Charitable Trust & Exempt Institutions Voluntary Donation by Parents to Educational Institutions—Whether Constitutes Capitation Fee

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The Tax Publishers Income Tax--Charitable Trust & Exempt Institutions Voluntary Donation by Parents to Educational Institutions--Whether Constitutes Capitation Fee CA. Nisha Bhandari It is very common in case of educational institutions to receive huge funds from various sources for the purpose of betterment and growth of such educational institutions. It is the general tendency of the Department to deny exemption to such institutions on the ground that such institutions are involved in money making activities by collecting funds from the students in form of admission fee, corpus fund, loans, etc. But all the donations and voluntary contributions received by an educational institution should not be viewed with suspicion. The learned author in this write up discusses the recent decision of the Chennai Tribunal in Dy. CIT v. Sindhi Educational Society 2023 TaxPub(DT) 5866 (Chen-Trib) wherein it was observed that donation by parents voluntarily and without any compulsion would not constitute capitation fee. 1. Nature of contribution from parents to be judged as per factual circumstances In P. S. Govindasamy Naidu & Sons v. Asstt. CIT (2010) 324 ITR 44 (Mad), it was held that capitation fees received by the assessee-educational institution was not entitled for exemption under section 10(22) [Now section 10(23C)], even though it was credited to the corpus of the institution. It is seen from the order of the assessing authority that on an examination of a random number of parents who admitted the children into the college, it was found that the amount paid was not to the corpus donation account, but it was collected only by way of capitation fee. The assessee treated it on its own as corpus donation and issued receipts as corpus donation and credited it under the corpus donation account. The assessing authority rightly held that it is immaterial how the recipient, namely, the assessee herein, accounted for the same and issued receipts towards charitable purpose at the time of receipt of the income. Admittedly, it was towards capitation fee. In such circumstances, the assessing authority rightly rejected the contention of the assessee that the contribution by the parents towards capitation fee could not be characterised as voluntary payment to be credited under the head 'Corpus donation'. It is also seen that the assessing authority referred to the decision of the Tribunal, 'B' Bench, Bombay in a similar circumstance, wherein it was held that the donation given for material gain for securing admission could not be characterised as donation towards charitable purpose, and as such, the assessee was not entitled to have the benefit. The nature of quality of the receipt has to be adjudged as at the time of receipt. The subsequent act of the assessee to enter the same under some head on receipt cannot alter the quality of the receipt. Having regard to the fact that the amount that had been received was under capitation fee, it could not be characterised as donation. Since it does not involve any interpretation as regards section 10(22) there was no justification to admit this case. In such circumstances, the tax case appeal was rejected at the admission stage itself and was accordingly dismissed. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Income Tax--Charitable Trust & Exempt Institutions

Voluntary Donation by Parents to Educational Institutions--Whether Constitutes Capitation Fee

CA. Nisha Bhandari

It is very common in case of educational institutions to receive huge funds from various sources for the purpose of betterment and growth of such educational institutions. It is the general tendency of the Department to deny exemption to such institutions on the ground that such institutions are involved in money making activities by collecting funds from the students in form of admission fee, corpus fund, loans, etc. But all the donations and voluntary contributions received by an educational institution should not be viewed with suspicion. The learned author in this write up discusses the recent decision of the Chennai Tribunal in Dy. CIT v. Sindhi Educational Society 2023 TaxPub(DT) 5866 (Chen-Trib) wherein it was observed that donation by parents voluntarily and without any compulsion would not constitute capitation fee.

1. Nature of contribution from parents to be judged as per factual circumstances

In P. S. Govindasamy Naidu & Sons v. Asstt. CIT (2010) 324 ITR 44 (Mad), it was held that capitation fees received by the assessee-educational institution was not entitled for exemption under section 10(22) [Now section 10(23C)], even though it was credited to the corpus of the institution. It is seen from the order of the assessing authority that on an examination of a random number of parents who admitted the children into the college, it was found that the amount paid was not to the corpus donation account, but it was collected only by way of capitation fee. The assessee treated it on its own as corpus donation and issued receipts as corpus donation and credited it under the corpus donation account. The assessing authority rightly held that it is immaterial how the recipient, namely, the assessee herein, accounted for the same and issued receipts towards charitable purpose at the time of receipt of the income. Admittedly, it was towards capitation fee. In such circumstances, the assessing authority rightly rejected the contention of the assessee that the contribution by the parents towards capitation fee could not be characterised as voluntary payment to be credited under the head 'Corpus donation'. It is also seen that the assessing authority referred to the decision of the Tribunal, 'B' Bench, Bombay in a similar circumstance, wherein it was held that the donation given for material gain for securing admission could not be characterised as donation towards charitable purpose, and as such, the assessee was not entitled to have the benefit. The nature of quality of the receipt has to be adjudged as at the time of receipt. The subsequent act of the assessee to enter the same under some head on receipt cannot alter the quality of the receipt. Having regard to the fact that the amount that had been received was under capitation fee, it could not be characterised as donation. Since it does not involve any interpretation as regards section 10(22) there was no justification to admit this case. In such circumstances, the tax case appeal was rejected at the admission stage itself and was accordingly dismissed.