Capitation fees and fund diversion justified withdrawal of educational exemption after hearing and upheld retrospective effect.

Approval under Section 10(23-C)(vi) was withdrawn because the educational institution was found, on search material, to have collected capitation fees, diverted trust funds for private and non-educational purposes, and failed to exist solely for educational purposes. The Court held that such conduct meant the statutory conditions for exemption were no longer satisfied, so withdrawal was justified. The retrospective withdrawal from 01-04-2009 was also upheld because the record showed continuing misuse and illegality over the relevant period. No breach of natural justice was found, as a show-cause notice was issued, objections were considered, and a hearing was granted.

---

---

Issues: (i) Whether approval granted under Section 10(23-C)(vi) of the Income-tax Act, 1961 could be withdrawn on the ground that the trust was collecting capitation fees, diverting funds and not existing solely for educational purposes; (ii) Whether the withdrawal of approval with effect from 01-04-2009 was sustainable; (iii) Whether there was violation of principles of natural justice in passing the withdrawal order.

Issue (i): Whether approval granted under Section 10(23-C)(vi) of the Income-tax Act, 1961 could be withdrawn on the ground that the trust was collecting capitation fees, diverting funds and not existing solely for educational purposes.

Analysis: The approval under Section 10(23-C)(vi) is available only to an educational institution existing solely for educational purposes and not for profit. The material gathered in search proceedings showed collection of capitation fees under the guise of donations, use of funds for personal assets and private purposes of trustees, payment of amounts towards speed money and other non-educational outgoings, and diversion of trust funds. Such conduct showed that the institution was not carrying on its activities genuinely in accordance with the conditions of approval and that education was not the sole object.

Conclusion: The withdrawal of approval was justified and the finding was against the assessee.

Issue (ii): Whether the withdrawal of approval with effect from 01-04-2009 was sustainable.

Analysis: The impugned order was based on material reflecting unlawful entries and misuse of funds over the relevant period. Once the record disclosed continuing illegality and diversion of funds, the authority was not confined to a narrow future-only withdrawal, and the retrospective effect assigned to the withdrawal was supported by the material found in the books and seized records.

Conclusion: The retrospective withdrawal from 01-04-2009 was upheld and the finding was against the assessee.

Issue (iii): Whether there was violation of principles of natural justice in passing the withdrawal order.

Analysis: A show cause notice was issued, objections were filed, and hearing was afforded before the final order. The notice itself referred to the search material and the alleged misuse of funds. On those facts, the Court held that the opportunity given was adequate and there was no breach of natural justice.

Conclusion: No violation of natural justice was found and the finding was against the assessee.

Final Conclusion: The approval under Section 10(23-C)(vi) was lawfully withdrawn on the basis that the institution had ceased to satisfy the statutory conditions for exemption, and the writ petitions failed.

Ratio Decidendi: An educational institution that collects capitation fees and diverts trust funds for private or non-educational purposes ceases to satisfy the statutory condition of existing solely for educational purposes, and its approval under Section 10(23-C)(vi) may be withdrawn after reasonable opportunity of hearing.

---