2007-VIL-333-ITAT-HYD

Equivalent Citation: [2008] 20 SOT 353 (HYD.)

Income Tax Appellate Tribunal HYDERABAD

IT APPEAL NO. 1138 (HYD.) OF 2006

Date: 31.10.2007

VODITHALA EDUCATION SOCIETY

Vs

ASSISTANT DIRECTOR OF INCOME-TAX (EXEMPTIONS) II, HYDERABAD

BENCH

 PRADEEP PARIKH AND N.R.S. GANESAN, JJ.

JUDGMENT

N.R.S. Ganesan, Judicial Member. - This appeal of the assessee is directed against the order of the CIT(A)-IV, Hyderabad dated 31-10-2006 for the assessment year 2003-04. The only issue that arises for consideration is grant of exemption under section 11 of the Income-tax Act, 1961 (‘the Act’).

2. Shri Ravindra Chenji, ld. Counsel for the assessee submitted that the assessee-society running educational institutions and hostel in the States of Andhra Pradesh and Maharashtra. For the assessment year 2003-04, the assessee filed return of income on 3-12-2003 claiming exemption under section 11 of the Income-tax Act. The ld. Counsel further submitted that there was survey operation at one of the engineering colleges run by the assessee at Ramtek, Maharashtra in July, 2005. According to the ld. Counsel, incriminating materials were seized by the authorities and one of the employees viz., Mr. Srinivasa Rao was examined during the course of survey operations. According to the ld. Counsel, the admission of students to the college was looked after by the Principal of the College. In respect of management quota seats, Shri Srinivasa Rao was not vested with any power. Referring to the statement made by Shri Srinivasa Rao, ld. Counsel submitted that Shri Srinivasa Rao has clearly stated before the authorities that he was not aware of the fees collection. The said Srinivasa Rao also stated that he was not aware of the account books of the society. Moreover, he also stated that he does not have any role in the society. In contradiction to what he stated earlier, the said Shri Srinivasa Rao stated before the authorities that he himself wrote some of the incriminating material seized at the time of survey. These incriminating material relates to collection of fees from the students admitted under management quota. Therefore, according to the ld. Counsel there is a clear contradiction in the statement made by Shri Srinivasa Rao. Therefore, an opportunity should be given to the assessee to cross examine Shri Srinivasa Rao, before relying on the same. Since such an opportunity was not given to the assessee by the Assessing Officer. The learned counsel submitted that the matter may be remitted back to the file of the Assessing Officer.

3. The ld. Counsel further submitted that the Assessing Officer has taken the income of only one college for computation at page 11 of the assessment order. The income derived by the assessee from other educational institutions was not considered by the Assessing Officer. The ld. Counsel further submitted that the assessee claimed exemption only under section 11 of the Income-tax Act. However, the Assessing Officer examined the case of the assessee under section 10(23C) and rejected the same. When the assessee 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.

4. On the contrary, Shri D. Goyal, ld. Departmental Representative contended that the assessee is not entitled to any exemption under section 10(23C) as educational institution. Since there is violation of section 13(1)(c) of the Act, according to the ld. DR the assessee is not entitled to exemption under section 11 of the Act also. Referring to the opportunity/cross-examination of Shri Srinivasa Rao, the ld. DR submitted that even assuming that the Assessing Officer has not given any opportunity to the assessee, the CIT(A) has given sufficient opportunity. Therefore, it is not necessary to remit the matter to the Assessing Officer. Moreover, the Assessing Officer and CIT(A) have placed reliance on the totality of the material seized during the course of survey operations and not only on the statement recorded during the course of survey from Shri Srinivasa Rao. Therefore, according to the learned DR cross examination of Shri Srinivasa Rao may not be relevant. The ld. DR very fairly submitted that in the computation part, the Assessing Officer has taken the income of only one college and, therefore, the Assessing Officer may be asked to verify the income of the assessee-society from the other colleges. Referring to the statement made by Shri Srinivasa Rao, the ld. DR submitted that the assessee has collected more money/capitation fee while admitting the students under the management quota. The said Srinivasa Rao has admittedly handed over the money collected under the management quota to various interested person/Chairman as mentioned in the seized papers. Therefore, it is a clear case of utilization of the society fund for the benefit of the trustees/Chairman. Accordingly, there is a clear violation of section 13(1)(c)( ii) of the Act. According to the ld. DR the assessee is not entitled to exemption under section 11 as claimed.

5. We have considered the rival submissions on either side and also perused the material available on record. Admittedly, the assessee-society is running educational institutions and hostels in the States of AP and Maharashtra. There was a survey operation in the premises of one of the colleges on 20-7-2005. Several incriminating materials were seized in the course of survey operation which discloses collection of money over and above the prescribed fee from the students. From the assessment order, it appears the assessee initially applied for approval of the prescribed authority for exemption, as provided in section 10(23)( c)(vi) of the Act. The prescribed authority appears to have rejected the claim of the assessee. When this was brought to the notice of the assessee by the Assessing Officer, the assessee claimed that it has the option to choose between two exemptions viz., section 10(23C)(vi ) and section 11 of the Act. Therefore, the assessee claimed exemption under section 11 of the Act. However, the Assessing Officer found that such a choice is not available to the assessee. The Assessing Officer further observed that section 11 of the Act does not authorize deduction from total income. It provides for exemption. In other words, the income from property held for charitable or religious purpose should not be included in the total income. The Assessing Officer has also examined the distinction between the educational institution and the trust/society which runs the educational institution. The Assessing Officer further found that in case the assessee has such option either to claim exemption under section 11 or under section 10(23C), the provisions of section 10(23C) would be rendered otiose and the very purpose of legislating them would be defeated. However, the CIT(A) has not dealt with this issue at all. The CIT(A) simply proceeded on the basis of the claim of the assessee under section 11 and since there is violation of the provisions of section 13(1)(c) by utilizing the funds of the society by the person’s interested, he found that that the assessee is not entitled to any exemption under section 11 of the Act. The question now arises for consideration is whether the assessee is entitled to claim exemption under section 11 or under section 10(23C)( vi) of the Act.

6. Let us first examine the provisions of section 11 of the Income-tax Act. Section 11 provides for exemption of income from the total income from the property held under Trust for charitable or religious purpose. For the purpose of claiming exemption under section 11 the assessee has to make an application under section 12A of the Act for registration. One of the prerequisites for making such application under section 12A is that the assessee should be a religious or charitable institution or trust. Admittedly, the main activity of the assessee-society is to run educational institutions. The Legislature in their wisdom enacted sections 10(23C)( iiiab), 10(23C)(iiiad ) and 10(23C)( vi) for grant of exemption of income in respect of universities or institutions which exist solely for education purpose and not for profit. From the material papers filed before this Tribunal, it appears the assessee filed an application before the concerned authority for registration under section 12A of the Act, and the same was granted with effect from 1-4-2001. On an appeal filed by the assessee before this Tribunal in ITA No. 569/Hyd./03, this Tribunal by an Order dated 18-2-2004 directed the DIT (Exemptions) to reconsider the grant of registration under section 12AA of the Act with effect from 1-4-1988. It is not known whether any order has been passed by DIT (Exemptions) in pursuance of the direction of this Tribunal. The fact remains that the assessee was granted registration with effect from 1-4-2001.

7. Let us examine whether the assessee-society is a charitable institution or not. Charitable purpose has been defined by the Legislature in section 2(15) of the Income-tax Act. Section 2(15) of the Income-tax Act reads as follows :

"Charitable purpose includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility."

From the above, it is obvious that ‘education’ is included in the charitable purpose. Admittedly, the assessee-society is running educational institutions. The next question that falls for our consideration is when the assessee collects money over and above the fees prescribed by the Government, whether it constitutes a charitable institution or not. We find that the Apex Court in the case of Miss Mohini Jain v. State of Karnataka [1992] 2 SCC 666 considered the issue of capitation fee collected by the private educational institutions. His Lordship Hon’ble Mr. Justice Kuldip Singh (as His Lordship then was), speaking for the Bench of the Apex Court, observed as follows—

"The right to education, therefore, is concomitant to the fundamental rights enshrined under Part III of the Constitution. The State is under a constitutional mandate to provide educational institutions at all levels for the benefit of the citizens. The educational institutions must function to the best advantage of the citizens. Opportunity to acquire education cannot be confined to the richer section of the society. Increasing demand for medical education has led to the opening of large number of medical colleges by private persons, groups and trusts with the permission and recognition of State Governments. The Karnataka State has permitted the opening of several new medical colleges under various private bodies and organizations. These institutions are charging capitation fee as a consideration for admission. Capitation fee is nothing but a price for selling education. The concept of ‘teaching shops’ is contrary to the constitutional scheme and is wholly abhorrent to the Indian culture and heritage."

Therefore, capitation fee is nothing but a price for selling education. As held by the Apex Court, the concept of ‘teaching shop’ is contrary to the constitutional scheme and is wholly abhorrent to Indian culture and heritage. Some of the State Legislatures passed legislation prohibiting the collection of capitation fee and also made the same as a punishable offence.

8. The Apex Court in the case of Islamic Academy of Education v. State of Karnataka [2003] 6 SCC 697 directed all the State Governments to constitute a Committee headed by an Hon’ble retired High Court Judge for prescribing fee structure for professional colleges. The Apex Court further held that if any amount is charged other than the fee prescribed by the Committee under any head or guise, the same would amount to capitation fee. Therefore, collection of money over and above the fee prescribed by the committee would amount to collection of capitation fee. The relevant Para of the Apex Court judgment is extracted hereinafter at para 19.

9. Collection of capitation fee is contrary to the Constitutional scheme and prohibited by State enactment. Moreover, education was used as an apparatus/mode to collect capitation fee. In other words, exorbitant money was collected illegally in the guise of running the educational institution. 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 other words, when the assessee sells the seat of a professional course and collects capitation fee, the activity of assessee cannot remain a charitable activity, within the meaning of section 2(15) of the Income-tax Act. Education would remain as a charity only in a case where the education was imparted systematically for a fee prescribed by the Government. In our opinion, it is not the intention of the Parliament to recognize any body/society or institution as a charitable institution where ‘education’ was a saleable commodity. In the case on hand, the material found during the course of survey operation clearly established the collection of money over and above the fee prescribed by Government for admission of a student. Therefore, it is a clear case of sale of education by the assessee-society. In our opinion as such, the assessee cannot be considered as a charitable institution under section 2(15) of the Income-tax Act. Therefore, the assessee is not eligible for exemption under section 11 of the Income-tax Act.

10. We would like to further add that collection of money over and above the 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 education beyond the reach of the vast majority of the population. More than 30 per cent of the population is living below poverty line and bulk of the remaining population is struggling for existence under poverty. In this economic situation, if we allow a few individuals who had an opportunity to establish an educational institution to collect money directly or indirectly for admis- sion of students, it would be a threat to very existence of democracy and sovereignty of this country. Therefore, the judicial and quasi-judicial authorities, cannot be expected to be a silent spectators of what is happening in the educational institutions. In our opinion, it is high time for the authorities concerned to initiate action immediately if not already initiated, to put an end to this kind of malpractice with iron hands. In view of the above in our opinion, the assessee-society cannot be considered to be a charitable institution and therefore, not eligible to claim exemption under section 11.

11. Even assuming for the sake of argument that the assessee is a charitable institution under section 2(15) of the Income-tax Act, in our opinion, the assessee is not entitled for exemption under section 11 of the Income-tax Act. Section 11(1) of the Income-tax Act reads as follows :

11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—

(a )income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;

(b )income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of fifteen per cent of the income from such property;

(c )income derived from property held under trust—

(i )created on or after 1-4-1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and

(ii )for charitable or religious purposes, created before 1-4-1952, to the extent to which such income is applied to such purposes outside India :

Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income;

(d )income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust to institution."

Therefore, any income derived from the property held under Trust for charitable purpose, should not be included in the total income. In this case, admittedly, the assessee is not holding any property under trust for charitable purpose. It is also not the case of the assessee that any income was derived from the property held under Trust for charitable purpose. Moreover, it is also not the case of the assessee that any income in the form of voluntary contributions was received with a specific direction to form part of the corpus of the society. The assessee-society runs educational institution and derived income from such institution. The assessee has also collected money over and above the fees prescribed for admitting students under management quota. In other words, the educational institution was used as a tool/apparatus for collecting money over and above the fees prescribed. The assessee-society has no other source of income/receipt. The society, owns the educational institution. The Legislatures have visualized two situations. One is religious and another is charitable. Section 11 provides for exemption in respect of income; derived from property held under Trust for charitable and religious purpose. As we have already observed ‘Education’ falls within the definition of charitable purpose. Therefore, any income derived from property held under Trust for charitable purpose and applied for education, is eligible for exemption under section 11 of the Income-tax Act, 1961. In this case, admittedly, the assessee has not derived any income from any property held under Trust. The only source of receipt is, the education itself, i.e., from educational institution.

12. The next question that falls for our consideration is, whether the educational institution owned by the assessee-society would be regarded as a property held under Trust by the society. Section 11 speaks of the property held under Trust. The Legislature visualized two situations. One is income derived from the property held under Trust and another is application of that income derived from the property held under Trust for a charitable purpose. Therefore, there is a clear distinction between the property held under Trust and the charitable activity. In the case before us, the assessee-society is carrying on charitable activity by establishing educational institutions. Therefore, the charitable activity of the assessee is education. The income if any derived from the property held under the Trust and applied for the educational activity, shall be construed as application of income for the purpose of charitable purpose. Therefore, the expenditure incurred in establishing the educational institution namely acquisition of land, construction of building etc., are all application of income for charitable activity. If any income was generated in the course of educational activity, the said income shall be construed as if it was generated in the course of carrying on the charitable activity. Therefore, such receipt/income received in the course of carrying on charitable activity is also eligible for exemption provided the same was applied or set apart for educational purposes. However, such receipt/income cannot be construed as derived from property/business held under trust. Since such receipt/income is inevitable or consequential while carrying on the activity of education, such income also becomes eligible for exemption. The educational institution is an apparatus for carrying out the charitable activity. Therefore, in our opinion, the educational institution or charitable activity itself cannot be construed as the property held under Trust. As we have already observed, establishing educational institution, is an activity of charity. Therefore, by any stretch of imagination, the charitable activity, cannot be held as the property held under Trust, even though the income/receipt incidental to such activity is eligible for exemption. However, in our opinion, the money collected over and above the prescribed fee for admitting students cannot be construed as income derived from/incidental to the activity of carrying on charitable activity.

13. Section 11(4A) of the Income-tax Act reads as follows :

"[(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.]"

It is well-settled principle of law that a business held under a Trust is also a property. Section 11(4) also makes it very clear that the property held under the Trust includes a business undertaking. If the assessee-society was running a business incidental to the attainment of the object of the Society and separate books of account are maintained by the assessee, the income derived from such business, shall be treated as income derived from the property held under the Trust. We find that the Apex Court in the case of Asstt. CIT v. Thanthi Trust [2001] 247 ITR 785 considered the provisions of section 11(4A). His Lordship Hon’ble Mr. Justice S.P. Bharucha (as His Lordship then was) speaking for the Bench of the Apex Court has observed as follows :

"The substituted sub-section (4A) states that the income derived from a business held under trust wholly for charitable or religious purposes shall not be included in the total income of the previous year of the trust or institution if ‘the business is incidental to the attainment of the objective of the trust or, as the case may be, institution’ and separate books of account are maintained in respect of such business. Clearly, the scope of sub-section (4A) is more beneficial to a trust or institution than was the scope of sub-section (4A) as originally enacted. In fact, it seems to us that the substituted sub-section (4A) gives a trust or institution a greater benefit than was given by section 13(1)(bb). If the object of Parliament was to give trusts and institutions no more benefit than that given by section 13(1)(bb), the language of section 13(1)(bb) would have been employed in the substituted sub-section (4A). As it stands, all that it requires for the business income of a trust or institution to be exempt is that the business should be incidental to the attainment of objectives of the trust or institution. A business whose income is utilized by the trust or the institution for the purposes of achieving the objectives of the trust or the institution is, surely, a business which is incidental to the attainment of the objectives of the trust."

It is clear from the above observation of the Apex Court that if the business income was derived from business held under the trust and the same was utilized by the institution for achieving the object of the institution, then, we may say that such income was applied for charitable purpose. As we already observed the assessee-society has no property or business whatsoever under Trust. Moreover, it is not the claim of the assessee that any income was derived from the property or business held under Trust.

14. We find that the Kerala High Court in the case of Brahmin Educational Society v. Asstt. CIT [1997] 227 ITR 317 considered a similar question. In the case before the Kerala High Court, the assessee-society was running educational institution. The assessee-society received income from Kuri Business. Kuri Business was being done to augment the income of the educational institution. The question which arose before the Kerala High Court was whether the income received by the assessee from Kuri Business, was exempted under section 10(22) of the Income-tax Act, 1961. The Kerala High Court examined the provisions of sections 11, 11(4) and 10(22) of the Income-tax Act and found that if the society exists solely for educational purpose and it runs an educational institution, its income will be income of the educational institution and therefore, exempted under section 10(22) of the Income-tax Act, 1961. The Kerala High Court further observed that section 11(4) of the Income-tax Act cannot override section 10(22). The language of section 10(22) is analogous with provisions of sections 10(23C)(iii ab), 10(23C)( iii ad) and 10 (23C )(vi). Therefore, the judgment of the Apex Court and other High Courts in respect of section 10(22) is equally applicable to the present section. When the Legislature enacted a specific provision for grant of exemption of income in respect of educational institution under sections 10(23C)( iii ab), 10(23C )(iii ad) and 10(23C)(vi ), the general provision contained in section 11 may not override the provisions of specific section. In other words, the income of the educational institution has to be examined under sections 10(23C)( iiiab), 10(23C)(iii ad) and 10(23C)( vi) and not under section 11 of the Act. This view of ours is further fortified by the Judgment of the Karnataka High Court in the case of CIT v. Saraswati Poor Students Fund [1984] 150 ITR 142. Even otherwise, the material available of record, which was found during survey operation clearly shows the receipt of money over and above the fees prescribed by the committee constituted by the Government, for admitting the students under the Management Quota. The material found during the course of survey operation, further establishes that the money collected over and above the prescribed fee for admitting students was paid to the Chairman and other interested persons of the society. Therefore, there is a clear violation of the provisions of section 13(1)(c) of the Income-tax Act. Under section 13(1)(c) if any part of income of the institution, is used or applied directly/indirectly for the benefit of a person, i.e., the founder or any interested person, as referred to in section 13(3) of the Income-tax Act, then the assessee shall not be entitled to exemption under sections 11 and 12 of the Income-tax Act. Therefore, in our opinion, the assessee is not entitled for exemption under section 11 of the Income-tax Act.

15. Now, let us examine whether the assessee is entitled for exemption under section 10(23C)( iii ab), 10(23C)( iii ad) or 10(23C )(vi) of the Income-tax Act, 1961. Section 10(23)( iii ab) refers to educational institution or university, which is wholly or substantially financed by Government. In this case, the assessee-society, was not financed by the Government either wholly or substantially and therefore, the provisions of section 10(23C)(iiiab ) are not applicable. Let us now examine whether the assessee-society would fall under section 10(23C)( iii ad). Section 10(23C )(iii ad) would be applicable in case the assessee’s annual receipts do not exceed Rs. 1 crore. In this case, the assessee’s annual receipt admittedly exceeds Rs. 1 crore. Therefore, the provisions of section 10(23C)( iii ad) is also not applicable. Now what remains is section 10(23C)( vi) which provides for exemption of income of any university or other educational institutions existing solely for educational purpose and not for profit. In this case, the assessee-society is admittedly not an university. However, the assessee-society is running educational institutions and receiving income from such institutions.

16. Let us now examine when a society which runs/owns an educational institution, whether such society itself would be regarded as ‘other educational institutions’. We find that the Apex Court examined this issue in the case of Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310¹ (SC). In the case before the Apex Court, the assessee-society established and running the educational institution. The Administrative Commissioner held that section 10(22) is applicable to the educational institution and not to any one who might be financing and running the said institution. However, the Apex Court held that since the society came into existence to impart education, such educational society should be regarded as an ‘educational institution’. His Lordship Hon’ble Mr. Justice K.S. Paripoornan (as his Lordship then was) speaking for the Apex Court in the case of Aditanar Educational Institution (supra) at page 317 observed as follows :

"We are of the view that an educational society or a trust or other similar body running an educational institution solely for educational purposes and not for the purpose of profit could be regarded as ‘other educational institution’ coming within section 10(22) of the Act [See CIT v. Doon Foundation [1985] 154 ITR 208 (Cal.) and Agarwal Shiksha Samiti Trust v. CIT [1987] 168 ITR 751 (Raj.)]. It will be rather unreal and hypertechnical to hold that the assessee-society is only a financing body and will not come within the scope of ‘other educational institution’ as specified in section 10(22) of the Act. The object of the society is to establish, run, manage or assist colleges or schools or other educational institutions solely for educational purposes and in that regard to raise or collect funds, donations, gifts etc., colleges and schools are the media through which the assessee imparts education and effectuates its objects. In substance and reality, the sole purpose for which the assessee has come into existence is to impart education at the levels of colleges and schools and so, such an educational society should be regarded as an ‘educational institution’ coming within section 10(22) of the Act. We hold accordingly."

Therefore, it is obvious that the assessee-society would fall within the term ‘other educational institution’.

17. Let us now examine whether the provisions of section 10(23C)(vi) would be applicable to the assessee or not. For the purpose of claiming exemption under section 10(23C)(vi), the university or the other educational institution, has to get the approval of the prescribed authority. The prescribed authority, is the Chief Commissioner or the Director General of Income-tax. The purpose of designating the senior most Officers of the Income-tax Department, as Prescribed Authority, clearly shows that, before granting approval, a thorough examination has to be made and find out whether the assessee-society is existing solely for educational activity and not for profit. In this case, as seen from the assessment order, the prescribed authority, rejected the application made by the assessee for approval. It is also not the case of the assessee that the necessary approval was obtained from the prescribed authority. In the absence of such approval from the prescribed authority, the assessee, is not entitled for any exemption under section 10(23)( vi) of the Income-tax Act.

18. Furthermore, the assessee has to establish that the running of educational institutions is not for the purpose of profit. Let us now examine whether the assessee is running the educational institution for the purpose of profit or not. The assessee has no independent source of income other than the income from the educational institutions. During the course of survey, admittedly, the revenue authorities found incriminating material which shows the collection of exorbitant amounts from the students, who are admitted under the management quota. Shri R. Srinivasa Rao who was examined in the course of survey proceedings admitted that the money collected from the students who were admitted under management quota are concealed income of society. He also further stated that the monies collected under the management quota were handed over to the chairman and other persons interested in the society. However, Sri R. Srinivasa Rao was not cross-examined by the assessee. We find that the Assessing Officer has placed reliance on the totality of the material seized during the course of survey operations and not only on the statement recorded during the course of survey from Sri R. Srinivasa Rao. Even otherwise, as held by Madras High Court in the case of T. Devasahaya Nadar v. CIT [1964] 51 ITR 20 it cannot be said as a general proposition of law that any evidence upon which the department, might rely should have been subjected to cross-examination. In this case the statement of Mr. Srinivasa Rao was already brought to the notice of the assessee. Even otherwise if we ignore the statement received from Sri R. Srinivasa Rao, the material found during the course of survey operation clearly shows that the assessee-society collected money over and above the fees prescribed by the Government for admitting the students under the management quota. With this background, we have to examine whether the collection of the money over and above the fees prescribed by Government from the students or their parents for admitting under the management quota would have any profit motive or not.

19. Under article 41 of the Constitution of India, it is the responsibility of the State to provide education to all citizens of this country. The State may discharge its obligation through State owned or State recognized educational institutions. When State/Central Government grants recognition to the private educational institutions, it creates an agency to fulfil its obligation under the Constitution. Therefore, the private institutions, are functioning as agents of the State/Central Government. It is the primary responsibility and obligation of the State to provide education to the citizens. Therefore, the educational institutions while acting as agents of the State have to collect the fees as prescribed by the Government. The students are given admission to the private educational institutions in recognition of their ‘right to education’ under the Constitution. Therefore, charging of any amount over and above the fee prescribed by Government, either as capitation fee or otherwise, in consideration of admission to educational institution, is a patent denial of a citizen’s right to education under the Constitution. Education is in the concurrent list of the Constitution. Therefore, both the Central and State Governments are competent to enact law with regard to education. In other words, it is the responsibility/obligation of both the Central and State Governments to provide education to all the citizens of the country. Despite various cultural and linguistic differences, India is united because of tolerance and piousness of the people. Education is considered to be pious in this country. Ancient days ‘Gurukulams’ were established to impart knowledge to people. Due to efflux of time and civilization, the earlier ‘Gurukulams’ are now called as Schools, Colleges. In other words, it is known as educational institutions. However, the Indian civilization continue to recognize education as one of the pious obligation of the human society. When the people of this country considered education as a pious one, it cannot be made as a saleable commodity in the guise of encouraging private institution to support the State in the process of establishing educational institutions. To establish and administer educational institutions, are considered to be a charitable object. The way in which the exorbitant amounts are collected by the assessee-society for admission under the management quota, shows that they are not administering the educational institutions for pious and charitable purpose, but, with a profit motive. When the assessee sells the seat of the professional course in the college and collects money, can we say there is no profit motive. In other words, when the assessee admits students under management quota in consideration of an amount, which is over and above the fees prescribed by the Government, can we say there is no profit motive? The obvious answer to this question is in Negative. When the assessee collects money over and above the fees prescribed by Government, it clearly exposes the intention of the assessee to earn profit. It is also to be remembered that collection of capitation fees for admission to any educational institution is made as an offence punishable in this country. In spite of that, the assessee was bold enough in collecting the money over and above the fees prescribed by the Government.

20. The Apex Court in the case of T.M.A. Pai Foundation v. State of Karnataka [2002] 8 SCC 481 had an occasion to consider the right of the aided and unaided private educational institutions. The Constitutional Bench of the Supreme Court elaborately considered the right of establishing private educational institutions and found that collection of capitation fees being the worst part of mal-administration, can properly be subject-matter of regulatory control of a State. The Apex Court further observed that receiving donations by educational institutions connected with admission of students has to be treated as collection of capitation fees. The Apex Court observed that the right to admit students being an essential facet of the right to administer educational institutions of their choice, the State Government/University may not be entitled to interfere with their right so long as the admission to the unaided educational institution is on a transparent basis and merit is adequately taken care of. It was also observed that the unaided institutions cannot be regulated with regard to charging of fees, however, such institution shall not charge capitation fees. This judgment was considered by another Bench of the Apex Court in the case of Islamic Academy of Education (supra). The majority Judges of the Apex Court after considering the judgment in the case of TMA Pai Foundation (supra), observed that there can be no fixing of rigid fee structure by the Government. Each institute must have the freedom to fix its own fee structure, taking into consideration the need to generate funds to run the institution and to provide facilities necessary for the benefit of the students. The educational institutions must also be able to generate surplus which must be used for the betterment and growth of that educational institution. It was further observed that the surplus funds cannot be diverted for any other use or purpose and cannot be used for personal gain or for any other business or enterprise. The Apex Court further directed all the State Governments and concerned authorities to set up committee headed by a Hon’ble Retired High Court Judge who shall be nominated by the Hon’ble Chief Justice of the High Court. For the purpose of convenience, we reproduce the direction of the Apex Court as reported in pages 720-722 of Islamic Academy of Education’s case (supra).

"7. So far as the first question is concerned, in our view the majority judgment is very clear, there can be no fixing of a rigid fee structure by the Government. Each institute must have the freedom to fix its own fee structure taking into consideration the need to generate funds to run the institution and to provide facilities necessary for the benefit of the students. They must also be able to generate surplus which must be used for the betterment and growth of that educational institution. In paragraph 56 of the judgment it has been categorically laid down that the decision on the fees to be charged must necessarily be left to the private educational institutions that do not seek and will be entitled to have its own fee structure. The fee structure for each institute must be fixed keeping in mind the infrastructure and facilities available, the investments made, salaries paid to the teachers and staff, future can be no profiteering and capitation fees cannot be charged. It thus needs to be emphasized that as per the majority judgment imparting of education is essentially charitable in nature. Thus the surplus/profit that can be generated must be only for the benefit/use of that educdtional institution. Profits/surplus cannot be diverted for any other use or purpose and cannot be used for personal gain or for any other business or enterprise. As, at present, there are statutes/regulations which govern the fixation of fees and as this Court has not yet considered the validity of those statutes/regulations, we direct that in order to give effect to the judgment in TMA Pai case the respective State Governments/concerned authority shall set up, in each State, a committee headed by a retired High Court Judge who shall be nominated by the Chief Justice of that State. The other member, who shall be nominated by the Judge, should be a Chartered Accountant of repute. A representative of the Medical Council of India (in short ‘MCI’) or the All India Council for Technical Education (in short ‘AICTE’), depending on the type of institution, shall also be a member. The Secretary of the State Government in charge of Medical Education or Technical Education, as the case may be, shall be a member and Secretary of the Committee. The Committee should be free to nominate/co-opt another independent person of repute, so that the total number of members of the Committee shall not exceed five. Each educational institute must place before this Committee, well in advance of the academic year, its proposed fee structure. Along with the proposed fee structure all relevant documents and books of account must also be produced before the Committee for their scrutiny. The Committee shall then decide whether the fees proposed by that institute are justified and are not profiteering or charging capitation fee. The Committee will be at liberty to approve the fee structure or to propose some other fee which can be charged by the institute. The fee fixed by the Committee shall be binding for a period of three years, at the end of which period the institute would be at liberty to apply for revision. Once fees are fixed by the Committee, the institute cannot charge either directly or indirectly any other amount over and above the amount fixed as fees. If any other amount is charged, under any other head or guise e.g., donations, the same would amount to charging of capitation fee. The Governments/appropriate authorities should consider framing appropriate regulations, if not already framed, where under if it is found that an institution is charging capitation fees or profiteering that institution can be appropriately penalized and also face the prospect of losing its recognition/affiliation. It must be mentioned that during arguments it was pointed out to us that some educational institutions are collecting, in advance, the fees for the entire course i.e., for all the years. It was submitted that this was done because the institute was not sure whether the student would leave the institute midstream. It was submitted that if the student left the course in midstream then for the remaining years the seat would lie vacant and the institute would suffer. In our view an educational institution can only charge prescribed fees for one semester/year. If an institution feels that any particular student may leave in midstream then, at the highest, it may require that student to give a bond/bank guarantee that the balance fees for the whole course would be received by the institute even if the student left in midstream. If any educational institution has collected fees in advance, only the fees of that semester/year can be used by the institution. The balance fees must be kept invested in fixed deposits in a nationalized bank. As and when fees fall due for a semester/year only the fees falling due for that semester/year can be withdrawn by the institution. The rest must continue to remain deposited till such time that they fall due. At the end of the course the interest earned on these deposits must be paid to the student from whom the fees were collected in advance."

From the above observation of the Apex Court, it is obvious that each institute has to collect fees with regard to infrastructure and the benefit of the students of that educational institution. However, that fee has to be fixed by the committee headed by an Hon’ble retired High Court Judge. In the State of Andhra Pradesh, a committee has already been constituted to determine the fees that may be collected by the private professional educational institutions. The committee also after considering the information furnished by the respective educational institutions fixed the fees that may be collected by the professional educational institution per semester/year. Therefore, the assessee has to collect the fees that was prescribed by the Committee headed by Hon’ble Retired Judge of the High Court. The money that was collected by the assessee either directly or indirectly over and above the amount fixed as fees by the committee has to be treated as collection and charging of capitation fees and the assessee has to face the further consequences in accordance with law including losing of its recognition/affiliation. Moreover, if the assessee feels that any particular student may leave the institution in midstream, then at the best, it may require that student to give a bond/bank guarantee that the balance fees for the whole course would be received by the institute even if the student left in midstream. In case, the assessee collected the fees for entire course in advance, only the fees of that semester/year can be used by the institution. The balance fees must be kept invested in fixed deposits in a nationalized bank. The interest earned on such deposit must be paid to the student from whom the fees was collected in advance. In the case before us, the assessee even though claimed that the fees for the entire 4 years was collected, the same was not deposited/invested in any Bank as per the direction of the Apex Court. In fact, the entire money was utilized by the persons interested in the society. Therefore, there is a clear case of misuse of funds of the institution, besides, collecting money over and above the fees prescribed for the semester indirectly which amounts to collection of capitation fees as held by the Hon’ble Apex Court. Therefore, in our opinion, assessee-society exists not solely for educational purpose, but exists only for profit.

21. The Apex Court had another occasion to examine the case of an educational institution in P.A. Inamdar v. State of Maharashtra [2005] 6 SCC 537. The Apex Court after considering the judgment in the case of TMA Pai Foundation ( supra) and Islamic Academy of Education’s case (supra), observed as follows, at para 6 page 555 of SCC.

"6. Education used to be charity or philanthropy in the good old times. Gradually it became an ‘occupation’. Some of the judicial dicta go on to hold it as an ‘industry’. Whether to receive education is a fundamental right or not has been debated for quite sometime. But it is settled that establishing and administering of an educational institution for imparting knowledge to students is an occupation, protected by article 19(1)(g) and additionally by article 26(a), if there is no element of profit generation. As of now, imparting education has come to be a means of livelihood for some professionals and a mission in life for some altruists."

Therefore, establishing and administering an educational institution for imparting knowledge to students is an occupation, protected by article 19(1)(g) and article 26( a) provided there is no element of profit generation. In the case before us, the material found during the course of survey operation clearly establishes the existence of element of profit generation.

22. At page 605 of SCC, the Apex Court further observed as follows :

"139. To set up a reasonable fee structure is also a component of ‘the right to establish and administer an institution’ within the meaning of article 30(1) of the Constitution, as per the law declared in Pai Foundation. Every institution is free to devise its own fee structure subject to the limitation that there as can be no profiteering and no capitation fee can be charged directly or indirectly, or in any form (paras 56 to 58 and 161) [answer to Question 5(c) of Pai Foundation are relevant in this regard].

Capitation fee cannot be permitted to be charged and no seat can be permitted to be appropriated by payment of capitation fee. ‘Profession’ has to be distinguished from ‘business’ or a mere ‘occupation’. While in business, and to a certain extent in occupation, there is a profit motive, profession is primarily a service to society wherein earning is secondary or incidental. A student who gets a professional degree by payment of capitation fee, once qualified as a professional, is likely to aim more at earning rather than serving and that becomes a bane to society. The charging of capitation fee by unaided minority and non-minority institutions, for professional courses is just not permissible. Similarly, profiteering is also not permissible. Despite the legal position, this Court cannot shut its eyes to the hard realities of commercialization of education and evil practices being adopted by many institutions to earn large amounts for their private or selfish ends. If capitation fee and profiteering is to be checked, the method of admission has to be regulated so that the admissions are based on merit and transparency and the students are not exploited. It is permissible to regulate admission and fee structure for achieving the purpose just stated."

In view of the above observation of the Apex Court, it is obvious that a private aided or unaided professional institution or any other institution has to collect the fees fixed by the committee, as directed by the Apex Court. The committee in the State of Andhra Pradesh has already fixed the fees for the respective colleges. Therefore, any amount received by the assessee over and above fee fixed by the committees has to be classified as capitation fees and the institution shall face the legal consequences. In other words, the assessee exists for profit and not solely for educational purpose. Since, the assessee has not obtained the approval of the prescribed authority as required under section 10(23C)( vi) and it also exists for profit and not solely for educational purpose, in our opinion, the assessee is not entitled for exemption under section 10(23C)( vi) also.

23. Further, we find that the Government and the prescribed authorities require to be informed before passing any order without giving effect to the provisions of section 10 of the Income-tax Act. We have also gone through the provisions of section 143 of the Income-tax Act. The provisions of section 143(3) reads as follows :

"[(3) On the day specified in the notice,—

(i )issued under clause (i) of sub-section (2), or as soon afterwards as may be, after hearing such evidence and after taking into account such particulars as the assessee may produce, the Assessing Officer shall, by an order in writing, allow or reject the claim or claims specified in such notice and make an assessment determining the total income or loss accordingly, and determine the sum payable by the assessee on the basis of such assessment;

(ii )issued under clause (ii) of sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment:]

[Provided that in the case of a—

(a )scientific research association referred to in clause (21) of section 10;

(b)news agency referred to in clause (22B) of section 10;

(c )association or institution referred to in clause ( 23A) of section 10;

(d )institution referred to in clause (23D ) of section 10;

(e )fund or institution referred to in sub-clause (iv ) or trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via) of clause (23C) of section 10,

which is required to furnish the return of income under sub-section (4C) of section 139, no order making an assessment of the total income or loss of such scientific research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, shall be made by the Assessing Officer, without giving effect to the provisions of section 10, unless—

(i )the Assessing Officer has intimated the Central Government or the prescribed authority the contravention of the provisions of clause (21) or clause (22B) or clause (23A) or clause (23B ) or sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause ( via) of clause (23C) of section 10, as the case may be, by such scientific research association, news agency, association or institution or fund or trust or university or other educational institution or any hospital or other medical institution, where in his view such contravention has taken place; and

(ii )the approval granted to such scientific research association or other association (or fund, or trust) or institution or university or other educational institution hospital or other medical institution has been withdrawn or notification issued in respect of such news agency or fund or trust or institution has been rescinded:)

[Provided further that where the Assessing Officer is satisfied that the activities of the university, college or other institution referred to in clause (ii) and clause (iii) of sub-section (1) of section 35 are not being carried out in accordance with all or any of the conditions subject to which such university, college or other institution was approved, he may, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university, college or other institution, recommended to the Central Government to withdraw the approval and that Government may by order, withdraw the approval and forward a copy of the order to the concerned university, college or other institution and the Assessing Officer.]"

24. In view of first proviso to section 143(3), the Assessing Officer may pass an order without giving effect to the provisions of section 10, provided, he informs the prescribed authority/Central Government as the case may be and the approval granted earlier is withdrawn or rescinded. In this case before us, it is not the case of the assessee that any approval was obtained from prescribed authority. In fact, as seen from assessment order, the prescribed authority, rejected the application of the assessee for approval. The question of intimating the prescribed authority and waiting for withdrawal of approval may be necessary in a case where approval was granted earlier. Since no approval was granted by prescribed authority earlier, there is no need for the Assessing Officer to intimate to the prescribed authority before passing the assessment order, without giving effect to the provisions of section 10(23C)(vi) of the Income-tax Act, 1961.

25. The other contention of the learned counsel for the assessee is that the Assessing Officer has taken the income of the one college for computation in the assessment order. The learned DR also conceded that the Assessing Officer has taken only the income of one college; therefore, the Assessing Officer may be asked to verify the income of other educational institution run by the assessee. In view of the above submission of the learned counsel for the assessee and learned DR, the Assessing Officer may verify the income of the other educational institution run by the assessee-society and the Assessing Officer shall be at liberty to rectify the computation of income in the assessment order under section 154 of the Income-tax Act. We make it clear that the confirmation of the assessment order by the CIT(A) and this Tribunal shall not be treated as a bar for verifying the income of the other educational institution and rectifying the computation of the assessment order. In other words, the Assessing Officer is at liberty to rectify the computation of income alone in the assessment order.

26. In view of the above discussion, we do not find any merit in the appeal of the assessee. Accordingly, the same is dismissed.

 

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