Education not a commercial activity, collection of admission fee illegal, no tax exemption: Madras High Court | Tech US News


The Madras High Court on Monday scrapped the practice of receiving capitation in exchange for confession. Bench for Justice R. Mahadevan and Judge Mohammed Shaffiq held that such capitation practice was violative of the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation) Act, 1992.

Therefore, there is no doubt that education can never be a commercial activity or trade or business and those in the field of education will have to constantly and consistently adhere to this guiding principle. The indisputable reality staring us in the face is the collection of capitation as a deferred condition for admission to educational institutions.

The court was hearing appeals filed by the Income Tax department challenging a single judge’s order granting tax exemption to a group of charities.

The present appeals raise the twin issue of flagrant violation of the Act on Payment of Capitations and then rewarding their own illegal act by claiming relief under Sections 11, 12AA and 80G of the Act.

The court observed that although the income of the educational institution was exempted under section 10(23C), the benefit could be availed only if the institutions used it exclusively for the purpose for which it was established.

Although the institutions claimed that the donations were made voluntarily, the court examined affidavits which clearly showed that the truth was otherwise. The court observed that the college’s modus operandi was to seek capitalisation, not directly from the parents, but their relatives/friends remitted the amount to any of the sister funds, which would then be transferred to the institution’s fund. Through this process, the sister trusts also claimed tax exemption, claiming that the payments were for “charitable purposes”.

The fact that a lengthy and indirect route was established for the head tax to reach the institution cannot change the nature of the payment from an illegal capitation to a voluntary contribution/donation, the court notes.

The Court thus held that unless the payment was made gratuitously without any consideration, the payment could not be characterized as a “voluntary contribution” for claiming exemption from tax under Sections 11 and 12 of the Act. The Court and the First Appellate Authority erroneously granted tax exemption on the ground that the money was used for the purposes of the institution.

The court thus annulled the findings of the tribunal and the second-instance court and ordered CENT to proceed after the assessment of the tax. The court also directed the authorities to cancel the registration certificate of the institutes under Section 12A and not treat them as charities.

Creation of online portals

The court lamented that despite state laws and precedents, the collection of the capitation fee could not be limited. The court also found that privatization also helped in the collection of capitations.

The court thus suggested the state to set up an online portal where students, their parents or anyone with first-hand information would submit any information about capitation levy at private institutions.

This web portal can be maintained by the State Center for Informatics and the Department for Information Technology and Digital Services. The state was also ordered to ensure that the portal is widely publicized in local and English newspapers. The court further ordered that pamphlets containing this information should be given to parents on admission.

Case Title: Commissioner of Income Tax v M/s MAC Public Charitable Trust (patch)

Citation: 2022 LiveLaw (Mad) 448

No. cases: tax case appeal no. 303 of 2022 (package)


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