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2007 (10) TMI 437 - AT - Income TaxSociety running educational institutions and hostel - Entitlement for exemption u/s 11 or u/s 10(23C) - Charitable purpose Or Not - Collection of capitation fee - incriminating materials seized in the course of survey operation - violation of the provisions of section 13(1)( c ) restrict to claim exemption of section 11 or 12 ? - Rectify the computation of income in the assessment order u/s 154 - 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 - HELD THAT - 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. 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 u/s 2(15) of the Income-tax Act. Therefore, the assessee is not eligible for exemption u/s 11 of the Income-tax Act. 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. 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 u/s 10( 23 )( vi ) of the Income-tax Act. In view of the observation of the Apex Court in P.A. Inamdar v. State of Maharashtra 2005 (8) TMI 614 - SUPREME COURT , TMA Pai Foundation 2002 (10) TMI 739 - SUPREME COURT and Islamic Academy of Education s case 2003 (8) TMI 469 - SUPREME 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 u/s 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 u/s 10(23C)( vi) also. 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 - 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. In view of the 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 u/s 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. Thus, we do not find any merit in the appeal of the assessee. Accordingly, the same is dismissed.
Issues Involved:
1. Grant of exemption under section 11 of the Income-tax Act, 1961. 2. Examination of the assessee's claim under section 10(23C) instead of section 11. 3. Collection of capitation fees and its impact on the charitable status of the assessee. 4. The necessity of cross-examination of Mr. Srinivasa Rao. 5. Verification of income from other educational institutions run by the assessee. Detailed Analysis: 1. Grant of Exemption under Section 11 of the Income-tax Act, 1961: The primary issue was whether the assessee, a society running educational institutions, was entitled to exemption under section 11 of the Income-tax Act. The Tribunal noted that the assessee initially applied for approval under section 10(23C)(vi) but was rejected by the prescribed authority. The assessee then claimed exemption under section 11. The Tribunal found that section 11 provides for exemption of income from property held under trust for charitable or religious purposes, and the assessee must be a religious or charitable institution registered under section 12A. The assessee was granted registration from 1-4-2001, but the Tribunal observed that the collection of capitation fees contradicted the charitable status, as it amounted to selling education, which is against the constitutional scheme and Indian culture. Consequently, the Tribunal held that the assessee could not be considered a charitable institution under section 2(15) and was not eligible for exemption under section 11. 2. Examination of the Assessee's Claim under Section 10(23C) Instead of Section 11: The Tribunal examined whether the assessee could claim exemption under section 10(23C)(vi) instead of section 11. It was noted that the assessee's application for approval under section 10(23C)(vi) was rejected by the prescribed authority. The Tribunal emphasized that section 10(23C)(vi) requires approval from the Chief Commissioner or Director General of Income-tax, ensuring the institution exists solely for educational purposes and not for profit. Since the assessee did not obtain such approval, it was not entitled to exemption under section 10(23C)(vi). 3. Collection of Capitation Fees and Its Impact on the Charitable Status of the Assessee: The Tribunal found that the assessee collected money over and above the fees prescribed by the government, which constituted capitation fees. The Supreme Court in various judgments has held that capitation fees are contrary to the constitutional scheme and amount to selling education. The Tribunal concluded that collecting capitation fees indicated a profit motive, disqualifying the assessee from being considered a charitable institution. Therefore, the assessee was not eligible for exemption under section 11 or section 10(23C)(vi). 4. The Necessity of Cross-Examination of Mr. Srinivasa Rao: The assessee argued that it should have been given an opportunity to cross-examine Mr. Srinivasa Rao, whose statement was used against it. The Tribunal noted that the Assessing Officer and CIT(A) relied on the totality of the material seized during the survey, not just Rao's statement. Moreover, the Tribunal referred to the Madras High Court's ruling that cross-examination is not a general requirement for evidence used by the department. Thus, the Tribunal found that cross-examination of Mr. Srinivasa Rao was not necessary. 5. Verification of Income from Other Educational Institutions Run by the Assessee: The Tribunal acknowledged that the Assessing Officer considered the income of only one college in the assessment order. Both the assessee's counsel and the Departmental Representative agreed that the income from other educational institutions should be verified. The Tribunal directed the Assessing Officer to verify the income from other institutions and rectify the computation of income accordingly under section 154 of the Income-tax Act. Conclusion: The Tribunal dismissed the appeal, concluding that the assessee was not entitled to exemption under section 11 or section 10(23C)(vi) due to the collection of capitation fees and the lack of approval from the prescribed authority. The Tribunal also directed the Assessing Officer to verify and rectify the income computation from other educational institutions run by the assessee.
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