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Friday, April 22, 2016

Visvesvraya Technological University (VTU) has been constituted under the Visveswaraiah Technological University Act, 1994 (for short “VTU Act”) = Section 10 (23c) (iiiab) of the Act.= For the Assessment Years 2004-2005 to 2009-2010 notices under Section 148 of the Income Tax Act, 1961 (for short “the Act”) were issued to the appellant – University – Assessee. Eventually returns were filed for the Assessment Years in question declaring 'Nil' income and claiming exemption under Section 10(23C)(iiiab) of the Act. The aforesaid claim of exemption was negatived by the Assessing Officer who proceeded to make the assessments. The same view has been taken by all the Authorities under the Act and also by the High Court in the order under challenge in the present proceedings. from the year 1999 to 2010 the appellant 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[4] 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. 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.

                                                                  REPORTABLE

                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION


                     CIVIL APPEAL NOS. 4361-4366 OF 2016
              (Arising out of S.L.P. (C) Nos.5354-5359 of 2014)

VISVESVARAYA TECHNOLOGICAL
UNIVERSITY                                        ...APPELLANT

                            VERSUS

ASSISTANT COMMISSIONER OF
INCOME TAX                                     ...RESPONDENT


                               J U D G M E N T

RANJAN GOGOI, J.


1.    Leave granted.

2.     The  appellant  –  University,  namely,   Visvesvraya   Technological
University (VTU) has been constituted under the Visveswaraiah  Technological
University Act,  1994  (for  short  “VTU  Act”).   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.
3.    For the Assessment Years 2004-2005 to 2009-2010 notices under  Section
148 of the Income Tax Act, 1961 (for short “the Act”)  were  issued  to  the
appellant – University – Assessee.  Eventually returns were  filed  for  the
Assessment Years in question declaring 'Nil' income and  claiming  exemption
under Section 10(23C)(iiiab) of the Act. The aforesaid  claim  of  exemption
was  negatived  by  the  Assessing  Officer  who  proceeded  to   make   the
assessments.  The same view has been taken by all the Authorities under  the
Act and also by the High Court in the order under challenge in  the  present
proceedings.

4.    The question, therefore, that arises in the  present  appeals  is  the
entitlement of the appellant –  University  –  Assessee  to  exemption  from
payment of tax under the provisions of Section  10(23C)(iiiab)  of  the  Act
which is in the following terms:
      “10.  Incomes not included in total income. -
            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”


5.    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.

6.    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[1].   The
principles that emanate from the views expressed by this Court are  set  out
in paragraph 11 in Queen's Educational Society (supra), which are  extracted
below:
“11.  Thus, the law common to  Section  10(23C)  (iiiad)  and  (vi)  may  be
summed up as follows:

(1)   Where an educational institution carries on the activity of  education
primarily for educating persons, the fact that it makes a surplus  does  not
lead to the conclusion that  it  ceases  to  exist  solely  for  educational
purposes and becomes an institution for the purpose of making profit.


(2)   The  predominant  object  test  must  be  applied  –  the  purpose  of
education should not be submerged by a profit making motive.

(3) A distinction must be drawn between the  making  of  a  surplus  and  an
institution being carried on “for profit”. No inference arises  that  merely
because imparting  education results in  making  a  profit,  it  becomes  an
activity for profit.

(4)   If after meeting expenditure, a surplus arises incidentally  from  the
activity carried on by the educational institution, it will not be cease  to
be one existing solely for educational purposes.

(5)  The ultimate test is whether on an overall view of the  matter  in  the
concerned assessment year the  object  is  to  make  profit  as  opposed  to
educating persons.”



7.    To the above principles, one further test as  laid  down  in  CIT  vs.
Surat Art Silk Cloth Manufacturers' Assn.[2]  and  culled  out  in  American
Hotel and Lodging Association Educational Institute  vs.  Central  Board  of
Direct Taxes and Others [3] 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.”  (Paragraph 37)

      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].  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.”

8.    In the present case, we find that during a short period  of  a  decade
i.e. from the year 1999 to 2010 the appellant  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[4] 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.

9.    As against the above, 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  appellant  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 (supra), extracted above,  it  must  be  held  that  the
first requirement of Section  10(23C)(iiiab),  namely,  that  the  appellant
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 appellant University.
10.   The above would require the Court 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  appellant  -  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.

11.   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.

12.   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.

13.   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.[5]  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 which is in the following terms:
(h)   “public authority” means any authority or body or institution of self-
government established or constituted,-
(a) ..................
(b) ..................
….....................
(d)   by notification issued or order made by  the  appropriate  Government,
and includes any
(i)   ….........
(ii)   non-Government  Organization  substantially  financed,  directly   or
indirectly by funds provided by the appropriate Government.”


14.   Reliance has been  placed  on  the  judgment  of  the  High  Court  of
Karnataka in Commissioner of Income-tax, Bangalore vs. Indian  Institute  of
Management[6], particularly, the view expressed that the expression  “wholly
or substantially  financed  by  the  Government'  as  appearing  in  Section
10(23C) cannot be confined to annual grants and must include  the  value  of
the land made available by the Government. In  the  present  case  the  High
Court in paragraph 53 of the impugned 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 appellant 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.

15.   For the aforesaid reasons, we do not find the  present  to  be  a  fit
case for interference. The  appeals,  consequently,  are  dismissed  however
without any order as to costs.

                                                 ………………..................,J.
                                                              (RANJAN GOGOI)



                                                 ………………..................,J.
                                                          (PRAFULLA C. PANT)
NEW DELHI
April 22, 2016.
-----------------------
[1]    (2015) 8 SCC 47
[2]    (1980) 2 SCC 31
[3]    (2008)10 SCC 509
[4]    (2003) 6 SCC 697 (paragraph 156)
[5]    [(2015) 217 DLT 470]
[6]    (2014) 49 Taxmann.com 136 (Karnataka)

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