University not wholly or substantially financed by govt not eligible for exemption u/s 10(23)(iiiab)

CA Saurabh Chokhra

Brief of the case:

i. The  Hon’ble Supreme court in the above cited case held that Visveswaraiah Technological University being not wholly or substantially financed by government is not entitled to claim exemption u/s 10(23)(iiiab).

ii. Further, the fees collected by the University as per prescribed govt. norms cannot be said to finance provided by govt.  Therefore, assistance by govt. by way of loans, grants and subsidies only to be considered as financing from it.

Facts of the case:

i. The assessee Visvesvraya Technological University (VTU) discharges functions earlier performed by the Department of Technical Education, Government of Karnataka. The University exercises control over all Government and Private Engineering Colleges within Karnataka.

ii. For the AY 2004-05to 2009-2010 notices under Section 148 of the Income Tax Act, 1961 were issued to the University. In response to such notices returns were filed declaring ‘Nil’ income and claiming exemption under Section 10(23C)(iiiab) of the Act.

iii. The aforesaid claim of exemption was denied  by the Assessing Officer who proceeded to make the assessments. The same view has been taken by all the Authorities under the Act and also by the High Court in the order under challenge in the present proceedings.

iv. Aggrieved assessee filed appeal before Supreme Court.

Held by Hon’ble Supreme Court:

i. Supreme court observed that exemption under Section 10(23C) (iiiab) is subject to two conditions. First condition is that the educational institution or the university must be solely for the purpose of education and without any profit motive. Secondly, it must be wholly or substantially financed by the government.

ii. In the present case, the university in a short period of 10 years had generated a surplus of about Rs.500 crores. But the assessee has contended that between 1994 and 2009 the University had actually spent about Rs.504 crores on infrastructure and the available surplus in the year 2010 which was in the range of Rs.440 crores was also intended to be applied for different infrastructural work, details of which have also been brought on record.

iii. It means that the surplus accumulated over the years has been ploughed back for educational purposes. In such cases, the institute can be well said as existing “solely for educational purposes and not for purposes of profit” as surplus is only incidental which is being ploughed back for educational purposes.

iv. As regards satisfaction of second condition of being wholly or substantially financed by the government, court observed that grants/direct financing by the Government during the six (06) Assessment Years in question i.e. 2004-2005 to 2009-2010 had never exceeded 1% of the total receipts of the appellant – University.

v. Further, the argument that fees of all kinds collected within the four corners of the provisions of Section 23 of the VTU Act must be taken to be receipts from sources of finance provided by the Government cannot be accepted because if collection of fees is to be understood to be amounting to funding by the Government merely because collection of such fees is empowered by the Statute, all such receipts by way of fees may become eligible to claim exemption under Section 10 (23c) (iiiab).

vi. Infact, assistance by govt. by way of loans, grants and subsidies only to be considered as financing from it.Therefore, the University not eligible to claim exemption u/s 10(23C) (iiiab) as it does not satisfy the second condition.

vii. In result the petition was dismissed.