Exemption under section 10(23c)(III AB) of the income tax act, 1961 is not available to the university run for the purpose of profit
October, 08th 2014
Section 10 of the Income Tax Act, 1961 (‘Act’ for short) provides for the income which shall not be included in the total income. Section 10(23C)(iiiab) provides that the income of any University or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government does not include in total income. This Sub-clause (iiiab) was inserted by the Finance (No. 2) Act, 1998, w.e.f. 1-4-1999.
The University of this Category does not mean or making profit. The University may have surplus of income over the expenditure. In ‘Aditanar Educational Institution V. Additional Commissioner of Income Tax’ – 1997 (2) TMI 3 - SUPREME Court the Supreme Court held that one should bear in mind the distinction between the corpus, the objects and the powers of the concerned authority. In short, merely because ‘certain surplus’ arises from its operations, it cannot be said that the institution is being run for the purpose of profit so long as no person or the individual is entitled to any profit of the said profit and the said profit is used to meet the object of the Institution.
In ‘Visveswaraiah Technological University V. Assistant Commissioner of Income Tax, 2014 (2) TMI 658 - KARNATAKA HIGH COURT’ the Visveswaraih Technological University (‘University’ for short) was established and incorporated in the State of Karnataka for development of Engineering, Technology and allied sciences under the provisions of the Visveswaraiah Technological University Act, 1994. The University is not for the purposes of profit.
The University filed their income tax returns declaring their income as NIL. The University claimed exemption under Section 10(23C)(iiiab) of the Act. The Assessing Officer held that the University is not an University not existing for purposes of profit as contemplated by Section 10(23C)(iiiab) of the Act and that it is not ‘wholly or substantially financed’ by the Government.
This case ran before the High Court. Before the High Court, the University contended the following:
The main source of income of the university consists of grants received from the Government as contemplated in Section 23 of the Act of 1994;
In addition to the grant the University receives funds under different heads from the students for pursuing their education and training at the colleges affiliated to it.
The High Court elaborately discussed about the surplus raised by the University and its claim for exemption under Section 10(23C)(iiiab) of the Act. The High Court held that an exemption under Section 10(23C)(iiiab) cannot be either claimed or granted unless all the ingredients as reflected therein are satisfied. The expression ‘not for the purpose of profit’ will have to be read in the light of the word ‘existing’ used in sub-clause (iiiab). The University was set up and is existing for the educational purpose which is not itself sufficient. The necessary requirement is that it should not exist for profit. There could be surplus every year but the word ‘surplus’ will have to be read and understood in proper perspective. The surplus, the High Court held, cannot be more than 10% - 15% so as to meet contingencies or unforeseen expenditure.
As per the version of High Court the surplus raised by the University should be reasonable. If the surplus exceeds the reasonable limit then it would amount to ‘existing for profit’. The High Court discussed about ‘reasonable surplus’. The constant increase in surplus every year after year by way of collection of fees under various heads, more than what is required, would not amount to ‘reasonable surplus’. It would indicate that the University is systematically making profit. Collecting more money, under different heads more than what they require to spend for the purpose for which they collect it, is not justified. The High Court further indicated that the surplus funds could be collected, or these could be incidental surplus, to meet contingencies or for spending during the consequent year for specific purpose for which it was collected and not for investing the same in fixed deposits for earning of income by way of interest.
The High Court further indicated that the University is entitled for financial aid in the form of monies/funds from the State Government for its development or expansion. In this case despite huge expansion to cater the need of 194 colleges, the University has generated surplus of about 500 crores within a span of 10 years. Such surplus could not be termed as ‘reasonable surplus’. Indubitably, like any normal person, who has a tendency to save surplus earning, even an educational institution, such as the university, is entitled to generate reasonable surplus for development of education and expansion of the Institution.
The High Court held that the records submitted by the University showing the receipts and expenditure shows that they have earned huge income which could be and would have to be termed as ‘profit’. The State Government also gave grants to the university. The University was not giving any relief for the benefit of the students in terms of monies. This being the position, it cannot be stated that though the University was set up for educational purposes it is no more profiteering institution. In other words, the University is making profits which cannot be exempted under the provisions of Section 10(23C)(iiiab) of the Act.
The University hardly gets 1% financial aid from the Government of its total receipts from other sources. Even if the costs of the lands at which they were transferred to the University are taken into consideration, still the total funding by the Government to the University would not exceed 4 to 5%. The High Court observed that it is clear from the materials on record that the University used the financial aid extended by the Government only for development purpose and not for meeting the expenditure for which they are entitled to seek grants as provided for under Section 23 of the Act of 1994. The fees they are receiving from the students routed through colleges affiliated to it and the Examination Authority cannot be treated as financial aid from Government. Having regard to the facts and figures, the University cannot be stated to have been financed either wholly or substantially. The High Court held that the University is a body corporate having perpetual succession and a common seal with a power to acquire and held property and to enter into contract in its name as contemplated under Section 3 of the Act of 1994, and in the light of the meaning of the word state in Article 289 of the constitution, it is to be opined that the university is not a ‘state’ within the meaning of Article 289(1) of theConstitution and it cannot be exempted from taxation as envisaged there under. The High Court dismissed the appeals filed by the university.