Education not a commercial activity; collection of capitation fees in exchange for admissions is illegal: Madras High Court

The Madras High Court Monday held that the collection of 'capitation fees,' or donations by private educational institutes in exchange for admissions is illegal and punishable [Commissioner of Income Tax Chennai v. M/s MAC Public Charitable Trust and others]..A division bench of Justices R Mahadevan and Mohammed Shaffiq said that educational institutes cannot collect capitation fees from students wishing to secure admissions, and later term the money as 'corpus donations' in order to evade payment of income tax."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 Court said.It underlined that providing education should not be treated as a commercial activity or business, and deprecated the practice of educational institutes violating the Capitation Fee Act and then attempting to secure more benefit out of it 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 Court said..The Court was hearing a bunch of appeals filed by the the Commissioner of Income Tax, Chennai challenging 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 to the institutes.The appellate authority and the tribunal had held that the corpus donations of these trusts must be treated as capital money and thus, be exempt from tax under Section 80F of the Income Tax Act. .The Commissioner of Income Tax moved the High Court in appeal.The institutes argued that the said donations had been made to their trusts voluntarily by the parents of students seeking admissions. They, therefore, contended that the donations were in the nature of corpus donation and could not be considered as their income. The High Court allowed the appeals filed by the State authorities and directed the state revenue authorities to proceed with their initial assessment that had held the respondent institutes as liable to pay tax.The Court noted that such practice of receiving donation and/or capitation fee as a condition precedent for admitting a student was in breach n of the provisions of the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992. It said that the appellate authority and the tribunal had failed to consider the provisions of the Capitation Fee Act and had given "perverse findings."The Court directed the revenue authorities to cancel the registration of the Trusts and said they must not be treated as charitable institutes. "The endeavour of the parents, combined with the aspirations of the students, who cannot be blamed, and the failure of the States to fulfil the duties enshrined upon them by the Constitution, has fed the private educational institutions, to further their greed and device methods to collect monies contrary to prescribed fee, by circumventing law," the Court said.The Court underscored that education should not be treated as commercial activity or business. ."It is therefore beyond the pale of any doubt that education can never be a commercial activity or a trade or business and those in the field of education will have to constantly and consistently abide by this guiding principle," the judgment said. .Senior Standing Counsel Narayanaswamy appeared for the Appellants Advocates Haja Nazirudeen, Hari Babu, and S Sithirai Anandam appeared for the respondents. [Read Judgment]