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Exemption u/s 10 (23C)(iiiab) cannot be denied merely on the basis of contradictory statements of few donors

Deccan Education Society Vs. Addl. CIT (ITAT Pune) Hon’ble ITAT observed that Merely because some of the donors stated that they have given the donation for admission will not disentitle the society from getting exemption which exists solely for educational purposes

Brief of the case:

The exemption is denied to assessee trust on the basis of statement given before AO in response to summon u/s 131 issued to certain donors as AO was of the view that assessee is not engaged in imparting educational services on charitable purpose but provides admission on capitation basis. After examining the facts and circumstances of the case Hon’ble ITAT observed that Merely because some of the donors stated that they have given the donation for admission will not dis-entitle the society from getting exemption which exists solely for educational purposes and which is otherwise entitled to the exemption.

Facts of the case:

  • The assessee is a trust which was set up in the year 1984 and is not registered u/s.12A of the Income-tax Act. It availed exemption u/s.10(22) upto A.Y. 1989-99 and thereafter u/s.10(23C)(iiiab). It has also been granted approval u/s.80G of the Income-tax Act for the purpose of deduction under the section to the donors of the assessee.
  • The assessee trust filed its return of income for the impugned assessment year on 29-09-2008 declaring total income at NIL after claiming exemption u/s 10 (23C) (iiiab). In the return of income, the assessee has shown income from other sources amounting to Rs.54,97,44,582/-.
  • The AO noticed from the details filed that the assessee trust has received Salary Grants from the State Govt. of Rs.28,70,35,473/-, other grants of Rs.34,86,635/- and non-salary grants of Rs.248,354/-, aggregating to Rs.29,07,70,462/ for some of its institutions. Assessee was asked for denial of exemption for unaided institutions u/s 10 (23C) (iiiab). AO also doubted that assessee trust collected capitation fee in form of corpus donation.
  • Assessee was asked to furnish details along with identity proof and details of donors.
  • The Assessing Officer issued summons u/s.131 56 donors out of which 16 donors have confirmed that the donations were paid in connection with and to secure the admissions of their wards/relatives who do not have qualifying marks or failed in the entrance test taken by the assessee’s various institutions for grant of admissions in various courses.
  • AO denied exemption by holding that merely because certain institutions run by an assessee were wholly or substantially financed by the Govt. does not ipso facto makes the other unaided educational institutions run by the said entity eligible to exemption u/s. 10(23C).
  • AO treated the status of the assessee as an AOP and assessing 23 the surplus of the year and the contributions received by the assessee in the guise of corpus donations aggregating to Rs.11,06,10,500/- (which includes income of unaided institutions of Rs.7,86,39,996/- of unaided institutions whose aggregate annual receipts exceeded Rs. One crore) as taxable business income.

Held by the CIT (A)

  • On the basis of submission of assessee CIT (A) sought remand report from the AO who sent his report wherein it was stated that summons u/s.131 of the Act were issued to the parties who had confirmed in their depositions having given donations to the assessee to secure admissions and the assessee was given opportunity to cross examine them.
  • On the basis of said report and submission of the assessee upheld the action of the AO in denying exemption u/s.10(23C) of the I.T. Act and held that the statements recorded from the donors showed that contributions were paid by the donors as a quid-pro-quo for securing admissions in various institutions run by the assessee and the same are not voluntary contributions or corpus donations.

Contention of the revenue:

  • The provisions envisaged giving the benefit of exemption to income received by persons on behalf of educational institutions solely existing for educational purposes and not for the purpose of profit, underlining that such exemption is institution specific and not person specific.
  • Other institutions of the assessee which do not fall under clauses (iiiab) or (iiiad) were not approved either under clause (vi) of Sec. 10(23C) or registered U/S.12A of the Act, the Assessing Officer held that income of such institutions would not be eligible for exemption either u/s.10(23C) or Sec.11 of the I.T. Act even if the incomes of such unaided institutions might have also been utilized/applied for running the aided institutions.
  • The assessee trust is existing solely for profit. The assessee has received pay orders or Demand Drafts towards Capitation Fee from the relatives, friends or children of the persons who have deposed before the Assessing Officer.
  • By accepting capitation fee in the guise of voluntary donation for giving admission they have violated the provisions of section 10(23C).
  • The applicant society has collected capitation fee for giving admissions to various students and it has violated Maharashtra Educational Institution (Prohibition of Capitation Fee) Act, 1987 and therefore, it is not entitled to the exemption.

Contention of the assessee:

  • Educational institutions run by the assessee include many institutes which receive grants from the Maharashtra State Government for payment of salary to the teaching and non-teaching staff. Hence the assessee has always claimed exemption u/s 10(23)(iiiab).
  • An explanation was added to section 10 (23)(iiiab) which has been inserted by the Finance (No.2) Act 2014, w.e.f. 01-04-2015 he submitted that the words “substantially financed” by the Government means if the grant from the Government is more than 50%.
  • The various institutions run by the assessee trust may be categorised into three types,

(i) some of the institutions run by the trust are aided where the Government grant is more than 50%,

(ii) some of the institutions run by the trust are not substantially financed by the Government but where the gross receipts are less than Rs. 1 crore and

(iii) some of the institutions run by the trust/society where it is neither substantially financed by the Government nor the receipt is less than Rs. 1 crore and where the approval of the CCIT is required for claiming exemption u/s.10(23C).

  • Hon’ble Delhi High Court in the case of DDIT Vs. Shanti Devi Progressive Educational Society 340 ITR 320 held that various amounts received towards admission fees, corpus funds and loan from parents was relatable to the activity of education.
  • Hon’ble Bombay High Court in the case of Vanita Vishram Trust Vs. Chief CIT reported in 327 ITR 121 held that rejection of approval under section 10(23C) is not valid 28 where the charitable trust, whose sole activity was running educational institutions for last 80 years and primary object of trust is to provide education.
  • For the AY 2005-06 & 2007-08 AO allowed exemption u/s 10 (23C) (iiiab) to the assessee trust.
  • Out of 47,251 students in the different institutions of the trust only 1,217 students have given donations out of which only 23 persons had admitted to have given donations for admission and only 6 donors were available for cross-examination.
  • The assessee trust may be granted exemption u/s.10(23C) (iiiab) to the institutes which are substantially financed by the Government and to the institutions whose gross receipt is less than Rs.1 crore.

Held by the court:

  • Assessee is an old public charitable trust which is operating various educational institutions in Maharashtra and engaged in imparting education.
  • There are 27 institutions run by the trust where the gross receipt is less than Rs. 1 crore and no grant has been received from the Government. Similarly, there are 3 institutions where the trust has not received any grant and the gross receipt is more than Rs. 1 crores.
  • An identical issue had come up before the Hon’ble Supreme Court in the case of Aditanar Educational institutions where it was held that

“It will be rather unreal and hypertechnical to hold that the assessee society is only a financing body and will not come within the scope of “other educational institution” as specified in section 10(22) of the Act. The object of the society is to establish, run, manage or assist colleges or schools or other educational institutions solely for educational purposes and in that regard to raise or collect funds, donations, gifts, etc. Colleges and schools are the media through which the assessee imparts education and effectuates its objects.”

In view of the decision of the Hon’ble Supreme Court cited (Supra), we are of the considered opinion that the exemption is available to the society as a whole which has been formed for the sole purpose of establishing, running, managing or assisting schools and colleges in different fields.

  • Nothing has been brought on record that any student has been denied admission for not giving donation. Merely because some of the donors stated that they have given the donation for admission the same in our opinion will not disentitle the society from getting exemption which exists solely for educational purposes and which is otherwise entitled to the exemption.
  • The relatives or parents of the students have filled up the declaration stating that they have given voluntary donations to the institutions; even some of them claimed deduction u/s.80G also.
  • Nothing has been brought on record that any such amount of donation has not been accounted for in the books of account or has been utilised by any of the trustees or their relatives or has not been utilised for purposes other than education.
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