Development fee paid to corpus fund is deductible as a capital receipt

Facts and issues of the cases

Since, the issues involved in all these appeals are identical, they were heard together and being adjudicated by a common order.The first issue before us is to determine whether the development funds given and collected by the institution are akin to the tuition fees collected or not. Whether the development fund collected partakes the character of revenue receipt or corpus donation u/ s 11(1)( d) of the Income Tax Act, 1961 and capital receipt in nature.The second issue being what should be the “ quantum” eligible as per the Section 11 (1)( a).

The relevant facts required for adjudication of the case are as under:

The institute was established in 1994
The assessee is a trust registered u/ s 12 A of the Act
The development fund was claimed u/s 11 (1 )( d)
All assessments have been completed u/ s 143(3 )
A search & seizure action has been conducted on 31.10.2014
The assessment has been completed on 30 .12.2016

Treatment of Development Fund as Tuition Fees:

The assessee has been running various Educational Institutes in various fields such as medical, engineering, law, management etc. Annual fees, charges and Development funds are collected by the Institutions under the Trust. From the perusal of seized documents, it was observed by the AO that the appellant has received development fee in addition to tuition fee from all the students on compulsory basis. The AO held that Development fee was a part of fee structure which was to be paid by the students to the institutes. Thus, it was noted by the AO that such development fee was not voluntary in nature but was part of overall course fee to be paid by the students on compulsory basis along with tuition fee. The appellant has shown the tuition fee as a part of income and expenditure statement as income whereas development fee has been taken directly to the balance sheet as corpus fund. The AO was of the opinion that such development fee was not on account of voluntary corpus fund and therefore the same should have been included in the revenue receipts in the income and expenditure statement.

The assessee stated before the AO that in view of provision of section 12 and 11 (1)( d), such corpus donation were made with a specific direction that it would form part of the corpus of trust and thus have been kept out of purview of income. The AO further observed that there was not a single student who has not paid development fee to ” the assessee”. There was no discretion with the students not to pay the development fee while seeking the admission. Thus, such receipts were not voluntary in nature. The AO confronted the above facts to the assessee and after considering the submission of the assessee observed that such development fee is not voluntary in nature as it has been charged on compulsory basis from all the students. On such facts it was inferred by the AO that such receipts are not covered by the provision of section 11 (1)( d) r.w.s.12 of the Act.

During the course of search, statements of some of the students were recorded u/s 131 of the Act in order to examine the nature of development fee charged from the students. It was stated by the students that such payment on account of development charges was compulsory part of the fee and was not thus voluntary. The AO relied upon the decision of the Hon’ ble Madras High Court in the case of PS Govindasami Naidu and Sons vs. ACIT 324 ITR 4-4. On such facts the AO reached to the conclusion that such development fee was in the nature of income of the Trust as such funds were not received voluntarily and there was no such voluntary and specific directions that it would form part of corpus. Accordingly the AO treated the amount of Rs. XXXXX received during the year on account of development fee as a part of income of the trust.

During the proceedings before the ld. CIT(A), the assessee argued that as per the Ministry of HRD, fee has been charged in two components – tuition fee – to recover actual cost of imparting education and development fee – to use for the procurement of equipments, books and assets and has been charged as specified in the prospectus. It was argued that when the students are made aware of the fact of payment of development fee through the prospectus, admission forms and fee slips, it cannot be said that it was compulsorily imposed on them. Further, such fees were utilized only for the specific purpose of the capital expenditure. Thus, the same were voluntary in the nature with the specific direction to treat the same as a part of the corpus and relied upon the provision of section 11 (1) ( d) of the Act.

Observation by the court

The ld. CIT( A) held that it is an undisputed fact that the assessee has received amount of Rs. XXXXX during the year from students who have taken admission in various institutes being run by the assessee as development fee, part of overall course fee. Such development fees have been taken directly to the balance sheet and have been treated by the assessee as voluntary funds received with the specific directions to treat the same as part of corpus as covered u/s 11 (1)( d) of the Act. The ld. CIT(A) held that these amounts are obligatory for each new admission to be paid to the assessee while taking the new admission, thus are not discretionary/ voluntary in nature. These amounts have not been received by the assessee as a voluntary contribution from the new admissions during the year. These amounts/ have not been received by the assessee from the parents of the new admissions as a voluntary contribution made with a specific direction that these would form part of corpus of the trust or institution. Rather the parents did not have any such discretion of not paying such contributions towards development fees and they also did not have any discretion in deciding the quantum for such components while paying the admission fee. The amount to be paid has been already fixed by the institutes being run by the assessee as a percentage of the tuition fee ranging from 7% to 36%. The ld. CIT(A) held that the parents under compulsion and forced to pay such contribution at the direction of the assessee and held that such contributions cannot be held as voluntary in nature as there was no specific directions to form part of the corpus of the assessee. There is nothing on record to show that the amounts were paid by the students to the institutes being run by the assessee with the directions to treat the same as a part of the corpus.

The ld. CIT( A) held that these amounts have been received by the assessee from the concerned parents as a part of overall fee structure, in addition to the tuition fee. Such receipts have been charged by the assessee from them through/ in the form of printed fee slips in which various components of tuition fee,development fee are already specified/ pre- filled. Merely because such, components have been disclosed in the admission prospectus, it would not lead to the inference that these receipts were voluntary in nature with the specific direction to form part of corpus. These receipts are incidental to the main activities carried out by the assessee i.e. from the running of institutes, in the regular course and thus these receipts have direct nexus with the main activities carried out by the assessee for the year under consideration. The ld. CIT( A) held that the development fee is in nature of revenue receipts having nexus with its main activities carried out in the regular course of running the institutes imparting educational activities and are incidental to the same and thus affirmed the action of the Assessing Officer.

Aggrieved the assessee filed appeal before us.Before us, the ld. AR relied on the submissions filed before the authorities below and reiterated the contents while the ld. DR supported the order of the ld. CIT( A) who affirmed the Assessment Order.Heard the arguments of both the parties and perused the material available on record.On the issue of “ Development Fee”, we have gone through the resolution dated 18 .03.1997 of the Government of India (MHRD) which as per Clause (8 ) deemed to be instructions issued by the Government to the University Grants Commission under Sub- section (1 ) of Section 20 of the UGC Act, 1956 and under sub- Section (1 ) of Section 20 of the AICTE Act, 1987.

The Ministry vide its notification No. FZO-43 /96 has laid down the “Policy For Fee Fixation in Private Educational Institutions’’ which is applicable to the assessee trust. There is a drastic distinction between the two fees has been clarified by the Ministry itself. Development Fee relates to rates to be determined by the UGC and AICTE. Different rates may prescribe for payment, fee, seats and foreign NRI seat holders. As the fee chargeable will be notified by the relevant committee it shall be the duty of the statutory body concern to communicate the rate of development fee to such bodies well in advance to enable the appropriate committee to suitable incorporate such rates.

Thus, Court find primarily the tuition fee is meant to incurring revenue expenditure, the development fee is aimed at requirement of equipments and acquisition of capital assets. On the issue, whether the development fee is revenue in nature or capital in nature. The Co-ordinate Bench of ITAT in the case of ACIT vs. JSS Mahavidyapeetha in ITA No. 735/ Bang/2012 held the view that litmus test of charitable institution is the application of funds and not the colour of the contributions.Further, the Co- ordinate Bench of ITAT Bangalore in the case of Sadvidya Educational Institution vs. ACIT in ITA No. 604/Bang/2011 held that Development Fees received from students as per Policy of Government for acquisition of Fixed Assets and utilized for acquisition of Capital Assets will fall within the definition of section 11 (1)( d).

With regard to the absence of specific direction as required by section 11 (1)(d), the Courts have sought to clarify that a specific direction can be gathered from how the recipient has accounted for the contribution.In the case of an educational institution which collected fees on account of building fund and treated as corpus, the Hon’ ble Karnataka High Court in Bharatiya Samskriti Vidyapith Trust vs. CIT in ITA Nos. 278-282 of 2007 held that, “ since the assessee had specifically mentioned building fund on fee receipts and had later applied for the purpose of building, it could be said that there was a specific direction under 11 (1)( d).

Similar view has been taken by Hon’ ble Karnataka High Court in the case of Sri Ramakrishna Seva Ashrama, 357 ITR 731. In the said case, a trust registered u/s 12 AA had collected contributions from the public which were accumulated in a Rural Project Fund and exemption claimed u/s 11 (1 )( d). The AO denied exemption due to absence of written specific direction from donors. On appeal, the Court held that if the amounts received are held as capital and only applied for specific purposes then it can be said that there was a specific direction to treat it as corpus funds. The Court further held that the requirement is that the voluntary contributions have to be made with a specific direction. The law does not require that the said direction should be in writing. In the absence of the direction in writing, the only way that one can find out whether there was a specific direction is to find out how the money so paid it is utilized.In the instant case, the Development Fee has been directly taken to corpus account as capital receipt u/s 11 (1)( d) and has also invested in the fixed asset in the year.Ergo, we hold that the Development Fee is to be treated as corpus fund allowed to be taken as capital receipt.

With regard to issue of computation of 15% u/ s 11(1)( a) of net surplus in place of gross receipt, we have gone through the provisions of the Act which are as under:“ Section 11( 1)( a) Income from property held for charitable or religious purposes.Subject to the provisions of sections 60 to 63 , the following income shall not be included in the total income of the previous year of the person in receipt of the income— income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, tobthe extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;”On going through the bare provisions of the Act, we hold that 15% accumulation is allowed on the income from property held under trust.

These provisions have been further clarified by the Hon’ ble Supreme Court in the case of Addl. CIT Vs. A.L.N. Rao Charitable Trust 216 ITR 697 wherein lordships has explained the law with an example of Rs. 1,00 ,000/- gross income and assuming an expenditure of Rs. 20,000/-, Court has held that Rs. 25 ,000/- being 25% (now 15%) of gross receipts will be allowed as accumulation u/s 11 (1 )( a) .Similarly, the Hon’ble Supreme Court in the case of CIT vs. Programme for Community Organisation,248 ITR 1 held that gross receipts were Rs. 2,57 , 376/- and the assessee had applied Rs. 1,70 , 369/- for charitable purposes, thereby leaving balance of Rs. 87,010/-. The Court held that Trust was eligible to accumulate 25% (now 15%) of Rs. 2 ,57 ,376/- u/ s 11 (1 )(a).

Hence, keeping in view the provisions of Section 11 (1 )(a) and the judgments of Hon’ble Supreme Court, Court held that the amount eligible u/ s 11( 1)(a) be determined taking into consideration, the income derived from the property held under trust to the extent to which the income so accumulated is not in excess of 15 % of income from such property.