Examiners (State Legislated Technological Universities) becoming Examinees before Income Tax Department in light of Rule 2BBB of Income Tax Rules 1962
Government Funded Technological Universities legislated by an ACT of State Legislature are receiving demand notices from Income Tax Department which are posing serious challenges to the existence and survival of the Higher Education System in India. The back ground of the issue is dealt in brief as under:
Blanket Income Tax exemption for all educational institutions wholly or substantially financed by the Government:
Under erstwhile Section 10(22) of Income Tax Act, there was blanket Income Tax exemption for all educational Institutions existing solely for educational purpose and not for the purpose of profit. However, Finance (No.2) Act 1998 omits the aforesaid clause (22) of Section 10 from the statue and checks and balances were created through Section 10(23C) compliance mechanism. The intention of the legislature was to avoid misuse of blanket exemption and bring in place a monitoring mechanism whereby checking of genuineness of their activities is ensured.
It is pertinent to note here that blanket income tax exemption is still applicable for educational institutions substantially financed by the Government under Section 10(23C)(iiiab).
With the above amendment, the legislature intention is to keep check on all private educational institutions and also implies that all educational institutions substantially financed by the Government are monitored regularly and their activities are genuine therefore exemption under Section 10(23C)(iiiab) is still continuing for them.
Rule 2BBB of Income Tax Rule 1962 is creating undue hardship to all State Legislated Technological Universities receiving grants in between 20-50% of total receipts during the financial year:
The phrase “wholly or substantially financed by the Government” has not been defined under the provisions of the Act. There is plethora of cases in substantiating the phrase “wholly or substantially financed by the Government”, the judiciary tried to interpret this by analysing whether financed by Government should be annual exercise or it can be one time exercise.
To address this interpretational issue, Income Tax Rules vide Rule 2BBB, has provided a mechanism for determining the same:
Rule 2BBB: Percentage of Government Grant for considering “University “Hospital etc., as substantially financed by the Government for the purpose of Section 10(23C).
“ for the purpose of sub-clauses (iiiab) and (iiiac) of clause (23c) of section 10, any University or other Educational Institution , hospital or other Institutions referred therein, shall be considered as being substantially financed by the Government for any previous year, if the Government Grant to such university (or) other Educational institutions, hospital or other institutions exceeds fifty percent of the total receipts including any voluntary contributions of such university or other educational institutions ,hospital or other institutions, as the case may be during the relevant previous year.
The aforesaid rule have far reaching consequences on survival of all State Legislated Technological Universities in India. Based on this rule, demand notices were issued to State Legislated Technological Universities by simply invoking threshold limit of 50% of funding by Government as per Rule 2BBB of Income Tax Rules 1962.
The adherence to this threshold is not always practicable for State Legislated Technological Universities due to special conditions they are working in. The denial of Income Tax exemption on account of this non compliance will inflict heavy Tax burden on State Legislated Technological Universities and put them in serious financial crisis.
In this regard it is submitted that majority of State Legislated Technological Universities are not able to satisfy Rule 2BBB of Income Tax rules 1962, due to alternative financial arrangement made by the Government to State Legislated Technological Universities viz. Grant of Authority to collect affiliation fees, examination fees, common service fees etc. as direct state funding is becoming difficult day by day.
5 years’ time-frame for utilisation of accumulated funds is acting as road block for availing alternative exemption under Section 12AA or Section 10(23C)(vi) of Income Tax Act 1961:
For availing the alternative remedy available under Section 12AA read with Section 10(23C)(vi) of Income Tax Act 1961,they are encountering with following problems.
a) Due to dependence on alternative finance mechanism and financial propriety State Legislated Technological Universities ended up with large accumulation of funds. It would be difficult for the State Legislated Technological Universities to apply the surplus amount as per third proviso to Section 10(23C)(vi) or Section 11(2)(a) within maximum period of 5 years. It would be also difficult for State Legislated Technological Universities to determine for what purpose accumulated fund would be spend in next 5 years due expenditure policies of State Legislated Technological Universities.
b) In fact they need to accumulate funds without any cap of time limit due to the reason that State Legislated Technological universities need lot of funds to meet the latest technological advancements and the aspiration of younger generation in developing qualitative infrastructures which will not fit in any fixed time frame work.
c) This involves huge capital which they plough back by internal accumulations through exercise of austerity measures as a matter of prudent financial policy. This policy protects their financial independence and avoids dependence on external funding agencies like Higher Education Finance Agency (HEFA).
Expenditure policy of the State Legislated Technological Universities:
It is also relevant to note that the investments made by the State Legislated Technological Universities are based on several factors like National Education Policies, UGC Guidelines, proceedings of Executive Committee, state financial policies etc.,
The expenditure policies of State Legislated Technological Universities do not take into account income tax provisions but academic policies of state to meet the needs and demands of future citizens of the country. So the investments made cannot be fit into a fixed time frame work. Any knee jerk reaction in our rush up to apply within 5 years’ time frame work may adversely affect financial stability of State Legislated Technological Universities.
As stated earlier the removal of blanket exemption to Private Universities is to monitor, determine genuineness of their activities and prevent misuse of blanket income tax exemption. 5 years time frame work stated above is also in relation to those private universities but not State Legislated Technological Universities.
Rule 2BBB is creating undue hardship to all State Legislated Technological Universities receiving grants in between 20-50% of total receipts during the year. This deeming fiction brought down State Legislated Technological Universities on par with private universities thereby removed blanket income tax exemption without any alternative remedy.
It is relevant to note here that State legislated Technological Universities are carrying out an exclusive statutory function in the field of University education by delivering quality education to the rural, tribal and economically backward sections of the society at a subsidized tuition fees as per the policy of the Government and sacred tenets of the Constitution of India.
The denial of blanket Income Tax Exemption to State Legislated Technological Universities will tax the pockets of students heavily and make education more costly which is not desirable that too at the instance of Central Revenue authorities.
In this regard, Hon’ble Union Minister of Finance need to consider the genuine hardship faced by State Legislated Technological Universities and grant the benefit of blanket Income Tax exemption under Section 10(23C)(iiiab) notwithstanding any limitations imposed by Rule 2BBB.
(the author of the article is a practising Chartered Accountant he can be reached at firstname.lastname@example.org)