Income Tax Appellate Tribunal (ITAT) New Delhi in the case of Jaycees Public School vs. ITO (Appeal No: ITA No. 4554/Del/2012) has held that merely charging of fees does not make an educational institution non-charitable or existing for the purposes of profit.
Commissioner Income Tax (CIT) had in the assessment order passed u/s 143(3), taken the view that the income of the Assessee Society was not eligible for exemption u/ 11 & 12 of the IT Act, 1961, because income of the Society is from fee and other related levies which cannot constitute income falling within the ambit of classes as defined in section 11 & 12 of Income tax.
CIT was also of the view that the Assessee’s activities are commercial in nature and there is no element of charity. The school did not provide exemption from fees or charge concessional fees to poor students.
CIT while examining the income and expenditure statement of the Society found that fees were charged from students under different heads such as admission fee, tuition fee, computer fee, late fee, games fee, library fee, examination fee, miscellaneous fees, prospectus fees and all those fees aggregated to approximately Rs. 2.01 crores.
Therefore, the view was taken that the above income of the Society cannot be said to be income derived from property held under trust and fees received from the student do not amount to voluntary contribution.
Hence, it was held that the Society had the object to impart education, but, education was provided by charging fees to the students. Looking to the amount of fees collected (Rs. 2.01 Cr) from the student the assessing officer held that the school is engaged in profit-making activity.
In other words, the Assessing Officer’s views were that if education is run on commercial lines, merely because it is a school, it does not mean that it would be entitled to the exemption under section 11 of the income tax act. Therefore he held that society’s income generated by way of tuition fees and other fees is not eligible for exemption under section 11 and 12 of the income tax act, 1961.
Further, if the students have to pay more than what is to be spent on them for imparting education, then there is no relief provided and the activity is merely a commercial and business activity.
Supreme Court’s verdict in a similar case
Recently, Supreme Court in Queen’s Education Society vs. CIT 372 ITR 699, has held that where a surplus is made by an educational institute which is also ploughed back for educational purpose, the said institution is to be held as existing solely for educational purposes and not for the purposes of the profit.
Supreme Court has further held that:
- Where an educational institution carries on the activity of education, the fact that it generates 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.
- The predominant object test must be applied – the purpose of education should not be submerged by a profit making motive.
- A distinction must be drawn between having surplus income and an institution run “for profit”.
- No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit.
- If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not cease to be an institution existing solely for educational purposes.
The ultimate test is whether in an overall view of the matter, in the concerned assessment year, the object is to make profit as opposed to educating persons.
In the Order dated 16th October 2017, ITAT observed that the school was engaged in educational activities and earned certain sums of money by way of fees. However, these sums of money were not applied for any non-educational purposes. The fees charged were also found to be reasonable and not exorbitant.
ITAT also observed that while the Society is running an educational institute it does not mean that the Assessee must run it for free. If the Assessee does not charge fees from student then it would not be possible for the trust to carry on its activities for which it is established as the excess would not be available to plough back for development of the educational facility for the students. Hence, ITAT did not find that the order of the Commissioner Income Tax cancelling the 12AA registration to the Society sustainable.
ITAT also disagreed with the contention of the Assessing Officer that it is necessary that Assessee should not charge fees or exempt fees to poor students or charge fees at concessional rate and then only it can be said that it is exists for the charitable purposes. ITAT did not approve of such finding because Section 2(15) of Income tax Act does not prescribe such condition (i.e. it is not necessary to provide free education or charge concessional fees in order to fall within the definition of ‘charitable purpose’).
In view of the above facts ITAT directed Commissioner of Income tax to restore the registration granted to the Assessee Society u/s 12A A of the Income Tax Act 1961.