ITAT Allows Sections 11 & 12 Exemption to Educational Trust; Deletes Capital Gains Addition and Depreciation Disallowance

The Bangalore ITAT granted major relief to Rashtreeya Sikshana Samithi Trust, an educational trust running engineering and dental colleges in Karnataka, by allowing its claims under Sections 11 and 12 of the Income Tax Act for A.Ys. 2014-15 to 2016-17. The Assessing Officer had denied the exemption on the allegation that the trust was operating with a profit motive and had collected Rs.61.15 crore as “development fee,” treating it as illegal capitation fee under the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act.

The Tribunal noted that the very same issue had already been decided in the trust’s favour for A.Y. 2012-13 and that decision had subsequently been upheld by the Karnataka High Court. It observed that no proceedings had ever been initiated by the State authorities for violation of the capitation fee law. In the absence of any such action, the AO’s conclusion that the collections represented capitation fees was based merely on assumptions. The ITAT reiterated that earning a surplus does not deprive an institution of its charitable character so long as the surplus is utilised for educational purposes and infrastructure development.

For A.Y. 2014-15, the Tribunal also deleted the disallowance of depreciation on fixed assets. Relying on the Supreme Court’s judgment in CIT v. Rajasthan and Gujarati Charitable Foundation Poona, it held that the restriction introduced through Section 11(6) operates prospectively from A.Y. 2015-16 and therefore could not be applied to the year under consideration.

The Tribunal further granted relief on the issue of long-term capital gains arising from compulsory acquisition of the trust’s land for the Bangalore Metro Rail project. Rejecting the Revenue’s insistence on a strict one-to-one tracing of compensation funds, the ITAT held that Section 11(1A) focuses on the reinvestment of capital gains in new capital assets and not on the physical movement of the exact funds.

Therefore, it accepted investments made before receipt of compensation as well as acquisitions financed through loans secured against deposits representing compensation proceeds, and deleted the entire capital gains addition of Rs.11.61 crore.

Thus, the Tribunal allowed the trust’s claims on all major issues and directed deletion of the additions made by the Revenue.

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