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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 4361-4366 OF 2016 (Arising out of S.L.P. (C) Nos.5354-5359 of 2014)

VISVESVARAYA TECHNOLOGICAL  UNIVERSITY                  ...APPELLANT

VERSUS

ASSISTANT COMMISSIONER OF  INCOME TAX                 ...RESPONDENT

J U D G M E N T

RANJAN GOGOI, J.

1. Leave granted.

2. The  appellant  –  University,  namely,  Visvesvraya  

Technological University (VTU) has been constituted under the  

Visveswaraiah  Technological  University  Act,  1994  (for  short  

“VTU Act”).   It discharges functions earlier performed by the  

Department of Technical Education, Government of Karnataka.  

The  University  exercises  control  over  all  Government  and  

Private Engineering Colleges within Karnataka.

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3. For  the  Assessment  Years  2004-2005  to  2009-2010  

notices under Section 148 of  the Income Tax Act,  1961 (for  

short  “the  Act”)  were  issued  to  the  appellant  –  University  –  

Assessee.   Eventually  returns  were  filed  for  the  Assessment  

Years  in  question  declaring  'Nil'  income  and  claiming  

exemption  under  Section  10(23C)(iiiab)  of  the  Act.  The  

aforesaid claim of exemption was negatived by the Assessing  

Officer  who proceeded to make the assessments.   The same  

view has been taken by all the Authorities under the Act and  

also  by the High Court  in the order  under  challenge in  the  

present proceedings.   

4. The question, therefore, that arises in the present appeals  

is the entitlement of the appellant – University – Assessee to  

exemption from payment of tax under the provisions of Section  

10(23C)(iiiab) of the Act which is in the following terms:

“10. Incomes  not  included  in  total  income. -  

In computing the total  income of a  previous year of any person, any income falling  within any of the following clauses shall not be  included-

(23C) any  income  received  by

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any person on behalf of- (iiiab) any  university  or  other  

educational  institution  existing  solely  for  educational purposes and not for purposes of  profit,  and  which  is  wholly  or  substantially  financed by the Government”

5. The  entitlement  for  exemption  under  Section  10(23C)

(iiiab)  is  subject  to  two  conditions.   Firstly  the  educational  

institution or the university must be solely for the purpose of  

education and without any profit motive.  Secondly, it must be  

wholly  or  substantially  financed  by  the  government.   Both  

conditions will  have to be satisfied before exemption can be  

granted under the aforesaid provision of the Act.   

6. The relevant principles of law which will govern the first  

issue i.e. whether an educational institution or a university, as  

may be, exists only for educational purpose and not for profit  

are no longer res integra, having been dealt with by a long line  

of decisions of this Court which have been elaborately noticed  

and  extracted  in  a  recent  pronouncement  i.e.  Queen's  

Educational Society vs. Commissioner of Income Tax  1  . The  

1 (2015) 8 SCC 47

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principles that emanate from the views expressed by this Court  

are set out in paragraph 11 in Queen's Educational Society  

(supra), which are extracted below:

“11. Thus, the law common to Section 10(23C) (iiiad)  and (vi) may be summed up as follows:

(1) Where an educational institution carries on the  activity of education primarily for educating persons,  the fact that it makes a surplus does not lead to the  conclusion  that  it  ceases  to  exist  solely  for  educational purposes and becomes an institution for  the purpose of making profit.

(2) The predominant object test must be applied –  the purpose of education should not be submerged  by a profit making motive.

(3) A distinction must be drawn between the making  of a surplus and an institution being carried on “for  profit”.  No  inference  arises  that  merely  because  imparting   education results in making a profit,  it  becomes an activity for profit.

(4) If  after  meeting  expenditure,  a  surplus  arises  incidentally  from  the  activity  carried  on  by  the  educational institution, it will not be cease to be one  existing solely for educational purposes.

(5)  The ultimate test is whether on an overall view of  the  matter  in  the  concerned  assessment  year  the  object  is  to  make  profit  as  opposed  to  educating  persons.”

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7. To the above principles, one further test as laid down in  

CIT  vs. Surat  Art  Silk  Cloth  Manufacturers'  Assn.2 and  

culled  out  in  American  Hotel  and  Lodging  Association  

Educational  Institute vs.  Central  Board of  Direct  Taxes  

and Others 3 may be added which is as follows:

“In order to ascertain whether the institute is carried  on with the object of making profit or not it is the  duty of the prescribed authority to ascertain whether  the  balance  of  income  is  applied  wholly  and  exclusively to the objects for which the applicant is  established.”  (Paragraph 37)

The  above  principle  has  been  specifically  reiterated  in  

paragraph 19 of the decision in Queen's Educational Society  

(supra) in the following terms:

“The final conclusion that if a surplus is made by an  educational society and ploughed back to construct  its own premises would fall out of Section 10(23-C)  is to ignore the language of the section and to ignore  the tests laid down in Surat Art Silk Cloth case [CIT  v. Surat Art Silk Cloth Manufacturers' Assn.(1980) 2  SCC  31],  Aditanar  case  [Aditanar  Educational  Institution v. CIT [(1997) 3 SCC 346]  and American  Hotel  &  Lodging  case  [American  Hotel  &  Lodging  Assn. Educational Institute v. CBDT [(2008) 10 SCC  509].   It  is clear that when a surplus is ploughed  back  for  educational  purposes,  the  educational  institution exists solely for educational purposes and  not for purposes of profit.”

2 (1980) 2 SCC 31 3 (2008)10 SCC 509

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8. In the present case, we find that during a short period of a  

decade i.e. from the year 1999 to 2010 the appellant University  

had generated a surplus of about Rs.500 crores.  There is no  

doubt that the huge surplus has been collected/accumulated  

by realizing fees under different heads in consonance with the  

powers vested in the University under Section 23 of the VTU  

Act. The difference between the fees collected and the actual  

expenditure  incurred  for  the  purposes  for  which  fees  were  

collected  is  significant.  In  fact  the  expenditure  incurred  

represents  only  a  minuscule  part  of  the  fees  collected.  No  

remission, rebate or concession in the amount of fees charged  

under the different heads for the next Academic Year(s)  had  

been granted to the students.  The surplus generated is far in  

excess of what has been held by this Court to be permissible (6  

to 15%) in  Islamic Academy of Education and another vs.  

State of Karnataka and  others  4   though the percentage of  

surplus in Islamic Academy of Education (supra) was in the  

context  of  the  determination  of  the  reasonable  fees  to  be  

charged by private educational bodies.

4 (2003) 6 SCC 697 (paragraph 156)

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9. As against the above, the amount of direct grant from the  

Government  has  been  meagre,  details  of  which  are  being  

noticed separately later in a different context.  The University  

nevertheless has grown and the number of private engineering  

colleges affiliated to it had increased from about 64 to presently  

about  194.  The  infrastructure  of  the  University  has  also  

increased  offering  educational  avenues  to  an  increasing  

number of students in different and varied subjects. Materials  

have been brought on record before the High Court as well as  

before  this  Court  to  show  the  several  number  of  work  

orders/tenders  issued  by  the  University  for  infrastructure  

expansion. It is emphatically contended by the appellant in the  

written  submissions  filed  that  between  1994  and  2009  the  

University  had  actually  spent  about  Rs.504  crores  on  

infrastructure  and  the  available  surplus  in  the  year  2010  

which was in the range of Rs.440 crores was also intended to  

be applied for different infrastructural work, details of which  

have also been brought on record.  However, the said amount  

was attached by the Revenue pursuant to the demands raised

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in terms of the assessments made. Even in a situation where  

direct  government  grants  have  not  been  forthcoming  and  

allocation against permissible heads like salary, etc. had not  

been made the University has thrived and prospered.  There  

can,  however,  be  no  manner  of  doubt  that  the  surplus  

accumulated  over  the  years  has  been  ploughed  back  for  

educational  purposes.   In  such  a  situation,  following  the  

consistent principles laid down by this Court referred to earlier  

and  specifically  what  has  been  said  in  paragraph  19  in  

Queen's  Educational  Society (supra),  extracted  above,  it  

must  be  held  that  the  first  requirement  of  Section  10(23C)

(iiiab), namely, that the appellant University exists “solely for  

educational  purposes  and  not  for  purposes  of  profit”  is  

satisfied. The exemption granted in respect of  the University  

under Section 80G of the Act, qua the donations made to it  

also cannot be ignored in view of an inbuilt recognition in such  

exemption  with  regard  to  the  charitable  nature  of  the  

institution i.e. the appellant University.

10. The above would require the Court to go into the further  

question as to whether the appellant University is  wholly or

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substantially  financed  by  the  Government  which  is  an  

additional  requirement  for  claiming  benefit  under  Section  

10(23C)(iiiab) of the Act.  It is not in dispute that grants/direct  

financing by the Government during the six (06) Assessment  

Years  in  question  i.e.  2004-2005  to  2009-2010  had  never  

exceeded 1% of the total receipts of the appellant - University-  

Assessee.  In such a situation, the argument advanced is that  

fees  of  all  kinds  collected  within  the  four  corners  of  the  

provisions of Section 23 of the VTU Act must be taken to be  

receipts from sources of finance provided by the Government.  

Such  receipts,  it  is  urged,  are  from  sources  statutorily  

prescribed.   The  rates  of  such  fees  are  fixed  by  the  Fee  

Committee  of  the  University  or  by  authorized  Government  

Agencies (in cases of Common Entrance Test). It is, therefore,  

contended that such receipts must be understood to be funds  

made  available  by  the  Government  as  contemplated  by  the  

provisions of Section 10 (23c) (iiiab) of the Act.   

11. Universities  and  Educational  Institutions  entitled  to  

exemption under  the  Act  have been categorized under  three

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different  heads,  namely,  those  covered  by  Section  10(23C)

(iiiab);  Section  10(23C)(iiiad)  and 10(23C)(vi)  of  the  Act.  The  

requirement  of  the  University  or  the  educational  institution  

existing “solely for educational purposes and not for purposes  

of profit” is the consistent requirement under Section 10(23C)

(iiiab),  10(23C)(iiiad)  and  10(23C)(vi).   However,  in  cases  of  

Universities covered by Section 10(23C)(iiiab) funding must be  

wholly or substantially by the Government whereas in cases of  

universities  covered  by  Section  10(23C)(iiiad)  the  aggregate  

annual  receipts  should  not  exceed  the  amount  as  may  be  

prescribed.  Universities  covered  by  Section  10(23C)(vi)  are  

those other than mentioned in sub-clause (iiiab) or sub-clause  

(iiiad) and which are required to be specifically approved by the  

prescribed authority.

12. Having regard to the text and the context of the provisions  

of Section 10 (23c) (iiiab), 10 (23c) (iiiad) and 10 (23c) (vi) it will  

be reasonable to reach a conclusion that while Section 10 (23c)  

(iiiab)  deals  with  Government  Universities,  Section  10  (23c)  

(iiiad)  deals  with  small  Universities  having  an  annual

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“turnover”  of  less  than Rupees  One  Crore  (as  prescribed by  

Rule 2 (BC) of the Income Tax Rules). On a similar note, it is  

possible to read Section 10 (23c) (vi) to be dealing with Private  

Universities whose gross receipts exceeds Rupees One Crore.  

Receipts by way of fee collection of different kinds continue to a  

major  source of  income for  all  Universities  including Private  

Universities.  Levy  and  collection  of  fees  is  invariably  an  

exercise under the provisions of  the Statute constituting the  

University.   In such a situation, if  collection of fees is to be  

understood  to  be  amounting  to  funding  by  the  Government  

merely  because collection of  such fees is  empowered by  the  

Statute, all such receipts by way of fees may become eligible to  

claim exemption under Section 10 (23c) (iiiab).   Such a result  

which would virtually render the provisions of the other two  

Sub-sections  nugatory  cannot  be  understood  to  have  been  

intended by the Legislature and must, therefore, be avoided.  

13. It will, therefore, be more appropriate to hold that funds  

received  from  the  Government  contemplated  under  Section  

10(23c)(iiiab)  of  the  Act  must  be  direct  grants/contributions

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from governmental  sources and not  fees collected under  the  

statute.  The view of  the  Delhi  High Court  in  Mother Diary  

Fruit & Vegetable Private Limited vs. Hatim Ali & Anr  .  5    

which had been brought to the notice of the Court has to be  

understood in the context of the definition of 'public authority'  

as specified in Section 2(h)(d)(ii) of the Right to Information Act,  

2005 which is in the following terms:

(h) “public authority” means any authority or body  or  institution  of  self-government  established  or  constituted,-  (a) .................. (b) .................. …..................... (d) by  notification  issued  or  order  made  by  the  appropriate Government, and includes any (i) …......... (ii) non-Government  Organization  substantially  financed,  directly or indirectly by funds provided by  the appropriate Government.”

14. Reliance has  been placed on the judgment of  the High  

Court  of  Karnataka  in  Commissioner  of  Income-tax,  

Bangalore vs. Indian  Institute  of  Management  6  ,  

particularly, the view expressed that the expression “wholly or  

5 [(2015) 217 DLT 470] 6 (2014) 49 Taxmann.com 136 (Karnataka)

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substantially  financed  by  the  Government'  as  appearing  in  

Section 10(23C) cannot be confined to annual grants and must  

include  the  value  of  the  land  made  available  by  the  

Government. In the present case the High Court in paragraph  

53 of  the impugned judgment has recorded that  even if  the  

value of the land allotted to the University (114 acres) is taken  

into  account  the  total  funding  of  the  University  by  the  

Government would be around 4% - 5% of its total receipt.  That  

apart what was held by the High Court in the above case, while  

repelling  the  contention  of  the  Revenue  that  the  exemption  

under  Section  10(23c)  (iiiab)  of  the  Act  for  a  particular  

assessment year must be judged in the context of  receipt of  

annual grants from the Government in that particular year, is  

that  apart  from  annual  grants  the  value  of  the  land  made  

available; the investment by the Government in the buildings  

and other infrastructure and the expenses incurred in running  

the  institution  must  all  be  taken  together  while  deciding  

whether the institution is wholly or substantially financed by  

the Government.  The situation  before us, on facts, is different  

leading  to  the  irresistible  conclusion  that  the  appellant

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University does not satisfy the second requirement spelt out by  

Section 10 (23c) (iiiab) of the Act.  The appellant University is  

neither  directly  nor  even  substantially  financed  by  the  

Government so as to be entitled to exemption from payment of  

tax under the Act.   

15. For the aforesaid reasons, we do not find the present to be  

a  fit  case  for  interference.  The  appeals,  consequently,  are  

dismissed however without any order as to costs.  

………………..................,J. (RANJAN GOGOI)

………………..................,J.    (PRAFULLA C. PANT)

NEW DELHI April 22, 2016.