CHENNAI: Holding that collection of capitation fees for seats in educational institutions is against public policy and the Prohibition of Capitation Fee Act, a division bench of the Madras High Court has directed the Income Tax Department to levy tax on capitation fee, concealed as voluntary donations, by educational institutions and trusts and cancel the registration of such trusts.
Delivering the verdict on a batch of appeals filed by the Commissioner of Income Tax, Chennai, challenging the orders of the tribunal and appellate authority, the bench of Justices R Mahadevan and Mohammed Shaffiq said that it is clear in law that unless a contribution is made without any consideration it cannot be treated as ‘voluntary contribution’ for the purpose of exemption of tax under Sections 11 and 12 of the Income Tax Act.
Referring to the findings of the I-T appellate authority and tribunal that assessees, particularly educational institutions, are entitled to collect donations, and as long as such donations are applied as per their objective and treated as voluntary contributions, their claim of exemption under Section 11 of the I-T Act cannot be denied, the bench said such findings “are unacceptable as they are completely against the provisions of the TN Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992, and the objective of granting exemption under the I-T Act.”
The bench said the illegality of collecting the capitation fees cannot be ignored as the assessing officer has clearly established the collection of capitation by the trusts. “The assessing authority shall proceed further on the basis of the orders of tax assessment, which are the subject matter of these appeals,” the judges said.
Cancel registration of edu trusts, rules HC
They also directed the assessing authority to proceed to cancel the registration certificate issued to these assessees/ trusts under Section 12A of the I-T Act and to not treat the respondents as charitable institutions any longer. The appeals were filed against the orders of the I-T tribunal and appellate authority which ruled in favour of trusts, including MAC Public Charitable Trust and Sri Venkateshwara Education and Health Trust, on the ground that they were eligible for tax exemption for donations, though they were capitation fees, as none of the donor parents had raised complaints.
The case of the I-T department was that a capitation fee was forcibly collected from parents, in the guise of donations made through their friends and relatives, for admission to Venkateshwara Engineering College in Sriperumbudur. Judges called the reasoning of the appellate authority that donors or parents/students had not complained to authorities regarding donations for securing admission in educational institutions managed by Sri Venkateswara Educational & Health Trust as ‘naïve’ and said it ‘cannot be accepted’ considering the menace of capitation fee staring at society starkly in the face.
The long-winding and indirect route adopted for capitation fees to reach the institution cannot change the character of the payment from an illegal capitation fee to a voluntary contribution/donation, Justices Mahadevan and Mohammed Shaffiq said.
“When the contributions cannot be treated as voluntary, the further question of their application to charitable purposes or otherwise need not be gone into, meaning thereby that the assesses are not entitled to the benefits of Sections 11 and 12 of the I-T Act,” they said.
The case
The case of the I-T department was that a capitation fee was forcibly collected from parents, in the guise of donations made through their friends and relatives, for admission to Venkateshwara Engineering College in Sriperumbudur.
Indirect fee won’t change its nature: HC
“Indirect route adopted for capitation fee to reach the institution cannot change the character of the payment,” the judges said