CA Anilkumar Shah

The need of the Charitable Trusts carrying out various activities of public charitable purposes do not need any elaboration, especially in the country of culture of giving is known for more than 5000 years.

The rising economic disparity in the society necessitates the need as never before. The need is further aggravated by the inability of the Govt. to input the resources in the basic infrastructure in the fields like relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest. That is the reason these objects are inserted in the definition of Charitable Purpose as defined in Sec.2(15) of the Income Tax Act, 1961 (the Act).

The country is still struggling to build infrastructure and basic amenities in the fields especially of education and medical facilities.

The provisions regarding exemptions to charitable trusts have undergone many changes especially during the last decade.

Since 2015 the provisions in the Act have undergone major changes and amendments. The misuse of the exemption provisions by some errant trusts have made the Govt. to make the changes in the Act. But, more than that the revenue has been haunting the trusts to tax its receipts and curb the exemptions day by day.

In majority of the cases lack of understanding of the exemption provisions has raised many

avoidable litigations and in the process, the settled positions are unsettled even by Hon. Apex Court changing its own interpretations.

Three recent judgments of far reaching nature, two of Hon. the Supreme Court and one by Hon. Madras High court, which I wish to draw attentions of the readers to: –

• ACIT (Exemptions) v. Ahmedabad Urban Development Authority, [2022] 143 taxmann.com 278 (SC), dt. 19-10-2022.

• New Noble Educational Society v. CCIT, [2022] 143 taxmann.com 276 (SC), dt. 19-10-2022.

• CIT v. M/s. MAC Public Charitable Trust & others (T.C.A. No. 303, 309 & 310 of 2021; T.C.A. No. 62 & 63 of 2022), dt. 31-10-2022.

All the three judgments require a separate article each to discuss the issues and far reaching impacts of each of them.

We will discuss them in a series of articles starting from this article.

Let us first take up the case of –

CIT v. MAC Public Charitable Trust & others, [2022] 144 taxmann.com 54 (Madras)

Facts in brief

It may kindly be noted that the facts in this case played a vital role and hence have to be understood properly.

1. Brief facts of the lead case were as under-

   The assessee, Sri Venkateswara Educational and Health Trust registered as Charitable Trust under Section 12A (a) of the Act and filed the return of income with ‘nil’ income for the AY 2011-12.

   On verification of ITR and other details during scrutiny, it unfolded that Rs.9,90,50,000/- was received by the Assessee as corpus donation from M/s. MAC Charities, M/s. MAC Public Charitable Trust and M/s. Spic Educational Foundation etc. This amount was received by the Assessee as donations from number of persons. To verify the same, elaborate exercise was undertaken by the Assessing Officer (AO) by issuing summons to various persons and their sworn statements were recorded.

   The enquiry revealed that the said amount was paid to M/s. United Educational Foundation, in lieu of procuring seats in Sri Venkateswara College of Engineering which is a unit of the Assessee.

   Further analysis concluded that there was a nexus between M/s. United Educational Foundation, M/s. MAC Charities, M/s. MAC Public Charitable Trust and Sri Venkateswara College of Engineering.

   The AO also concluded that the Assessee utilised M/s. United Educational Foundation, M/s. MAC Charities, M/s.MAC Public Charitable Trust as a tool for transfer of capitation fees received from the students and thereby virtually sold education for a price.

   Such practice of receiving donation and/or capitation fee as a condition precedent for admitting a student is opposed to the provisions of the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992.

   The enquiry also unfolded that the Assessee demanded and insisted the parents of the

   students, who wish to get admission for their children, to pay capitation fee to the other trust in the name of their relatives or friends of the parents, but not in their name. The parents also, in the interest of admitting their children in the said College, were forced to pay capitation fee in the name of their relatives or friends.

   According to the AO, the analysis of the fund transactions confirms that the Assessee made to appear that the contributors voluntarily paid the capitation fee, which was channelised through other trusts.

   The donations received in the other trusts as Corpus donation and also paid as Corpus donations to the college trust.

   Thus, the Assessee had purposefully and intentionally channelised the capitation fee in the name of donations back to themselves, thereby exempting the receipt of amount at both ends and confirmed the same through sworn statements from some of the parents and donors.

   The AO also noticed that as per the Trust Deed dated 01.08.1984, the founder of the Trust was Mr. L.V. Ramaiah, but on examination of the supplementary deed dated 13.06.1995, it was executed by Dr. A.C. Muthiah. An amendment deed dated 17.12.2011 was also perused which indicated that it was executed by Mr. M.H. Avadhani. Therefore, the Assessee was called upon to submit evidence for change in trustees and to explain, whether it was intimated to the Director of Income Tax (Exemptions), but the Assessee failed to respond to the same.

   The assessment for all the trusts were completed on the same lines. The exemption u/s 11 was denied and donations were treated as income and tax levied for the years AY 2011-12, 2013-14 and 2014-15 for all the trusts.

   Appeal before Hon. CIT(A)

2. The assessee trusts filed appeal and the Hon. CIT(A) allowed the appeals with the following conclusions-

   1. There is no prohibition in law for a charitable institution to receive donation from another charitable institution.

   2. There is also no prohibition in law for a charitable institution to give donation to another charitable donation

   3. The donation given by the Assessee trust is application of income and hence exempt u/s.11 of the Act.

   4. The donation received and given by the Assessee trust are voluntary in nature.

   5. The Assessee trust is not connected with receipt of donation/capitation fee by any trust from anyone.

   6. The Assessee trust is not connected with the admission of students to any Engineering College.

   7. In result, the appeal of the appellant trust is fully allowed.

(Note: It may be noted that now the donation to other trusts is not allowed as application of income in the hands of the donating trust.)

Appeal before Hon. ITAT

3. Aggrieved by the orders so passed by the Appellate Authority dated 01.08.2014 relating to the AY 2011-12, the Revenue preferred the appeals before the Income Tax Appellate Tribunal. It was contended on behalf of the Revenue before the Tribunal that the funds were mostly diverted to their connected/related charitable Trusts in order to secure admission for the relatives/wards of the donors in the educational institution run by M/s. Sri Venkateswara Educational & Health Trust. The Revenue placed reliance on the sworn statements recorded from various persons.

   The Tribunal, by a common order dated 12.04.2017, rejected the contentions so made on

   the side of the Revenue by observing that the statements recorded from the donors revealed that they made the donations voluntarily.

   Further observations of the Hon. ITAT were as under-

   • The AO did not examine the source of investment made by the donors. While so, it could be inferred that the AO might have coerced the individual donors and obtained the statements as the donors have changed their stand before the AO.

   • None of the donors or the parents/ students studying in the educational institutions did make any complaint to any of the authorities complaining the so-called extortion of money in the form of donation for securing admission in the educational institutions run by M/s. Sri Venkateswara Educational & Health Trust.

   • There is no bar for the Assessee Trusts to receive and/or accept voluntary donations from the donors or from the relatives/ parents of the students studying in the educational institutions connected with the charitable trusts.

   • There may be quit-pro-quo arrangement for receipt of donation, but unless it is established by cogent evidence drastic decision cannot be arrived at by withdrawing the benefit of Section 11 of the Act to all the charitable trusts which will jeopardize the functioning and the very existence of the charitable educational institutions.

   • The trusts have issued valid receipts for the donations received and had maintained the names, address of the donors as per the provisions of the Act.

   • There is no finding with respect to any violation of Section 13 of the Act, because the donations received by the respective charitable trusts are spent according to the objects of the trusts.

     In effect, the Tribunal opined that the AO had not brought out credible materials to show that the Assessee Trusts had received donations as a condition precedent for allotment of seats to the student in M/s. Sri Venkateswara College of Engineering. Accordingly, the Tribunal dismissed the appeals preferred by the Revenue.

   Appeal before Hon. High Court

   of Madras The reported order of Hon. High Court runs in 124 pages and the issues involved are discussed in depth.

   There were total 20 cases decided together, and as the issues involved in all these appeals were common, they were taken up for hearing together and were disposed of by this common judgment.

   Submissions by the Revenue

4. In appeal before Hon. High Court the learned Senior Standing Counsel appearing for the revenue submitted following issues:

   • The respondents /Assessees are part of a group trust. The modus operandi is that students of the educational institution of Trust – A are asked to give donations to Trust – C. Thereafter, Trust – C transfers the donation amount received to Trust – B and from Trust – B to Trust – A. Such is the arrangement within the group trusts and they have common trustees. In order to prove the modus operandi resorted to by the Assessee-Trust, the Assessing Officer recorded statements from 1500 persons out of which around 50 percent of those who have given statement, conceded that the donation was a quid pro quo transaction for admission. However, certain parents retracted their statements, which was mainly relied on by the Appellate Authority as well as the Tribunal to set aside the orders of assessment. Stating so, the learned

     Senior Standing Counsel submitted that the channelisation of the donations in such a way cannot be treated as voluntary donations.

   • Assessees’ admittance of re-donation by one trust to the other Trust, amply fortifies the stand of the Revenue that the transaction is not genuine.

   • The capitation fee received was for allotment of seats by the Trust and hence, it cannot be said to be a voluntary contribution/donation to the trust.

   • That apart, the fact that no action has been initiated by the State cannot be a reason to allow the exemption under the provisions of the Act or absolve the liability of the assessees, that too after the device to route the capitation fee was discovered. Further, it is also settled law that illegality cannot be perpetuated.

   • As per the provisions of the Act, the Assessing Officer is a statutory authority who can independently make his own decision upon scrutiny of the records and pass orders for disallowing the income. Hence, the Assessing Officer need not depend upon the State Government authorities to initiate action under the Tamil Nadu Educational Institutions (Prohibition and Capitation Fee) Act 1992.

   • 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 Act.

   Submissions by the assessee

5. The learned senior counsel for the assessee trusts submitted that –

   • The object of the trust is to run educational institutions and other activities; and is to support other institutions by donating the donated money.

   • There was no quid pro quo as contended by the learned counsel for the department. The trustees in the trusts do not get benefitted in any way at all. Thus, section 13 is not attracted in this case. Continuing further, the learned senior counsel submitted that the respondents / trusts have registration under sections 12A as well as 80G of the Act and hence, the power to divert funds under section 12 exists.

   • The application of the donated money is towards the object of the trust, more particularly, charitable purposes only. Therefore, the same becomes relevant in view of section 13(1)(c) r/w section 13(3).

   • No opportunity for cross examination of the witnesses was provided to the respondents / assessees.

Judgment by Hon. High Court

6. The judgment has discussed in depth the
   following important issues –

   1. Education – meaning

   2. Education – Rights and duties under the Constitution

   3. Exemption provisions u/s 10(23C), 11, 12 and Sec.13

   4. Education- not a trade, business or commerce

   5. Provisions of Tamil Nadu Educational Institutions (Prohibition Collection of Capitation Fee) Act, 1992

   6. Menace of Capitation fee and its illegality

   7. Retraction of the sworn statement recorded and the issues in rejecting the same.

   8. Lifting of Corporate veil for Trusts

   9. Meaning of Voluntary Contributions.

7. Conclusions of the Hon. High Court-

   • In view of our findings that the amounts
     collected by the assessees are capitation fee in quid pro quo for allotment of seat in deviation of the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992 and the same are neither a voluntary contribution nor to be treated as applied for charitable purpose, the orders of the Appellate Authority as well as the Tribunal, which are impugned in these appeals, are absolutely perverse in nature and therefore, they are set aside. Accordingly, all the substantial questions of law are answered in favour of the Revenue and against the Assessees. – Para 68.

   • Our country, though has developed considerably, after independence and made several strides marching forward in different fields including in education, we are yet to reach the stage we aspired to, as a nation with specific reference to education.

   • The States are unable to comply with the directions enshrined in the Constitution to thrive for education for all, which would encompass within it the access to all sections of the society by providing equal opportunity.

   • Parents are reluctant to make their ward attend Public Schools unlike in other countries.

   • As per the report of the All India Survey on Higher Education for the year 2019- 20, by the Ministry of Education, Higher Secondary Department, 78.6% of colleges are privately managed. In the Union Budget for the year 2022-2023, a sum of Rs.1,04,277 crores has been allocated for school education, literacy and higher education.

   • Despite the fact that there are State laws making it penal to collect capitation fee and the repeated dictum of various Courts

     including the Apex Court, the menace of capitation fee could not be curtailed, forget eradication.

   • Education is a means to achieve equality. It not only instils confidence in the mind of the student, but also is a tool to eradicate exploitation. It offers employment opportunity, besides helping in churning oneself into a better person.

   • The development of a country is to be weighed in terms of the educated. Privatization of education aids in collection of Capitation Fee.

   • We hope that the Central and State government will thrive to ensure that all those who deserve, but are unable to get admission in educational institutions for want of funds, are accommodated to pursue education and take appropriate steps to eradicate the collection of capitation fee by creating policies and awareness and for that purpose, on the lines of the web-portal under the aegis of the Supreme Court, a web-portal of a similar nature must be set-up, wherein any information about the private colleges charging capitation fees can be furnished by the students or their parents or anyone having first-hand information in this regard.

   • The web-portal has to be maintained and regulated by the National Informatics Centre (NIC) and the Information Technology and Digital Services Department, Government of Tamil Nadu; and the State Government is directed to publish the details about the web-portal in the English as well as vernacular newspapers at the time of admission.

   • In addition, a pamphlet should be compulsorily given to the students and their parents at the time of counselling informing them about the availability of the web-portal stated above. – Para 69

8. Hon. High Court ordered the Dept. as under-

   In view of the fact that the present appeals filed by the Revenue are allowed, it is natural that –

   1. The Assessing Authority shall proceed further on the basis of the orders of assessment of tax, which are the subject matter of these appeals.

   2. The Assessing Authority shall also proceed further for cancellation of registration certificate issued to the Assessees/trusts under Section 12A of the Act thereby not to treat the respondents as charitable institutions any longer.

   3. The Assessing Officer shall also proceed to reopen the previous assessments, if permissible by law, based on tangible materials relating to collection of capitation fee, since it is illegal and is punishable.

9. Regarding lifting of corporate veil in case of trusts –

   1. There is no bar to apply the doctrine of lifting of corporate veil in the case of trusts.

   2. What is to be seen, is the existence of the systemised mechanism to collect the capitation fee as donation through other entities.

   3. The principles laid down in various decided cases while expounding the concept of lifting the corporate veil, especially in cases relating to tax evasion, and in cases where public interest and policy are sought to be defeated by fraud, are squarely applicable to the present appeals where while the Assessee Trusts are controlled by common trustees and are in indeed sister Trusts, this Court may be constrained to lift the veil to see the real beneficiaries and the object of the donations by relatives/friends of parents as quid pro quo for admissions into the Assessee educational institutions as well s the other Assessees who are not educational institutions.

   4. On lifting the veil, it is clear as daylight that the modus operandi adopted by the Assessee Institutions and Trusts are with the twin objectives of circumventing/ violating the provisions of the Capitation Fee Act of Tamil Nadu as well as evading tax while seeking tax exemption under the corporate veil of being different and distinct entities receiving funds from each other for purely charitable purposes.

   5. Suffice it to say, nothing can be farther from the naked truth that cannot hide itself sufficiently behind the fig leaf of the legal cover sought to be taken by the Assessees under the guise of being charitable trusts and seeking exemption thereof.

10. It may be seen that the menace of Capitation fee like in the Medical and Engineering colleges can never be justified and have to be removed. The scenario of admissions in medical and engineering colleges is going to change upon taking all the steps as per the directions of the Hon. High Court.

11. But, at the same time, it must be noted that apart from best efforts of the Central as well as State Governments, the infrastructure for the education which is a fundamental right of every citizen, is very poor and have to still go a long way. That is the reason that the private educational institutions are allowed to work in the field. Otherwise there is no reason why should they be permitted to operate in the education field at all. The menace of capitation fee cannot be justified on any ground. But, at the same time the environment to build good education infrastructure is not conducive especially when it comes to land, building and costly equipments and heavy running expenses. On one hand the Act provides exemptions for incomes of the charitable trusts, but at the same

    time puts the restrictions in such a way that the exemptions practically cannot be availed. The surplus is many times confronted by tax officials as taxable and unwarranted litigation is raised. The courts are full of such cases. Any tax digest will generate huge number of cases where the surplus was treated as profit and taxed. The tax officials, raising unwarranted issues and demands especially in the trust cases apart from settled principles, are never punished nor even asked any questions. The revenue including its audit dept. seem at least apparently to be biased against the trusts, for the reasons best known to them.

12. The amount received by the trusts in this case is expended on the objects of the trust and this fact is nowhere denied by any authority at any level including the Hon. High Court. This underlines the need of huge funds required to meet the expenses of carrying the educational activity only. Who will give a thought to this? The nature of the current generation as well as the parents is to look for the posh and good infrastructure of the educational institution. If the laws do not permit to collect fees properly, where from will the money come to build the same?

13. The exemption u/s 10(23C)(iiiad) the limit as correctly interpreted by various Hon. Courts was receipt of Rs.1 crore to be calculated institution-wise and not per trust as such. The limit was set as long as 1998. Did not that need to be increased commensurate with the inflation? Instead the law is amended to make it for the entire trust at Rs.5 crores only. By this attitude India cannot have any Nalanda again in this country nor any Oxford, Stanford, or Cambridge or the like. The present brain drain will never reduce, if the attitude is not changed. Just for comparison the

    The salary was increased to Rs.500 in 1964, Rs.750 in 1983, Rs. 1,000 in 1985, Rs. 1,500 in
    1988, Rs. 4,000 in 1998, Rs. 12,000 in 2001 and to
    Rs. 16,000 in 2006.
    The daily allowance was increased to Rs.31 in 1964, Rs.51 in 1969, Rs.75 in 1983, Rs.150 in 1988, Rs.200 in 1993 (subject to the members signing the Attendance Register), Rs.400 in 1998, Rs.500 in 2001 and to Rs. 1,000 in 2006.

    A comparative chart of 1998 and latest salaries shows that it is increased from Rs.4000 to Rs.1,00,000, a whopping 2500% increase since 1998.

    What parameters are followed in deciding various exemption limits is known only to the concerned bureaucrats and the members of the house.

    An interesting provision from Section 8A of The Salary, Allowances and Pension of Members of Parliament Act, 1954, which reads as under-

    (1A) The pension and additional pension to every person shall be increased after every five years commencing from 1st April, 2023 on the basis of Cost Inflation Index provided under clause (v) of Explanation to section 48 of the Income-tax Act, 1961.]

    [Inserted by Act 13 of 2018 (The Finance Act, 2018) – effective from 01-04-2018.]

    Is the same not required to be inserted in exemption limits including the basic amount not chargeable to tax?

14. I am finding it irresistible to quote an interview with an American whom I met in New Jersey USA in June 2014. I asked what are the careers brilliant students wish to pursue in USA? His answer was: every brilliant student wishes to become a Professor, a Teacher or a Police! What this indicates? Can we dare to imagine or compare this answer in our country?

15. The judgment has referred the allocation of Rs. 1,04,277 crores Budget 2022 for school education, literacy and higher education. But if we look into the details of this figure the picture is not very encouraging.

    Expenditure Profile 2022-2023, February 2022 was tabled by Ministry of Finance Budget Division. The above figure appears under Sr. No.5 Expenditure of Ministries and Departments in Part I at pages 6-18 and the details of the same in following pages.

    The details reveal that major portion is going to be on salaries. It may be noted that the pay-scales have risen to meet the 7th pay commission norms. Thus, the major portion of the budgeted allocation is on the salaries and the infrastructure development is allocated a meagre amount.

    The details appear as under –

    Details of Expenditure allocation		Rs. Crores
    25. Department of School Education and Literacy		63,449.37
    1. Central Sector Schemes/Projects	358.26
    2. Centrally Sponsored Schemes	50,694.11
    3. Establishment Expenditure of the Centre	38.00
    4. Other Central Sector Expenditure	12,359.00
    26. Department of Higher Education		40,828.35
    1. Central Sector Schemes/Projects	5,412.01
    2. Centrally Sponsored Schemes	2,042.95
    3. Establishment Expenditure of the Centre	273.38
    4. Other Central Sector Expenditure	33,100.00
    Total Budget allocation		1,04,277.72

    One can keep the track of the actual expenditure details of the budgeted figures which I am sure will reveal interesting scenario.

    Hon. High court itself has observed that 78.6% colleges are privately managed. Why this situation? Certainly the education sector is yet to achieve the expected level of infrastructure by the Govt. The exemption norms under the Income Tax Act, 1961 have to be re-visited and requires a holistic view to be taken by all the concerned authorities.

    We will look into the two important judgments of Hon. Supreme Court in the next two articles.