2014 (2) TMI 658 - HC - Income Tax

University loses tax exemption under Section 10(23C)(iiiab) for failing to prove solely educational purpose without profit motive

Visvesvaraya Technological University Versus Assistant Commissioner of Income-tax

Karnataka HC ruled against a university claiming exemption under Section 10(23C)(iiiab) of the Income Tax Act. The court held that the university did not ... Claim of Exemption u/s 10(23C)(iiiab) of the Act - Purpose of University - Whether rejecting the claim of the University seeking exemption/deduction u/s 10(23C) (iiiab) of the Act was justified and Whether the University is existing solely for educational purposes and not for purposes of profit and that the surplus in its accounts in any given year would not constitute profit to deny exemption/benefit under section 10 (23C) (iiiab) of the I.T. Act – Held that:- The intention of legislature is primarily to be gathered from the words used in the statute - Once it is shown that an assessee falls within the letter of law, he must be taxed, however, great the hardship may appear to the judicial mind to be - The University earns income from different sources every year - The expressions, 'existing solely for educational purposes and not for purposes of profit', is common in all the three sub-clauses - Thus the common element in sub-clauses (iiiab), (iiiad) and (vi) is that the University or education institution must exist 'solely for educational purpose and not for the purposes of profit' – Relying upon Additional Commissioner of Income-tax, Gujarat v. Surat Art Silk Cloth Manufacturers Association [1979 (11) TMI 1 - SUPREME COURT] – the test that must be applied is not 'whether as a matter of fact an activity results in profit' but 'whether the activity is carried on with the object of earning profit'. According to the revenue the University gets about 1% financial aid/ grants from the Government of the total receipts - even without grants, the surplus amount is more than double the expenditure incurred during 2004-05 till 2009-10. In 2005-06 the surplus amount is almost four times more than the actual expenditure - without actual compliance of a taxing provision, such as Section 10 (23C) (iiiad) of the Act, the provision, such as Section 23 of the 1994 Act, would not entitle any person, such as the University to seek any benefit of the taxing provision. Section 10(23C) (iiiad) of the Act, uses the word/expression 'financed', which is a clear indication of the intendment of the legislature - an exemption under Section 10(23C) (iiiab) cannot be either claimed or granted unless all the ingredients as reflected therein are satisfied/fulfilled. The expression 'not for purposes of profit' will have to be read in the light of the word 'existing' used in sub-clause (iiiab) - the University used the financial aid extended by the Government only for development purpose and not for meeting the other 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 the Government to the University - the amount is not coming from Government corpus/treasury – thus, the University cannot be treated as an institution wholly or substantially financed by the Government. Whether the appellant is a State or part of the State, within the meaning of Article 289(1) of the Constitution of India so as to seek exemption from taxation under this Article – Held that:- The University is a 'body corporate' having perpetual succession and a common seal with a power to acquire and hold 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, the University is not a 'State' within the meaning of Article 289(1) of the Constitution and it cannot be exempted from taxation as envisaged thereunder - The word 'State' employed in the Article cannot be extended so as to include the University – Decided against Assessee. Issues Involved:1. Validity of the issuance of notice under Section 148 of the Income Tax Act.2. Whether the University can be treated as a 'State' under Article 289(1) of the Constitution of India.3. Entitlement of the University for exemption under Section 10(23C)(iiiab) of the Income Tax Act.4. Whether the University is existing solely for educational purposes and not for purposes of profit.5. Whether the University is wholly or substantially financed by the Government.Detailed Analysis:1. Validity of the Issuance of Notice under Section 148 of the Income Tax Act:The notices under Section 148 were issued by the Assessing Officer requiring the University to file its return of income for the assessment years 2004-05 to 2009-10, as the income during these years had escaped assessment. The University did not comply with these notices initially, leading to further notices under Section 142(1) and summons under Section 131. Eventually, the University filed returns declaring 'nil income' and claimed exemption under Section 10(23C)(iiiab). The assessment was completed rejecting the exemption claim.2. Whether the University can be Treated as a 'State' under Article 289(1) of the Constitution of India:The University argued that it was an extended arm of the State and thus exempt from taxation under Article 289(1). However, the court held that the definition of 'State' under Article 12 of the Constitution cannot be applied to Article 289(1). The Supreme Court's judgments in cases like Andhra Pradesh State Road Transport Corporation v. ITO and Adityapur Industrial Area Development Authority v. Union of India clarified that statutory corporations or bodies corporate, like the University, do not qualify as 'State' under Article 289(1). Therefore, the University is not exempt from taxation under this Article.3. Entitlement of the University for Exemption under Section 10(23C)(iiiab) of the Income Tax Act:The University claimed exemption under Section 10(23C)(iiiab), which applies to educational institutions existing solely for educational purposes and not for profit, and which are wholly or substantially financed by the Government. The authorities, including the Tribunal, consistently found that the University did not meet these criteria. The court examined the financials and concluded that the University's income from fees and other sources far exceeded the grants received from the Government, which were less than 1% of its total receipts. Thus, the University was not considered wholly or substantially financed by the Government.4. Whether the University is Existing Solely for Educational Purposes and Not for Purposes of Profit:The court analyzed whether the University's activities resulted in profit. It was established that while the University was set up for educational purposes, it systematically generated surplus income far exceeding its expenditure, which was invested in fixed deposits. The court held that the surplus was not incidental but indicated a profit-making activity. The Supreme Court's principles in cases like Aditanar Educational Institution v. Additional CIT and American Hotel and Lodging Association Educational Institute v. CBDT were applied, emphasizing that the predominant object should not be profit. The University's significant surplus was deemed unreasonable and indicative of profit-making.5. Whether the University is Wholly or Substantially Financed by the Government:The court scrutinized the University's claim of being substantially financed by the Government. The financial data showed that the grants from the Government were minimal compared to the University's total income from other sources. The receipts from students and affiliated colleges were not considered Government grants. The statutory provisions under Section 23 of the Visveswaraiah Technological University Act, 1994, did not mandate actual grants but allowed for various income sources. The court concluded that the University was not substantially financed by the Government.Conclusion:The appeals were dismissed, and all questions were answered in favor of the revenue. The University was not entitled to the claimed exemptions under Section 10(23C)(iiiab) and Article 289(1) of the Constitution, as it did not meet the necessary criteria of being wholly or substantially financed by the Government and existing solely for educational purposes without profit.