Very important Judgement from Madras HC: Lifts Educational Institutions’ ‘corporate veil’ over ‘involuntary’ capitation fee; Orders Sec.12A registration cancellation

Madras HC in a 123 pager judgment allows Revenue’s appeals against various educational institutions concerning exemption under Section 11; Directs the Revenue to proceed further on the basis of assessment orders and also cancel the registration certificate issued to the various Trusts under Section 12A and not to treat them as charitable; HC also directs the Revenue to proceed to reopen the previous assessments, if permissible by law, based on tangible materials relating to collection of capitation fee; HC holds that the amounts collected in quid pro quo for allotment of seat in deviation of the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992 as capitation fee; On voluntary contribution, HC holds that unless a contribution is made gratuitously and without consideration, it cannot be treated as “voluntary contributions” for the purpose of exemption of tax under Sections 11 and 12; HC takes into account Revenue’s finding that “capitation fee” was in fact collected, therefore, rejects the findings of CIT(A) and ITAT that the Assessees are entitled to collect donations and as long as the donations are applied as per the objects, they are to be treated as voluntary; HC categorically holds that the amounts collected are neither a voluntary contribution nor applied for charitable purpose, thus, holds the impugned orders to be absolutely perverse; HC relies on a plethora of SC ruling and observes, “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.”; HC lifts the corporate veil and explains how the Educational Institutions and Trusts operate with the twin objectives of circumventing/violating the Capitation Fee Act and to evade tax while seeking exemption under the corporate veil of distinct entities that receive funds from each other for purely charitable purposes; HC remarks, “Suffice it to say, nothing can be farther from the naked truth that cannot hide itself sufficiently behind the fig leaf of the legal cover sought to be taken by the Assessees under the guise of being charitable trusts and seeking exemption thereof”; In the larger public interest, HC observes that the State Government shall ensure that the deserving candidates do get admission and directs for creation of a web-portal to eradicate the collection of capitation fee by creating policies and awareness on the lines of the web-portal under the aegis of the Supreme Court, wherein any information about the private colleges charging capitation fees can be furnished by the students or their parents or anyone having first-hand information in this regard, which has to be maintained and regulated by the National Informatics Centre (NIC) and the Information Technology and Digital Services Department, Government of Tamil Nadu; Directs the State Government to publish the details about the web-portal in the English as well as vernacular newspapers at the time of admission.