Collection of capitation fee by educational institutions illegal, rules Madras HC

Even a voluntary contribution should be treated as capitation fee, it says

In a significant verdict, the Madras High Court on Monday held that any amount collected by educational institutions in excess of the prescribed fee, either directly or indirectly, should be treated as capitation fee even if it happened to be a voluntary contribution/donation and that collection of capitation fee is illegal and punishable.

Justices R. Mahadevan and Mohammed Shaffiq wrote: “It is beyond the pale of any doubt that education can never be a commercial activity or trade or business... However, the undeniable reality staring at our face is that the collection of capitation fee has become a condition precedent for admission into many educational institutions.”

The verdict was delivered while dealing with a batch of cases related to Income Tax proceedings initiated against a group of trusts including the one which runs an engineering college at Sriperumbudur in Kancheepuram district. The judges allowed the appeals preferred by the Income Tax department and reversed a favourable verdict obtained by the trusts from a tribunal.

Authoring the verdict for the Division Bench, Justice Mahadevan said, the modus operandi adopted by the college management was to demand capitation fee from the parents but insist that it should be deposited into the account of a sister trust not from the bank accounts of the parents but from that of their relatives or friends.

Such deposits get routed from one trust to another before reaching the college management as corpus fund. In the process, the trusts also end up claiming exemption from payment of Income Tax on the ground that they were charitable institutions and that the funds were actually voluntary contributions made by different donors.

Disapproving of such a practice of perpetrating an illegality and also claiming tax exemption, the judges directed the appellant to proceed against the trusts before the court and ensure cancellation of their registration under Section 12A of the I-T Act, 1961 for the purpose of seeking exemption under the category of charitable institutions.

The judges said the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act of 1992 prohibits collection of capitation fee not just directly by the educational institutions but also through other individuals or institutions. “Such exhaustive provisions are to enable the State to eradicate cartels and routing of funds,” they observed.