By TIOL News Service

NEW DELHI, APR 23, 2016: THE issue is - Whether when assessee-university has generated huge surplus but got miniscule grants from Govt, collection of fees prescribed under statute can be construed as funding by Govt. NO is the answer.

Facts of the case

The assessee is Visvesvraya Technological University (VTU) which was constituted under the Visveswaraiah Technological University Act, 1994. It discharged functions earlier performed by the Department of Technical Education, Government of Karnataka. The University exercised control over all Government and Private Engineering Colleges within Karnataka.

For the Assessment Years 2004-2005 to 2009-2010 notices under Section 148 of the Income Tax Act, 1961 were issued to the University and the Assessee declared 'Nil' income claiming exemption under Section 10(23C)(iiiab) of the Act. Such a claim was negatived by the Assessing Officer and same view was taken by all the Authorities under the Act and also by the High Court in the order under challenge in the present proceedings..

On appeal, the SC held that,

++ 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;

++ 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-TIOL-20-SC-IT;

++ in the present case, we find that during a short period of a decade i.e. from the year 1999 to 2010 the assessee 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 was in the context of the determination of the reasonable fees to be charged by private educational bodies;

++ as against the surplus generated, the amount of direct grant from the Government has been meagre, details of which are being noticed separately later in a different context. The University nevertheless has grown and the number of private engineering colleges affiliated to it had increased from about 64 to presently about 194. The infrastructure of the University has also increased offering educational avenues to an increasing number of students in different and varied subjects. Materials have been brought on record before the High Court as well as before this Court to show the several number of work orders/tenders issued by the University for infrastructure expansion. It is emphatically contended by the assessee in the written submissions filed 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. However, the said amount was attached by the Revenue pursuant to the demands raised in terms of the assessments made. Even in a situation where direct government grants have not been forthcoming and allocation against permissible heads like salary, etc. had not been made the University has thrived and prospered. There can, however, be no manner of doubt that the surplus accumulated over the years has been ploughed back for educational purposes. In such a situation, following the consistent principles laid down by this Court referred to earlier and specifically what has been said in paragraph 19 in Queen's Educational Society, it must be held that the first requirement of Section 10(23C)(iiiab), namely, that the assessee-University exists "solely for educational purposes and not for purposes of profit" is satisfied. The exemption granted in respect of the University under Section 80G of the Act, qua the donations made to it also cannot be ignored in view of an inbuilt recognition in such exemption with regard to the charitable nature of the institution i.e. the assessee University.

++ now the Court is required to go into the further question as to whether the appellant University is wholly or substantially financed by the Government which is an additional requirement for claiming benefit under Section 10(23C)(iiiab) of the Act. It is not in dispute 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 University- Assessee. In such a situation, the argument advanced is 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. Such receipts, it is urged, are from sources statutorily prescribed. The rates of such fees are fixed by the Fee Committee of the University or by authorized Government Agencies (in cases of Common Entrance Test). It is, therefore, contended that such receipts must be understood to be funds made available by the Government as contemplated by the provisions of Section 10 (23c) (iiiab) of the Act;

++ 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;

++ 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;

++ 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;

++ in the present case the High Court in paragraph 53 of the judgment has recorded that even if the value of the land allotted to the University (114 acres) is taken into account the total funding of the University by the Government would be around 4% - 5% of its total receipt. That apart what was held by the High Court in the above case, while repelling the contention of the Revenue that the exemption under Section 10(23c) (iiiab) of the Act for a particular assessment year must be judged in the context of receipt of annual grants from the Government in that particular year, is that apart from annual grants the value of the land made available; the investment by the Government in the buildings and other infrastructure and the expenses incurred in running the institution must all be taken together while deciding whether the institution is wholly or substantially financed by the Government. The situation before us, on facts, is different leading to the irresistible conclusion that the assessee 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.

(See 2016-TIOL-45-SC-IT)