N.L. Kalra, Accountant Member -
(1.) THE revenue has filed an appeal against order of learned CIT(A)-V, Bangalore dated 29.3.2007. THE grounds of appeal raised by the revenue are as under:
i) THE learned CIT(A) has erred in coming to the conclusion that the Institute is wholly and substantially finance by the Government even though only Rs. 3,02,65,000/- which is 6.84% is the grants received from the Government and the balance amount is generated by the Institute out of fees and other income.
ii) THE learned CIT(A) has erred in coming to the conclusion that the assessee Institute is wholly and substantially financed by the Government on the ground that it was established by the Ministry of Human Resources and Development and the loan has been given by the State Government and entire property of assets have been created out of the funds given by the Government which are irrelevant for determining whether the institute is wholly and substantially financed by the Government or not.
iii) THE order of the CIT(A) for the Ay 2003-04 which is in favour of the assessee has not been accepted by the Department and appeal is pending before the ITAT. THE issue has not reached finality.
(2.) The Assessing Officer during the course of proceedings required the assessee to explain as to how the income is exempt Under Section 10(23C)(iiib) when the grants received from the Government is not substantial because income of University or educational institution is exempt Under Section 10(23C)(iiib) in case University or educational institution is wholly and substantially financed by Government. Before the Assessing Officer, the assessee filed a copy of letter written by HRD Ministry to Director of Indian Institute of Management dated 25th October, 2006 in which it was stated as under:-
The IIMs are the public institutions and these do not cease to be so by virtue of some of them not receiving Government grants both recurring and non-recurring for a couple of years. As a matter of fact, the revenue generated by the institutions belong to the consolidated fund of India and the Government after a conscious decision has permitted the IIMs to retain and spend the revenue so generated for their maintenance/growth.
As per Assessing Officer, the clarification given by the HRO Ministry is not binding on the Income Tax Department and hence, claim of the assessee is not acceptable that its income is exempt Under Section 10(23C)(iiib).
2.1 The assessee further submitted that the learned CIT(A) for the AY 2003-04 has held that income of the assessee is exempt Under Section 10(23C)(iiib) but the Assessing Officers stated that order of CIT(A) for the AY 2003-04 has not been accepted by the department and an appeal has been filed before ITAT. Accordingly, the Assessing Officer denied the exemption and computed the total income at Rs. 5,87,01,378/- as against excess of expenditure over income as per computation at Rs. 2,75,93,119/-.
2.2 The assessee filed an appeal before the learned CIT(A). The learned CIT(A) noticed that the assessee has not received any planned or non-planned grant from the Government. The collection of fees during the year was much higher as compared to last year and the reasons for such increased collections were as under:
• There was an increase in the fees by Rs. 25,000/-per student per annum in the case of the Post Graduate Programme in Management.
• The revenue generated from Executive Education Programmes was higher.
• Collection from Common ,Admission Test was higher.
• The number of students enrolled in the Post Graduate Programme in Public Policy Management was higher than that of the previous year.
• The number of students in the Post Graduate Programme in Software Management had double this year.
It was further stated before the learned CIT(A) that grants were not received from Government asi-he Government was planning to set up more IIMs.
2.3 The learned CIT(A) held that it is not disputed that the institution is existing solely for educational purposes and not for purposes of profit. Now one has to see as to whether the institution is wholly or substantially financed by Government. The learned CIT(A) observed that she has already held for the asst. years 1999-2000 and 2003-04 that the institute is wholly and substantially financed by the Government. For giving such a finding in AY 1999-2000 and 2003-04, the reasons in brief are summarized as under.-
(a) Sub-clause (iiiab) of 10(23C) was introduced by Finance No. 2 Act, 1998. Initially it was proposed to withdraw blanket exemption available to educational and medical institutions. A large number of representations were received and it was submitted that such withdrawal will cause hardship to small medical and educational institutions as they will be required to go to the I.T.O. time and again to avail the tax exemption. In view of such representation, the Finance Minister w stated in his speech that all educational and medical institutions which are financed and managed by Government will enjoy the benefit of exemption and in respect of other institutions, the exemption was made available if the receipts do not exceed Rs. 1 crore.
(b) Exemption in 10(23C)(iiiab) is on finance and not on receipts. The meaning of finance is that after meeting the expenditure from its own income, the balance requirement of funds is met by the Government. Hence; the institute can be said to be substantially financed by Government.
(c) The Government exercises fairly good control over the affairs of the institute. Many of the members of the Board of Governors are appointed by the Central and State Government. The Central Government has 42.9% voting right while the State Government has 10.7% voting right. Thus, the Government has more than 50% voting rights which means that institute is being managed by the Government. This is clear from Clause 5, 6, 7 of the Memorandum of Association and these were reproduced as under:
Clause-5 The Central Government in consultation with the State Government may at any time appoint one or more persons to review the work and progress of the society or the institute and to hold an enquiry into the affairs thereof and to report thereon, in such manner as the Central Government may stipulate. Upon receipt of any such report, the Central Government in consultation with the State Government may take such action and issue such directions as it may consider necessary in respect of any of the matters dealt with in the report regarding the Society or the Institute, as the case may be, and the Society shall be bound to comply with such directions.
Clause-6 In case the Central Government is satisfied that the society or the institute is not functioning properly the Central Government shall have the power to take over the administration and assets of the institute.
Clause-7 If, on winding up or dissolution of the Society, there shall remain, after satisfaction of all its debts and liabilities, any assets and property whatsoever, the same shall not be paid to or distributed among the members of the society or any of them but shall be dealt with in such manner as the Central Government in consultation with the State Government may determine.
(d) Accounts are audited by Controller, Auditor General of India and are forwarded to the Central Government.
(e) The initial funds for the setting up of the institute and the land were allotted by the Government.
(f) The institute can be treated as financed by Government on account of the following facts:
(i) The basic infrastructure to run the courses is provided with the support of funds of the Government. The income generated is being utilized for the objectives of the trust.
(ii) It cannot be held that if major source of receipts is fee from the participants then the institute can be put into the category of being funded by the private sources.
2.4 During the course of proceedings before us, the learned Aft submitted that the issue stands covered by the decision of the Tribunal in the case of the assessee for the asst. year 2003-04.
2.5 On the other hand, the learned DR supported the order of the Assessing Officer and stated that the institute is not financed by the Government.
2.6 We have heard both the parties. The Tribunal while disposing off the appeal for the AY 2003-04 in ITA No. 870/Bang/2006 vide order dated 3.8.2007 observed as under:
The Assessing Officer himself found that it is an educational institution, which is existing solely for education purpose and not for the purpose of profit. Therefore, the main criteria for the purpose of allowing exemption Under Section 10(23C) have been satisfied and accepted by the Assessing Officer. The Assessing Officer appears to have been confused the other criteria that the institute is only partly financed by the Government; therefore, exemption cannot be granted. The word "wholly and substantially" has not been explained in the Income-tax Act in relation to exemption Under Section 10(23C) of the Act. In common parlance, it would mean that the educational institution should receive substantial grant from the Government for the purpose of availing benefit Under Section 10(23C) of the I.T. Act. In the present case, we have noticed that substantial grants are being received every year by the institution. It is not required under law that the entire funds required to run the institution has to be granted by the Government. If that is so, the institution cannot charge any fees for the students, that is not the object of the institution. The institution has to generate income for meeting its expenses and salaries etc. and that is being done by generating some other income and that income generated by the institute cannot disqualify for exemption Under Section 10(23C) of the Act. It has been rightly observed by the learned CIT(A) that registration Under Section 12A is not required for the purpose of exemption Under Section 10(23C) of the Act. It was further-noticed by the learned CIT(A) that for the purpose of being notified Under Section 10(23)(vi) of the I.T. Act, the assessee had already taken necessary steps; therefore, in our opinion, finding of learned CIT(A) is justified and does not require any interference.
2.7 As per directive principles of state policy mentioned in Article 41 of the Constitution, it is the duty of the Government not only to establish educational institutions but also to effectively secure the right to education, by admitting students to the seats available at such institutions. Such obligation may be discharged through State owned institutions or state recognized institution. The IIMs are the institutes established by Centre and are commonly known as Central Institutions. Such institutions are necessary so that higher education is made available to persons who are not able to afford the cost of higher education as charged by the private or unaided institutions. The Apex Court in the case of Miss Mohini Jain v. State of Karnataka (1992) 2 SCC 666 observed:
The right to education, therefore, is concomitant to the fundamental rights enshrined under Part III of the Constitution. The State is under a constitutional mandate to provide educational institutions at all levels for the benefit of the citizens. The educational institutions must function to the best advantage of the citizens. Opportunity to acquire education cannot be confined to the richer Sections of the society.
2.8 It is clear from the facts as stated by the learned CIT(A) in his order that institute has been set up by Government and is managed by the Government. There is excess of expenditure over income. The educational institution charge fee as approved by the Government and deficit if any can be met through grants. This is sufficient to say that the institute is substantially financed by Government.
2.9 The requirement Under Section 10(23C)(iiiab) is that institute be wholly or substantially financed by Government. It does not mean that we have to see the financing in each year. Financed here means that the institute was set with the finances made available by the Government. Such requirement is met in this case. After setting up infrastructure, the institute started imparting education and charged fees as prescribed by Government. The Assessing Officer has taken a very narrow meaning of the word 'financed'. When we say that a particular industry has been financed by a bank, then it means that industry was set up with the finance made available by the Bank.
2.10 Section 14(1) of the CAG's Act, 1971 refers that where a body or authority is substantially financed by grants or loans from the Consolidated Fund of India or of any State or of any Union Territory having a Legislative Assembly, the Comptroller and Auditor General shall, subject to the provisions of any law for the time being in, force applicable to the body or authority, as the case may be, audit all receipts and expenditure audited by hum. In the instant case, audit is done by the office of the Comptroller General of India and this means that the institute is treated as substantially financed by the Government.
2.11 Under the Right to Information Act, public authority is covered and defined Under Section 2(h) of the RTI Act. This includes bodies controlled and substantially financed by the Government. In the case of KRICHCO, out of the gross share capital, the government of India's share was 67.59% and it was held that it is a public authority. It was held that indirect support in the form of share capital is to be considered as finance provided by the Government.
2.12 This Bench in the case of Bangalore University in ITA No. 398/Bang/2007 vide order dated 28.3.2008 held that in case in a year fees collected from students exceed the grants received from the Government will not render it outside the purview of being an educational institution existing solely for the education purpose. The fact that the University was being hitherto run by the Government funds cannot be ignored. The Tribunal allowed exemption to Bangalore University Under Section 10(23C)(iiiab). The ratio of law as laid down in that judgement is squarely applicable.
2.13 If we consider the dictionary meaning of the word 'finance' then it means the management of large amounts of money by Government or large companies. It also means the funds to support the enterprises. The word 'finance' is related to balance sheet and not to the profit and loss account. We had an occasion to go through the balance sheet of the institute of the previous year ending on 31st March, 2004. The perusal of the balance sheet show the following figures in respect of funds provided:
On the liability side, there is only a liability of 320.08 in respect of current liability and provisions. The details have been given in Schedule-VI. Such liabilities represent the earnest money deposit, security deposit, caution money, library deposit refundable and accrued liabilities. From the figures as appearing in the balance sheet, it is clear that the finance has been provided by the Government and it cannot be said that the institute is not substantially financed by the Government. Therefore, we have no hesitation to hold that the institute is substantially financed by the Government.
2.14 We have also perused the letter from the Ministry of Human Resource Development to the Director, Indian Institute of Management dated 24th August, 2006. It is mentioned in this letter that the revenue generated by the Institute belong to the Consolidated Fund of India and the Government after a conscious decision has permitted the IIMs to retain and spend the revenue so generated for their maintenance and growth. As per Article 266(3) of the Constitution, no moneys out of the Consolidated Fund of India or the Consolidated Fund of State can be appropriated except in accordance with law and for the purpose and the manner provided in the Constitution. Thus, the fees which are being received and credited in the Consolidated Fund of India and are made available to the Institute by the Government as per power conferred to the Government under Article 266(3) of the Constitution. This makes it abundantly clear that finances are provided by the Government.
2.15 In the instant case, the institute has been granted registration Under Section 12A w.e.f. 1.4.1988 vide order dated 13.2.87 in ITA No. 813/Bang/2006. Hence, the alternate submission that income will be exempt Under Section 11 to 13 is also correct.
2.16 In the statement of facts before the learned CIT(A), it was mentioned that the assessee made an application for notification Under Section 10(23C)(vi) but the same was not processed as in the opinion of Assessing Officer, the claim of exemption in the case of assessee falls Under Section 10(23C)(iiiab). Income of an educational institution is exempt if it is existing solely for educational purposes and wholly and substantially financed by Government Under Section 10(23C)(iiiab). In other cases, i.e. if it is not wholly and substantially financed by Government, the income is exempt Under Section 10(23C)(iiiad) if receipts are less than one crore and exempt Under Section 10(23C)(vi) if receipts exceed one crore. For being eligible for exemption Under Section 10(23C)(vi), the institute is to be approved by prescribed authority. The institute applied for approval Under Section 10(23C)(vi) as the revenue was taking a stand that income is not exempt Under Section 10(23C)(iiiab). The application for notification Under Section 10(23C)(vi) was not processed as according to the Assessing Officer, the case of the assessee fell under 10(23C)(iiiab). Now the revenue cannot take a different stand. It cannot be visualized that the case of the assessee will fall neither Under Section 10(23C)(iiiab) nor 10(23C)(vi). Once application Under Section 10(23C)(vi) was not preceded then it is to be held that the case of assessee falls Under Section 10(23C)(iiiab). The revenue cannot be permitted to blow hot and cold.
2.17 Considering the above discussion, we hold that the learned CIT(A) was justified in holding that income of institute is exempt Under Section 10(23C)(iiiab) and the appeal of revenue is dismissed.
In the result, the appeal of the revenue is dismissed.;