2016 (7) TMI 272 - AT - Income Tax

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. The Revenue has also established that donation/voluntary contribution was collected from the parents of the students admitted during the year and more so the parents were not financially sound to part with substantial amount of donation in Lakhs to the educational institution. Therefore, we are of the view that the receipts of the assessee from the parents of students is nothing but capitation fees and once capitation fee is charged for admission of the students by the educational institution, the 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 and in the case of P.S. Govindaswamy Naidu & Sons v. ACIT, (2007 (10) TMI 382 - MADRAS HIGH COURT) has held that where it was found that amount paid by parents of students admitted to assessee s educational institution was not corpus donation amount, but it was collected only by way of capitation fees, such capitation fees was not exempt in the hands of assessee institution. Grant of registration u/s. 12AA by the Tribunal is concerned, we are of the view that the scope of grant of registration 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 the assessee is not engaged in charitable activities and is engaged in commercial activities, the benefit of exemption u/s. 11 can be denied. In the instant case, the AO has brought out enormous evidence on record especially to establish that the assessee is not engaged in charitable activities and all these evidence was overlooked by the CIT(Appeals) in the AYs 2009-10 & 2010-11. Therefore, we find no error in the order of the AO by denying the benefit of exemption u/s. 11 to the assessee. - Decided against assessee

Issues Involved:
1. Whether the collection of capitation fees/donations by the assessee trust disqualifies it from claiming exemption under Section 11 of the Income Tax Act.
2. Whether the letting out of Kalyana Mantapa for marriage purposes constitutes a charitable activity.
3. Whether the assessee's activities align with the charitable objectives as per the granted registration under Section 12AA.

Detailed Analysis:

1. Collection of Capitation Fees/Donations:
The primary issue revolves around whether the receipt of capitation fees or donations by the assessee in violation of the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984, disqualifies the assessee from claiming exemption under Section 11 of the Income Tax Act. The Revenue argued that the assessee collected capitation fees over and above the regular tuition fees, which is prohibited by the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984. The AO conducted an investigation and found that the donations were not voluntary but were collected as a condition for admission, thus constituting capitation fees. The AO denied the exemption under Section 11, citing that the assessee was not engaged in charitable activities but rather in commercial activities by selling education.

The Tribunal upheld the AO's findings, noting that the donations were collected from parents of students admitted during the year and were not towards the corpus of the trust. The Tribunal emphasized that capitation fees are defined by the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984, and the receipts in question fell under this definition. The Tribunal also referred to the judgment of the Hon'ble Supreme Court in the case of Ms. Mohini Jain v. State of Karnataka & Ors., which held that capitation fees are akin to selling education, thus disqualifying the institution from being considered charitable.

2. Letting Out of Kalyana Mantapa:
The assessee argued that letting out of Kalyana Mantapa for marriage purposes is one of the objects of the society and thus constitutes a charitable activity. The CIT(Appeals) accepted this argument and granted exemption, holding that this activity was part of the charitable activities of the trust. However, the AO considered this to be a commercial activity, referencing the judgment of the Hon'ble jurisdictional High Court in the case of Sri Subharam Trust.

The Tribunal did not find sufficient grounds to overturn the AO's assessment and held that the letting out of Kalyana Mantapa for marriage purposes could be considered a commercial activity rather than a charitable one.

3. Alignment with Charitable Objectives:
The assessee contended that the donations were towards the corpus and thus should not affect the exemption under Section 11. However, the AO and the Tribunal found that the donations were collected as capitation fees and not as voluntary contributions towards the corpus. The Tribunal emphasized that the nature of activities must align with the charitable objectives for the exemption to be granted under Section 11.

The Tribunal also addressed the issue of registration under Section 12AA, stating that while the registration process examines the objects of the society, the exemption under Section 11 requires scrutiny of the actual activities. The AO's investigation revealed that the assessee's activities were not charitable but commercial, justifying the denial of exemption.

Conclusion:
The Tribunal upheld the AO's decision to deny the exemption under Section 11 of the Income Tax Act, concluding that the assessee's collection of capitation fees constituted a commercial activity. The Tribunal set aside the CIT(Appeals)'s orders in ITA Nos. 206 & 207/Bang/14 and restored the AO's orders, while confirming the CIT(Appeals)'s order in ITA No.1099/Bang/2015. The appeals of the Revenue were allowed, and the assessee's appeal was dismissed.

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