DCIT Vs Sindhi Educational Society (ITAT Chennai)
The case of DCIT Vs. Sindhi Educational Society has recently been examined by the Income Tax Appellate Tribunal (ITAT) in Chennai. In this case, the issue at hand revolved around the exemption u/s.11 of the Income Tax Act, specifically regarding corpus donations collected from parents of students admitted in schools run by the Sindhi Educational Society.
The ITAT Chennai thoroughly reviewed the case, considering the relevant provisions of the Tamil Nadu Education Institutions (Prohibition of Collection of Capitation Fee) Act, 1992, and the Tamil Nadu Schools (Regulation of Collection of Fee) Act, 2009. Additionally, they referred to the decision of the Hon’ble Madras High Court in CIT v. MAC Public Charitable Trust and the Hon’ble Supreme Court’s decision in Ahmadabad Urban Development Authority vs. CIT.
The key facts of the case include the following:
- The assessee is registered u/s.12AA of the Income Tax Act and has been in existence for 48 years, operating two schools and one college in Chennai.
- The society runs Sindhi Model Senior Secondary School, Sindhi Model Matriculation School, and Sindhi College of Arts & Science.
- The primary objective of the society is education, and no violations of u/s.11, 12, or 13 of the Act were found by the Revenue.
Conclusion:
After a detailed analysis, the ITAT Chennai came to several important conclusions:
1. The AO’s objection that corpus donations were collected compulsorily was not substantiated. The donations were voluntary and were based on general appeals made to parents.
2. The donations collected by the society did not violate the Tamil Nadu Education Institutions (Prohibition of Collection of Capitation Fee) Act, 1992. The donations were of a small amount, voluntary, and meant for new admissions.
3. The Tamil Nadu Education Institutions (Prohibition of Collection of Capitation Fee) Act, 1992, was not applicable to the schools run by the assessee society as it pertains to professional institutions offering degrees and diplomas.
4. The AO’s claim that the society did not maintain separate books of accounts for incidental activities was refuted as the AO himself had computed income and expenditure from these activities in his assessment order.
5. The society’s earning of more than 20% profit from its activities did not disqualify it from exemption u/s.11, as the surplus was not significant, and the primary objective of imparting education was maintained.
In light of these conclusions, the ITAT Chennai dismissed the appeals filed by the Revenue for all assessment years, upholding the benefit of exemption u/s.11 of the Income Tax Act for the Sindhi Educational Society.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
These seven appeals filed by the Revenue are directed against separate, but identical orders of the Commissioner of Income Tax (Appeals)-19, Chennai, dated 27.09.2022, and pertains to assessment years 2013-14 to 2019-20. Since, facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are being disposed off, by this consolidated order.
2. The Revenue has, more or less, raised common grounds of appeal for all the assessment years. Therefore, for the sake of brevity, grounds of appeal filed for the AY 20 13-14, are re-produced as under:
1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.
2. The Ld. CIT(A) erred in deleting the addition Rs. 4,02,25,300/- made towards excess of income over expenditure by the assessing officer denying the exemption u/s. 11 of the Income tax Act, 1961.
2.1 The CIT(A) erred in failing to appreciate that donations received by the assessee trust are not voluntary in nature. The donation amount is fixed by the school administration run by the trust. This donation amount is made compulsory for the new admission of students in the schools run by trust. Signature from parents were obtained from parents in preprinted forms treating it as contribution to corpus. Further, the amount collected as donations were returned back to parents in some cases where admissions were rejected. This showed that the donations are not voluntary in nature but represented the capitation fee for getting admission to the institutions run by the trust.
2.2 The CIT(A) erred in failing to appreciate that by collecting donations compulsorily for admission of students in deviation of the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992 the institution cannot be construed as engaged in charitable activities and this makes the assessee ineligible to claim exemption u/s. 11 of the Act.
2.3 The CIT(A) failed to appreciate that since the contributions are not voluntary in nature, the assesses is not eligible to claim exemption u/s. 11 in respect of the contribution towards corpus as per the provisions of Sec. 11 (1)(d) of the Act.
2.4 The CIT(A) failed to appreciate that Shri. C. V. Kalyanasundaram who consolidated the accounts of the assessee, in his sworn statement, admitted that the donation is over and above the tuition fees and misc. fees received. This donation is compulsory for all new admission cases. Some donations were returned, if the students declined admission/management rejected admission. This proved that the donations are not voluntary in nature.
2.5 The CIT(A) erred in observing that provision of Sec. 11 (4A) is not applicable since the assessee has not derived profit from different sources other than the preoccupation of running financial institution. The assessee has not maintained separate books of accounts for incidental business activities such as sale of books, plying of buses etc as stipulated in the provisions of Sec. 11 (4A) of the Act for claiming exemption u/s. 11 of the Act.
2.6 The Ld. CIT(A) failed to appreciate that as per the provisions of Tamilnadu Educational Institutions & Prohibitions of Collection of Capitation fee Act, 1992 any institution shall not levy any other recurring or non-recurring fee including capitation fee. Hence, the amount collected from the students in the form of donations cannot be construed as for the purpose of charitable objective and also not in the character of voluntary contributions u/s. 2(24)(iia).
2.7 The CIT(A) erred in holding that the decision of the Supreme Court in the case of Queens Elizabeth Society Vs CIT 372 ITR 699 is squarely applicable to the facts of the case and theory of capitation fee referred cannot be equated with the “Corpus donations” in the case of assessee. Since the corpus donations are not voluntary in nature and they are nothing but capitation fee, the assessee should not be given benefit of Sec. 11 of the Act.
In these terms, the decision of Queens Elizabeth society supra is favourable to the revenue.
2.8 Further, for a similar issue, while disposing appeals filed by the revenue in the case of M/s.MAC Public Charitable Trust and M/s.Shri Venkateshwara Educational and Health Trust & others in TCA Nos.303 to 310 Of 2021 and 59,60,62,63 of 2022, the Hon’ble Madras High Court held as follows: “In view of our above findings that the amounts collected by the assessees are capitation fee in quid pro qua for allotment of seat in deviation of the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992 and the same are neither a voluntary contribution nor to be treated as applied for charitable purpose, the orders of the Appellate Authority as well as the Tribunal, which are impugned in these appeals, are absolutely perverse in nature and therefore, they are set aside. Accordingly, all the substantial questions of law are answered in favour of the Revenue and against the Assessees”.
In the instant case, the assessee trust is collecting Capitation fee in the form of Corpus donations from the students applying for new admission as elaborately discussed in the assessment order. Hence, the above decision of Madras High Court is squarely applicable to the facts of this case.
3. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing Officer be restored.
3. The brief facts culled out from ITA No.975/Chny/2022 for AY 20 13- 14 are that the assessee is a society registered under the Society Registration Act, 1860 in the year 1974, with the main object of imparting education. The Society is registered u/s.12AA of the Income Tax Act, 1961 (in short “the Act”) from AY 1975-76. The object of the Society is to provide quality education to all those who require such education irrespective of any discrimination. The Society has established two Schools and one College of Arts & Science. First school, Sindhi Model Senior Secondary School, Kellys, Chennai, is affiliated to CBSE and the School has presently strength of 2400 students from Pre-KG to 11th Standard. Second school, Sindhi Model Matriculation Higher Secondary School, Chetpet, Chennai, is affiliated to State Board curriculum and has presently strength of 650 students from LKG to 12th Standard. Sindhi College of Arts & Science, Numbal, Chennai, was established in the year 1991 and the college now offers 12 undergraduate and 3 post graduate courses with student strength of 1800 students. The assessee Society is also establishing Sindhi Model School of Excellence and the School is expected to start functioning from the Academic Year 2019-20. The Society has filed its return of income for AYs 2013-14 to 2019-20 u/s.139(1) of the Act, and claimed exemption u/s.11 & 12 of the Act. A survey u/s.133A of the Act was conducted on 04.02.2020 at the premise of the assessee Society. During the course of survey, it was noticed that the Society is collecting donations in lieu of new admissions and claimed that those donations are voluntary in nature. It was further observed that the Society was collecting excess fess over and above the fees prescribed by the Statutory Authorities. It is also noticed that the Society did not maintain separate books of accounts for incidental activities like sale of text books, plying of buses, running canteen, and income from ground rent.
4. During the course of survey, a statement on oath u/s.131 of the Act, was recorded from Shri. C.V.Kalyanasundaram, who consolidates the accounts of the Society, where, he had admitted that the Society is collecting donations from new students during admission process and preprinted corpus donation receipts are given and the parents fill necessary columns. The said donations are over and above the tuition fees and miscellaneous fess fixed by the Schools. Further, a statement on oath u/s.131 of the Act, was recorded from Mr.J.C.Prakash, one of the Members of the Society and he was confronted with ‘corpus donation’ receipts and called upon to explain. In response, he specifically stated that the Society appeals for ‘corpus donation’ from parents during admission process and those parents who admitted their children to Sindhi Model Senior Secondary School, Kellys, Chennai, were paid ‘corpus donation’ of Rs.50,000/-,but said donation is not compulsory. He further stated that the Society is not collecting any donations for admission to Sindhi College of Arts & Science, Numbal, and Chennai. During the course of survey, it was further noticed that the Society is collecting uniform ‘corpus donation’ from parents of students admitted to Sindhi Model Senior Secondary School, Kellys, Chennai. Similarly, the Society has collected Development Fund (Corpus) from parents of students admitted to Sindhi Model Matriculation School, Chetpet, Chennai, ranging from Rs.1,500/- to Rs.15,000/- for different assessment years.
5. During the course of assessment proceedings, a show cause notice was issued to the assessee to explain ‘as to why’ the exemption claimed u/s.11 of the Act, should not be denied for various violations referred to in Sec.11 & 12 of the Act, noticed during the course of survey. In the said show cause notice, the AO observed that the Society is collecting ‘Capitation Fees’ in violation of the Tamil Nadu Education Institutions (Prohibition of Collection of Capitation Fee) Act, 1992 & the Tamil Nadu Schools (Regulation of Collection of Fee) Act, 2009. The AO further observed that although, the assessee Society is generating income from incidental services in terms of provisions of Sec.11(4) of the Act, but separate books of accounts are not maintained in violation of said provisions. Since, there is a violation of provisions of Sec.11 & 12 of the Act, the AO called upon the assessee to explain ‘as to why’ exemption claimed u/s.11 of the Act, should not be denied.
6. In response, the assessee submits that although, the Society has collected ‘corpus donation’ from parents of students admitted in Schools, but such donations are voluntary in nature. The Society makes an appeal to parents for donation for various development activities of the Society, including development of infrastructure facilities, for which, the parents invariably contribute donations for corpus of the Trust, but such donations are not in violation of the provisions of the Tamil Nadu Education Institutions (Prohibition of Collection of Capitation Fee) Act, 1992 & the Tamil Nadu Schools (Regulation of Collection of Fee) Act, 2009. The assessee further submitted that Sindhi Model Senior Secondary School, Kellys, Chennai, is affiliated to CBSE and is governed by state rules and as per section 3(3) of the Tamil Nadu Schools (Regulation of Collection of Fee) Act, 2009, the Government has not fixed any fees for Schools affiliated to CBSE, and further, the Schools are permitted to collect fees commensurate with the facilities provided by the School. In so far as Sindhi Model Matriculation School, Chetpet, Chennai, which is affiliated to State Board, the Society does not collect any excess fees as alleged during the course of survey. Further, the Society is maintaining its books of accounts in computerized environment and segmental accounting entries are passed in the books of accounts and from the said accounts, segmental income and expenditure can be ascertained. Therefore, it cannot be said that there are no separate books of accounts for incidental activities.
7. The AO, however, was not convinced with the explanation furnished by the assessee and according to the AO, the facts gathered during the course of survey, clearly established collection of donation in lieu of admissions to Schools run by the Society in violation of provisions of the Tamil Nadu Education Institutions (Prohibition of Collection of Capitation Fee) Act, 1992 & the Tamil Nadu Schools (Regulation of Collection of Fee) Act, 2009. The AO further observed that said donation amount is fixed by the School administration for new admission and invariably all students shall pay donations for getting admission in the Schools. Further, signatures were taken from parents in pre-printed forms provided by the School. In some cases, donations has been refunded to the parents, wherever, they did not get admission in the Schools. The AO further noted that Mr.C.V. Kalyanasundaram, Administrative In-Charge of the Society, categorically admitted that a separate bank account is maintained for receiving donations and such donations are collected from new admission students during admission process. This fact has been confirmed by Mr.J.C.Prakash, Member of the Society. Therefore, the AO opined that collecting donations compulsorily for admission of students is clearly prohibited by the Law and such donations in excess of prescribed fees is nothing but ‘Capitation Fees’ for admission and this makes the assessee Society ineligible to claim exemption u/s.11 of the Act. The AO further observed that the assessee Society has been generating income by renting out cricket grounds, running canteen, plying of buses, sale of text books, note books, etc., but no separate books of accounts are maintained as required u/s.11(4A) of the Act, to be eligible for exemption towards income generated from incidental activities. The AO has discussed the issue in light of tabular income and expenditure statement furnished by the assessee from AYs 2013-14 to 2019-20 and observed that the Society has incurred loss from the incidental activities and the same has been set off against income of the Society which otherwise would have been available for charitable activities. Since, the assessee Society did not maintain separate books of accounts as required u/s.11(4A) of the Act, the conditions precedent for claiming exemption are not satisfied, and thus, the assessee is ineligible to claim exemption u/s.11 of the Act. Therefore, the AO opined that the assessee Society is not entitled for exemption u/s.11 of the Act, and thus, rejected exemption claimed u/s.11 of the Act, and computed income under normal provisions of the Act. The relevant findings of the AO are as under:
7. From the aforementioned paragraphs, it is seen that the donation amount is directly linked to admissions. Such compulsory donations, received in lieu of admissions, collected using pre-printed forms and claimed as corpus is to be denied exemptions u/s.11(1)(d) and is to be treated as income of the trust u/s.11(1)(a) of the act. Also, the assessee has not complied with the provisions of section 11 (4A) and the proceeds from such activity is to be denied exemption under section 11. Further, the assessee has collected extra fees which are not approved by the government of Tamil Nadu. For this act of the collecting excess fees over and above the prescribed fees and collecting donations which are not voluntary but compulsory, the exemption claimed by the assessee trust u/s 11 is to be denied and income over expenditure is to be brought to tax.
8. The amount of donation is fixed. Hence, it is not voluntary. The Donee should not decide the amount of donation that must be given by the donor. Corpus donation has to be on the direction of the donor and not by the wish of the donee. In this case, a pre-printed form is given to the parent for filling name, addresss, PAN and signature etc., The donation is collected from all the newly admitted students. Also as discussed in the earlier paras the assessee has collected extra fees over and above the fees prescribed by the government. Collection of any amount exceeding the prescribed fee is prohibited by law. The Hon ‘ble Apex Court in the case of Ms. Mohini Jain v. State of Karnataka & Ors. (1992) 3 SCC 666, held that capitation fee was nothing but price of selling education and such “teaching shops” were contrary to the Constitutional scheme and abhorrent to our Indian culture. Hon’ble Supreme Court’s decisions in case of TMA Pai Foundation Vs. State of Karnataka (2002) (8 SCC 481), Islamic Academy of Education Vs. State of Karnataka (2003) (6 SCC 697) and P.A. Inamdar Vs. State of Maharashtra (2005) (6 SCC 537) also supports the fact that the education is not a commercial activity. Education would remain as a charity only in a case where education is imparted systematically for a fee prescribed by Government. A private aided or unaided professional institution or any other educational institution of a State is required to collect fees with regard to infrastructure and benefit of students of that educational institution. Collection of money over the above fee prescribed by Committee would amount to collection of capitation fee and such an institution would face legal consequences for same (Vodithala Education Society Vs. ADIT, [2008] 20 SOT 353 (HYD.)) The Hon’ble ITAT, Hyderabad vide their order on 22-3 -2012 in the case of M/s Islamic Educational Society had observed, as under: “Further, we find that the Constitutional Bench of Apex Court in the case of T.M.A. Pai foundations and others Vs State of Karnataka & Others (2002) 8 SCC 481 examined the issue of collection of capitation fees for the admission of students over and above fees prescribed by the private institution and held that the institution which are collecting capitation fees for admission of students over and above the fees prescribed cannot be construed as charitable/educational institution……..
Same view was taken by Apex Court in the case of Islamic Academy of Educations and another Vs State. of Karnataka & another (2003) 6 SCC 697. If the admissions were received compulsorily for admission of students, the assessee is not entitled for exemption either u/s 1 0(23C) or u/s 11 of the IT Act…………………….. ” In the leading case of Queen’s Educational
Society Vs. Commissioner of Income Tax, reported in (2015) 8 SCC 47 relied upon by the assessee in its submission, the Apex Court held that if the activity is primarily for educating persons, the fact that Institution makes a surplus/profit which arises incidentally from the Educational activities or public utility activities does not render the Institution a profit making Institution. In the very same judgment, the Hon ‘ble Supreme Court warned that if they are not found to be genuine or such activities are not being carried out in accordance with all or any of the conditions subject to which approval has been given under Section 10(23-C) of the Act, such approval and exemption must be withdrawn forthwith.
9. In view of the above, the exemption u/s.11 is denied and the excess of income over expenditure is taxed. As exemption u/s. 11 is denied, the assessee’s claim of accumulation under explanation 2 of Section 11(1) in Form 9A is also denied. Hence, the assessment is completed u/s.143(3) of IT Act 1961 for A.Y 2013-14 as under:
