Karnataka High Court Allows Tax Exemption On Voluntary Donation Received By Educational Institution

The Karnataka High Court has allowed a tax exemption on voluntary donations received by educational institutions.

The bench of Justice P.S. Dinesh Kumar and Justice T.G. Shivashankare Gowda has observed that the educational institution is carrying out education that is charitable within the meaning of Section 2(15), it has applied or accumulated sums as required by Section 11(1)(a), the explanation thereto, and Section 11(2), it is duly registered under Section 12A, and it has not violated Section 13. There is no private gain, and all the funds are plowed back only into education. Thus, accumulations and applications are as per the provisions of Section 11. Therefore, exemption under sections 11 and 12 has to be granted to the assessee.

The respondent assessee is a charitable trust registered under Section 12A of the Income Tax Act, 1961. It has obtained approval under Sections 11 and 12. For AY 2012–13, the assessee filed returns of income declaring income as nil. The case was selected for scrutiny, and notices under Sections 142(1) and 143(2) were issued. The assessee filed revised returns. The difference between the two returns was claimed as corpus donations, and according to the assessee, the Trust was exempt in the original returns and had disclosed the income under the heading ‘other income’ in the revised returns.

The Additional Commissioner of Income Tax, Exemptions, took up the case for scrutiny and assessment. The AO passed the assessment order holding that income from other sources as income for the Trust. The CIT (A) confirmed AO’s order. The ITAT has reversed the order passed by the AO and held that the assessee is entitled to exemption.

The department challenged the ITAT’s order. The department contended that the assessee has collected a sum of Rs. 27,23,55,000 as a donation in violation of the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984. Since there was a violation of provisions of the KEI (Prohibition of Capitation Fee) Act, the assessee is not entitled to exemption, as the same shall also amount to a violation of Sections 11 and 12 of the Act.

The assessee contended that merely because no action has been initiated under the KEI (Prohibition of Capitation Fee) Act, it does not ipso facto mean that there was no violation, and IT authorities can always consider the violation of any statute while framing the assessment.

The court held that the AO, based on assumption and surmise, has held that there was a violation under the KEI (Prohibition of Capitation Fee) Act by the assessee, and that incorrect assumption has been rightly reversed by the ITAT.

Case Title: Pr Commissioner Of Income-1 Tax (Exemptions) Versus M/S Rashtreeya Sikshana Samithi Trust

Case No.: Income Tax Appeal No. 554 Of 2018

Citation: 2023 LiveLaw (Kar) 247

Date: 05/06/2023

Counsel For Appellant: E.I. Sanmathi

Counsel For Respondent: Vikram Huilgol

Click Here To Read The Order