2016 (7) TMI 170 - AT - Income Tax

Exemption u/s 11 - Assessee society (registered u/s 12A) was running several educational institutions - During survey proceedings AO found that capitation fee/donation was collected by the assessee society from the students and such amount was disclosed in the return as voluntary donations and claimed exempt u/s 11. AO relied upon Apex Court ruling in the case of Islamic Academy of Education vs. State of Karnataka 2003 (8) TMI 469 - SUPREME COURT wherein the Hon ble Supreme Court heavily deprecated the practice of collecting capitation fee from students and held that the collection of capitation fee is contrary to the constitutional framework of India and collection of any such fee by educational institution cannot be recognized as a charitable activity within the meaning of section 2(15). The only issue in the present appeal is whether the amount collected by the management of the society over and above the prescribed fees charged by the Government is in the nature of capitation fees or voluntary contribution. It is undisputed fact that the assessee has been collecting amounts over and above the fee prescribed by the Government. Assessee-society had not led any evidence on record in support of the proposition that contributions are voluntary and made forming part of corpus of the society. Even before us, the assessee-society made no efforts to prove that the contributions are voluntary in nature. Therefore, the said capitation fees is not exempt u/s 11 - Decided against the assessee.

Summary

Issues Involved:
1. Nature of donations collected by the assessee-society.
2. Taxability of amounts collected over and above the prescribed fees.
3. Applicability of exemptions under sections 11(1)(a) and 12 of the Income-tax Act, 1961.
4. Interpretation of voluntary contributions versus capitation fees.

Detailed Analysis:

1. Nature of Donations Collected by the Assessee-Society:
The primary issue was whether the amounts collected by the assessee-society over and above the prescribed fees were voluntary contributions or capitation fees. The assessee, a society running educational institutions, claimed these amounts as voluntary donations exempt under sections 11(1)(a) and 12 of the Income-tax Act, 1961. However, during survey operations, it was found that these amounts were collected as capitation fees for admissions, which the assessee accounted for as voluntary contributions in their books.

2. Taxability of Amounts Collected Over and Above the Prescribed Fees:
The Assessing Officer (AO) determined that the amounts collected were not voluntary contributions but capitation fees, which are taxable under the head 'income from other sources.' The AO relied on the Supreme Court's decision in Islamic Academy of Education vs. State of Karnataka, which held that capitation fees are contrary to the constitutional framework and cannot be recognized as a charitable activity. Consequently, for the assessment years 2006-07, 2007-08, and 2010-11, the amounts collected over and above the prescribed fees were brought to tax.

3. Applicability of Exemptions Under Sections 11(1)(a) and 12 of the Income-tax Act, 1961:
The assessee contended that the donations were voluntary and thus exempt under section 11(1)(a). However, the CIT(A) upheld the AO's view for the assessment years 2006-07 and 2007-08, stating that the excess money collected was directly linked to admissions under the management quota and thus constituted capitation fees. For the assessment year 2010-11, the CIT(A) erroneously allowed the exemption based on the jurisdictional High Court's decision in DIT(Exemptions) vs. Sri Bellimatha Mahasamsthana Socio Cultural and Educational Trust, which was not applicable to the facts of this case.

4. Interpretation of Voluntary Contributions Versus Capitation Fees:
The Tribunal concluded that the amounts collected over and above the prescribed fees were capitation fees, not voluntary contributions. This conclusion was based on the clear nexus between the funds collected and student admissions, which the assessee failed to disprove. The Tribunal referred to the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984, which defines capitation fees and prohibits their collection. The Tribunal also cited the Supreme Court's decision in Islamic Academy of Education, which emphasized that education should not be a saleable commodity and that collecting capitation fees undermines the charitable nature of educational institutions.

Furthermore, the Tribunal highlighted that the assessee did not provide evidence to support the claim that the contributions were voluntary or part of the corpus of the society. The Tribunal reiterated that any donation made to gain an advantage or benefit cannot be considered voluntary, referencing the Supreme Court's ruling in Safdarjung Enclave Educational Society vs. MCD.

Conclusion:
The Tribunal dismissed the appeals filed by the assessee for the assessment years 2006-07 and 2007-08, and allowed the revenue's appeal for the assessment year 2010-11. The amounts collected over and above the prescribed fees were deemed capitation fees and thus taxable, not qualifying for exemption under sections 11(1)(a) and 12 of the Income-tax Act, 1961. The Tribunal emphasized that the collection of capitation fees is against public policy and the constitutional framework, and cannot be recognized as a charitable activity.