M/s Navodaya Education Trust Vs Sri. Sunki Rajender Reddy (Karnataka High Court)
The petitioner – Trust in question having the cloak of an Educational Trust, to enjoy the exemption from Income Tax obtained the approval under Section 10(23-C) of the Act, was thoroughly misused and abused by the Trustees who appear to be Members of the same family or closely related and appear to have used the entity of an exempted juristic person of the petitioner – Trust for purposes other than the pure Educational purposes.
The facts unearthed during the course of search and seizure under Section 132 of the Act which have been succinctly narrated, analyzed and discussed by the Respondent – Authority reveal that the petitioner Trust not only acted against public policy and the directions of the Hon’ble Supreme Court by collection of Capitation Fees from various students for Admission to its Medical College and a staggering sum of Rs. 52.00 crores was collected by them under the innocuous name given to part of it as ‘Anonymous Donations’ and which the learned Counsel for the petitioner – Trust also tried to explain that they were voluntary anonymous donations by the alumni students or parents of the students is nothing but a sham excuse. The huge Capitation Fees collected by such Medical Colleges and other Institutions to provide seats to the intending students can be anything but voluntary contribution for charitable and pious purposes by the parents or students and such lame excuses could hardly be convincing for any Tax Authority, much less this Court. The violation of the clear directions of the Hon’ble Supreme Court in a large number of judgments which specifically and clearly prohibited the collection of any Capitation Fees, including in the case of Ms. Mohini Jain Vs. State of Karnataka and others (1992) 3 SCC 666, and others as quoted in the impugned order itself above clearly shows that the petitioner – Educational Trust in question was acting for profits, contrary to law. This itself would disentitle the Educational Trust from the benefit of exemption under Section 10(23-C) of the Act.
The other facts against the petitioner – Trust like payment of huge honorarium to the Trustees, huge amounts paid as Lease Rent to Shri. Sunki Rajender Reddy, Smt. Swathi Rajender Reddy, Mr. Amrut Reddy and Ms. Nandika are also glaring and very damaging for the very foundation of exemption to the Educational Institutions. The Authority concerned has also found that `86.10 crores was shown for the Financial Years 2010-11 to 2014-15 under the Heading “TRF”, (Transfer to Trustees) for building up their personal assets and other pay offs or payment of speed money etc. for seeking approvals etc. This clearly shows that the petitioner – Educational Trust was running like a business establishment, rather than for educational purpose.
It cannot be expected of the Respondent -Authority to ask on each single entry in the Accounts of the Trust, the explanation of the petitioner – Trust or other Trustees and if a reasonable opinion could be formed on the basis of the material gathered during the course of search and seizure operations under Section 132 of the Act that the petitioner – Trust does not exist solely for the purpose of education, the petitioner -Trust cannot be allowed to cry wolf on the anvil of breach of principles of natural justice.
The search warrants under Section 132 of the Act appear to have been issued against the petitioner -Trust as well as other Trustees who were Members of the same family and it can be reasonably ascertained that they would know of the case against them. The burden clearly lied upon them to establish their bona fides in the matter to prove that the Educational Trust in question was not being used for other purposes other than within the four corners of Section 10(23-C) of the Act.
The compliance with the principles of natural justice was fully made in the present case in as much as the Show Cause Notice was duly given to the petitioner – Trust on 28/11/2017 in which even reference to search action under Section 132 of the Act was made and it was also stated that the amounts collected by way of donations were used by the Trustees for their personal purposes and for purchase of personal assets and for obtaining accommodation entries etc. and thus it was a comprehensive Show Cause Notice to which even a detailed Reply was filed by the petitioner -Trust but which was not found to be satisfactory by the Respondent Authority and in the opinion of this Court rightly so. Thus the breach of principles of natural justice is not at all found in the present case for allowing the petitioner – Trust to assail the said order on the said ground.
The Medical Education in our country in the past few decades has earned more a bad reputation and the vicious cycle of the Medical Education or Engineering Education in our country thriving on illegal Donations, Capitation Fees, arbitrary allocation of Private Management seats etc. and illegal manner in which the approvals from Government Authorities were obtained, has faced the wrath of the Courts on several occasions up to the Hon’ble Apex Court of the country and a series of judgments in this regard have been given by the various High Courts and Supreme Court. The beginning of this viciousness at the entry level of Medical and Engineering Colleges permeates the professional practices of these fields throughout and the ill-effects of the same on the poor and middle class sections of the society is indeed a traumatic experience.
The purpose of exempting such Institutions from Income Tax was obviously to restrict such exemption upon a very strict compliance with the parameters for the same and only bona fide, chaste and pure Educational Institutions could expect such exemptions from the Income Tax which as per the said norms and the rules of interpretation of such provisions of exemption have to be strictly construed by the Courts of law. Any liberal or flexible interpretation ‘looking over’ the strict compliance of the conditions is likely to defeat the very purpose of grant of such exemption and the business houses which additionally want to run Educational Institutions also as business enterprises cannot be allowed to take the benefit of exemption from Income Tax under the cover of a registered Educational Trust through the Books of Accounts of the Trust, in which all kinds of other business activities may keep on happening.
It is only after the search operations under Section 132 of the Act, which in the present case revealed the ugly part of the Trust activities and the reasons based on such material gathered by the Income Tax Authorities cannot be brushed aside and such reasons as stated in the impugned order are found to be sufficient for upholding the correctness of the impugned order.
The case laws relied upon by the learned counsel for the petitioner are of little help to the petitioners in the present case. Most of them turned upon the fact situation at the time of initial grant of exemption under Section 10(23-C) of the Act and the Courts were not dealing with a fact situation which after the grant of exemption could result in the withdrawal of the same upon misuse of approval under Section 10(23-C) of the Act. Therefore, those cases are clearly distinguishable on facts, while there being no quarrel on the propositions of the law laid down in the same.
In the leading case of Queen’s Educational Society Vs. Commissioner of Income Tax, reported in (2015) 8 SCC 47 relied upon by the learned counsel for the petitioners, 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.
The relevant paragraph 11 is quoted below for ready reference:
“11. Thus, the law common to Sections 10(23-C)(iii-ad) and (vi) may be summed up as follows:
(1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purpose and becomes an institution for the purpose of making profit.
(2) The predominant object test must be applied – the purpose of education should not be submerged by a profit-making motive.
(3) A distinction must be drawn between the making of a surplus and an institution being carried on “for profit”. No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit.
(4) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes.
(5) The ultimate test is whether on an overall view of the matter in the assessment year concerned the object is to make profit as opposed to educating persons”.
In American Hotel and Lodging Association Educational Institute Vs. Central Board of Direct Taxes and others reported in (2008) 10 SCC 509, the Hon’ble Supreme Court dealt with a case of a non-profit Educational organization set up in USA having its branch Office in India mainly to comply with its obligations under various Agreements with the Government of India (Ministry of Tourism) and the Branch collected amounts of fees from Educational Institutions/persons wishing to take the courses offered in the field of Hospitality and fees for the required course material was remitted back to USA after deducting the incidental costs by Indian Branch, but the CBDT rejected the Application under Section 10(22) of the Act that there was a surplus repatriated outside India. Under these circumstances, the Supreme Court held that the scope of inquiry for grant of approval under Section 10(23-C) of the Act was limited to the consideration of the nature, existence for non-profit purposes and genuineness of the Applicant. That the remaining monitoring mechanism as postulated in the Third Proviso was not required to be considered at the stage of approval. This case is clearly distinguishable from the facts of the present case and is of no help to the petitioners.
28. In Chief Commissioner of Income Tax Vs. Geetanjali University Trust (2013) 352 ITR 433 (Raj), a Division Bench of the Rajasthan High Court held that the approval for exemption under Section 10(23-C) of the Act could not be denied to the Trust and while upholding the remand of the case to the Chief Commissioner of Income Tax for reconsideration the Court observed that merely because a defect in the Admission procedure was found in the case of the petitioner – Trust, by the High Court which order was ultimately modified by the Hon’ble Supreme Court, it cannot be said that the petitioner – Trust did not exist solely for educational purposes. The Division Bench of the Rajasthan High Court though observed in paragraph 12 that ‘Of course the requirement of an Educational Institution to provide Admissions strictly in accordance with the prescribed Rules, Regulations and the Statute cannot be less emphasized, rather the same need to be adhered to in true letter and spirit but then the said violation cannot lead to its losing the character as an entity existing solely for the purpose of Education’ and there upon the Court upheld the order of the learned Single Judge by which the matter was sent back to Chief Commissioner of Income Tax to decide the proceedings under Section 10(23-C) of the Act afresh. This judgment is also not on all fours with the case of the present petitioner – Trust.
29. Thus on an over all analysis of the facts and legal position, this Court is of the opinion that there was ample material on record to establish that the petitioner Trust had indulged in illegal activities and could not be said to be existing purely for Educational purposes, and rather various other business activities of the said family of Trustees and their money was passing through the cover and shields of the Books of Accounts of the petitioner – Trust rendering it as merely a skeleton for the purpose of exemption to Educational Trust and rather than a real Educational Trust, solely existing for the purpose of Education. Such sham or bogus Trusts cannot be held to be entitled to exemption under the provisions of Section 10(23(C) of the Act and therefore the Respondent Authority has rightly withdrawn the approval of the petitioner – Trust under the said provision.