TaxTMI 
TaxTMI 
2014 (2) TMI 658
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....ort, 'the University') under Section 148 of the Income Tax Act, 1961 (for short, 'the Act'). The notices were issued requiring the University to file its return of income for the assessment years 2004-05 to 2009-10, since, according to the Revenue, income during these years had escaped assessment. Compliance, of these notices was not done, and hence notices under Section 142(1) dated 11.04.2011 and 06.09.2011 were issued. Despite these notices, no returns were filed and hence summons under Section 131 of the Act dated 09.11.2011 were issued fixing the date of hearing on 17.11.2011. Then, the University sought further time to file returns. On 15.12.2011 they filed return of income declaring 'nil income', claiming exemption under Section 10 (23C)(iiiab) of the Act. Assessment for the years 2004-05 to 2009-10 was accordingly completed by separate assessment orders, all dated 29.12.2011, under Section 143(3) read with Section 147 of the I.T. Act, rejecting the claim of the University seeking exemption under Section 10(23C)(iiiab). The Assessing Officer held that the University is not an University "not existing for purposes of profit" as contemplated by clause (iiiab) of Section 10(23C....
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....nd in law, the authorities below were justified in rejecting the claim of the University seeking exemption/deduction under section 10(23C) (iiiab) of the I.T. Act, based on their case that they are wholly (or at least substantially) financed by the State Government, as contemplated by Section 23 of the Visveswaraiah Technological University Act, 1994? (ii) 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? (iii) Whether the appellant -University, 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? 6. Before we consider the questions of law and advert to the arguments advanced by learned counsel for the parties in support of their claims we deem it appropriate to state about status of the University. The University was established and incorporated in the State of Karnataka for development of Engineering, Technology and al....
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....credited:- (i) its "income" from fees, grants, donations, gifts, if any; (ii) contributions or grants that may be made by the Central Government, State Government, University Grants Commission, All India Council for Technical Education or like authority or any local authority or any corporation owned or controlled by the Government; (iii) other contributions, receipts, grants and donations and benefactions; (iv) contributions from industry, business and technical departments of the Government and other user organisations: Provided that the funds received by the University under item (iv) above shall be called the Development Fund of the University which shall be utilised for the promotion of Technological Education and Research both within the University and in the constituent units without diverting the same for normal capital or recurring expenditure of the University. (2) The University may have such other funds as may be prescribed by the Statutes. (3) The General Fund, the Development....
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....equired to submit a copy of the accounts and audit report to the State Government along with a statement of the action taken by the University on the reports and the State Government shall cause the same to be laid before both Houses of the State Legislature. The Act of 1994 also provides for removal of difficulties under Section 55 thereof. 7. It is not in dispute that the receipts and expenditure of the University are audited under the provisions of the Comptroller & Auditor General (Duties, Powers & Conditions of Service) Act, 1971 (for short, 'the Act of 1971'). Section 14 of the Act of 1971 provides for audit of receipts and expenditure of bodies or authorities substantially financed from the Union or State Revenues. A close look at this provision as well as the provisions contained in Section 23 of the Act of 1994 would show that audit of receipts and expenditure of the University is carried out under the provisions of the Act of 1971, in view of the provisions contained in the Act of 1994, in particular, Section 23 thereof, which contemplate nonlapsable grants by the State Government for all practical purposes. 8. We would also like to make reference to the grant of ex....
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....-clauses of section 10 of the I.T. Act, so as to appreciate the diverse contentions urged on behalf of the parties. 10. It would be advantageous to reproduce the relevant clause (23C) and sub-clauses (iiiab) (iiiad) and (vi) of Section 10 of the I.T. Act:- "10. In Computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included ----------------------------- (23C) any income received by any person on behalf of - ----------------------------- (iiiab) 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; or (iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution....
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....He submitted that under the Act of 1994, in particular Section 23 thereof, the entire expenditure of the University, both recurring and non-recurring, such as pay and allowances of the staff, contingencies, supplies and services of the appellant should be made by the State Government each year through non-lapsable grants. He submitted that grants paid every year are not only in terms of monies or but also by way of making lands available at very concessional rates. He submitted that the Government allotted huge track of land for establishment of the University and has been continuously allotting lands either free of cost or at concessional rates for further extension/expansion of the University. About 194 Engineering Colleges are affiliated to this University, and therefore, this University requires a huge establishment/infrastructure to carry out its duties/functions contemplated by the Act of 1994. 11.2 Mr. Nair submitted that the Government gave initial land and funds for creation of assets of the University. The University, thus, acquired the income generation capacity with the help of finances from the Government, and therefore, whatever is the income they are getting from ....
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.... 11.5 Mr. Nair submitted, the University indisputably was established and is existing solely for educational purpose and not for the purpose of profit. By no stretch of imagination, he submitted that the University can be stated to have been established for purpose of profit. The surplus in its account in any given year, therefore, would not constitute profit so as to deny exemption under Section 10(23C) (iiiab) of the I.T. Act. He submitted that initially only 68 Engineering Colleges were affiliated to the University and now number of colleges has reached 194. Every year 90,000 students clear the degrees of B.Tech. and M.Tech. Over and above this, every year new colleges are coming up which result in fairly large amount of surplus funds. The surplus funds in this background cannot be treated as profit or income, but it is only a receipt over expenditure as authorised by the Government and cannot be disbursed or distributed among anybody, but could be only used for schemes and projects exclusively for educational purposes as directed and approved by the State Government. He submitted, the stand of the revenue that the University has accumulated surplus over a period of time as its ....
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....tes that the Government should have liberally given money to the University and it should be existing on the basis of such finance given to them by the Government. 12.3 Mr. Wilson invited our attention to one of the letters issued by the Government, whereby Government made it clear that it was not going to extend any maintenance grants to the appellant-University. Then he invited our attention to Section 55 of the Act of 1994, which, according to him, make it clear that if any difficulty arises in giving effect to the provisions of the Act, the State Government may do anything which appears to it to be necessary for the purpose of removing the difficulty. In the light of this provision he submitted that it is well within the power of the Government not to extend any maintenance grant, if the circumstances do not require or demand for the same. Hence, he submitted, reliance on Section 23 is of no avail to the University. 12.4 Mr. Wilson, submitted that the development grant extended for purchase of lands and other infrastructure is for the purpose of investment in capital assets which cannot be treated as annual maintenance grants contemplated under Sub-section (4) of Section ....
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....he light of diverse contentions urged on behalf of the parties mainly based on the provisions of Section 10(23C) (iiiab) of the Act and of the Act of 1994 and judgments relied upon in support by learned counsel for the parties. 14. The principle that a taxing statute should be strictly construed is well settled. It is equally trite 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. On the principle of interpretation of statute the following passage in Commissioner of Sales-tax, U.P. v. Modi Sugar Mills Ltd., AIR 1961 SC 1047 is relevant - "11...In interpreting a taxing statute, equitable considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions. The court must look squarely at the words of the statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed: it cannot imply anything which is not expressed; it cannot import provisions in the statutes so as to su....
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....ake profit; and whether it is wholly or substantially financed by the Government? 17. The University is denied benefit of an exemption under Section 10 (23C) (iiiab) by the Assessing Officer. In sum and substance, the grievance of the University is that it is entitled to the benefit of an exemption under Section 10 (23C) (iiiab), since it is "wholly" or atleast "substantially" financed by the State Government, as contemplated by Section 23 of the Act of 1994. Undoubtedly, the University earns income from different sources every year. Whether the income of the University could be termed as profit so as to deny them benefit of Section 10 (23C) (iiiab) is the question. It is true that the University has not been established for "making" profit under the provisions of the Act of 1994 by the State Government. But, whether it systematically started making profit, as alleged by the revenue, is the question. In short it is the case of the revenue that the University is existing for the purposes of profit though it was set up for educational purpose and not suppose to make profit. 18. As observed earlier, sub-clauses (iiiab), (iiiad) and (vi) of Sections 10 (23C) use the similar langu....
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....f that pursuit is solely and exclusively education, the statutory norm is fulfilled." 20.1 Whether fulfillment of the norm, as aforementioned, is sufficient to extend benefit of Section 10(23C) (iiiab), even if the University is making huge profit is the question. As long as "surplus" is "reasonable surplus", there should not be any difficulty in giving exemption under Section 10(23C) (iiiab) of the Act if it fulfills other conditions stipulated therein. If an University or an educational institution under the guise of "surplus" start making huge profit, in our opinion, it would cease to exist for net making profit and in that event would not be entitled for exemption under this provision. 21. At this stage we would also like to refer to Section 10(22) of the I.T. Act, which was omitted by Finance (No.2) Act, 1998 with effect from 01.04.1999. By the very same Finance (No.2) Act, 1998 sub-clauses (iiiab), (iiiad) and (v) were introduced. Clause (22) which was omitted from the I.T. Act with effect from 01.04.1999 reads thus:- "Any income of an University or other educational institution, existing solely for educational purpose and not for the purpose....
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....conducting educational institutions. The application submitted by the petitioner therein for approval under Section 10 (23C) (vi) was rejected inter alia on the ground that the objects for which the Trust existed were of a varied nature and did not fulfill the condition that it must exist solely for the purposes of education. Moreover, the trust, had a surplus which had been utilized for the purchase of assets as reflected in the balance-sheet. While setting aside the order refusing approval, it was noted that since the establishment of the trust, save and except for carrying on an educational institution, no other activity had been carried on for long years. Moreover, the fact that a surplus may arise in the activity of the trust after meeting the expenditure incurred for conducting educational activities was held not to disentitle the trust for the benefit of the provisions of Section 10(23C). 24. It is in this backdrop we would now like to consider whether the appellant is "wholly or substantially" financed by the Government of Karnataka and that the University existed during the relevant assessment years 'not for purposes of profit'. While considering these questions we woul....
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....71970 602242791 2008-09 1179300782 570671654 608639128 2009-10 1206176395 352258103 853918292 26.1 The second table shows the financial results of the University for past three years which reads thus:- Table-II Financial Year Receipts Expenditure Surplus/profit 2009-10 Rs.138.21 Crores Rs.54.02 Crores Rs.84.19 Crores -60.91% 2010-11 Rs.133.81 Crores Rs.47.31 Crores Rs.86.50 Crores -64.64% 2011-12 Rs.172.34 Crores Rs.78.41 Crores Rs.93.93 Crores -54.50% 26.2 The third table shows fees collected and expenditure incurred by the University for two financial years i.e., 2009-10, 2010-11. Table-III Nature of fees Financial year Amount of Fees Collected Amount expenditure income Balance/profit Convocation 2009-10 Rs.2,72,40,187 Rs.27,07,672 Rs.2,45,32,515 Examination Fee Rs.32,79,37,115 Rs.17,66,43,156 (Remuneration to examiners and others, squad expenses, TA, DA in connection with exam.) Rs.15,12,93,959 Convocation 2010-11 Rs.3,41,31,767 Rs.4,22,595 Rs.3,37,09,173 Examination Fee Rs.34,09,71,278 Rs.12,18,68,114 Rs.4,8....
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....Total : 4,290/- 290/- 290/- 290/- Total = 4,290+290+290+290+=5,160 27. There does not appear to be any dispute that every year about 90,000 students from different streams pass out from the colleges and the University issue them degrees. 28. As against the receipts under different heads, reflected in the aforementioned tables, the University, as reflected in the assessment order, received the following grants between 1998-99 and 2009-10: in 1998-99 and 1999-2000 the University received about four crores of rupees for purchase of land and others. In 2000-01 they received Rs.48,93,000/- for development work; in 2001-02 they received Rs.7,50,000/- for development work. In 2002-03 they received Rs.45,00,000/- for development work. In 2003-04 and in 2004-05 they received Rs.10,00,000/- each for development work. In 2005-06 they received Rs.7,50,000/- and Rs.10,00,000/- each for development works from 2006-07 to 2009-10. Thus, since 1998-99 till 2009-10 the total grants/ funds paid/ made available by the State Government to the University were Rs.5,68,93,000/-. 29. From the above figures, which were taken into consideration by the authorities below, we find substa....
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....ich according to the University, it is entitled for under the provisions of Section 23 of the Act of 1994, are added to the receipts as per the income and expenditure account perhaps surplus figures would further enhance by about 20%. Thus, the receipts as per the income and expenditure account, reflected in the Tables would show that they are exorbitantly higher than the actual expenditure and in any case cannot be treated as "incidental surplus". It is also evident from the fact that even after incurring expenditure during all these years the University has at its disposal about 500 crores rupees as surplus. 33. We make it clear that we are not expressing any opinion on the question whether the University should collect such huge sums from students under different heads. But the fact remains that the University collect huge sums, 3-4 time more than the requirement. Such "surplus", in our opinion, cannot be stated to be incidental. It is not in dispute that huge amounts are invested by the University in fixed deposits, which fetch huge interest thereon. In this backdrop, it will have to be considered that collection of the amounts under different heads or the receipts as per th....
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.... acquired income generation capacity would not mean the "income" that the University is generating from other sources will have to be treated as financial aid by the Government. If we say so, perhaps every such institution, which admittedly, make profit, also will have to be exempted under sub-clauses (iiiab) (iiiad) and (vi) of Section 10(23C) of the Act. The provisions contained in Section 10(23C) (iiiab) in our opinion cannot be stretched that far, when admittedly no grants, as contemplated under Section 23 of the Act of 1994, are ever extended by the State Government to the University. Extending actual grants or financial aid is one thing and organizing funds is other. Merely because funds are organized by the Government or generated, as contemplated under sub-sections(1) to (3) of Section 23 of the Act of 1994, would not, in our opinion, mean or could be treated as financial aid by the Government, so as to say that the University is wholly or substantially financed by the Government. 36. The University has placed on record the information received by them under the Right to Information Act from the office of the Principal Secretary, Education Department (Higher Education), ....
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....ystematically making profit. As observed earlier and seen from different tables, it cannot be stated that fees collected by the University under different heads, is reasonable surplus and it is incidental. There cannot be any justification to collect the monies under different heads 3-4 times more than what they require to spend for the purpose for which they collect it. For instance, as seen in Table - III, the University in the financial year 2009-10 collected Rs.2,72,40,187 fees for convocation as against which the total expenditure incurred under this head was hardly Rs.27,07,672/-. In 2010-11 under the same head the total collection was Rs.3,41,31,667/-, whereas the total expenditure was hardly Rs.4,22,595/-. i.e. hardly 1/8 of the total collection. Thus, the collection of fees under each head and corresponding expenditure for the services rendered does not justify the claim of the University that the receipts are only in the nature of surplus and not profit. As observed earlier, surplus funds could be collected, or these could be incidental surplus, to meet contingencies or for spending during the subsequent year for specific purpose for which it was collected and not for inv....
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....be generated for the benefit/use of the institution and not to the extent so as to keep it in fixed deposits to earn huge income by way of interest. 41. In deciding the character of the recipient, it is not necessary to look at the profit each year, but to consider the nature of activities undertaken. The character of the recipient of income must have the character of educational institution in India to be ascertained from the nature of activities. Mr. Nair, therefore, submitted that if after meeting expenditure, surplus remains incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purpose. In other words, he submitted, the existence of surplus from the activity will not mean absence of educational purpose. In support of this contention he placed reliance upon the judgment of the Supreme Court in American Hotel and Lodging Association Educational Institute (supra). 42. The meaning of the word 'surplus' given in Black's Law Dictionary, Eighth Edition, reads thus- 1. The remainder of a thing; the residue or excess. 2. The excess of receipts over disbursements. 3. Funds th....
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....ld be useful. Paragraph 156 reads thus:- "While this Court has not laid down any fixed guidelines as regards fee structure, in my opinion, reasonable surplus should ordinarily vary from 6% to 15%, as such surplus would be utilized for expansion of the system and development of education." 45. The Supreme Court in P.A. Inamdar and others v. State of Maharashtra and Others, (2005) 6 SCC 537 observed that, education, accepted as an useful activity, whether for charity or for profit, is an occupation. Nevertheless, it does not cease to be a service to society and even though an occupation, it cannot be equated to a trade or business. In Mohini Jain (Miss) v. State of Karnataka and Others, (1992) 3 SCC 666, the Supreme Court in paragraph 17 observed that, "the students are given admission to the educational institutions - whether state-owned or state-recognised - in recognition of their "right to education" under the Constitution. Charging capitation fee in consideration of admission to educational institutions, is a patent denial of a citizen's right to education under the Constitution. The Supreme Court further observed that Indian civilisation recognise....
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....om an activity lawfully carried on by the educational institution, the institution would not cease to be one which is existing solely for educational purposes since the object is not to make profit. Thus, after meeting expenditure, a surplus results incidentally from an activity lawfully carried on by the educational institution, the institution will not cease to be one existing solely for educational purposes and since the object is not to make profit. The decisive or acid test, the Supreme Court observed in Aditanar (supra), is whether on a overall view of the matter, the object is to make profit. In evaluating or appraising the issue, the Supreme Court noted that one should bear in mind the distinction between the corpus, the objects and the powers of concerned authority. In short, merely because 'certain surplus' arises from its operations, it cannot be held that the institution is being run for the purpose of profit so long as no person or individual is entitled to any portion of the said profit and the said profit is used to meet the object of institution. 49. It is not in dispute that the University was established for educational purpose and not for purposes of profit. B....
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....t, we did not find the University giving any relief or benefit to the students in terms of monies. This being the position, it cannot be stated that though the University was set up for educational purpose, it is no more a profiteering institution. In other words, it is undoubtedly making profits which cannot be exempted under the provisions of Section 10(23C) (iiiab) of the I.T. Act. The fact that the University has unreasonable surplus of income over the expenditure during the years in question, it cannot, by any stretch of imagination, would lead to the conclusion that it exists not for the purposes of profit, though the predominant nature of the activity is educational. 52. It was argued on behalf of the University that considering the actual grants received by the University from the State Government in the form of monies and the lands coupled with the statutory obligation under the provisions of the Act of 1994 it is clear that the University, though not wholly, is substantially financed by the State Government. It was submitted by Mr. Nair, learned Senior counsel for the University that the very approach of the revenue comparing the grants actually received with the recei....
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....ted that the University being a 'body corporate' having a perpetual succession and a common seal with a power to acquire and hold property and to enter into contracts in the name by which it is known, sue and be sued and having its own general fund cannot be treated as a 'State' under Article 289(1) of the Constitution of India nor 'a person' as defined under Section 2(31) of the I.T. Act. 56. The definition, as reflected in Article 12 of the Constitution of India, in our opinion cannot be applied to bring the University within the ambit of Article 289 of the Constitution of India. In other words, the extended definition of State as contemplated by Article 12 of the Constitution cannot be extended to bring the University within the ambit of Article 289(1) of the Constitution of India. In this connection, we would like to refer to judgments of the Supreme Court. The Supreme Court in The Andhra Pradesh State Road Transport Corporation by its Chief Executive Officer, Hyderabad, v. The Income-tax Officer, B1B - Ward, Hyderabad and another, AIR 1964 SC 1486, observed that the scheme of Article 289 appears to be that ordinarily the income derived by a State both from Governmental and ....
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.... is also not in dispute that even a statutory corporation is not a 'State' within the meaning of said provision. 59. The Supreme Court in Adityapur Industrial Area Development Authority v. Union of India and Others, (2006) 5 SCC 100, while dealing with Article 289(1), in paragraphs 10 and 11 observed thus:- "10. A mere perusal of Article 289(1) discloses that a claim of exemption under it must proceed on the foundation that the exemption is claimed in respect of property and income of a State. Once it is held that the property and income is that of the State, a question may well arise whether it is still taxable in view of the provision of clause (2) of Article 289 which dominantly is in the nature of a proviso. Clause (2) empowers the Union to impose any tax to such extent as Parliament may by law provide, in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operation connected therewith. Thus, even the income of the State within the meaning of clause (1) of Article 289 may be taxed by law made by Parliament, if such income is derived from a trade or business of any kind carried on by or on b....