2016 (4) TMI 874 - SC - Income Tax

Exemption from payment of tax under the provisions of Section 10(23C)(iiiab) - direct grant from the Government - Purpose of University Held that - Having regard to the text and the context of the provisions of Section 10 (23c) (iiiab), 10 (23c) (iiiad) and 10 (23c) (vi) it will be reasonable to reach a conclusion that while Section 10 (23c) (iiiab) deals with Government Universities, Section 10 (23c) (iiiad) deals with small Universities having an annual turnover of less than Rupees One Crore (as prescribed by Rule 2 (BC) of the Income Tax Rules). On a similar note, it is possible to read Section 10 (23c) (vi) to be dealing with Private Universities whose gross receipts exceeds Rupees One Crore. Receipts by way of fee collection of different kinds continue to a major source of income for all Universities including Private Universities. Levy and collection of fees is invariably an exercise under the provisions of the Statute constituting the University. In such a situation, if collection of fees is to be understood to be amounting to funding by the Government merely because collection of such fees is empowered by the Statute, all such receipts by way of fees may become eligible to claim exemption under Section 10 (23c) (iiiab). Such a result which would virtually render the provisions of the other two Sub-sections nugatory cannot be understood to have been intended by the Legislature and must, therefore, be avoided. It will, therefore, be more appropriate to hold that funds received from the Government contemplated under Section 10(23c)(iiiab) of the Act must be direct grants/contributions from governmental sources and not fees collected under the statute. The situation before us, on facts, is different leading to the irresistible conclusion that the appellant University does not satisfy the second requirement spelt out by Section 10 (23c) (iiiab) of the Act. The appellant University is neither directly nor even substantially financed by the Government so as to be entitled to exemption from payment of tax under the Act. - Decided against assessee

Issues Involved:

1. Entitlement of the University to exemption under Section 10(23C)(iiiab) of the Income Tax Act, 1961.
2. Whether the University exists solely for educational purposes and not for profit.
3. Whether the University is wholly or substantially financed by the Government.

Issue-wise Detailed Analysis:

1. Entitlement of the University to exemption under Section 10(23C)(iiiab) of the Income Tax Act, 1961:

The primary issue in the present appeals is whether the appellant University is entitled to exemption from payment of tax under Section 10(23C)(iiiab) of the Income Tax Act, 1961. This provision exempts income received by any university or other educational institution existing solely for educational purposes and not for profit, and which is wholly or substantially financed by the Government.

2. Whether the University exists solely for educational purposes and not for profit:

The entitlement for exemption under Section 10(23C)(iiiab) is subject to two conditions. Firstly, the educational institution or the university must be solely for the purpose of education and without any profit motive. The principles governing this issue have been elaborated in previous judgments, notably in Queen's Educational Society vs. Commissioner of Income Tax (2015) 8 SCC 47. The Supreme Court reiterated that the predominant object test must be applied, and the purpose of education should not be submerged by a profit-making motive. The Court emphasized that a surplus arising incidentally from educational activities does not imply a profit motive if it is ploughed back for educational purposes.

In the present case, the University had generated a surplus of about ?500 crores during a decade. Despite the significant surplus, the Court found that the surplus was ploughed back for educational purposes, satisfying the first requirement that the University exists solely for educational purposes and not for profit. The exemption granted under Section 80G of the Act, recognizing the charitable nature of the institution, further supported this conclusion.

3. Whether the University is wholly or substantially financed by the Government:

The second condition for exemption under Section 10(23C)(iiiab) is that the University must be wholly or substantially financed by the Government. It was undisputed that direct grants from the Government during the assessment years in question never exceeded 1% of the University's total receipts. The appellant argued that fees collected under statutory provisions should be considered as government funding. However, the Court rejected this argument, stating that funds from the Government must be direct grants or contributions, not fees collected under statutory provisions.

The Court compared the provisions of Section 10(23C)(iiiab) with Sections 10(23C)(iiiad) and 10(23C)(vi), noting that the former deals with Government Universities, while the latter sections deal with small and private universities. The Court concluded that interpreting statutory fee collections as government funding would render the provisions of the other two sub-sections nugatory, which was not the Legislature's intention.

Reliance on the judgment of the Karnataka High Court in Commissioner of Income-tax, Bangalore vs. Indian Institute of Management (2014) 49 Taxmann.com 136 was also addressed. The High Court had considered the value of land and other infrastructure provided by the Government in determining substantial financing. However, even if such factors were considered, the total funding by the Government in the present case was around 4%-5% of the University's total receipt, which was insufficient to meet the requirement of being substantially financed by the Government.

Conclusion:

The Supreme Court concluded that the appellant University did not satisfy the second requirement of being substantially financed by the Government. Consequently, the University was not entitled to exemption under Section 10(23C)(iiiab) of the Income Tax Act, 1961. The appeals were dismissed without any order as to costs.

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