The Madras High Court on Monday held that any amount or donations collected by private educational institutions in exchange for admissions will be termed as 'capitation fees' and that collection of capitation fees is illegal and punishable. A division bench of Justices R Mahadevan and Mohammed Shaffiq in a significant verdict said that educational institutions can not collect capitation fees from students seeking admission and terming the money as 'corpus donation' to evade from the payment of income tax.
The bench was hearing the batch of cases related to Income Tax proceedings filed by the Commissioner of Income Tax, Chennai. The Income Tax department challenged previous orders passed by the Income Tax Appellate Authority and the Income Tax Tribunal in favour of three educational institutes from the State and some charitable trusts affiliated with the institutes.
As reported by the Bar and Bench, the Madras High Court said: "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". The High Court highlighted that providing education should not be treated as a commercial activity or business. The bench condemns the practice of educational institutes violating the Capitation Fee Act and their attempt to secure more benefits by seeking tax exemption for such capitation fees.
"However, the undeniable reality staring at our face is the collection of capitation fee as a condition precedent for admission into educational 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 Madras High Court added.
The institutes were claiming that the donations were voluntarily made by the parents of the students to their trusts. Therefore, they contended that the donation corpus was in the nature of charity and cannot be treated as his income. The High Court held that such practice of receiving the donation and/or capitation fee as a condition for admitting a student is violative of the provisions of the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992.
The court stated that the appellate authority and the tribunal had failed to consider the provisions of the Capitation Fee Act and had given "perverse findings" and directed the revenue authorities to cancel the registration of the Trusts as they can not be treated as charitable institutes.
