The Karnataka High Court has upheld the Income-Tax Department’s action of withdrawing exemption granted to a Raichur-based leading educational institution from payment of income tax after it was revealed from raids that the Trust was illegally collecting crores of rupees as capitation fee and donations, besides indulging in “money laundering”.
Justice Vineeet Kothari passed the order while dismissing petitions filed by Navodaya Education Trust, which runs a medical, dental, engineering colleges, besides other educational institutions in Raichur city, and its four trustees — Sunki Rajendra Reddy and others. The petitioners had questioned the department’s December 21, 2017, order of withdrawing exemption from income tax under Section 23-C(vi) of the Income Tax Act.
The department’s raid found that the Trust had been collecting a staggering ₹50 to ₹100 crore of “unaccounted money” in the form of voluntary donations/capitation fee every year, and was maintaining complete records for this purpose, but was not officially declaring this income.
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The documents seized from the raids, conducted in December 2015 on the premises of the Trust-run education institutions and the trustees, had disclosed that such “unaccounted” donations and capitation fee were used for construction of a temple, paying “speed money” for getting approvals, incurring election expenses of one, Sunki Rajender Reddy, to buy personal assets for the trustees, and for “money laundering” to claim bogus long-term capital gains and gifts, etc. Collection of capitation fee is illegal and contrary to apex court’s verdicts, the department pointed out.
It was also found from the seized documents that the Trust, during 2011-15, had transferred around ₹86 crore to the trustees, who all appear to be members of the same family or closely related, and the assets of trustees were way beyond their known sources of income.
However, the Trust claimed that its sole purpose is “only education”, while contending that the department had not given reasonable time to reply to the notice, and it had not confronted the Trust with all adverse materials.
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‘Cover and shields’
On overall analysis of facts and legal position, the court observed that “... there was ample material on record to establish that the petitioner Trust had indulged in illegal activities and could not be said to be existing purely for educational purposes, and rather various other business activities of the said family of trustees and their money was passing through the cover and shields of the books of accounts of the Trust, rendering it as merely a skeleton for the purpose of exemption to Educational Trust, rather than a real educational trust to ...”