REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 4361-4366 OF 2016 (Arising out of S.L.P. (C) Nos.5354-5359 of 2014) VISVESVARAYA TECHNOLOGICAL UNIVERSITY ...APPELLANT VERSUS ASSISTANT COMMISSIONER OF INCOME TAX ...RESPONDENT JUDGMENT RANJAN GOGOI, J. 1. Leave granted. 2. appellant University, namely, Visvesvraya Technological University (VTU) has been constituted under Visveswaraiah Technological University Act, 1994 (for short VTU Act ). It discharges functions earlier performed by Department of Technical Education, Government of Karnataka. University exercises control over all Government and Private Engineering Colleges within Karnataka. Page 1 2 3. For Assessment Years 2004-2005 to 2009-2010 notices under Section 148 of Income Tax Act, 1961 (for short Act ) were issued to appellant University Assessee. Eventually returns were filed for Assessment Years in question declaring 'Nil' income and claiming exemption under Section 10(23C)(iiiab) of Act. aforesaid claim of exemption was negatived by Assessing Officer who proceeded to make assessments. same view has been taken by all Authorities under Act and also by High Court in order under challenge in present proceedings. 4. question, therefore, that arises in present appeals is entitlement of appellant University Assessee to exemption from payment of tax under provisions of Section 10(23C)(iiiab) of Act which is in following terms: 10. Incomes not included in total income. - In computing total income of previous year of any person, any income falling within any of following clauses shall not be included- (23C) any income received by Page 2 3 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 Government 5. entitlement for exemption under Section 10(23C) (iiiab) is subject to two conditions. Firstly educational institution or university must be solely for purpose of education and without any profit motive. Secondly, it must be wholly or substantially financed by government. Both conditions will have to be satisfied before exemption can be granted under aforesaid provision of Act. 6. relevant principles of law which will govern first issue i.e. whether educational institution or university, as may be, exists only for educational purpose and not for profit are no longer res integra, having been dealt with by long line of decisions of this Court which have been elaborately noticed and extracted in recent pronouncement i.e. Queen's Educational Society vs. Commissioner of Income Tax1. 1 (2015) 8 SCC 47 Page 3 4 principles that emanate from views expressed by this Court are set out in paragraph 11 in Queen's Educational Society (supra), which are extracted below: 11. Thus, law common to Section 10(23C) (iiiad) and (vi) may be summed up as follows: (1) Where educational institution carries on activity of education primarily for educating persons, fact that it makes surplus does not lead to conclusion that it ceases to exist solely for educational purposes and becomes institution for purpose of making profit. (2) predominant object test must be applied purpose of education should not be submerged by profit making motive. (3) distinction must be drawn between making of surplus and institution being carried on for profit . No inference arises that merely because imparting education results in making profit, it becomes activity for profit. (4) If after meeting expenditure, surplus arises incidentally from activity carried on by educational institution, it will not be cease to be one existing solely for educational purposes. (5) ultimate test is whether on overall view of matter in concerned assessment year object is to make profit as opposed to educating persons. Page 4 5 7. To above principles, one further test as laid down in CIT vs. Surat Art Silk Cloth Manufacturers' Assn.2 and culled out in American Hotel and Lodging Association Educational Institute vs. Central Board of Direct Taxes and Others 3 may be added which is as follows: In order to ascertain whether institute is carried on with object of making profit or not it is duty of prescribed authority to ascertain whether balance of income is applied wholly and exclusively to objects for which applicant is established. (Paragraph 37) above principle has been specifically reiterated in paragraph 19 of decision in Queen's Educational Society (supra) in following terms: final conclusion that if surplus is made by educational society and ploughed back to construct its own premises would fall out of Section 10(23-C) is to ignore language of section and to ignore 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) 10 SCC 509]. It is clear that when surplus is ploughed back for educational purposes, educational institution exists solely for educational purposes and not for purposes of profit. 2 (1980) 2 SCC 31 3 (2008)10 SCC 509 Page 5 6 8. In present case, we find that during short period of decade i.e. from year 1999 to 2010 appellant University had generated surplus of about Rs.500 crores. There is no doubt that huge surplus has been collected/accumulated by realizing fees under different heads in consonance with powers vested in University under Section 23 of VTU Act. difference between fees collected and actual expenditure incurred for purposes for which fees were collected is significant. In fact expenditure incurred represents only minuscule part of fees collected. No remission, rebate or concession in amount of fees charged under different heads for next Academic Year(s) had been granted to students. surplus generated is far in excess of what has been held by this Court to be permissible (6 to 15%) in Islamic Academy of Education and another vs. State of Karnataka and others4 though percentage of surplus in Islamic Academy of Education (supra) was in context of determination of reasonable fees to be charged by private educational bodies. 4 (2003) 6 SCC 697 (paragraph 156) Page 6 7 9. As against above, amount of direct grant from Government has been meagre, details of which are being noticed separately later in different context. University nevertheless has grown and number of private engineering colleges affiliated to it had increased from about 64 to presently about 194. infrastructure of University has also increased offering educational avenues to increasing number of students in different and varied subjects. Materials have been brought on record before High Court as well as before this Court to show several number of work orders/tenders issued by University for infrastructure expansion. It is emphatically contended by appellant in written submissions filed that between 1994 and 2009 University had actually spent about Rs.504 crores on infrastructure and available surplus in year 2010 which was in 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, said amount was attached by Revenue pursuant to demands raised Page 7 8 in terms of assessments made. Even in situation where direct government grants have not been forthcoming and allocation against permissible heads like salary, etc. had not been made University has thrived and prospered. There can, however, be no manner of doubt that surplus accumulated over years has been ploughed back for educational purposes. In such situation, following 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 first requirement of Section 10(23C) (iiiab), namely, that appellant University exists solely for educational purposes and not for purposes of profit is satisfied. exemption granted in respect of University under Section 80G of Act, qua donations made to it also cannot be ignored in view of inbuilt recognition in such exemption with regard to charitable nature of institution i.e. appellant University. 10. above would require Court to go into further question as to whether appellant University is wholly or Page 8 9 substantially financed by Government which is additional requirement for claiming benefit under Section 10(23C)(iiiab) of Act. It is not in dispute that grants/direct financing by Government during six (06) Assessment Years in question i.e. 2004-2005 to 2009-2010 had never exceeded 1% of total receipts of appellant - University- Assessee. In such situation, argument advanced is that fees of all kinds collected within four corners of provisions of Section 23 of VTU Act must be taken to be receipts from sources of finance provided by Government. Such receipts, it is urged, are from sources statutorily prescribed. rates of such fees are fixed by Fee Committee of 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 Government as contemplated by provisions of Section 10 (23c) (iiiab) of Act. 11. Universities and Educational Institutions entitled to exemption under Act have been categorized under three Page 9 10 different heads, namely, those covered by Section 10(23C) (iiiab); Section 10(23C)(iiiad) and 10(23C)(vi) of Act. requirement of University or educational institution existing solely for educational purposes and not for purposes of profit is consistent requirement under Section 10(23C) (iiiab), 10(23C)(iiiad) and 10(23C)(vi). However, in cases of Universities covered by Section 10(23C)(iiiab) funding must be wholly or substantially by Government whereas in cases of universities covered by Section 10(23C)(iiiad) aggregate annual receipts should not exceed amount as may be prescribed. Universities covered by Section 10(23C)(vi) are those other than mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which are required to be specifically approved by prescribed authority. 12. Having regard to text and context of provisions of Section 10 (23c) (iiiab), 10 (23c) (iiiad) and 10 (23c) (vi) it will be reasonable to reach conclusion that while Section 10 (23c) (iiiab) deals with Government Universities, Section 10 (23c) (iiiad) deals with small Universities having annual Page 10 11 turnover of less than Rupees One Crore (as prescribed by Rule 2 (BC) of Income Tax Rules). On similar note, it is possible to read Section 10 (23c) (vi) to be dealing with Private Universities whose gross receipts exceeds Rupees One Crore. Receipts by way of fee collection of different kinds continue to major source of income for all Universities including Private Universities. Levy and collection of fees is invariably exercise under provisions of Statute constituting University. In such situation, if collection of fees is to be understood to be amounting to funding by Government merely because collection of such fees is empowered by Statute, all such receipts by way of fees may become eligible to claim exemption under Section 10 (23c) (iiiab). Such result which would virtually render provisions of other two Sub-sections nugatory cannot be understood to have been intended by Legislature and must, therefore, be avoided. 13. It will, therefore, be more appropriate to hold that funds received from Government contemplated under Section 10(23c)(iiiab) of Act must be direct grants/contributions Page 11 12 from governmental sources and not fees collected under statute. view of Delhi High Court in Mother Diary Fruit & Vegetable Private Limited vs. Hatim Ali & Anr.5 which had been brought to notice of Court has to be understood in context of definition of 'public authority' as specified in Section 2(h)(d)(ii) of Right to Information Act, 2005 which is in 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 appropriate Government, and includes any (i) ......... (ii) non-Government Organization substantially financed, directly or indirectly by funds provided by appropriate Government. 14. Reliance has been placed on judgment of High Court of Karnataka in Commissioner of Income-tax, Bangalore vs. Indian Institute of Management6, particularly, view expressed that expression wholly or 5 [(2015) 217 DLT 470] 6 (2014) 49 Taxmann.com 136 (Karnataka) Page 12 13 substantially financed by Government' as appearing in Section 10(23C) cannot be confined to annual grants and must include value of land made available by Government. In present case High Court in paragraph 53 of impugned judgment has recorded that even if value of land allotted to University (114 acres) is taken into account total funding of University by Government would be around 4% - 5% of its total receipt. That apart what was held by High Court in above case, while repelling contention of Revenue that exemption under Section 10(23c) (iiiab) of Act for particular assessment year must be judged in context of receipt of annual grants from Government in that particular year, is that apart from annual grants value of land made available; investment by Government in buildings and other infrastructure and expenses incurred in running institution must all be taken together while deciding whether institution is wholly or substantially financed by Government. situation before us, on facts, is different leading to irresistible conclusion that appellant Page 13 14 University does not satisfy second requirement spelt out by Section 10 (23c) (iiiab) of Act. appellant University is neither directly nor even substantially financed by Government so as to be entitled to exemption from payment of tax under Act. 15. For aforesaid reasons, we do not find present to be fit case for interference. appeals, consequently, are dismissed however without any order as to costs. ..................,J. (RANJAN GOGOI) ..................,J. (PRAFULLA C. PANT) NEW DELHI April 22, 2016. Page 14 Visvesvaraya Technological University v. Assistant Commissioner of Income-tax