The high court’s division bench, consisting of Justices R. Mahadevan and Mohammed Shaffiq, minced no words in laying down that there is no question of granting tax exemptions to such donations that are nothing but capitation fee, prohibited by the law and squarely attracting the penal provisions of Tamil Nadu’s capitation fee regulation.
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Why is the Madras High Court’s recent judgment in Commissioner of Income Tax, Chennai versus M/s. MAC Public Charitable Trust significant?
ON October 31, the Madras High Court passed a judgment in a set of cases where some ‘charitable’ Trusts had sought for tax exemptions on the voluntary donations received by them. A closer look at the case revealed that this was merely a tip of the iceberg, and a red herring to divert the attention of the Court from the real issue – the offence of collection of capitation fee by private colleges, on whose behalf capitation fee is collected by these Trusts in the name of ‘voluntary donations’ and then conveniently passed on to the college themselves once again for the apparent charitable cause of education.
These Trusts, which are none other than sister concerns of private colleges, received the “voluntary” donations on behalf of the latter to escape penalisation under the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee), Act, 1992, which prohibits collection of capitation fee and makes it a punishable offence. While lamenting the state of affairs in the field of education and reiterating that education can never be a business, trade or commerce but is a noble activity, and seats are not to be sold at fancy prices on the whims and caprice of these institutions, the high court’s division bench, consisting of Justices R. Mahadevan and Mohammed Shaffiq, minced no words in laying down that there is no question of granting tax exemptions to such donations that are nothing but capitation fee, prohibited by the law and squarely attracting the penal provisions of the Capitation Fee Act.
To illustrate, if one seeks admission into a private college -‘A’, a family friend of mine will have to make a donation to a Trust ‘B’, which in turn may transfer the funds to another Trust ‘C’, which will forward the money to college ‘A’. As a premium on such blatant attempts at overreaching the law, the said Trusts also seek for tax exemption on these contributions, stating they are registered as charitable Trusts and hence entitled to exemptions for voluntary donations made to them.
This judgement, in the instant case, while exposing the nexus between M/s. United Educational Foundation, M/s. MAC Charities, M/s. MAC Public Charities and Sri Venkateswara College, puts the spotlight on how such private colleges not only violate the law with brazen impunity but also, ironically, seek tax exemptions on such ill-gotten money, giving them the name and colour of donations whilst they are actually amounts collected forcibly from parents as a quid pro quo for admission of their children to these colleges.
How are private educational institutions able to bypass regulations to continue to charge capitation fees?
Capitation – Corruption – Coercion: the big Cs that rule the world of private education are loathsome by themselves, but they become a true societal vice, when done in the name of another ‘C’ – Charity. Capitation fee, euphemistically called ‘donations’, are a household term with almost every other Indian parent having experienced the agony of donating “out of their own will” to the educational institution where their ward studies.
The elements of corruption and coercion become inbuilt in such forced donations as on the one hand, they are an unofficial licence to the institutions to charge several times higher than the permitted tuition and other permitted fees and charges, whether in schools or colleges, and on the other hand, leaves the parent with a Hobson’s choice to pay the institution if they wish to secure admission to a course of study.
This practice has now become so rampant that it seems to have become institutionalised in our lives, despite there being a specific law in Tamil Nadu banning the collection of capitation fee by any educational institution. While the Act only penalises the educational institution for receiving or collecting capitation fee, every person who pays such a capitation fee, also aids in the contravention of this penal law.
However, the parents are often left with no choice. If they were to seek strict implementation of this law and deny payment of ‘donation’ or capitation fee, the loss is only theirs. With so many takers of seats at private colleges and even premier private schools, the demand-supply ratio ensures that this penal law is observed only in breach.
What is mind boggling is the innovative modus operandi adopted by these institutions. To illustrate, if one seeks admission into a private college -‘A’, a family friend of mine will have to make a donation to a Trust ‘B’, which in turn may transfer the funds to another Trust ‘C’, which will forward the money to college ‘A’. As a premium on such blatant attempts at overreaching the law, the said Trusts also seek for tax exemption on these contributions, stating they are registered as charitable Trusts and hence entitled to exemptions for voluntary donations made to them. It is one such set of baffling cases that the Madras high court had occasion to deal with.
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Why did the court apply the doctrine of ‘lifting the corporate veil’?
In this case, the court applied the doctrine of ‘lifting the corporate veil’ to unravel the real identity of the donations made, the proximity of the donations to the admission sought to be obtained by the student, the identity of the donor, and the element of quid pro quo, to finally find that the donations made were not either ‘voluntary’ or even ‘charitable’ in reality but only meant to benefit the educational institution in return for admission.
The doctrine helped to unearth that the charitable Trusts and the educational institution even had a common controlling management. It is in these circumstances that the doctrine of ‘lifting the corporate veil’ was an appropriate device to decide if the tax exemptions as claimed by the petitioner Trusts were indeed permissible, or only employed to camouflage a greater wrong, attracting the prohibition under the Capitation Fee Act.
The doctrine of lifting the corporate veil helped to unearth that the charitable Trusts and the educational institution even had a common controlling management. It was an appropriate device to decide if the tax exemptions as claimed by the petitioner Trusts were indeed permissible, or only employed to camouflage a greater wrong,
This judgement has once again brought home the message that human ingenuities can well be employed to elude the law, but one cannot escape the long arm of the law after all.
What were some noteworthy mandates issued by the court?
The court issued some other noteworthy directions such as opening up previous tax assessments in respect of these institutions to unravel the nature of such donations, as well as empowering the authorities to cancel the registration of these institutions as charitable entities eligible for exemption from paying tax on receiving the hard-earned money of parents in the name of charity.
In May this year, the Supreme Court had the occasion to deal with the issue of capitation fee collection by colleges in the case of Rashtreeya Sikshana Samithi Trust versus Committee for Fixation of Fee Structure of Pvt. Professional Colleges & Ors., and while issuing a slew of directions, it ordered that a web-portal under the aegis of Supreme Court has to be set-up wherein any information about the private medical colleges charging capitation fees can be furnished by the students.
The division bench of the Madras high court, taking a cue from the above, has also mirrored this direction in its judgement by stating that such a web-portal be maintained and regulated by the National Informatics Centre and the Tamil Nadu government’s Information Technology and Digital Services Department, and that the state government publish the details about the web-portal in English as well as vernacular newspapers at the time of admission. In addition, it has been mandated that a pamphlet be compulsorily given to students and their parents at the time of counselling, informing them about the availability of the web-portal stated above. Keeping the complainant’s details discreet may also encourage the lodging of complaints, and keep the student and their parents free from worry of any backlash from the college.
It is hoped that this decision will go another mile, if not a long way, in deterring private educational institutions from employing novel ways of circumventing and violating the law, while also reiterating the principle, repeated ad infinitum by all superior constitutional courts, that education must always remain a noble service or activity, never to be motivated by commercial gain.
Click here to view the Madras High Court’s full judgment.
