Charging Capitation Fee Is Dehors The Objective Of Charitable Trust: Delhi HC Quashes Income Tax Exemption Granted To An 'Education Trust'

The Delhi High Court quashed orders granting Income Tax exemption to an education trust observing that charging capitation fee is dehors the objective of the charitable trust.

In that context, the Bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav observed: "undisputedly, the assessee has engaged itself in charging capitation fee which is dehors the objective of the charitable trust. Therefore, the claim of the assessee for exemption as per Section 11 and 12 of the Act does not hold any water."

The appellant/assessee, a charitable trust involved in education and part of the Santosh Group conducting medical courses, filed its income tax return showing an excess expenditure of Rs. 2,69,34,371 and declared nil income. The case was processed under Section 143(1) and picked for scrutiny assessment, leading to a notice under Section 143(2).

The assessing officer (AO) passed an order determining the total income of the assessee to be ₹15,03,47,006 after making various additions. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who partly allowed the appeal and deleted the addition. This order was upheld by the ITAT, and the appeal against the ITAT's order was admitted by the Court, with appeals pending.

On June 27, 2013, a search under Section 132 was conducted on the Santosh Group, including the assessee. It was discovered that the group charged a capitation fee for admissions, which was not reported in the ITR. Consequently, reassessment proceedings were initiated by the AO under Section 147/148, and a notice was served to the assessee after recording reasons to believe.

The assessee responded to the notice, asking for the originally filed ITR to be treated as the response to the notice under Section 148. A notice under Section 143(2) was issued. The assessee's objections were rejected on February 2, 2015.

The AO framed an assessment order under Section 143(3) read with Section 148 on March 19, 2015, noting that ₹1,17,85,000 pertained to AY 2005-06 and ₹7,46,51,210 was already included in the income and expenditure account as fees. The AO held that the undeclared fees amounted to Rs. 10,38,30,790. Consequently, the AO disallowed the exemption under Section 11, assessed the income as an association of persons, and computed the total income to be Rs. 21,19,29,461.

The department's appeal to the ITAT was dismissed, and the ITAT quashed the reopening of assessment proceedings under Section 148. The department argued that the CIT(A) and the ITAT erroneously relied on the ITSC's decision for AYs 2008-09 and 2009-10, stating that the ITSC's order is conclusive for the matters of the concerned AY.

The High Court noted that, "undisputedly, the assessee has engaged itself in charging capitation fee which is dehors the objective of the charitable trust. Therefore, the claim of the assessee for exemption as per Section 11 and 12 of the Act does not hold any water. In view of the aforenoted pronouncements of law, the ITAT has wrongly sustained the exemption claimed by the assessee."

It was further observed that the finality of the ITSC's order is rooted in Section 245-I of the Income Tax Act, which states that "every order of settlement passed under sub-Section 4 of Section 245D shall be conclusive as to the matters, and no matter covered by the order shall, save as otherwise provided in Chapter XIX-A, be reopened in any proceeding under this Act or under any other law for the time being in force."

While allowing the department's appeal, the Court determined that the ITAT had incorrectly relied on the ITSC's decision for subsequent years, leading to the conclusion that the ITAT's order was liable to be quashed.

Cause Title:  PR Commissioner of Income Tax - Central 1 vs Maharaji Education Trust (Neutral Citation: 2024: DHC: 4938-DB)

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