VISVESVARAYA TECHNOLOGICAL UNIVERSITYversusASSISTANT COMMISSIONER OF INCOME TAX

                             [2016] 4 S.C.R. 362



A         VISVESVARAYA TECHNOLOGICAL UNIVERSITY
                                      v.
           ASSISTANT COMMISSIONER OF INCOME TAX
                   (Civil Appeal Nos. 4361-4366 of2016)
B                              APRIL 22, 2016
          [RANJAN GOGOi AND PRAFULLA C. PANT, JJ.]
          Income Tax Act, 1961 -- s.10(23C)(iiiab) - Exemption under -
    Entitlement to the assessee-University - Held: The entitlement for
    the exemption is subject to two conditions (i) The University is solely
c   for the purpose of education without profit motive, and (ii) it must
    be wholly or substantially financed by the Government - In the
    present case, the first condition is fulfilled by the University, but
    not the second - Therefore, the assessee-University is not entitled
    to exemption from payment of tax - Visweswaraiah Technological
D   University Act, 1994 - s.23.
           Government Grants - Fees collected uls. 23 of Visweswaraiah
    Technological University Act - Held: Cannot be considered as a
    Government Grants (financed by Government) as contemplated u!
    s. 10(23C)(iiiab) of Income Tax Act, 1961 - Visweswaraiah
E   Technological University Act, 1994 - s.23 - Income Tax Act, 1961
    ~ s. 10(23Cj(iiiabj.

          Dismissing the appeals, the Court
           HELD: 1. The entitlement for exemption under Section
    10(23C)(iiiab) of the Income Tax Act, 1961 is subject to two
F   conditions. Firstly the educational institution or the University
    must be solely for the purpose of education and without any profit
    motive. Secondly, it must be wholly or substantially financed by
    the Government. [Para 5] [366-A-B)
           2.1 In the present case, during a short period of a decade
    i.e. from the year 1999 to 2010, the appellant University had
G
    generated a surplus of about Rs.500 crores. The huge surplus
    has been collected/accumulated by realizing fees under different
    heads in consonance with the powers vested in the University
    under Section 23 of the Visweswaraiah Technological University
    Act, 1994. The differeirce between the fees collected and the
H   actual expenditure incurred for the purposes for which fees were
                                 362
     VISVESVARAYA TECHNOLOGICAL UNIVERSITY v.                           363
       ASSISTANT COMMISSIONER OF INCOME TAX

collected is significant. In fact the expenditure incurred represents    A
only a minuscule part of the fees collected. The surplus generated
is far in excess of what has been held by this Court to be
permissible (6 to 15%) in Islamic Academy case*. [Para 8] [367-
F-G]
       2.2 However, the amount of direct grant from the
                                                                         B
Government has been meagre. The University nevertheless has
grown and the number of private engineering colleges affiliated
to it had increased. The infrastructure of the University has also
increased. Even in a situation where direct Government grants
have not been forthcoming and allocation against permissible
heads like salary, etc. had not been made, the University has            c
thrived and prospered. There can, however, be no manner of
doubt that the surplus, accumulated over the years, has been
ploughed back for educational purposes. In such a situation, the
first requirement of Section 10(23C)(iiiab), namely, that the
appellant University exists "solely for educational purposes and
                                                                         D
not for purposes of profit" is satisfied. The exemption granted in
respect of the University under Section 80G of the Act, qua the
donations made to it also cannot be ignored in view of an inbuilt
recognition in such exemption with regard to the charitable nature
of the institution i.e. the appellant University. [Para 9] (368-B, E-
G]                                                                       E
      Queen :S Educational Society v. Co111111issio11er of Income
      Tax (2015) 8 SCC 47: 2015(3) SCR 838; CIT Surat   1'
      Art Silk Cloth Manufacturers' Assn. (1980) 2 SCC
      31:1980 (2) SCR 77; American Hotel and Lodging
      Association Educational Institute v. Central Board of
                                                                         F
      Direct Taxes and Ors. (2008) 10 SCC 509 : 2008 (8)
       SCR 117 - relied on.
      *Islamic Academy of Education and Anr. v. State of
      Karnataka and Ors. (2003) 6 SCC 697 : 2003 (2) Suppl.
      SCR 474 - referred to.
     3. The appellant-University does not satisfy the second             G
requirement spelt out by Section 10 (23C) (iiiab) of the Income
Tax Act. The appellant University is neither directly nor even
substantially financed by the Government so as to be entitled to
exemption_ from payment of tax under the .Income Tax Act. The
grants/direct financing by the Government during the six
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364           SUPREME COURT REPORTS                      [2016] 4 S.C.R.


A     Assessment Years in question i.e. 2004-2005 to 2009-2010 had
      never exceeded 1 % of the total receipts of the appellant -
      University- Assessee. The fees of all kinds collected within the
      fonr corners of the provisions of Section 23 of the University Act
      cannot be taken to be receipts from sources of finance provided
      by the Government. Such receipts cannot be understood to be
B
      funds made available by the Government as contemplated by the
      provisions of Section 10 (23C)(iiiab) of the Act. If collection of
      fees is to be understood to be amounting to funding by the
      Government, merely because collection of such fees is
      empowered by the Statute, all such receipts by way of fees may
c     become eligible to claim exemption under Section 10 (23C)(iiiab).
      Such a result which would virtually render the provisions of the
      other two Sub-sections, viz. s. 10 (23C) (iiiab) and 10(23C) (vi),
      nugatory which cannot be understood to have been intended by
      the Legislature and must, therefore, be avoided. Even if the value
      of the land allotted to the appellant-University is taken into
D
      account, the total funding of the University by the Government
      would be around 4% - 5% of its total receipt. [Paras 10, 12 and
      14] [368-H; 369-A-C, H; 370-A-B, G-H; 371-A]
            Commissioner of Income-tax, Bangalore v. Indian
            Institute of Management (2014) 49 Taxmann.com 136
E           (Karnataka); Mother Dimy Fruit & Vegetable Private
            Limited v. Hatim Ali & Am: (2015) 217 DLT 470 -
            referred to.
                            Case Law Reference

 F         2015 (3) SCR 838                relied on         Para6
            1980 (2) SCR 77                relied on         Para7
           2008 (8) SCR 117                relied on         Para 7
           2003 (2) Suppl. SCR 474         referred to       Para8
G          (2015) 217 DLT 470              referred to       Para 13
            (2014) 49 Taxmann.com 136
            (Karnataka)                    referred to       Para 14
           CIVILAPPELLATEJURISDICTION: Civil Appeal Nos. 4361-
      4366of2016.
H
      VISVESVARAYA TECHNOLOGICAL UNIVERSITY v.                                  365
        ASSISTANT COMMISSIONER OF INCOME TAX

     From the Judgment and Order dated 20.12.2013 of the High Court             A
ofKarnataka Dharwad Bench dismissing the ITA No. 5007-12 of2013.
      Arvind Datar, Sr. Adv., Swarup, Manjunath Meled, Anand Shetty,
Anil Kumar, Advs. for the Appellant.
      Arijit Prasad, D. L. Chidanand, B. V. Balaram Das, Mrs. Anil
Katiyar, Advs. for the Respondent.                                               B

      The Judgment of the Court was delivered by
      RANJAN GOGOi, J. 1. Leave granted.
      2. The appellant- University, namely, Visvesvraya Technological
University (VTU) has been constituted under the Visveswaraiah                    c
Technological University Act, I 994 (for short "VTU Act"). It discharges
functions earlier performed by the Department of Technical Education,
Government of Karnataka. The University exercises control over all
Government and Private Engineering Colleges within Karnataka.
      3. For the Assessment Years 2004-2005 to 2009-20 I 0 notices under         D
Section 148 of the Income Tax Act, 1961 (for short "the Act") were
issued to the appellant - University - Assessee. Eventually returns
were filed for the Assessment Years in question declaring 'Nil' income
and claiming exemption under Section I 0(23C)(iiiab) of the Act. The
aforesaid claim of exemption was negatived by the Assessing Officer
                                                                                 E
who proceeded to make the assessments. The same view has been
taken by all the Authorities under the Act and also by the High Court in
the order under challenge in the present proceedings.
       4. The question, therefore, that arises in the present appeals is the
entitlement of the appellant- University-Assessee to exemption from
                                                                                 F
payment of tax under the provisions of Section I 0(23C)(iiiab) of the Act
which is in the following terms:
      "I 0. Incomes not included in total income. -
      In computing the total income of a previous year of any person,
      any income falling within any of the following clauses shall not be
                                                                                 G
      included-
      (23C) any income received by 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 the Government"
                                                                                 H
366              SUPREME COURT REPORTS                           [2016] 4 S.C.R.



A            5. The entitlement for exemption under Section I 0(23C)(iiiab) is
      subject to two conditions. Firstly the educational institution or the
      university must be solely for the purpose of education and without any
      profit motive. Secondly, it must be wholly or substantially financed by
      the government. Both conditions will have to be satisfied before exemption
      can he granted under the aforesaid provision of the Act.
B
             6. The relevant principles of law which will govern the first issue
      i.e. whether an educational institution or a university, as may be, exists
      only for educational purpose and not for profit are no longer res integra,
      having been dealt with by a long line of decisions of this Court which
      have been elaborately noticed and extracted in a recent pronouncement
c     i.e. Queen's Educational Societv vs. Commissioner oflncome Tax'.
      The principles that emanate from the views expressed by this Court are
      set out in paragraph 11 in Queen's Educational Society_( supra), which
      are extracted below:
             "11. Thus, the law common to Section I 0(23C) (iii ad) and (vi)
D            may be summed up as follows:
             (I) Where an educational institution carries on the activity of
             education primarily for educating persons, the fact that it makes a
             surplus does not lead to the conclusion that it ceases to exist solely
             for educational purposes and becomes an institution for the purpose
             of making profit.
E
              (2) The predominant object test must be applied -the purpose of
              education should not be submerged by a profit making motive.
             (3) A distinction must be drawn between the making of a surplus
             and an institution being carried on "for profit". No inference arises
             that merely because imparting education results in making a profit,
 F           it becomes an activity for profit.
              (4) If after meeting expenditure, a surplus arises incidentally from
              the activity carried on by the educational institution, it will not be
              cease to be one existing solely for educational purposes.
              (5) The ultimate test is whether on an overall view of the matter
G             in the concerned assessment year the object is to make profit as
              opposed to educating persons."
            7. To the above principles, one further test as laid down in CIT
      vs. Surat Art Silk Clotlt Manufacturers' Assn. 1 and culled out in
      1
        (2015) s sec 47
H     ' (I 980J 2 sec 3 I
   VISVESVARAYA TECHNOLOGICAL UNIVERSITY v.                                       367
 ASSISTANT COMMISSIONER OF I. T. [RANJAN GOGOi, J.]

American Hotel and Lodging Association Educational Institute vs.                  A
Central Board o[Direct Taxes and Others 3 may be added which is as
follows:
      "In order to ascertain whether the institute is carried on with the
      object of making profit or not it is the duty of the prescribed authority
      to ascertain whether the balance of income is applied wholly and             B
      exclusively to the objects for which the applicant is established."
      (Paragraph 37)
      The above principle has been specifically reiterated in paragraph
19 of the decision in Queen's Educational Society (supra) in the
following terms:                                                                   c
      "The final conclusion that ifa surplus is made by an educational
      society and ploughed back to construct its own premises would
      fall out of Section I 0(23-C) is to ignore the language of the section
      and to ignore the tests laid down in Surat Art Silk Cloth case [CIT
      v. Surat Art Silk Cloth Manufacturers' Assn.(1980) 2 SCC 31 ],               D
      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) I 0 SCC
      509]. It is clear that when a surplus is ploughed back for educational
      purposes, the educational institution exists solely for educational
      purposes and not for purposes of profit."                                    E
      8. In the present case, we find that during a short period of a
decade i.e. from the year 1999 to 2010-the appellant University had
generated a surplus of about Rs.500 crores. There is no doubt that the
huge surplus has been collected/accumulated by realizing fees under
different heads in consonance with the powers vested in the University             F
under Section 23 of the VTU Act. The difference between the fees
collected and the actual expenditure incurred for the purposes for which
fees were collected is significant. In fact the expenditure incurred
represents only a minuscule part of the fees collected. No remission,
rebate or concession in the amount of fees charged under the different
                                                                                   G
heads for the next Academic Year(s) had been granted to the students.
The surplus generated is far in excess of what has been held by this
Court to be permissible (6 to 15%) in Islamic Academy o[Ed11catio11
and another vs. State o[Kamataka mu/ others' though the percentage
' (200SJ 1osec 509
'(2003) 6 sec 697 (paragraph 156)                                                  H
368             SUPREME COURT REPORTS                            [2016] 4 S.C.R.



A     of surplus in Islamic Academy o.fEducation (supra) was in the context
      of the determination of the reasonable fees to be charged by private
      educational bodies.
              9. As against the above, the amount of direct grant from the
      Government has been meagre, details of which are being noticed
B     separately later in a different context. The University nevertheless has
      grown and the number of private engineering colleges affiliated to it had
      increased from about 64 to presently about 194. The infrastructure of
      the University has also increased offering educational avenues to an
      increasing number of students in different and varied subjects. Materials
      have been brought on record before the High Court as well as before
c     this Court to show the several number of work orders/tenders issued by
      the University for infrastructure expansion. It is emphatically contended
      by the appellant in the written submissions filed that between 1994 and
      2009 the University had actually spent about Rs.504 crores on
      infrastructure and the available surplus in the year 2010 which was in
D     the 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, the said amount was attached by the Revenue pursuant to the
      demands raised in terms of the assessments made. Even in a situation
      where direct government grants have not been forthcoming and allocation
      against permissible heads like salary, etc. had not been made the
 E    University has thrived and prospered. There can, however, be no manner
      of doubt that the surplus accumulated over the years has been ploughed
      back for educational purposes. In such a situation, following the consistent
      principles laid down by this Court referred to earlier and specifically
      what has been said in paragraph 19 in Queen's Educational Society
 F     (supra), extracted above, it must be held that the first requirement of
       Section I 0(23C)(iiiab ), namely, that the appellant University exists "solely
       for educational purposes and not for purposes of profit" is satisfied. The
       exemption granted in respect of the University under Section 80G of the
       Act, qua the donations made to it also cannot be ignored in view of an
       inbui It recognition in such exemption with regard to the charitable nature
 G     of the institution i.e. the appellant University.
            I 0. The above would require the Com1 to go into the further
      question as to whether the appellant University is wholly or substantially
      financed by the Government which is an additional requirement for
      claiming benefit under Section I 0(23C)(iiiab) of the Act. It is not in
 H
    VISVESVARAYA TECHNOLOGICAL UNIVERSITY v.                                     369
  ASSISTANT COMMISSIONER OF I. T. [RANJAN GOGOi, J.]

dispute that grants/direct financing by the Government during the six            A
(06)Assessment Years in question i.e. 2004-2005 to 2009-20 I 0 had never
exceeded 1% of the total receipts of the appellant- University-Assessee.
In such a situation, the argument advanced is that fees of all kinds
collected within the four corners of the provisions of Section 23 of the
VTU Act must be taken to be receipts from sources of finance provided
                                                                                  B
by the Government. Such receipts, it is urged, are from sources statutorily
prescribed. The rates of such fees are fixed by the Fee Committee of
the 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 the Government as
contemplated by the provisions of Section I 0 (23c) (iiiab) of the Act.           c
       11. Universities and Educational Institutions entitled to exemption
under the Act have been categorized under three different heads, namely,
those covered by Section 10(23C)(iiiab); Section 10(23C)(iiiad) and
10(23C)(vi) of the Act. The requirement of the University or the
educational institution existing "solely for educational purposes and not         D
for purposes of profit" is the consistent requirement under Section
 I 0(23C)(iiiab ), 10(23C)(iiiad) and I 0(23C)(vi). However, in cases of
Universities covered by Section I 0(23C)(iiiab) funding must be wholly
or substantially by the Government whereas in cases of universities
covered by Section I 0(23C)(iiiad) the aggregate annual receipts should
not exceed the amount as may be prescribed. Universities covered by               E
Section I 0(23C)(vi) are those other than mentioned in sub-clause (iiiab)
or sub-clause (iiiad) and which are required to be specifically approved
by the prescribed authority.
       12. Having regard to the text and the context of the provisions of
Section 10 (23c) (iiiab), 10 (23c) (iiiad) and 10 (23c) (vi) it will be           F
reasonable to reach a conclusion that while Section 10 (23c) (iiiab) deals
with Government Universities, Section I 0 (23c) (iiiad) deals with small
Universities having an annual "turnover" ofless than Rupees One Crore
(as prescribed by Rule 2 (BC) of the Income Tax Rules). On a similar
note, it is possible to read Section I 0 (23c) (vi) to be dealing with Private    G
Universities whose gross receipts exceeds Rupees One Crore. Receipts
by way offee collection of different kinds continue to a major source of
income for all Universities including Private Universities. Levy and
collection of fees is invariably an exercise under the provisions of the
Statute constituting the University. In such a situation, if collection of
                                                                                  H
370                SUPREME COURT REPORTS                         [2016] 4 S.C.R.



A     fees is to be understood to be amounting to funding by the Government
      merely because collection of such fees is empowered by the Statute, all
      such receipts by way of fees may become eligible to claim exemption
      under Section 10 (23c) (iiiab). Such a result which would virtually
      render the provisions of the other two Sub-sections nugatory cannot be
      understood to have been intended by the Legislature and must, therefore,
B
      be avoided.
             13. It will, therefore, be more appropriate to hold that funds received
      from the Government contemplated under Section I 0(23c)(iiiab) of the
      Act must be direct grants/contributions from governmental sources and
      not fees collected under the statute. The view of the Delhi High Court in
c     Motlter Diary Fruit & Vegetable Private Limited vs. Hatim Ali &
      Anr. 5 which had been brought to the notice of the Court has to be
      understood in the context of the definition of'public authority' as specified
      in Section 2(h)(d)(ii) of the Right to Information Act, 2005 which is in
      the following terms:
D            (h)        "public authority" means any authority or body or
             institution of self-government established or constituted,-
             ( a) ··················
             (b) ................. .

 E
             ( d)    by notification issued or order made by the appropriate
             Government, and includes any
             (i)
             (ii)      non-Government Organization substantially financed,
             directly or indirectly by funds provided by the appropriate
 F
             Government."
             14. Reliance has been placed on the judgment of the High Court
      of Karnataka in Commissioner o(Income-tax, Bangalore vs. Indian
      Institute o(Ma11age111ent6, particularly, the view expressed that the
      expression "wholly or substantially financed by the Government' as
 G    appearing in Section I 0(23C) cannot be confined to annual grants and
      must include the value of the land made available by the Government. In
      the present case the High Court in paragraph 53 ofthe impugned judgment
      has recorded that even ifthe value of the land allotted to the University
      '[(2015) 21? DLT 470]
 H    '' (2014) 49 Taxmann.com 136 (Karnataka)
     VISVESVARAYA TECHNOLOGICAL UNIVERSITY v.                                    371
  ASSISTANT COMMISSIONER OF I. T. [RANJAN GOGOi, J.]

(114 acres) is taken into account the total funding of the University by          A
the Government would be around 4% - 5% of its total receipt. That
apart what was held by the High Court in the above case, while repelling
the contention of the Revenue that the exemption under Section I 0(23c)
(iiiab) of the Act for a particular assessment year must be judged in the
context ofreceipt ofannual grants from the Government in that particular
                                                                                  B
year, is that apart from annual grants the value of the land made available;
the investment by the Government in the buildings and other infrastructure
and the expenses incurred in running the institution must all be taken
together while deciding whether the institution is wholly or substantially
financed by the Government. The situation before us, on facts, is
different leading to the irresistible conclusion that the appellant University    c
does not satisfy the second requirement spelt out by Section 10 (23c)
(iiiab) of the Act. The appellant University is neither directly nor even
substantially financed by the Government so as to be entitled to exemption
from payment of tax under the Act             ·
       15. For the aforesaid reasons, we do not find the present to be a          D
fit case for interference. The appeals, conseqt1ently, are dismissed
however without any order as to costs.
Kalpana K. Tripathy                                         Appeals dismissed.