Bangalore ITAT Upholds Section 11 Exemption Despite Alleged Capitation Fee Collections

Rashtreeya Sikshana Samithi Trust Vs ACIT (ITAT Bangalore)

Bangalore ITAT Upholds Section 11 Exemption Despite Alleged Capitation Fee Collections

The Bangalore ITAT held that Rashtreeya Sikshana Samithi Trust is entitled to exemption under Sections 11 and 12, rejecting the Revenue’s contention that collection of “development fees” amounted to capitation fees and reflected a profit-making motive. The Tribunal noted that an identical issue in the assessee’s own case for AY 2012-13 had already been decided in its favour and subsequently affirmed by the Karnataka High Court. The High Court had specifically observed that the allegation of violation of the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act was based merely on assumptions, as no action had ever been initiated against the trust under that Act. Consequently, the Tribunal held that the Revenue could not deny charitable status under Section 2(15) merely on the basis of large surpluses or development fee collections.

The Tribunal further observed that once an institution is recognized as charitable and registered under Section 12A, exemption under Sections 11 and 12 can be denied only upon establishing violations of the specific provisions governing application or accumulation of income. The Assessing Officer had not demonstrated any breach of Sections 11, 12 or 13. The Tribunal also emphasized that capital expenditure incurred for educational infrastructure constitutes application of income, and therefore the AO’s computation of surplus by considering only revenue expenditure was fundamentally flawed. Revenue’s appeals for AYs 2014-15 to 2016-17 were accordingly dismissed.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

These appeals are filed by the assessee and the Revenue against the order passed under section 250 of the Income Tax 1961 pertaining to A.Ys. 2014-15 to 2016-17 at National Faceless Appeal Centre-NFAC, Delhi.

First, we take up Revenue’s appeal in ITA No. 1764/Bang/2025 for A.Y. 2014-15.

2. The first issue raised by the Revenue is that the ld. CIT-A erred in holding that the assessee is eligible for exemption/deduction under section 11 and 12 of the Act when educational institution being run for profit making motive.

3. The relevant facts are that the assessee is a trust and running educational institution, mainly engineering and dental colleges. It is registered and claims exemption of income u/s 11 & 12 of the Act on the grounds that it is engaged in charitable activity of imparting education. The assessee follows the fee structure as prescribed under the agreement with the Government of Karnataka, wherein a portion of seats are allotted under Government/CET quota at regulated fee and the balance seats under management/NRI quota.

3.1 During the course of assessment proceedings, the AO examined the financial statements and noticed that the assessee had disclosed a substantial amount of ₹61.15 crore as “development fee”, which was credited to the Income and Expenditure Account. On further verification, it was observed that this amount (development fee) was collected from parents and relatives of students who secured admission in the institution. The AO formed opinion that there existed a direct nexus between payment of such “development fee” and grant of admission. Based on this factual matrix, the AO formed a prima facie view that the assessee was indulging in commercialization of education rather than carrying on charitable activities.

3.2 The AO then proceeded to examine the legal position on the concept of “education” u/s 2(15) of the Act. Referring to the ratio laid down by the Hon’ble Supreme Court in the case of Sole Trustee, Loka Shikshana Trust reported in 101 ITR 234, the AO observed that education, in the legal sense, refers to systematic instruction, schooling or training given for the preparation for the work of life and not an activity driven by profit motive. If the institution derives substantial funds directly from students or their parents in connection with admission, such activity assumes the character of business or commercialization. Reference was further made to the decision of ITAT Hyderabad in the case Vodithala Education Society reported in 20 SOT 353, wherein collection of excess fees over prescribed limits was held to be in the nature of capitation fee, thereby the claim of charitable status under section 2(15) of the Act was denied.

3.3 The AO further referred to the landmark judgments of the Hon’ble Supreme Court such as Mohini Jain vs State of Karnataka [1992] 2 SCC 666, Unni Krishnan vs State of Andhra Pradesh [ AIR 1993 SC 2178], TMA Pai Foundation vs State of Karnataka[ 8 SCC 481], Islamic Academy of Education vs State of Karnataka [6 SCC 697] and P A Inamdar vs State of Maharashtra [6 SCC 537]. Based on these rulings, the AO noted that charging of capitation fees and profiteering in educational institutions is impermissible in law. While reasonable surplus is allowed, it must be incidental and applied towards educational purposes. Any systematic extraction of money linked to admissions would amount to sale of education.

3.4 The AO then examined the regulatory framework prevailing in Karnataka, particularly the consensual agreement between the State Government and private professional colleges governing fee structure and seat sharing. It was observed that the agreement prescribed an upper limit of fees for different categories of students and permitted higher fees only within declared limits, especially for NRI/management quota. However, the assessee had collected amounts over and above the notified fee in the guise of “development fee” or “voluntary contribution”, which was not permitted under the agreement or under the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act.

3.5 On verification of details furnished by the assessee itself, the AO found that such collections of “development fee” were not voluntary in nature. The assessee had provided donor-wise details showing corresponding students who obtained admission, thereby establishing a clear quid pro quo. The AO therefore concluded that these receipts were nothing, but capitation fee collected in violation of law. It was also observed that the assessee had not notified any such additional fee structure to the Government, which was mandatory under the regulatory framework of Karnataka Educational Institutions (Prohibition of Capitation Fee) Act.

3.6 The AO further carried out a detailed financial analysis of the assessee over several years. It was noted that over the period, the assessee had collected following sum of development fees:

3.7 The collection of development fees has resulted in huge surplus over the year which are tabulated as under:

3.8 Even without considering the receipts of “development fee”, the assessee was generating substantial surplus in the range of 16% to 34%, indicating that normal fee collections were sufficient to meet expenditure and cross-subsidy requirements. The same is tabulated as under:

3.9 The AO observed that such high surplus could not be regarded as incidental to educational activity. Instead, it indicated a systematic profit-making approach. Furthermore, the AO observed that generation of surplus could be for the purpose of meeting infrastructure requirements of the institution or for the cause of charitable activity in the field of education. However, in the present case, in the last 6 years even after meeting the infrastructure requirement, the assessee has accumulated substantial funds in the form of fixed deposits, mutual funds and other forms of assets yielding good amount of interest income. This conduct, according to the AO, was akin to that of a commercial entity rather than a charitable institution. In view of the foregoing discussion, detailed examination of facts, the AO held that the assessee has failed to satisfy the basic and indispensable condition prescribed u/s 11(1)(a) of the Act, namely that the property held under trust should exist wholly for charitable purposes i.e. education. The determination of this condition goes to the root of the matter and unless the same is fulfilled, the question of application or accumulation of income does not arise.

3.10 As such, the AO held that on careful consideration of the materials on record, it is evident that the assessee has been systematically collecting substantial amounts from students and their parents in connection with admission, in the guise of development fee or voluntary contribution and corpus donation. These receipts are directly linked with admission and therefore partake the character of capitation fee. Such collection is not only contrary to the regulatory framework governing private professional institutions but is also in clear violation of the provisions of the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act. Accordingly, the income so generated cannot be regarded as arising from activities lawfully carried out by the assessee, thereby failing the first and foremost test laid down by the Hon’ble Supreme Court.

3.11 Further, the magnitude and pattern of surplus generated by the assessee clearly indicates that such surplus is neither incidental nor reasonable. The surplus is not a by-product of educational activity but is consciously generated through collection of amounts over and above the prescribed fee structure. The Hon’ble Supreme Court in cases such as Aditanar Educational Institutions (224 ITR 310) and Queens Educational Society (55 taxmann.com 255) has consistently held that only reasonable surplus incidental to the main object is permissible; however, where surplus is generated in a systematic and disproportionate manner, particularly through unlawful means, the same assumes the character of profit. In the present case, the assessee has adopted a structured mechanism of collecting capitation fee year after year, resulting in substantial and abnormal surplus. Therefore, the second test of “incidental surplus” is also not satisfied.

3.12 Even otherwise, the assessee has failed to demonstrate that such surplus has been applied wholly and exclusively towards its charitable objects. On the contrary, it is observed that significant amounts of surplus have been accumulated and invested in fixed deposits, mutual funds and other financial instruments, yielding further income. This pattern of accumulation and investment indicates a clear intent for profit maximization and wealth creation.

3.13 The AO also rejected the contention of the assessee that once income is applied or accumulated in accordance with section 11 of the Act, the nature or source of income cannot be questioned, by holding the same as devoid of merit. The AO noted that the Hon’ble Supreme Court in cases such Aditanar Educational Institutions (224 ITR 310) and Queens Educational Society (55 taxmann.com 255) as well as the jurisdictional High Court in the case of Visvesvaraya Technological University (42 taxmann.com 237) have clearly held that the primary condition is that the institution must exist solely for charitable purposes. If the very activity of the assessee is tainted by profit motive or unlawful means, the benefit of exemption cannot be granted merely on the ground of application or accumulation of income. The AO held that in the present case, all the three parameters laid down by the Hon’ble Supreme Court in the above cases, namely (i) lawful activity, (ii) incidental and reasonable surplus, and (iii) application of income towards objects, stand violated. The conduct of the assessee clearly establishes that it is using the educational institution as a vehicle for profiteering, while claiming exemption under the provisions of section 11 of the Act.

3.14 Accordingly, the AO concluded that the assessee does not exist wholly for charitable purposes within the meaning of section 2(15) read with section 11 of the Act. The essential condition for claiming exemption being not fulfilled, the assessee is not entitled to exemption u/s 11 and 12 of the Act. The exemption so claimed is therefore disallowed and the total income of the assessee is brought to tax under the normal provisions of the Act in the status of an Association of Persons.

4. The aggrieved assessee preferred an appeal before the learned CIT(A).

5. The learned CIT(A) following the judgment of Hon’ble Karnataka High Court in own case of the assessee pertaining to A.Y. 2012-13 in ITA No. 554 of 2018 set aside the finding of AO and allowed the ground of appeal raised by the assessee by holding that the assessee is eligible for deduction/exemption under section 11 of the Act.

6. Being aggrieved by the order of the learned CIT(A), the Revenue is in appeal before us.

7. The learned DR before us submitted that the AO has rightly denied exemption u/s 11 & 12 of the Act as the assessee is engaged in commercialization of education. It was argued that the assessee has collected huge amounts from students/parents in the guise of development fee, which is directly linked to admission and therefore constitutes capitation fee. Such collection is in violation of the Karnataka Prohibition of Capitation Fee Act and the consensual agreement with the Government of Karnataka. The Ld. DR further contended that the assessee has generated excessive surplus year after year and a substantial portion of such surplus is attributable to these collections, which clearly indicates profit motive. It was therefore submitted that the assessee does not satisfy the condition of existing wholly for charitable purposes and hence the order of the AO deserves to be upheld.

8. The learned AR, on the other hand, before us submitted that the issue is squarely covered in favour of assessee by the order of this Tribunal in assessee’s own case for A.Y. 2012-13 in ITA No. 1732/Bang/2015, which has been affirmed by the Hon’ble Karnataka High Court in ITA No. 554 of 2018. It was contended that the facts for the year under consideration are identical to the assessment year 2012-13 and no distinguishing feature has been brought on record by the Revenue. The Ld. AR further submitted that mere generation of surplus does not disentitle the assessee from exemption so long as the predominant object is imparting education and the income is applied for such purpose. It was therefore prayed that following the principles of consistency and binding judicial precedents, the order of the learned CIT(A) allowing exemption u/s 11 & 12 is to be upheld.

8.1 Both the ld. DR and AR before us vehemently supported the order of the lower authorities as favourable to them.

9. We have heard the rival contentions of both the parties and perused the materials available on record. The issue for our consideration is whether the assessee is eligible for exemption u/s 11 of the Act or whether the activities of the assessee fall outside the scope of “charitable purpose” as defined u/s 2(15) of the Act, as alleged by the AO.

9.1 At the outset, we note that the AO has proceeded on the premise that the assessee is not carrying on charitable activity and that its activities are in the nature of commercialization of education. This finding, in our considered view, cannot be sustained in light of the fact that an identical issue had arisen in the assessee’s own case for A.Y. 2012-13, wherein the AO had taken the very same view that the assessee is not engaged in charitable activity. The Tribunal, however, vide its order dated 20.03.2018 in ITA No. 1732/Bang/2017, has categorically reversed the findings of the AO and held that the assessee is a charitable institution within the meaning of section 2(15) of the Act. We further note that the aforesaid order of the Tribunal has been carried in appeal by the Revenue before the Hon’ble Karnataka High Court in Income Tax Appeal No. 554 of 2018, and the Hon’ble High Court has upheld the findings of the Tribunal. Thus, the issue now stands concluded in favour of the assessee by the decision of the jurisdictional High Court. The relevant finding of the Hon’ble High Court reads as follows:

7. We have carefully considered rival contentions and perused records.

8. This court in Kammavari Sangham has held that so long as the exemption certificate is in force, the assessee is entitled for its benefit. In New Noble Educational Society relied upon by Shri Sanmathi, it is held that the compliance with registration under the different tax law is also a relevant consideration and it can legitimately weigh with the tax authority while deciding the applications for approval under Section 10(23C).

9. Undisputed facts of this case in hand are, the exemption certificate was in force as on the date of issuance of notice. The AO has denied the benefit of exemption by holding that the assessee had received a sum of Rs.27,23,55,000/-as capitation fee in the guise of voluntary contribution.

10. Shri Huilgol pointed out from para 18 of the impugned order that the assessee had filed an affidavit before the ITAT stating that no action under the KEI (Prohibition of Capitation Fee) Act, was initiated against the assessee. The ITAT has recorded that the learned departmental representative had not contradicted the said affidavit either orally or by filing a counter affidavit. Based on this factual aspect, the ITAT has recorded thus in the impugned order;

“37. In the light of the above, we are of considered opinion that the Appellant is carrying out education which is charitable within the meaning of section 2(15), it has applied and/or accumulated sums as required by section 11(1)(a), the explanation thereto and section 11(2), it is duly registered under section 12A and has not violated section 13. Further there is no private gain and all the funds are ploughed back only into education. Thus accumulations and application are as per the provisions of section 11. Therefore, exemption under section 11 and 12 has to be allowed to the assessee. We hold that the assessee is entitled to exemption u/s.11 and 12 of the Act. In the result grounds 3 to 5 of assessee appeal are allowed.”

The AO had held that there was violation under the KEI (Prohibition of Capitation Fee) Act, and accordingly, brought the money collected by the assessee to tax. In challenge before the ITAT, the assessee has filed an affidavit stating that no action was initiated against the assessee by the State and that has remained uncontroverted. The resultant position is, the AO, based on assumption and surmise, has held that there was violation under the KEI (Prohibition of Capitation Fee) Act by the assessee and that incorrect assumption has been rightly reversed by the ITAT. So far as the authority in New Noble Educational Society is concerned, the Apex Court has held that the registration under different statutes is also a relevant consideration while deciding the application for approval under Section 10(23C) of the Act. In the case on hand, we are not dealing with a situation where the IT Department was considering any application for granting exemption. On the other hand, the department had issued the exemption certificate and the AO on an incorrect assumption has treated the money collected by the assessee as capitation fee under the KEI (Prohibition of Capitation Fee) Act. Therefore, the said authority does not lend any support to the Revenue. This court has already taken a view in Kammavari Sangham and the same is applicable to the facts of this case.

11. In view of the above, this appeal by the Revenue must fail and hence, the following;

ORDER

(i) Appeal is dismissed; and

(ii) Questions of law are held in favour of the assessee and against the Revenue.

9.2 Once it is settled that the assessee is a charitable institution, duly registered and covered within the meaning of section 2(15), the provisions of section 11, 12 and 13 of the Act automatically come into play. These provisions constitute a complete code in themselves for taxation of charitable trusts and institutions. Therefore, the income of such trust cannot be computed by applying normal provisions applicable to business entities, as has been done by the AO.

9.3 The scheme of section 11 clearly provides that income derived from property held under trust is eligible for exemption to the extent it is applied for charitable purposes. Section 11(1) of the Act mandates that at least 85% of the income should be applied towards charitable purposes, which in the present case is imparting education. In case the trust is unable to apply 85% of the income during the year, the same can be accumulated in accordance with section 11(2) of the Act, subject to compliance with the prescribed conditions including investment in specified modes.

9.4 In the present case, we find that the AO has not recorded any finding that the assessee has violated the provisions of section 11(1) i.e. application of 85% of income towards charitable activity or section 11(2) of the Act i.e. accumulation of income if income towards charitable purpose is less than 85%. There is no allegation that the assessee has failed to apply the required percentage of income towards its objects or that the accumulation, if any, is not in accordance with law. A such the AO has not examined this aspect. The AO proceeded to disallow the assessee claim of the exemption on the presumption that the assessee trust does not exist wholly and exclusively for charitable purpose and activity carried are not charitable as defined under section 2(15). However, this finding of the of the AO has already been reversed by the coordinate bench of this tribunal in own case of the assessee for A.Y. 2012-13 as mentioned in the preceding paragraph.

9.5 Without prejudice to the above, we further find that the AO has computed the surplus by deducting only revenue expenditure from the gross receipts for alleging the profit motive of the assessee trust. This approach, in our view, is fundamentally flawed. The assessee is not a normal commercial entity but a charitable trust. In the case of a trust, capital expenditure incurred for achieving its objects is also treated as application of income. Therefore, while determining whether the condition of application of income is satisfied, both revenue as well as capital expenditure are to be considered.

9.6 In the present case, it discernible from the assessment order that the assessee is incurring expenditure towards infrastructure, but it is not coming how much amount incurred towards infrastructure or other capital expenditure. As such the AO completely ignored the capital expenditure incurred by the assessee towards infrastructure and development of educational institutions, which are directly related to its charitable objects. If such capital expenditure is considered as application of income, the surplus computed by the AO would undergo substantial reduction and the allegation of excessive surplus would not survive. It is also noted that the AO has observed that after meeting infrastructure requirement assessee still accumulated fund which were invested into FDs or mutual funds yielding further income. In this regard we are of the considered opinion that the charitable trust under the provision of section 11(2) is allowed to accumulate its income if it not able to apply 85% of income received during the relevant assessment year. Such accumulation is required to be deposited and invested in specified manner. The AO has not found any violation of prescribed manner and conditions for accumulation. Therefore, in our considered view this allegation of the AO without pointing any specific violation of provision of section 11 does not hold water.

9.7 We further note that AO has observed that the assessee has collected capitation fee in the guise of development fee, corpus fund etc. Regarding collection of capitations fee, we deal later in the following paragraph. As far as collection of corpus fund is concerned, the charitable trust is entitled to receive corpus donations, which are in the nature of capital receipts and are not includible in the income of the trust, subject to fulfilment of prescribed conditions. The AO has not brought any material on record to show that the corpus donations received by the assessee are in violation of the provisions of the Act.

9.8 The entire approach of the AO is based on the premise that generation of surplus and collection of development fee indicate profit motive. In this regard, we note that the law is well settled that generation of surplus, by itself, does not lead to the conclusion that the institution exists for profit. What is required to be seen is whether the predominant object is to carry out charitable activity and whether the surplus is applied towards such objects. In the present case, the assessee is running educational institutions and there is no dispute regarding the nature of activity. The AO has not established that the funds have been diverted for non-charitable purposes.

9.9 The allegation of commercialization made by the AO is also not sufficient to deny exemption in the absence of violation of the specific provisions of section 11 to section 13 of the Act. Once the assessee is held to be a charitable institution in earlier years on identical facts, and such finding has attained finality, the Revenue cannot take a contrary stand in the year under consideration without bringing any distinguishing facts on record.

9.10 In view of the above discussion, we hold that the assessee continues to be a charitable institution within the meaning of section 2(15) and is entitled to exemption u/s 11 of the Act. The AO was not justified in denying the exemption by alleging profit motive and not the charitable activity.

9.11 Without prejudice to the above, we note that the AO has made allegation that the assessee has collected capitation fee and violated the provision of KEI (Prohibition of Capitation Fee) Act, and accordingly, brought the money collected by the assessee to tax. At the outset, we note that identical issue had come up for consideration before this Tribunal in assessee’s own case for Assessment Year 2012-13 in ITA No. 1732/Bang/2017, wherein the Tribunal, after examining similar set of facts, set aside the finding of the AO on the premises that the there was no action initiated against the assessee by the State and that has remained uncontroverted. On further appeal by the Revenue before the Hon’ble Karnataka High Court in Income Tax Appeal No. 554 of 2018, the Hon’ble High Court has upheld the findings of the Tribunal. The relevant finding of the Hon’ble High Court reads as follows:

“The AO had held that there was violation under the KEI (Prohibition of Capitation Fee) Act, and accordingly, brought the money collected by the assessee to tax. In challenge before the ITAT, the assessee has filed an affidavit stating that no action was initiated against the assessee by the State and that has remained uncontroverted. The resultant position is, the AO, based on assumption and surmise, has held that there was violation under the KEI (Prohibition of Capitation Fee) Act by the assessee and that incorrect assumption has been rightly reversed by the ITAT. So far as the authority in New Noble Educational Society is concerned, the Apex Court has held that the registration under different statutes is also a relevant consideration while deciding the application for approval under Section 10(23C) of the Act. In the case on hand, we are not dealing with a situation where the IT Department was considering any application for granting exemption. On the other hand, the department had issued the exemption certificate and the AO on an incorrect assumption has treated the money collected by the assessee as capitation fee under the KEI (Prohibition of Capitation Fee) Act. Therefore, the said authority does not lend any support to the Revenue. This court has already taken a view in Kammavari Sangham and the same is applicable to the facts of this case.

11. In view of the above, this appeal by the Revenue must fail and hence, the following;

ORDER

(i) Appeal is dismissed; and

(ii) Questions of law are held in favour of the assessee and against the Revenue.”

9.12 In the present year also, the Revenue has not brought on record any distinguishing facts to deviate from the view already taken in earlier years. The learned DR has not brough any material on record suggesting the assessee has collected capitations fee in violation KEI (Prohibition of Capitation Fee) Act and against the assessee has been taken under the said Act. Hence, respectfully following the decision of the coordinate bench of this Tribunal in assessee’s own case for A.Y. 2012-13 in ITA No. 1732/Bang/2015, which has been affirmed by the Hon’ble Karnataka High Court in ITA No. 554 of 2018, we hold that the assessee is eligible for exemption u/s 11 & 12 of the Act. Accordingly, we find no infirmity in the order of the learned CIT(A) in allowing the claim of the assessee. Hence, the grounds raised by the Revenue are hereby dismissed.

10. The next and last issue raised by the Revenue is whether the learned CIT(A) is right in holding that the assessee is eligible for depreciation on the assets claimed as application of fund.

11. During the assessment proceedings, the AO noted that the assessee in application of income claimed depreciation on fixed assets. The investment in the impugned fixed was also claimed as application of income in the year of purchases. Accordingly, the AO held that the assessee is availing double benefit for same expenditure. Hence, the AO disallowed the claim of deprecation under section 11 of the Act.

12. The aggrieved assessee preferred appeal before the learned CIT(A) and submitted that identical claim of depreciation for A.Y. 2011-12 has been allowed by the learned CIT(A). Hence, the learned CIT(A) following the decision of predecessor CIT(A) in own case of the assessee for A.Y. 2011-12, deleted the disallowances made by the AO.

13. Being aggrieved by the order of the learned CIT(A), the Revenue is in appeal before us.

14. The learned DR before us submitted that the AO has rightly disallowed the depreciation claimed by the assessee. He submitted that the assessee has already treated the cost of fixed assets as application of income u/s 11 of the Act in the year of purchase. Therefore, allowing depreciation again on the same assets would result in double deduction, which is not permissible under the Act. He further submitted that the intent of the legislature has been clarified by insertion of section 11(6) by the Finance (No. 2) Act, 2014, which specifically prohibits such double claim. Accordingly, he contended that even otherwise, the principle against double deduction applies, and therefore the order of the AO deserves to be upheld.

15. The learned AR, on the contrary, before us submitted that the issue is squarely covered in favour of the assessee by various judicial precedents. He submitted that for the year under consideration, the amendment brought by insertion of section 11(6) is not applicable. He further submitted that prior to A.Y. 2015-16, it is a settled position that depreciation is allowable even if the cost of asset has been treated as application of income. He relied on the judgment of the Hon’ble Supreme Court in the case of CIT vs. Rajasthan and Gujarati Charitable Foundation Poona reported in 89 taxmann.com 127 and other Hon’ble High Court decisions such as Hon’ble Bombay High Court in the case of CIT vs. Institute of Banking Personnel Selection (IBPS)’[2003] 131 Taxman 386, wherein it has been held that depreciation is a necessary charge to determine real income of the trust. He further submitted that in the assessee’s own case for earlier years, the learned CIT(A) has allowed the claim, and the Revenue has accepted the same. Therefore, following the principle of consistency also, the claim of the assessee deserves to be allowed.

15.1 Both the ld. DR and AR before us vehemently supported the order of the lower authorities as favourable to them.

16. We have heard the rival contentions of both the parties and perused the materials available on record. The issue for our consideration is whether the assessee is entitled to claim depreciation on fixed assets, the cost of which has already been treated as application of income u/s 11 of the Act. In this regard, we note that the AO has disallowed the claim of depreciation on the ground that the assessee has already claimed the cost of such assets as application of income and therefore allowing depreciation would result in double deduction. However, we find that the learned CIT(A) has deleted the disallowance by following the decision of his predecessor in the assessee’s own case for A.Y. 2011-12.

16.1 On perusal of the facts, we find that the issue is no longer res integra for the year under consideration. It is a settled position of law that prior to the insertion of section 11(6) of the Act, depreciation on assets is allowable even if the cost of such assets has been treated as application of income. In this regard, we place reliance on the judgment of the Hon’ble Supreme Court in the case of CIT vs. Rajasthan and Gujarati Charitable Foundation Poona reported in 89 taxmann.com 127, wherein the view of Hon’ble High Court that the depreciation is allowable to a charitable trust to determine real income, even when the cost of the asset has been claimed as application of income. The Hon’ble Supreme Court held that amendment brought by insertion of section 11(6) of the Act is prospective in nature and applicable from A.Y. 2015-16 onward. The relevant extract is reproduced as under:

3. It may be mentioned that most of the High Courts have taken the aforesaid view with only exception thereto by the High Court of Kerala which has taken a contrary view in ‘Lissie Medical Institutions v. CIT[2012] 24 com 9/209 Taxman 19 (Mag.)/348 ITR 344′.

4. It may also be mentioned at this stage that the legislature, realising that there was no specific provision in this behalf in the Income-tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the Assessment Year 2015-2016. The Delhi High Court has taken the view and rightly so, that the said amendment is prospective in nature.

5. It also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well.

16.2 We note that year under dispute before us is A.Y. 2014-15 and the provisions of section 11(6), which restrict such claim of depreciation, have been inserted by the Finance (No. 2) Act, 2014 applicable from A.Y. 201516 as held by the Hon’ble Supreme Court. Therefore, the said provision is not applicable to the year under consideration i.e., A.Y. 2014-15. Accordingly, the contention of the Revenue based on the said provision cannot be accepted.

16.3 We also find merit in the contention of the assessee that in its own case for earlier assessment year, identical claim has been allowed by the learned CIT(A) and no appeal was preferred by the Revenue. There is no material on record to show any change in facts and circumstances. Therefore, following the principles of consistency also, the view taken by the learned CIT(A) deserves to be upheld. In view of the above discussion and respectfully following the binding precedent of the Hon’ble Supreme Court, we do not find any infirmity in the order of the learned CIT(A) in allowing the claim of depreciation. Accordingly, the ground raised by the Revenue is dismissed.

17. In the result, the appeal of the Revenue is hereby dismissed.

Coming to Revenue’s appeal in ITA Nos. 1765 & 1766/Bang/2025 for A.Y. 2015-16 and 2016-17

18. The only issue raised by the Revenue is that the ld. CIT-A erred in holding that the assessee is eligible for exemption/deduction under section 11 and 12 of the Act when educational institution being run for profit making motive.

19. At the outset, we note that the issues raised by the Revenue in its grounds of appeals for the AYs 2015-16 and 2016-17 are identical to the issue raised by the Revenue in ITA No. 1764/Bang/2025 for the assessment year 2014-15. Therefore, the findings given in ITA No. 1764/Bang/2025 shall also be applicable for the assessment years 2015-16 & 2016-17. The appeal of the Revenue for the A.Y. 2014-15 has been decided by us vide paragraph No. 9 of this order against the Revenue. The learned DR and the AR also agreed that whatever findings are for the AY 2014-15 shall also be applied for the assessment years 2015-16 & 2016-17. Hence, the grounds of appeal filed by the Revenue for A.Ys. 2015-16 & 2016-17 are hereby dismissed.

20. In the result, both appeals filed by the Revenue for Assessment Years 2015-16 and 2016-17 are hereby dismissed.

Coming to Assessee’s appeal in ITA No. 1728/Bang/2025 for A.Y. 2016-17

21. We first proceed to deal with the issue raised by the assessee through Ground Nos. 2 & 5 of the appeal which are interconnected and pertain to the disallowances of claim of exemption under section 11 of the Act on long term capital gain arising on compulsory acquisition of land for Bangalore Metro Rail project.

22. The relevant facts are that the assessee trust had declared capital gains of Rs. 11,61,31,888/- during the relevant assessment year arising from transfer of immovable property on 03.09.2015. In the return of income, the assessee claimed exemption of such capital gain u/s 11(1A) of the Act.

22.1 During the course of assessment proceedings, the AO called upon the assessee to substantiate the eligibility of exemption. The assessee submitted that it had purchased two immovable properties in Kothanur village. One property was purchased on 25.05.2015 for Rs. 26.07 crore out of own funds. The other property was purchased on 30.03.2016 for Rs. 13.93 crore out of loan taken from the bank against fixed deposits.

22.2 On verification, the AO observed that the capital gain has arisen on the transfer of land dated 03.09.2015, whereas the first property was purchased before receipt of sale consideration/ such transfer of property. The second property was purchased out of borrowed funds. The AO further noted that there was no clear nexus between the sale consideration received and the investment made in the new asset. Further, the assessee could not establish any nexus between the consideration received and the investment made in the new asset. The AO also rejected the reliance placed on the case laws relating to section 54/54F of the Act as such case laws were not applicable with respect to the capital gain which was claimed as exempted under section 11(1A) of the Act.

22.3 The alternative claim of exemption by the assessee under the RFCTLARR Act was also rejected on the grounds that no such claim was made in the return of income and no revised return was filed. As per the AO such claim cannot be made in view of the decision of the Hon’ble Supreme Court in Goetze (India) Ltd. reported in 157 taxman 1 unless claimed in the return of income. Accordingly, the AO held that the conditions of section 11(1A) of the Act were not fulfilled. Hence, the AO disallowed the exemption and brought the capital gain to tax.

23. The aggrieved assessee preferred an appeal before the learned CIT(A).

24. Before the learned CIT(A), the assessee submitted that the AO has wrongly interpreted the provisions of section 11(1A) of the Act. It was argued that the section only requires reinvestment of net consideration into a new capital asset and does not mandate strict one-to-one correlation between sale consideration received and investment made. The assessee contended that in practical situations, such direct linkage may not always be possible, especially where consideration accrues over time.

24.1 The assessee further submitted that it had in fact reinvested an amount of Rs. 13.93 crore in purchase of land at Kothanur village. Though the investment was made through loans against fixed deposits, it was argued that such borrowing was only a financial arrangement and the substance of the transaction was reinvestment in capital assets. It was contended that the source of funds is not relevant so long as investment in new capital assets is made.

24.2 The assessee also relied on CBDT Circular No. 72 dated 06.01.1972 and submitted that capital gains need not be directly applied if other funds are used for acquiring capital assets. It was argued that section 11(1A) is different from section 54/54F and does not prescribe any specific conditions regarding timing or source of investment.

24.3 Further, the assessee submitted that the capital gain arose on account of compulsory acquisition by Bangalore Metro Rail Corporation Ltd., and therefore the same is exempt under section 96 of the RFCTLARR Act. It was argued that merely because the claim was not made in the return of income, the exemption cannot be denied, especially when the legal position clearly supports the claim.

24.4 The assessee also contended that even if there is any shortfall in utilization of net consideration, proportionate exemption should be allowed as per section 11(1A) of the Act. It was therefore prayed that the entire addition made by the AO be deleted.

24.5 However the learned CIT(A) observed that for claiming exemption u/s 11(1A) of the Act, the assessee must utilize the net consideration received from transfer of capital asset for acquiring a new capital asset. In the present case, the Ld. CIT(A) noted that one property was purchased before the date of transfer and therefore it cannot be said to be purchased out of sale consideration. The second property was purchased out of loan, taken against fixed deposits and not from the sale proceeds. Hence, the assessee failed to establish any nexus between the consideration received and the investment made. The Ld. CIT(A) rejected the argument advanced by the assessee and upheld the disallowances made by the AO by observing as under:

23.3 The facts of the case of the appellant are that the appellant was holding land and building situated 656/559, Pattangeri village, 130 Kenjari ward, Bangalore. The said asset was compulsorily acquired by Bangalore Metro Rail Corporation Limited for Bangalore Metro Rail Project. The appellant received compensation of Rs. 11,61,32,626/- by letter of Bangalore Metro Rail Corporation Limited dated 03.09.2018. The appellant purchased property situated at 2290/SY no. 171/5 and SY no. 172/6 at Kothanur village on 25.05.2015 and 30.03.2016 for consideration of Rs. 26,07,68,356/- and Rs. 13,93,04,880/-, respectively. The appellant claimed that reinvestment of net sale consideration into purchase of new asset as exempt u/s 11(1A) of the Act. The AO denied claim of the exemption on the ground that one property was purchased prior to receipt of compensation and second property was purchased out of loan taken by the appellant against fixed deposit. Thus, there was no direct nexus between receipt of compensation and reinvestment into new assets. The AO also rejected the claim of exemption u/s 96 of RFCTLAAR of the act as the claim was not filed by way of revised return.

23.4 As far as the exemption u/s 11(1A) is considered, in the case of AL Ameen Educational Society vs DIT (Exemption) 139 ITD 245 (Bangalore), the Hon’ble ITAT Bangalore has explained the scope of provisions of section 11(1A). The Hon’ble ITAT has held that entire net consideration has used to acquire new asset, then nothing will be taxable u/s 11(1A)(a)(i) of the Act.

In the case of Al Ameen Educational Society v. DIT (Exemption) [2012] 26 taxmann.com 250 (Bangalore), the Hon’ble ITAT, Bangalore has held as under:

“… Applicability of section 11(1A)

• • • Section 11(1A)(b) applies only when the property held under trust in part only for such purposes, is transferred. It is in the light of the provisions of section 11(1A)(a) that the present case has to be decided. The above provisions of section 11(1A) were introduced by the Finance (No.2) Act, 1971 with retrospective effect from 1-4-1962. The CBDT in Circular No. 72, dated 6-1-1972 has explained the purpose behind introduction of the above provisions insofar as it relates to section 11(1A)(a). [Para”14]
    • Section 11(1A) can be explained in the form of the following example. If the entire net consideration is used to acquire new asset then there is no difficulty as nothing will be taxable (Section 11(1A)(a)(i)). When cost of acquisition and improvement of the asset transferred is say Rs. 10 lakhs, the net consideration is say Rs. 20 lakhs and the cost of the new asset is Rs. 11 lakhs then Rs. 1 lakh will be deemed as income applied for charitable purposes under section 11(1A) (section 11(1A)(a)(ii)). If the cost of acquisition of the new asset is only Rs. 10 lakhs or less than the benefit of exemption under section 11(1A)(a) cannot be availed of. [Para 15]
    • The provisions of section 11(1A)(a)(ii) contemplates a computation of capital gain under the normal provisions of the Act. This is clear from the expression used in section 11(1A)(a) which refers to ‘where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held, then, the capital gain arising from the transfer’. So also section 11(1A)(a)(ii) which uses the expression ‘so much of such capital gain’. The expression capital gain or the mode of computation of capital gain has not been defined for the purpose of section 11(1A) and therefore the normal expression capital gain and the computation of such capital gain as laid down in the provisions of sections 45 to 55A will apply. For determining the quantum of capital gain which will be deemed to be application of income for charitable purpose and become eligible to get exemption under section 11(1), the provisions of section 11(1A) have to be applied. [Para 16]

Analysis of facts of case in light of above said legal position

• • • In the light of the legal position as explained above it is to be seen as to whether the assessee can claim the benefit of provisions of section 11(1A)(a) and to what extent. The provisions applicable in the present case was section 11(1A)(a)(ii) because the entire net consideration was not utilized in acquiring another capital asset to be held under trust wholly for charitable or religious purposes. The net sale consideration received or transfer in the present case was Rs. 4,00,00,000. The cost of acquisition of the property without the benefit of indexation was Rs. 1,33,01,892. As already held capital gain on transfer of capital asset has to be made in accordance with the provisions of sections 45 to 55A. [Para 16.1]
    • In the case of trustees of Shri Ramnagar Trust No. 1 v. Third, ITO [1985] 13 ITD 426 (Mum.), it has been held that advances received by a trust in the period earlier to the previous year in which transfer of a capital asset by a trust takes place, if invested in purchase of capital asset in the period earlier to the previous year in which transfer of the capital asset takes place such purchase should also be considered as application of capital gain for charitable purpose. If that decision is applied then the difference between the sum of Rs. 2,78,38,080 which is the investment out of net sale consideration received on transfer of capital asset made by the assessee and the cost of the transferred asset would be deemed to have been applied to charitable or religious purposes. The expression ‘Cost of the transferred asset’ is defined in Explanation (ii) to section 11(1A), and it lays down that ‘Cost of the transferred asset’ means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within meaning assigned to that expression in clause (b) of sub-section (1) of section 55. Thus the difference between the capital gain utilized in acquisition of new assets, viz., Rs. 2,78,38,080 and the indexed cost of acquisition viz., Rs. 2,51,22,641, viz., Rs. 27,15,449 should be considered as application of capital gain for charitable purpose which would be entitled to exemption under section 11(1). The remaining sum of Rs. 1,21,61,909.33 Ps (Rs. 1,48,77,358.33 Ps being capital gain as per normal provisions of the Act and Rs. 27,15,449 which is eligible for exemption as application of capital gain for charitable purpose under section 11(1A)(a)(ii), should be considered as not applied for charitable purposes and not eligible for deduction under section 11(1). [Para 17.1]

In the case of the appellant, the net consideration received from capital asset, from which capital gain arises, is to be reinvested in new asset by the appellant. After reinvestment of net consideration the appellant could claim exemption u/s 11(1A)(a)(i) of the Act. The appellant has not been able to prove that the net consideration received was reinvested into the new asset. Further the investment in the second property was also by taking loan against the fixed deposit. The appellant has contended that it was not a loan but loan against the fixed deposit. The ultimate source of purchase of second property was loan taken by the appellant and not the net consideration. Therefore, in absence of reinvestment of net consideration by the appellant in purchase of two new properties, the appellant could not be allowed deduction u/s 11(1A)(a)(i) of the act. Thus, the claim of the appellant regarding exemption u/s 11(1A)(a)(i) is rejected.

25. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

26. The learned AR before us submitted that the assessee is eligible for exemption u/s 11(1A) of the Act as the conditions of the section have been substantially complied with. It was argued that section 11(1A) requires utilization of net consideration, but it does not require strict one-to-one correlation between the sale proceeds and investment. Even if the consideration has accrued and not actually received, the assessee can still make investment and claim exemption.

26.1 The Ld. AR submitted that the compensation received on compulsory acquisition was invested in fixed deposits for more than six months. As per CBDT Circular, such investment in fixed deposits should be treated as utilization of net consideration for acquiring a capital asset.

26.2 It was further argued that the Kothanur 2 property was acquired using loans taken against fixed deposits. Therefore, in substance, the investment was made from the compensation received. The borrowing was only a financial arrangement and did not change the nature of utilization.

26.3 The Ld. AR also contended that the assessee had sufficient own funds and the loan taken was backed by deposits created out of compensation. Hence, it cannot be said that borrowed funds were used independently.

26.4 Regarding Kothanur 1 property, it was submitted that even if the property was purchased prior to receiving compensation, the law does not prohibit such utilization. Judicial precedents have held that investment made before transfer can also be considered for exemption. The Ld. AR relied on decision of Tribunal in the case of Al-Ameen Educational Society, Anandraj 26 taxmann.com 250 (supra), to argue that the provisions of section 11(1A) should be interpreted liberally and not in a technical manner.

26.5 It was also submitted that even otherwise, proportionate exemption should be allowed to the extent of investment made. Accordingly, Ld. AR prayed that the exemption u/s 11(1A) of the Act be allowed and the addition made by the AO and confirmed by the CIT(A) be deleted.

27. On the contrary, the learned DR supported the orders of the AO and the learned CIT(A). It was submitted that the assessee failed to establish that the net consideration received on compulsory acquisition was utilized for acquiring the new assets. One property was purchased prior to transfer and the other from borrowed funds. Therefore, the mandatory conditions of section 11(1A) of the Act were not satisfied and hence, the exemption was rightly denied.

28. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the short issue for our consideration is whether the assessee is eligible for exemption u/s 11(1A) of the Act in respect of capital gains arising on compulsory acquisition of its property, and whether the lower authorities were justified in denying the same on the ground of absence of direct nexus between the sale consideration and investment in new assets. Before proceeding further, it is relevant to reproduce the provisions of section 11(1A)(a) of the Act, which reads as under:

(1A) For the purposes of sub-section (1),—

(a) where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:—

(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of such capital gain;

(ii) where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset;

(b) where a capital asset, being property held under trust in part only for such purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the appropriate fraction of the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:—

(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of the appropriate fraction of such capital gain;

(ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset.

28.1 From a plain reading of the above provisions, the requirement of law is for the utilization of net consideration for acquiring another capital asset. The provision does not mandate a strict or direct one-to-one correlation between the exact funds received and the funds invested. The emphasis is on utilization in substances and not on the form or timing of such utilization.

28.2 In the present case, it is an admitted fact that the assessee’s property was compulsorily acquired and compensation was received. It is also not in dispute that the assessee has invested substantial amounts in acquisition of immovable properties at Kothanur village. Therefore, the primary condition of reinvestment in capital assets stands satisfied.

28.3 The AO as well as Ld. CIT(A) have denied the claim mainly on two grounds. Firstly, one of the properties was purchased prior to the receipt of compensation on transfer of the property under compulsory acquisition. Secondly, the other property was acquired through loan taken against fixed deposits and therefore, according to them, there was no nexus with the sale consideration.

28.4 In our considered view, both these objections are hyper-technical and not in consonance with the scheme of section 11(1A) of the Act. The law does not prescribe that the investment must be made only after receipt of consideration. Hence, we hold that even investments made prior to transfer can be considered, if the overall funds position establishes that the assessee has applied the consideration for acquiring capital assets.

28.5 Further, regarding the second property, the finding of the lower authorities that the investment was made from borrowed funds ignores the substance of the transaction. The record shows that the loans were taken against fixed deposits which were made from the amount of compensation received. Therefore, in substance, the source of investment remains the compensation itself. The borrowing is only a financial mechanism and cannot be used to deny the benefit otherwise available under the statute.

28.6 We also find merit in the contention of the Ld. AR that section 11(1A) of the Act does not require tracing of funds in a rigid manner. The CBDT Circular No. 72 to support the view that utilization of funds should be understood in a practical and commercial sense. The approach of the AO in insisting on direct nexus is therefore misplaced.

28.7 The reliance placed by the Ld. CIT(A) on the decision in Al-Ameen Educational Society, in fact, supports the case of the assessee rather than the Revenue. The said decision clearly explains that what is relevant is utilization of net consideration, and even proportionate exemption is permissible where the entire consideration is not utilized.

28.8 In the present case, the assessee has demonstrated that substantial investment has been made in capital assets. Therefore, at the minimum, proportionate exemption u/s 11(1A)(a)(ii) ought to have been allowed. The outright denial of exemption by the lower authorities is therefore not sustainable.

28.9 In view of the above discussion, we hold that the assessee has substantially complied with the conditions prescribed u/s 11(1A) of the Act. The interpretation adopted by the AO and affirmed by the Ld. CIT(A) is too narrow and defeats the legislative intent of granting relief to charitable trusts reinvesting the consideration on transfer of property into capital assets. Accordingly, we direct the AO to allow exemption u/s 11(1A) in respect of the capital gains. The addition made by the AO and confirmed by the Ld. CIT(A) is hereby deleted. Hence, the ground of appeal of the assessee is allowed.

29. The other grounds being Ground Nos. 1, 3, 4 & 6 of the appeal raised by the assessee are either general grounds or not pressed before us. Hence, the same are hereby dismissed as infructuous or not pressed.

29.1 In the result, the appeal of the assessee is partly allowed.

30. In the combined result, all the appeals of the Revenue are hereby dismissed whereas the appeal of the assessee is hereby partly allowed.

Order pronounced in court on 23^rd day of June, 2026