[2016] 4 S.C.R. 362

VISVESVARAYA TECHNOLOGICAL UNIVERSITY

ASSISTANT COMMISSIONER OF INCOME TAX

(Civil Appeal Nos. 4361-4366 of2016)

APRIL 22, 2016

[RANJAN GOGOi AND PRAFULLA C. PANT, JJ.]

Income Tax Act, 1961 -- s.10(23C)(iiiab) - Exemption under - Entitlement to the assessee-University - Held: The entitlement for the exemption is subject to two conditions (i) The University is solely for the purpose of education without profit motive, and (ii) it must be wholly or substantially financed by the Government - In the present case, the first condition is fulfilled by the University, but not the second - Therefore, the assessee-University is not entitled to exemption from payment of tax - Visweswaraiah Technological University Act, 1994 - s.23.

Government Grants - Fees collected uls. 23 of Visweswaraiah Technological University Act - Held: Cannot be considered as a Government Grants (financed by Government) as contemplated u! s. 10(23C)(iiiab) of Income Tax Act, 1961 - Visweswaraiah Technological University Act, 1994 - s.23 - Income Tax Act, 1961

~ s. 10(23Cj(iiiabj.

Dismissing the appeals, the Court

HELD: 1. The entitlement for exemption under Section 10(23C)(iiiab) of the Income Tax Act, 1961 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. [Para 5] [366-A-B) 2.1 In the present case, 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. 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 Visweswaraiah Technological University Act, 1994. The differeirce between the fees collected and the actual expenditure incurred for the purposes for which fees were 362

VISVESVARAYA TECHNOLOGICAL UNIVERSITY v.

ASSISTANT COMMISSIONER OF INCOME TAX

collected is significant. In fact the expenditure incurred represents only a minuscule part of the fees collected. The surplus generated is far in excess of what has been held by this Court to be permissible (6 to 15%) in Islamic Academy case*. [Para 8] [367-

F-G] 2.2 However, the amount of direct grant from the Government has been meagre. The University nevertheless has grown and the number of private engineering colleges affiliated to it had increased. The infrastructure of the University has also increased. 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, 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. [Para 9] (368-B, E- G]

Queen :S Educational Society v. Co111111issio11er of Income Tax (2015) 8 SCC 47: 2015(3) SCR 838; CIT 1' Surat Art Silk Cloth Manufacturers' Assn. (1980) 2 SCC 31:1980 (2) SCR 77; American Hotel and Lodging Association Educational Institute v. Central Board of Direct Taxes and Ors. (2008) 10 SCC 509 : 2008 (8) SCR 117 - relied on. *Islamic Academy of Education and Anr. v. State of Karnataka and Ors. (2003) 6 SCC 697 : 2003 (2) Suppl.

SCR 474 - referred to.

3. The appellant-University does not satisfy the second requirement spelt out by Section 10 (23C) (iiiab) of the Income Tax 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 .Income Tax Act. The grants/direct financing by the Government during the six

Assessment Years in question i.e. 2004-2005 to 2009-2010 had never exceeded 1 % of the total receipts of the appellant - University- Assessee. The fees of all kinds collected within the fonr corners of the provisions of Section 23 of the University Act cannot be taken to be receipts from sources of finance provided by the Government. Such receipts cannot be understood to be funds made available by the Government as contemplated by the provisions of Section 10 (23C)(iiiab) of the Act. 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, viz. s. 10 (23C) (iiiab) and 10(23C) (vi), nugatory which cannot be understood to have been intended by the Legislature and must, therefore, be avoided. Even if the value of the land allotted to the appellant-University is taken into account, the total funding of the University by the Government would be around 4% - 5% of its total receipt. [Paras 10, 12 and

14] [368-H; 369-A-C, H; 370-A-B, G-H; 371-A]

Commissioner of Income-tax, Bangalore v. Indian Institute of Management (2014) 49 Taxmann.com 136 (Karnataka); Mother Dimy Fruit & Vegetable Private Limited v. Hatim Ali & Am: (2015) 217 DLT 470 - referred to.

Case Law Reference

2015 (3) SCR 838 relied on Para6

1980 (2) SCR 77 relied on Para7

2008 (8) SCR 117 relied on Para 7

2003 (2) Suppl. SCR 474 referred to Para8

(2015) 217 DLT 470 referred to Para 13

(2014) 49 Taxmann.com 136 (Karnataka) referred to Para 14

CIVILAPPELLATEJURISDICTION: Civil Appeal Nos. 4361- 4366of2016.

VISVESVARAYA TECHNOLOGICAL UNIVERSITY v. 365

ASSISTANT COMMISSIONER OF INCOME TAX

From the Judgment and Order dated 20.12.2013 of the High Court A ofKarnataka Dharwad Bench dismissing the ITA No. 5007-12 of2013.

Arvind Datar, Sr. Adv., Swarup, Manjunath Meled, Anand Shetty, Anil Kumar, Advs. for the Appellant.

Arijit Prasad, D. L. Chidanand, B. V. Balaram Das, Mrs. Anil Katiyar, Advs. for the Respondent.

The Judgment of the Court was delivered by

RANJAN GOGOi, J. 1. Leave granted.

2. The appellant- University, namely, Visvesvraya Technological University (VTU) has been constituted under the Visveswaraiah Technological University Act, I 994 (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 2009-20 I 0 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 I 0(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 I 0(23C)(iiiab) of the Act which is in the following terms:

"I 0. 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 I 0(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 he 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 Societv vs. Commissioner oflncome Tax'.

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 I 0(23C) (iii ad) and (vi) may be summed up as follows: (I) 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 Clotlt Manufacturers' Assn. 1 and culled out in

1 (2015) s sec 47 ' (I 980J 2 sec 3 I

American Hotel and Lodging Association Educational Institute vs.

Central Board o[Direct Taxes and Others3 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 ifa surplus is made by an educational society and ploughed back to construct its own premises would fall out of Section I 0(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) I 0 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 o[Ed11catio11 and another vs. State o[Kamataka mu/ others' though the percentage

' (200SJ 1 o sec 509 '(2003) 6 sec 697 (paragraph 156)

of surplus in Islamic Academy o.f 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 I 0(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 inbui It recognition in such exemption with regard to the charitable nature of the institution i.e. the appellant University.

I 0. The above would require the Com1 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 I 0(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 2009-20 I 0 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 I 0 (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

I 0(23C)(iiiab ), 10(23C)(iiiad) and I 0(23C)(vi). However, in cases of Universities covered by Section I 0(23C)(iiiab) funding must be wholly or substantially by the Government whereas in cases of universities covered by Section I 0(23C)(iiiad) the aggregate annual receipts should not exceed the amount as may be prescribed. Universities covered by Section I 0(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 I 0 (23c) (iiiad) deals with small Universities having an annual "turnover" ofless 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 I 0 (23c) (vi) to be dealing with Private Universities whose gross receipts exceeds Rupees One Crore. Receipts by way offee 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 I 0(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 Motlter 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 o(Income-tax, Bangalore vs. Indian Institute o(Ma11age111ent6, particularly, the view expressed that the expression "wholly or substantially financed by the Government' as appearing in Section I 0(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 ofthe impugned judgment has recorded that even ifthe value of the land allotted to the University

'[(2015) 21? DLT 470] '' (2014) 49 Taxmann.com 136 (Karnataka)

(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 I 0(23c)

(iiiab) of the Act for a particular assessment year must be judged in the context ofreceipt ofannual 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, conseqt1ently, are dismissed however without any order as to costs.

Kalpana K. Tripathy Appeals dismissed.