Education Not Commercial Activity, Collection Of Capitation Fee For Admission Illegal, No Tax Exemption: Madras High Court

The Madras High Court on Monday deprecated the practice of receiving capitation fee in exchange of admissions. The bench of Justice R Mahadevan and Justice Mohammed Shaffiq held that such practice of receiving capitation fee is against the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992. 

It is therefore beyond the pale of any doubt that education can never be a commercial activity or a trade or business and those in the field of education will have to constantly and consistently abide by this guiding principle. However, the undeniable reality staring at our face is the collection of capitation fee as a condition precedent for admission into educational institutions.

The court was hearing appeals filed by the Income Tax Department challenging the single judge order allowing tax exemption for a group of charitable institutions.  

The present appeals raise the twin issues of the blatant violation of the Capitation Fee Act and then drawing a premium on their own illegal act by seeking exemption under Sections 11, 12AA and 80G of the Act. 

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

Though the institutions claimed that the donations were paid voluntarily, the court examined the sworn statements which clearly showed that the truth was otherwise. The court noted that the modus operandi of the college was to seek capitation fee, not directly from the parents, but have their relatives/friends transfer this amount to any of the sister trusts which would then be transferred into the institution's fund. Through this process, the sister trusts also claimed tax exemption by claiming that the payments were for "charitable purposes".

The fact that a long-winding and indirect route has been adopted for capitation fee to reach the institution cannot change the character of the payment from an illegal capitation fee to a voluntary contribution/donation, the court noted.

The court thus observed that unless a payment was made gratuitously without any consideration, it could not be termed as a "voluntary contribution" for claiming tax exemption under Section 11 and 12 of the Act. The Tribunal and the first Appellate Authority had erroneously granted tax exemption by claiming that the money was used for the objects of the institution.

The court thus reversed the findings of the tribunal and the appellate court and directed the Assessing Authority to proceed on the basis of assessment of tax. The court also directed the authorities to cancel the registration certificate of the institutes under Section 12A and not treat them as Charitable institutions.

Creation of Web Portals

The court lamented that though there were State laws and precedents making it penal to collect capitation fee, the menace of capitation fee could not be curtailed. The court also noted that Privatisation had also aided in the collection of capitation fee.

The court thus suggested that the State could set up a web portal wherein any information about charging of capitation fee by private institutions could be furnished by the students, their parents or any person having first hand information.

This web portal may be maintained by the National Informatics Centre and the Information Technology and Digital Services Department. The State was also directed to give wide publicity about the portal both in vernacular and English newspapers. The court further directed that pamphlets containing these information should be given to the parents at the time of admission.

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

Citation: 2022 LiveLaw (Mad) 448

Case No: Tax Case Appeal No. 303 of 2022 (batch)