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2016 (7) TMI 272 - ITAT BANGALORE

2016 (7) TMI 272 - ITAT BANGALORE - TMI - Benefit of exemption u/s. 11 - whether the assessee has received the capitation fees from the students for which the benefit of exemption u/s. 11 of the Act can be denied? - Held that:- Where the definition of “capitation fee” has been given in the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984, no other definition of “capitation fee” can be adopted, as the word “capitation fee” has not been defined in the Income- tax Act. T .....

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e educational institution can be held that it is not engaged in charitable activities, but selling the education in the light of the judgment in the case of Ms. Mohini Jain v. State of Karnataka & Ors. (1992 (7) TMI 330 - SUPREME COURT) wherein held that capitation fees was nothing but price of selling education and such “teaching shops” were contrary to the Constitutional scheme and abhorrent to our Indian culture. - We have also carefully examined the judgments referred to by the parties .....

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tion u/s. 12AA is entirely different than the scope of grant of exemption u/s. 11 of the Act. While granting registration u/s. 12AA of the Act, the authority was required to examine the objects of the society if the object of the society is of charitable nature, but no other contrary material is placed, the registration u/s. 12AA is to be granted. - But while granting exemption u/s. 11 of the Act, the AO is required to examine the nature of activities of the assessee and if he noticed that t .....

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ided against assessee - ITA Nos.206 & 207/Bang/2014 - Dated:- 17-6-2016 - SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER Revenue by : Shri Sanjay Kumar, CIT-III & Shri Sunil Kumar Agarwala, Jt. CIT(DR) Assessee by : Shri S. Venkatesan, CA ORDER PER SUNIL KUMAR YADAV, JUDICIAL MEMBER These appeals are preferred by the Revenue as well as the assessee against the respective orders of the CIT(Appeals). Since the issues involved in these appeals are almost com .....

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over and above the regular fees in violation of Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984. However, for the sake of reference, we extract the grounds in ITA No.206/Bang/2014 hereunder:- i) The order of the CIT(A) on the issue of capitation fee / donations collected by the assessee trust over and above the regular tuition fee and violation of Karnataka Educational Institution Prohibition of Capitation Fee Act, 1984, cannot be accepted for the reason that, the as .....

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that, the AO is duty bound to look out for any violations committed by the entities claiming exemption and whether the entity is carrying on its activities on charitable footing, before allowing such exemptions claimed, which has been rightly done by the AO after bringing on record the relevant facts after investigation and disallowing the claim of exemption of the assessee trust. iii) The observation of the CIT(A) that so long as the income from the charitable activity, i.e., profits earned fr .....

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y is established, viz., helping the backward students from Kamma Community in imparting education and also to help the deserving students by giving free education and scholarships. 3. ITA No.1099/Bang/2015 is an appeal preferred by the assessee against the order of CIT(Appeals) for the AY 2011-12 on various grounds, but they all relate to denial of exemption u/s. 11 of the Act on account of receipt of capitation fees from the students. We, however, for the sake of reference extract the grounds r .....

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lant's own case and by not following the decision of the jurisdictional High Court in the case of CHILDRENS EDUCATIONAL SOCIETY reported in 358 ITR 395, which ratio has been upheld by implication in the case QUEEN'S EDUCATIONAL SOCIETY reported in 372 ITR 699 in preference to the ratio of the decision of the Hon'ble Uttarakhand High Court in the case of QUEEN'S EDUCATIONAL SOCIETY reported in 319 ITR 160 and in particular by following the decision of the non- jurisdictional ITAT, .....

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eneral public and which are accounted in its own books as "voluntary contributions" in the "Head Office Segment" and in the Income & Expenditure account of the books of accounts of the appellant trust, as fee for granting admissions by the educational institutions run by the appellant trust especially when the books of accounts and the entries made therein are not rejected under the facts and in the circumstances of the appellant's case. 3.1 The finding of the authori .....

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to the above, the learned CIT[A] failed to appreciate that there was no surplus at all with reference to 3 institutions and hospital and there was surplus only with reference to the "head office segment of the appellant trust" and that too such surplus was without reckoning the capital expenditure, which was not claimed as an expenditure in the Income & Expenditure account and if they were considered, the surplus earned would be very reasonable and could not be considered as any in .....

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appreciating that it was elementary principle of jurisprudence that the person should know what the accusation he had to face and the evidence on the basis of which such accusation was made to study the same and cross-examine the same having regard to the ratio of the decision of the Hon'ble Supreme Court in the case of MEENGLAS TEA ESTATE v. THE WORKMEN reported in 1963 AIR 1719 [SC] consequently, the evidence relied upon by the learned A.O. to render such finding was in violation of the p .....

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ENS' EDUCATION SOCIETY [supra] and also decision of the Hon'ble Supreme Court in the case of PINE GROVE INTERNATIONAL CHARITABLE TRUST [372 ITR 699], in which the Hon'ble Supreme Court has upheld that the surplus earned on account of running the educational institutions would not be impressed such educational activity by virtue of resultant surplus year after year as non-charitable activity on account of profit motive for being exempt u/s.10[23C] as well as u/s.11 and balance in view .....

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waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s 234-B of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled especially, there was no obligation to file an estimate and pay advance-tax and therefore, the interest charged u/s.234B of the Act requires to be cancelled. 8. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays th .....

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984, from the students/parents of the students disentitle the assessee to claim exemption u/s. 11 of the Act. 5. The initial assessment years are AYs 2009-10 and 2010-11 in which the AO has denied the exemption u/s. 11 of the Act on receipts of letting out of Kalyana Mantap for marriage purposes and the receipts of capitation fees from various students over and above the tuition fees. Besides, denying the exemption u/s. 11 of the Act, the AO had also made a reference to the CIT for cancellation .....

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enied to the assessee. 8. The CIT(Appeals) being convinced with the explanation of the assessee has granted exemption to the assessee, having held that letting out of Kalyana Mantap is a part of the charitable activities being one of the objects and receipt of voluntary donations does not disentitle the assessee from claiming the exemption. 9. The Revenue has challenged this order before the Tribunal with the submission that the AO has made necessary investigation from the parents of the student .....

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t where it was found that amount paid by the parents of the students admitted to assessee educational institution was not to the corpus donation account, but it was collected only by way of capitation fee, such amount of capitation fee was not exempt in the hands of the assessee- institution. 10. The ld. DR further invited our attention to the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984, according to which, capitation fee means any amount, by whatever name called .....

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SCC 666, wherein the Hon ble Supreme Court has held that capitation fee was nothing but price of selling education and such teaching shops were contrary to the Constitutional scheme and abhorrent to our Indian culture. Reliance was also placed upon the decision of the Hyderabad Tribunal in the case of Vodithala Education Society v. Addl. CIT (Exemption) reported in 20 SOT 353, wherein it was held that the assessee had collected money over and above the prescribed fee by the authority for admiss .....

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xemption u/s. 11 of the Act having made more enquiries against which an appeal was filed before the CIT(Appeals) and in this year, the CIT(Appeals) has also concurred with the view of the AO that the assessee was not engaged in charitable activities. While adjudicating the issue, the CIT(Appeals) has also reproduced the details of voluntary contributions received from different parents of the students. Against this order of the CIT(Appeals), the assessee has preferred an appeal bearing ITA No.10 .....

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versy of the case. 14. The ld. counsel for the assessee also submitted that while denying the exemption u/s. 11 of the Act in AY 2009-10, the AO has also made a reference to the cancellation of registration u/s. 12AA of the Act. Consequently, registration was cancelled by the CIT, but later on order of the CIT was reversed by the Tribunal, against which an appeal was filed before the Hon ble High Court of Karnataka and the order of the Tribunal was confirmed and the appeal of the Revenue was dis .....

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No.5004/2012 dated 15.10.2014. (4) Children s Education Society, 358 ITR 373 (Kar) (5) K.T. Venkatappa v. K.N. Krishnappa, 173 ITR 678 (Kar) (6) Shri Ananda Marakala, ITAT Bangalore, ITA No. 1584/Bang/2012 & CO 58/Bang/2013 dated 13.9.2013. (7) Colonisers v. ACIT, 41 ITD 57 (Hyd) [SB] (8) Kishinchand Chellaram, 125 ITR 713 (SC) 15. Having carefully examined the orders of authorities below and documents placed on record, we find that the controversy in these appeals is only with regard to de .....

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dgment of Hon'ble jurisdictional High Court in the case of Sri Subharam Trust in ITA No.380/2009 dated 30.5.2011. Besides, the AO has also examined the nature of receipts from the parents of students and he noticed that this receipt was over and above the tuition fees which was considered by the AO as capitation fees in the light of the provisions of Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984. Besides, the AO has also made necessary enquiries from the person .....

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. In fact the purpose of running the educational institutions is over- shadowed by profit making motives of the Society. It is worth mentioning that sangham is making huge surplus and there is no corresponding application of surplus/income . It was held by the Hon'ble Uttarakhand High Court in the case of Queen's Education Society, as reported in 177 Taxman 326, that if systematic profits are being earned, then the purpose may not be held as charitable and exemption u/s 11 may not be per .....

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t Sangham has received a sum of ₹ 1,14,20,000/- as donations which have been accounted under the head "voluntary contributions". It was further seen that the amount was received mainly in cash and varies from 1 lakh to 5 Lakhs. A notice dated 1.11.2011 was issued u/s 133(6) of the IT Act, 1961 to few of the persons whose name figured in the list and which is reproduced here: "1. Whether you have given any donation to this institution in earlier earlier or subsequent year, if .....

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ic course in which the admission was given. If so, whether any receipt was issued by the trust, if yes, a copy may kindly be furnished. 6. Are you assessed to tax, your PAN and income shown in assessment year 2008-09 and 2009-10 may be furnished. " 16. It was gathered from few persons that their son/daughter is studying in Kammavari Institute of Technology and accordingly the payment was made to the Society and for which receipts were issued towards voluntary contribution. Moreover these pe .....

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.- In this Act, unless the context otherwise requires,- (b) "capitation fee" means any amount, by whatever name called, paid or collected directly or indirectly in excess of the fee prescribed under section 5,but does not include the deposit specified under the proviso to section 3; (c) "educational institution" means any institution by whatever name called, whether managed by Government, private body, local authority, trust, university or any other person carrying on the act .....

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person who is in-charge of or is responsible for the management of such institution: Provided that subject to such rules as may be prescribed or such conditions as may be specified by general or special order, from time to time, the Government may, notwithstanding anything contained in this Act permit any educational institution established before the date of commencement of this Act and maintained or developed solely or substantially out of amounts collected as capitation fee or any class or cl .....

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the AY 2011-12, the CIT(Appeals) was not convinced with the contentions of the assessee and he himself also made a detailed enquiry in respect of voluntary contributions in his order. He has extracted the mode of payments and details of persons from whom the payments were made. He has also placed reliance upon various judgments in this regard while holding that capitation fees has been given in the disguise of so-called voluntary contribution. The relevant observations of the CIT(Appeals) is ext .....

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amine the evidences from the donors sent in response to the AO's queries u/s 133(6). It is an undisputed fact that except in one of the replies all the other respondents have described their payment as general donation, although it was admitted that the same was given at the time of admission of their ward to the engineering course in KSIT. Two of the sample "yes" replies from B.S. Rajashekar and Raveendran are extracted and scanned below in this regard with related money receipts .....

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e true. It is also evident that part of the receipts are not supported by evidences as seen from the denial of one of the respondent reproduced supra. The characterization of the amount as voluntary contribution, therefore, cannot be accepted and the AO's conclusion appear to be far more reasonable. 4.2 It is also seen that even though the assessee claims that the donations/voluntary contributions have been received in the books of Kammavari Sangham (HO) its primary accounting and detailing, .....

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#39; by parents of students admitted to the appellant professional courses in their replies to the AO could not have been otherwise, considering the enormous but subtle pressures that constrain parents in such situation. Infact, the printed receipts of Andhra Bank, KSIT branch reproduced above with mention of "voluntary contribution for the year ... " displays the blatant and systematic manner in which parents of students seeking admission are pulled into the system where readymade rec .....

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ivate Medical, Dental and Engineering Colleges Association (KPM & DECA) entered into under the Karnataka Professional Education Institution (Regulation of Admissions and Fixation of fee) (Special provisions) Act, 2006 being Act no.13 of 2006. The summary of the fees structure and percentage of seats as per this agreement is in respect of 3 categories i.e. Government quota seat (to be filled through CET (exam), COMED-K member institutions seat (to be filled through COMED-K exam) and the balan .....

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6 SCC 697) and P.A. Inamdar Vs. State of Maharashtra (2005) (6 SCC 537). In the case of Islamic Academy of Education the Hon'ble Court had said that a committee in each State, headed by a retired High Court Judge, should approve the fees structure which shall be binding for 3 years. The Hon'ble Supreme Court had opined in this order that the reasonable surplus for an educational institution should ordinarily range from 6% to 15%. It may be noted that starting from Academic Year 2011-12, .....

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Hon'ble Supreme Court cited above the existence of a fair, transparent system with caps on the fees that could be charged was inherently present. This included the tuition fees, various fees collected and paid to VTU and a reasonable component of "college and other fee" to support the differential facilities available in different colleges. The scanned receipt for "college fee" at page 06 of this order evidences this. This was intended to prevent the professional educati .....

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n in education. In order to claim exemption of income u/s, 11(1)(a), the income should have been derived from a property held under trust wholly for charitable or religious purposes. In the case of the appellant, the educational institutions run by it constitute this property held under trust. It, therefore, follows that this property i.e. the educational institutions, should exist wholly for educational purposes, education being one of the components of charitable activities permitted u/s, 2(15 .....

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r dt. 16.03.2015. The earlier land mark decisions of the Hon'ble Supreme Court have been discussed in this latest order and they include the following - 1. Aditanar Educational Institution Vs. Addl.CIT (1997) 224 ITR 310 2. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1 3. American Hotel & Lodging Association Vs. CBDT (2008) 301 ITR 86 4. Loka Shikshana Trust (1975) 101 ITR 234 5. The Indian Chamber of Commerce (1975) 101 ITR 796 5.4 The Hon'ble Court have held that .....

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with desperate middle class or lower middle class parents even opting to become indebted in order to meet the financial demands for their child's professional education. I am in agreement with the AO that these contributions which are in excess of the fees fixed for the particular course satisfy the definition of "capitation fee" in terms of Sec.2(b) of the Act of 1984. As per this Act "capitation fee means any amount, by whatever name called, paid or collected directly or ind .....

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cation (supra) the Bench deserved as follows (paras 9 & 10) "Collection of capitation fee is contrary to the Constitutional scheme and prohibited by State enactment ....................When the assessee used the charitable activity/ educational institution as an apparatus for selling the education, in our opinion, the element of charity no longer remains in the activity of the assessee .................. In the case on hand, the material found during the course of survey operation clear .....

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he fees prescribed by the Committee appointed as per the directions of the Hon 'ble Apex Court is increasing day-by-day for admitting students under Management Quota. This collection of money over and above the fees prescribed by the committee, shall be construed as collection of 'Capitation fees' as held by the Apex Court. Collection of capitation fee is not an isolated problem of an individual student and the institution. This is a social problem and makes the availability of educa .....

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udicial and quasi-judicial authorities, cannot be expected to be a silent spectators of what is happening in the educational institutions ..............." In the present case the AO as the quasi judicial authority has acted in the correct spirit of law to deny the exemption u/s 11. 6. The appellant has filed before me copies of orders passed by CIT(A), Mysore in its own case for AY 2009-10 and 2010-11. The latter order has merely followed the conclusion in the former. In the order for AY 20 .....

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rvations about applicable legal provisions due to which I do not consider it necessary to follow his order. In respect of Ground nos. 4, 5 & 6 raised by the appellant before him, it was contended by the appellant that it was entitled to the benefit of Section 10(23C)(iiiad) in respect of the educational institutions where the gross receipts did not exceed ₹ 1 crore. This was inspite of the claim for exemption in the IT return having been made u/s. 11. The CIT(A) at para 7.4 of his orde .....

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rvation is that the M/s Queens Education Society matter was actually delivered on Sec.10(23C)(iiiad). The issue of surplus generation is at the heart of understanding the profit orientation or charitable orientation of an assessee since the Hon'ble Supreme Court in the case of M/s Queen's Educational Society itself, as discussed supra, have observed that if the surplus is not incidental to the educational activity, it shows that the institution did not derive income from property held un .....

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nsibility of verifying whether the claimed charitable activities of an assessee flow from legal and legitimate activities sanctioned by statute. The CIT(A) has commented negatively on the AO's inference "sought to be drawn based on the fact that the persons who gave the voluntary contributions had admitted their students in the institutions run by the appellant in certain cases." It needs to be emphasized that the quid pro quo arrangement even in that year did not exist in certain .....

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specifically claimed exemption under section 11 of the Act, the Assessing Officer ought not to have considered the claim under section 10(23C) of the Act." The CIT(A)'s orders for AYs 2009-10 & 2010-11 do not appear to have appreciated this fact that the appellant cannot make one claim in the return and another before appellate authorities, thus subverting the sanctity of the return. 7. With regard to the judicial decisions relied upon by the AO and the appellant, I am inclined to h .....

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.10(23C) and does not fit the different facts in the appellant's case. The appellant had claimed that the AO's citing of the Hon'ble Supreme Court decision in the case of Mohini Jain Vs. State of Karnataka supra has no application to its case since the appellant had not collected any capitation fee at all in the first place. This understanding of the appellant is found to be factually incorrect since the in the Mohini Jain decision, the Hon'ble Supreme Court had said that the fee .....

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tary contributions were received over and above the tuition fees. There is no iota of evidence produced by the assessee to support that these donations were towards the corpus. Had it been a case of donation towards corpus, there should be a specific narration on the donation receipts that this contribution was made towards the corpus. Moreover in Karnataka receipt of donation/capitation fee is strictly prohibited by the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 198 .....

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ary contributions/donations falls within the proviso to section 3 of the Act, but no evidence is placed on record that proviso to section 3 would apply in the case of assessee. Where the definition of capitation fee has been given in the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984, no other definition of capitation fee can be adopted, as the word capitation fee has not been defined in the Income- tax Act. The Revenue has also established that donation/voluntary c .....

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ged in charitable activities, but selling the education in the light of the judgment of the Hon ble Supreme Court in the case of Ms. Mohini Jain v. State of Karnataka & Ors. (1992) 3 SCC 666 wherein the Hon ble Supreme Court has held that capitation fees was nothing but price of selling education and such teaching shops were contrary to the Constitutional scheme and abhorrent to our Indian culture. We have also carefully examined the judgments referred to by the parties and in the case of P. .....

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