Visvesvaraya Technological University vs. ACIT (Supreme Court)
April, 27th 2016
S. 10(23C): Meaning of expression "existing solely for the purpose of education and without any profit motive" explained. Huge surplus (in excess of 6 to 15%) and minimal expenditure implies profit motive. Fees collected from students, though as per statute, is not a funding by the Government
The Visvesvraya Technological University (VTU) has been constituted under the Visveswaraiah Technological University Act, 1994. It 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. The University claimed exemption under Section 10(23C)(iiiab) of the Act on the ground that it is solely for the purpose of education and without any profit motive and it is wholly or substantially financed by the government. The Karnataka High Court rejected the claim (2014) 362 ITR 279 (Kar) inter alia on the ground that an institution which regularly makes more than 10% – 15% surplus is existing for profit & is not eligible for exemption. On appeal by the University to the Supreme Court HELD by the Supreme Court rejecting the claim:
(i) The entitlement for exemption under Section 10(23C) (iiiab) is subject to two conditions. Firstly 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. Both conditions will have to be satisfied before exemption can be granted under the aforesaid provision of the Act.
(ii) The relevant principles of law which will govern the first issue i.e. whether an educational institution or a university, as may be, exists only for educational purpose and not for profit are no longer res integra, having been dealt with by a long line of decisions of this Court which have been elaborately noticed and extracted in a recent pronouncement i.e. Queen’s Educational Society vs. Commissioner of Income Tax (2015) 8 SCC 47. To the above principles, one further test as laid down in CIT vs. Surat Art Silk Cloth Manufacturers’ Assn (1980) 2 SCC 31 and culled out in American Hotel and Lodging Association Educational Institute vs. Central Board of Direct Taxes and Others (2008)10 SCC 509 may be added which is as follows: “In order to ascertain whether the institute is carried on with the object of making profit or not it is the duty of the prescribed authority to ascertain whether the balance of income is applied wholly and exclusively to the objects for which the applicant is established.” The above principle has been specifically reiterated in paragraph 19 of the decision in Queen’s Educational Society (supra) in the following terms: “The final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall out of Section 10(23-C) is to ignore the language of the section and to ignore the tests laid down in Surat Art Silk Cloth case [CIT v. Surat Art Silk Cloth Manufacturers’ Assn.(1980) 2 SCC 31], Aditanar case [Aditanar Educational Institution v. CIT [(1997) 3 SCC 346] and American Hotel & Lodging case [American Hotel & Lodging Assn. Educational Institute v. CBDT [(2008) 10 SCC 509].
(iii) It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit.”
(iv) In the present case, we find that during a short period of a decade i.e. from the year 1999 to 2010 the University had generated a surplus of about Rs.500 crores. There is no doubt that the huge surplus has been collected/accumulated by realizing fees under different heads in consonance with the powers vested in the University under Section 23 of the VTU Act. The difference between the fees collected and the actual expenditure incurred for the purposes for which fees were collected is significant. In fact the expenditure incurred represents only a minuscule part of the fees collected. No remission, rebate or concession in the amount of fees charged under the different heads for the next Academic Year(s) had been granted to the students. The surplus generated is far in excess of what has been held by this Court to be permissible (6 to 15%) in Islamic Academy of Education and another vs. State of Karnataka and others (2003) 6 SCC 697 (paragraph 156) though the percentage of surplus in Islamic Academy of Education (supra) was in the context of the determination of the reasonable fees to be charged by private educational bodies.
(v) Universities and Educational Institutions entitled to exemption under the Act have been categorized under three different heads, namely, those covered by Section 10(23C) (iiiab); Section 10(23C)(iiiad) and 10(23C)(vi) of the Act. The requirement of the University or the educational institution existing “solely for educational purposes and not for purposes of profit” is the consistent requirement under Section 10(23C) (iiiab), 10(23C)(iiiad) and 10(23C)(vi). However, in cases of Universities covered by Section 10(23C)(iiiab) funding must be wholly or substantially by the Government whereas in cases of universities covered by Section 10(23C)(iiiad) the aggregate annual receipts should not exceed the amount as may be prescribed. Universities covered by Section 10(23C)(vi) are those other than mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which are required to be specifically approved by the prescribed authority.
(vi) Having regard to the text and the context of the provisions of Section 10 (23c) (iiiab), 10 (23c) (iiiad) and 10 (23c) (vi) it will be reasonable to reach a conclusion that while Section 10 (23c) (iiiab) deals with Government Universities, Section 10 (23c) (iiiad) deals with small Universities having an annual “turnover” of less than Rupees One Crore (as prescribed by Rule 2 (BC) of the Income Tax Rules). On a similar note, it is possible to read Section 10 (23c) (vi) to be dealing with Private Universities whose gross receipts exceeds Rupees One Crore. Receipts by way of fee collection of different kinds continue to a major source of income for all Universities including Private Universities. Levy and collection of fees is invariably an exercise under the provisions of the Statute constituting the University. In such a situation, 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). Such a result which would virtually render the provisions of the other two Sub-sections nugatory cannot be understood to have been intended by the Legislature and must, therefore, be avoided.
(vii) It will, therefore, be more appropriate to hold that funds received from the Government contemplated under Section 10(23c)(iiiab) of the Act must be direct grants/contributions from governmental sources and not fees collected under the statute. The view of the Delhi High Court in Mother Diary Fruit & Vegetable Private Limited vs. Hatim Ali & Anr [(2015) 217 DLT 470] which had been brought to the notice of the Court has to be understood in the context of the definition of ‘public authority’ as specified in Section 2(h)(d)(ii) of the Right to Information Act, 2005. Reliance has been placed on the judgment of the High Court of Karnataka in Commissioner of Income-tax, Bangalore vs. Indian Institute of Management (2014) 49 Taxmann.com 136 (Karnataka). The situation before us, on facts, is different leading to the irresistible conclusion that the University does not satisfy the second requirement spelt out by Section 10 (23c) (iiiab) of the Act. The appellant University is neither directly nor even substantially financed by the Government so as to be entitled to exemption from payment of tax under the Act.