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TMI Blog2014 (2) TMI 658X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act'). The notices were issued requiring the University to file its return of income for the assessment years 2004-05 to 2009-10, since, according to the Revenue, income during these years had escaped assessment. Compliance, of these notices was not done, and hence notices under Section 142(1) dated 11.04.2011 and 06.09.2011 were issued. Despite these notices, no returns were filed and hence summons under Section 131 of the Act dated 09.11.2011 were issued fixing the date of hearing on 17.11.2011. Then, the University sought further time to file returns. On 15.12.2011 they filed return of income declaring 'nil income', claiming exemption under Section 10 (23C)(iiiab) of the Act. Assessment for the years 2004-05 to 2009-10 was accordingly completed by separate assessment orders, all dated 29.12.2011, under Section 143(3) read with Section 147 of the I.T. Act, rejecting the claim of the University seeking exemption under Section 10(23C)(iiiab). The Assessing Officer held that the University is not an University "not existing for purposes of profit" as contemplated by clause (iiiab) of Section 10(23C) of I.T. Act and that it is not "wholly or substantially financed" by the Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeking exemption/deduction under section 10(23C) (iiiab) of the I.T. Act, based on their case that they are wholly (or at least substantially) financed by the State Government, as contemplated by Section 23 of the Visveswaraiah Technological University Act, 1994? (ii) Whether the University is existing solely for educational purposes and not for purposes of profit and that the surplus in its accounts in any given year would not constitute profit to deny exemption/benefit under section 10 (23C) (iiiab) of the I.T. Act? (iii) Whether the appellant -University, is a State or part of the State, within the meaning of Article 289(1) of the Constitution of India so as to seek exemption from taxation under this Article? 6. Before we consider the questions of law and advert to the arguments advanced by learned counsel for the parties in support of their claims we deem it appropriate to state about status of the University. The University was established and incorporated in the State of Karnataka for development of Engineering, Technology and allied sciences under the provisions of the Visveswaraiah Technological University Act, 1994 (for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) contributions or grants that may be made by the Central Government, State Government, University Grants Commission, All India Council for Technical Education or like authority or any local authority or any corporation owned or controlled by the Government; (iii) other contributions, receipts, grants and donations and benefactions; (iv) contributions from industry, business and technical departments of the Government and other user organisations: Provided that the funds received by the University under item (iv) above shall be called the Development Fund of the University which shall be utilised for the promotion of Technological Education and Research both within the University and in the constituent units without diverting the same for normal capital or recurring expenditure of the University. (2) The University may have such other funds as may be prescribed by the Statutes. (3) The General Fund, the Development Fund and the other funds of the University shall be managed according to the provisions laid down in the Statutes. &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... University on the reports and the State Government shall cause the same to be laid before both Houses of the State Legislature. The Act of 1994 also provides for removal of difficulties under Section 55 thereof. 7. It is not in dispute that the receipts and expenditure of the University are audited under the provisions of the Comptroller & Auditor General (Duties, Powers & Conditions of Service) Act, 1971 (for short, 'the Act of 1971'). Section 14 of the Act of 1971 provides for audit of receipts and expenditure of bodies or authorities substantially financed from the Union or State Revenues. A close look at this provision as well as the provisions contained in Section 23 of the Act of 1994 would show that audit of receipts and expenditure of the University is carried out under the provisions of the Act of 1971, in view of the provisions contained in the Act of 1994, in particular, Section 23 thereof, which contemplate nonlapsable grants by the State Government for all practical purposes. 8. We would also like to make reference to the grant of exemption under Section 80G of the Act, to which our attention was drawn by learned Senior counsel for the University. There is no dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tageous to reproduce the relevant clause (23C) and sub-clauses (iiiab) (iiiad) and (vi) of Section 10 of the I.T. Act:- "10. In Computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included ----------------------------- (23C) any income received by any person on behalf of - ----------------------------- (iiiab) any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government; or (iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed; or (vi) any university or other educational institution exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay and allowances of the staff, contingencies, supplies and services of the appellant should be made by the State Government each year through non-lapsable grants. He submitted that grants paid every year are not only in terms of monies or but also by way of making lands available at very concessional rates. He submitted that the Government allotted huge track of land for establishment of the University and has been continuously allotting lands either free of cost or at concessional rates for further extension/expansion of the University. About 194 Engineering Colleges are affiliated to this University, and therefore, this University requires a huge establishment/infrastructure to carry out its duties/functions contemplated by the Act of 1994. 11.2 Mr. Nair submitted that the Government gave initial land and funds for creation of assets of the University. The University, thus, acquired the income generation capacity with the help of finances from the Government, and therefore, whatever is the income they are getting from different sources and under different heads will have to be treated as financial aid by the State Government. In other words, the whole finance of the University ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imagination, he submitted that the University can be stated to have been established for purpose of profit. The surplus in its account in any given year, therefore, would not constitute profit so as to deny exemption under Section 10(23C) (iiiab) of the I.T. Act. He submitted that initially only 68 Engineering Colleges were affiliated to the University and now number of colleges has reached 194. Every year 90,000 students clear the degrees of B.Tech. and M.Tech. Over and above this, every year new colleges are coming up which result in fairly large amount of surplus funds. The surplus funds in this background cannot be treated as profit or income, but it is only a receipt over expenditure as authorised by the Government and cannot be disbursed or distributed among anybody, but could be only used for schemes and projects exclusively for educational purposes as directed and approved by the State Government. He submitted, the stand of the revenue that the University has accumulated surplus over a period of time as its profit from collection of fees is wholly misconceived and cannot hold good so long as the surplus is spent exclusively for education purpose. 11.6 Mr. Nair invited our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lson invited our attention to one of the letters issued by the Government, whereby Government made it clear that it was not going to extend any maintenance grants to the appellant-University. Then he invited our attention to Section 55 of the Act of 1994, which, according to him, make it clear that if any difficulty arises in giving effect to the provisions of the Act, the State Government may do anything which appears to it to be necessary for the purpose of removing the difficulty. In the light of this provision he submitted that it is well within the power of the Government not to extend any maintenance grant, if the circumstances do not require or demand for the same. Hence, he submitted, reliance on Section 23 is of no avail to the University. 12.4 Mr. Wilson, submitted that the development grant extended for purchase of lands and other infrastructure is for the purpose of investment in capital assets which cannot be treated as annual maintenance grants contemplated under Sub-section (4) of Section 23. He submitted that each assessment year under the Income Tax Act is a separate unit and assessment proceedings in each assessment year is also a separate proceeding. An assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pport by learned counsel for the parties. 14. The principle that a taxing statute should be strictly construed is well settled. It is equally trite that the intention of legislature is primarily to be gathered from the words used in the statute. Once it is shown that an assessee falls within the letter of law, he must be taxed, however, great the hardship may appear to the judicial mind to be. On the principle of interpretation of statute the following passage in Commissioner of Sales-tax, U.P. v. Modi Sugar Mills Ltd., AIR 1961 SC 1047 is relevant - "11...In interpreting a taxing statute, equitable considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions. The court must look squarely at the words of the statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed: it cannot imply anything which is not expressed; it cannot import provisions in the statutes so as to supply any assumed deficiency." 14.1 The Supreme Court in Mathuram Agrawal v. State of M.P. in (1999) 8 SCC 667 in paragraph 12 observed thus- "12...The intention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m and substance, the grievance of the University is that it is entitled to the benefit of an exemption under Section 10 (23C) (iiiab), since it is "wholly" or atleast "substantially" financed by the State Government, as contemplated by Section 23 of the Act of 1994. Undoubtedly, the University earns income from different sources every year. Whether the income of the University could be termed as profit so as to deny them benefit of Section 10 (23C) (iiiab) is the question. It is true that the University has not been established for "making" profit under the provisions of the Act of 1994 by the State Government. But, whether it systematically started making profit, as alleged by the revenue, is the question. In short it is the case of the revenue that the University is existing for the purposes of profit though it was set up for educational purpose and not suppose to make profit. 18. As observed earlier, sub-clauses (iiiab), (iiiad) and (vi) of Sections 10 (23C) use the similar language with the distinguishing factors noticed earlier. The expressions, "existing solely for educational purposes and not for purposes of profit", is common in all the three sub-clauses. Thus the common e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the University is making huge profit is the question. As long as "surplus" is "reasonable surplus", there should not be any difficulty in giving exemption under Section 10(23C) (iiiab) of the Act if it fulfills other conditions stipulated therein. If an University or an educational institution under the guise of "surplus" start making huge profit, in our opinion, it would cease to exist for net making profit and in that event would not be entitled for exemption under this provision. 21. At this stage we would also like to refer to Section 10(22) of the I.T. Act, which was omitted by Finance (No.2) Act, 1998 with effect from 01.04.1999. By the very same Finance (No.2) Act, 1998 sub-clauses (iiiab), (iiiad) and (v) were introduced. Clause (22) which was omitted from the I.T. Act with effect from 01.04.1999 reads thus:- "Any income of an University or other educational institution, existing solely for educational purpose and not for the purpose of profit." 22. It appears that several educational institutions had taken advantage of this provision (10(22)) to seek exemption which now fall within the category under clause (vi) of Section 10(23C) of the I.T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a varied nature and did not fulfill the condition that it must exist solely for the purposes of education. Moreover, the trust, had a surplus which had been utilized for the purchase of assets as reflected in the balance-sheet. While setting aside the order refusing approval, it was noted that since the establishment of the trust, save and except for carrying on an educational institution, no other activity had been carried on for long years. Moreover, the fact that a surplus may arise in the activity of the trust after meeting the expenditure incurred for conducting educational activities was held not to disentitle the trust for the benefit of the provisions of Section 10(23C). 24. It is in this backdrop we would now like to consider whether the appellant is "wholly or substantially" financed by the Government of Karnataka and that the University existed during the relevant assessment years 'not for purposes of profit'. While considering these questions we would also like to consider whether the "surplus" in its account during the relevant assessment years would constitute profit so to deny exemption and/or benefit under Section 10(23C) (iiiab) of the I.T. Act. 25. Learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s/profit 2009-10 Rs.138.21 Crores Rs.54.02 Crores Rs.84.19 Crores -60.91% 2010-11 Rs.133.81 Crores Rs.47.31 Crores Rs.86.50 Crores -64.64% 2011-12 Rs.172.34 Crores Rs.78.41 Crores Rs.93.93 Crores -54.50% 26.2 The third table shows fees collected and expenditure incurred by the University for two financial years i.e., 2009-10, 2010-11. Table-III Nature of fees Financial year Amount of Fees Collected Amount expenditure income Balance/profit Convocation 2009-10 Rs.2,72,40,187 Rs.27,07,672 Rs.2,45,32,515 Examination Fee Rs.32,79,37,115 Rs.17,66,43,156 (Remuneration to examiners and others, squad expenses, TA, DA in connection with exam.) Rs.15,12,93,959 Convocation 2010-11 Rs.3,41,31,767 Rs.4,22,595 Rs.3,37,09,173 Examination Fee Rs.34,09,71,278 Rs.12,18,68,114 Rs.4,81,88,886 (Remuneration to examiners and others, squad expenses, TA, DA in connection with exam.) Rs.17,09,14,278 E-learning Rs.12,88,58,695 Rs. Nil Rs.12,88,58,695 26.3 The last table indicates percentage of grant received from the Government as against the receipts as per income and expenditure statement placed on record:- Table-IV Assessment Year Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt work; in 2001-02 they received Rs.7,50,000/- for development work. In 2002-03 they received Rs.45,00,000/- for development work. In 2003-04 and in 2004-05 they received Rs.10,00,000/- each for development work. In 2005-06 they received Rs.7,50,000/- and Rs.10,00,000/- each for development works from 2006-07 to 2009-10. Thus, since 1998-99 till 2009-10 the total grants/ funds paid/ made available by the State Government to the University were Rs.5,68,93,000/-. 29. From the above figures, which were taken into consideration by the authorities below, we find substance in what has been submitted on behalf of the revenue. According to the revenue the University gets about 1% financial aid/ grants from the Government of the total receipts. It is further clear that even without grants, as reflected in Table-I, the surplus amount is more than double the expenditure incurred during 2004-05 till 2009-10. In 2005-06 the surplus amount is almost four times more than the actual expenditure. Similar is the case in 2006-07 and 2007-08. In 2009-10 the surplus amount is almost 2½ times more than the total expenditure. The figures of expenditure also consists of the expenditure incurred b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear that we are not expressing any opinion on the question whether the University should collect such huge sums from students under different heads. But the fact remains that the University collect huge sums, 3-4 time more than the requirement. Such "surplus", in our opinion, cannot be stated to be incidental. It is not in dispute that huge amounts are invested by the University in fixed deposits, which fetch huge interest thereon. In this backdrop, it will have to be considered that collection of the amounts under different heads or the receipts as per the income and expenditure account is sufficient to hold that activities of the University would result in profit. In other words, though the University was not established for purposes of profit, whether income generated by it could be termed as profit so as to deny exemption under Section 10(23C) (iiiad) of the Act. 34. Except the grants, as mentioned above, of Rs.5,68,93,000/- received from the Government all other receipts, credited to the account of the University, are collected from the students admitted in 194 affiliated colleges. These amounts/monies, in any case, cannot be stated to have been received by the University f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne thing and organizing funds is other. Merely because funds are organized by the Government or generated, as contemplated under sub-sections(1) to (3) of Section 23 of the Act of 1994, would not, in our opinion, mean or could be treated as financial aid by the Government, so as to say that the University is wholly or substantially financed by the Government. 36. The University has placed on record the information received by them under the Right to Information Act from the office of the Principal Secretary, Education Department (Higher Education), Government of Karnataka to contend that the Government by orders extend financial aid to the University not only by way of lands and development funds but also authorize the University to collect registration fees through Examination Authority and part of annual fees from the colleges affiliated to the University and, therefore, all the receipts deserve to be treated as financial aid extended by the Government to the University as contemplated under Section 23 of the Act of 1994. This submission, in our opinion, for the reasons recorded in the last paragraph, deserves to be rejected outright. As observed earlier, all the receipts except ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Rs.3,41,31,667/-, whereas the total expenditure was hardly Rs.4,22,595/-. i.e. hardly 1/8 of the total collection. Thus, the collection of fees under each head and corresponding expenditure for the services rendered does not justify the claim of the University that the receipts are only in the nature of surplus and not profit. As observed earlier, surplus funds could be collected, or these could be incidental surplus, to meet contingencies or for spending during the subsequent year for specific purpose for which it was collected and not for investing the same in fixed deposits for earning income by way of interest. 39. It is true that after meeting expenditure, a surplus results incidentally from activity lawfully carried on by the educational institution. As long as the surplus is reasonable, any University or an institution would not cease to be one existing solely for educational purposes with the object not to make profit. The Supreme Court, in Aditanar (supra), has observed that the decisive or acid test is whether on an overall view of the matter, the object is to make profit. If we apply the doctrine of "reasonable surplus" in one case it cannot be stated that the "surplu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for educational purpose. In other words, he submitted, the existence of surplus from the activity will not mean absence of educational purpose. In support of this contention he placed reliance upon the judgment of the Supreme Court in American Hotel and Lodging Association Educational Institute (supra). 42. The meaning of the word 'surplus' given in Black's Law Dictionary, Eighth Edition, reads thus- 1. The remainder of a thing; the residue or excess. 2. The excess of receipts over disbursements. 3. Funds that remain after a partnership has been dissolved and all its debts paid. 4. A corporation's net worth, beyond the part value of capital stock. - Also termed overplus. 42.1 The meaning of 'surplus' in Oxford Dictionary, reads thus- "An amount left over, a an excess of revenue over expenditure. b the excess value of a company's assets over the face value of its stock. Adj. Exceeding what is needed or used." 42.2 The meaning of 'surplus' in Merriam-Webster's Collegiate Dictionary, reads thus- "1a: the amount that remains when use or need is satisfied b: an excess of receipts over disbursements 2: the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hini Jain (Miss) v. State of Karnataka and Others, (1992) 3 SCC 666, the Supreme Court in paragraph 17 observed that, "the students are given admission to the educational institutions - whether state-owned or state-recognised - in recognition of their "right to education" under the Constitution. Charging capitation fee in consideration of admission to educational institutions, is a patent denial of a citizen's right to education under the Constitution. The Supreme Court further observed that Indian civilisation recognises education as one of the pious obligations of the human society. To establish and administer educational institutions is considered a religious and charitable object. Education in India has never been a commodity for sale." 46. From the observations of the Supreme Court, in particular its judgment in Islamic Academy of Education and P.A.Inamdar (supra), it is clear that an institution cannot charge anything unreasonable under the guise of surplus and make/earn profit, indirectly or systematically and then claim that they are established for educational purpose and not for purposes of profit. What is happening in practice is relevant and in any case that cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould bear in mind the distinction between the corpus, the objects and the powers of concerned authority. In short, merely because 'certain surplus' arises from its operations, it cannot be held that the institution is being run for the purpose of profit so long as no person or individual is entitled to any portion of the said profit and the said profit is used to meet the object of institution. 49. It is not in dispute that the University was established for educational purpose and not for purposes of profit. But that by itself, in our opinion would not be sufficient to hold that the huge income generated from its day to-day affairs cannot be treated as profit. In other words, whether huge income earned by the University, over a period of time, in our opinion, cannot be treated as reasonable surplus, having regard to the facts and figures noticed by us in the foregoing paragraphs. 50. The Supreme Court in the Additional Commissioner of Income-tax, Gujarat v. Surat Art Silk Cloth Manufacturers Association, 121 ITR 1, while considering expression "activity for profit" for the purposes of Section 2(15) of the I.T. Act, observed that the test that must be applied is not whether as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was argued on behalf of the University that considering the actual grants received by the University from the State Government in the form of monies and the lands coupled with the statutory obligation under the provisions of the Act of 1994 it is clear that the University, though not wholly, is substantially financed by the State Government. It was submitted by Mr. Nair, learned Senior counsel for the University that the very approach of the revenue comparing the grants actually received with the receipts under different heads for determining whether the University was substantially financed by the State Government was wrong. He submitted that it cannot be overlooked that the Government is under an obligation to finance the entire expenditure as contemplated by Section 23 of the Act of 1994. In support of this submission, he also invited our attention to several documents to which we have already made reference in the foregoing paragraphs while dealing with the other submissions. 53. From the facts and figures, considered and discussed earlier and as reflected in different tables, it cannot be disputed that the University, as a matter of fact, gets hardly 1% financial aid fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be extended to bring the University within the ambit of Article 289(1) of the Constitution of India. In this connection, we would like to refer to judgments of the Supreme Court. The Supreme Court in The Andhra Pradesh State Road Transport Corporation by its Chief Executive Officer, Hyderabad, v. The Income-tax Officer, B1B - Ward, Hyderabad and another, AIR 1964 SC 1486, observed that the scheme of Article 289 appears to be that ordinarily the income derived by a State both from Governmental and Non-Governmental or commercial activities shall be immune from Income tax levied by the Union, provided, of course, the income in question can be said to be the income of the State. This general proposition flows from clause (1) of Article 289. The Supreme Court while dealing with clause (2) observed that if clause (1) had stood by itself, it may not have been easy to include within its purview income derived by a State from commercial activities but since clause (2) in terms, empowers the Parliament to make a law levying a tax on commercial activities carried on by or on behalf of a State, the conclusion is inescapable that these activities were deemed to have been included in clause (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which dominantly is in the nature of a proviso. Clause (2) empowers the Union to impose any tax to such extent as Parliament may by law provide, in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operation connected therewith. Thus, even the income of the State within the meaning of clause (1) of Article 289 may be taxed by law made by Parliament, if such income is derived from a trade or business of any kind carried on by or on behalf of the Government of a State or any operations connected therewith. Clause (1) of Article 289, therefore empowers Parliament to frame law imposing a tax on income of a State which is earned by means of trade or business of any kind carried by or on behalf of the State Government. 11. It is true, as submitted by Shri Venugopal, that clause (2) of Article 289 empowers Parliament to make a law imposing a tax on income earned only from trade or business of any kind carried by or on behalf of the State. It does not authorise Parliament to impose a tax on the income of a State if such income is not earned in the manner contemplated by clause (2) of Article 289. This, to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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