Karnataka High Court Reiterates: As Long as Exemption Certificate is in Force Income Tax Authorities Are Bound by the Same

Karnataka High Court Reiterates: As Long as Exemption Certificate is in Force Income Tax Authorities Are Bound by the Same

The Karnataka High Court by its division judge’s bench of Justices P.S. Dinesh Kumar and T.G. Shivashankare Gowda while allowing a tax exemption on voluntary donations received by educational institutions has reiterated that so long as exemption certificate is in force, the Income Tax Authorities are bound by the same and the assessee is entitled for its benefit.

In the present case, the respondent/assessee submitted to be a charitable trust registered under Section 12A of the Income Tax Act, 1961. It had obtained approval under Sections 11 and 12.

For Assessment Year (AY) 2012–13, the assessee filed returns of income declaring income as nil. The instant case was selected for scrutiny, and notices under Sections 142(1) and 143(2) were issued. The assessee filed revised returns.

According to the assessee the difference between the two returns was claimed as corpus donations and that the Trust was exempted in the original returns and had disclosed the income under the heading ‘other income’ in the revised returns.

The Additional Commissioner of Income Tax, Exemptions, took up the case for scrutiny and assessment. The AO passed the assessment order holding that income from other sources as income for the Trust.

The Commissioner of Income tax (Appeals) [CIT (A)] confirmed AO’s order. The ITAT had reversed the order passed by the AO and held that the assessee was entitled to exemption.

Aggrieved by the same, the department challenged the ITAT’s order. The department contended that the assessee had collected a sum of Rs. 27,23,55,000 as a donation in violation of the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984.

According to the department, the assessee was not entitled to exemption, since there was a violation of provisions of the KEI (Prohibition of Capitation Fee) Act and the same also amounted to a violation of Sections 11 and 12 of the Act.

It was the case of assessee that merely because no action had been initiated under the KEI (Prohibition of Capitation Fee) Act, it does not ipso facto mean that there was no violation, and IT authorities can always consider the violation of any statute while framing the assessment.

The bench after perusing the records referred to the decision passed in the case of Kammavari Sangham Vs. Deputy Director of Income-tax (Exemptions) (2023), wherein it was held that so long as the exemption certificate is in force, the assessee is entitled for its benefit.

The Court noted that in the present case the exemption certificate was in force as on the date of issuance of notice. The AO had denied the benefit of exemption by holding that the assessee had received a sum of Rs.27,23,55,000/- as capitation fee in the guise of voluntary contribution.

The bench concluded that since the department had issued the exemption certificate, the AO had incorrectly assumed and treated the money collected by the assessee as capitation fee under the KEI (Prohibition of Capitation Fee) Act.

In view of the same the Court dismissed the appeal filed by the Revenue.