Capitation fee not lawful, no tax exemption: ITAT

A bench of the Income Tax Appellate Tribunal (ITAT) has held that the practice of collection of capitation fees is contrary to the law and against the public policy. Accordingly, an educational institution will not be eligible for Income Tax exemption on the collection of capitation fees.

The expression “capitation fee” does not have any fixed meaning. Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992, has given a definition which says, “capitation fee means any amount by whatever name called, paid or collected directly or indirectly in excess of the fee prescribed under Section 4 (of the law).”

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Last month, the Supreme Court expressed concern over the collection of capitation fees and suggested a mechanism to curb it. Interestingly, there is legislation in the States of Karnataka, Tamil Nadu, Maharashtra, and Andhra Pradesh to curb this menace. However, the practice is prevalent in educational institutions, especially those providing professional courses in medical or engineering.

ITAT ruling

Disposing of a bunch of appeals filed by Pune-based Sinhagad Technical Education Society and cross-appeal filed by the Income Tax Department, the Pune bench of ITAT said, “It is settled position of law that the amount of capitation fees received over and above the prescribed under the provisions of the Maharashtra Educational Institution (Prohibition of Capitation Fees) Act, 1987 is not eligible for exemption u/s 11 as the practice of collection of capitation fees is contrary to the law laid down by the Apex Court in the case of Islamic Academy Of Education And Another vs the State Of Karnataka And Others, and also against public policy and contrary to the provisions of the Maharashtra Educational Institution (Prohibition of Capitation Fees) Act, 1987.”

“The Assessing Officer had rightly brought (the collection) to tax,” the bench said in a recent ruling.

The bench also noted that the capitation fees were collected in cash.

“The president of the appellant society had adopted a modus operandi by forming a non-juridical organisation with the object of collection of capitation fees for the admissions under the management quota for the benefit of persons managing the appellant society. Therefore, it can be safely concluded that the appellant society was formed for the purpose of personal gain, and it cannot be said to be an association formed with the object of charitable purpose,” it said.

A few suggestions

In the matter of Rashtreeya Sikshana Samithi Trust Etc vs Committee For Fixation of Fee Structure Of Private Professional Colleges & Ors. Etc, the Apex Court accepted suggestions of amicus curiae and the State governments and accordingly issued directions.

These suggestions include a web portal under the aegis of the Supreme Court that has to be set up wherein any information about the private medical colleges charging capitation fees can be furnished by the students.

While fixing the schedule for the admission process, the National Medical Commission and the Dental Council of India have to make sure that the counselling for all the rounds, including the stray vacancy round, is completed at least two weeks before the last date of admission.

It was also suggested that the names of students who are recommended by the authority for admission in the stray vacancy round have to be made public along with the rank allotted to them in the NEET exam.

“The management of private medical colleges are strictly prohibited from accepting payment of fees in cashr to avoid charging of capitation fee,” it said.

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