No Income Tax Exemption on Capitation Fee : Daily Current Affairs

Relevance: GS 2: Issues Relating to Development and Management of Social Sector/Services relating to Health, Education, Human Resources.

Key Phrases: Income Tax Appellate Tribunal (ITAT), capitation fees, Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992, Mohini Jain V/s State of Karnataka case, Unfair Practices in Technical Educational Institutions, Medical Institutions, and Universities Bill 2010.

Why in News?

  • Recently 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 public policy.
  • Accordingly, an educational institution will not be eligible for Income Tax exemption on the collection of capitation fees.

Capitation Fee

  • The expression “capitation fee” does not have any fixed meaning.
  • Generally a Capitation fee refers to an illegal transaction in which an organization that provides educational services collects a fee higher than that approved by regulatory norms.
  • In the context of Indian law, a capitation fee refers to the collection of payment by educational bodies not included in the prospectus of the institution, usually in exchange for admission to the institution.
  • 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 more than the fee prescribed under Section 4 (of the law).”


Do you know?

Income Tax Appellate Tribunal (ITAT):

  • The Income Tax Appellate Tribunal (ITAT) is referred to as ‘Mother Tribunal’ being the oldest Tribunal in the country. It was formed in 1941.
  • It is a quasi-judicial institution, which specialises in dealing with appeals under the Direct Taxes Acts. The orders passed by the ITAT are final and an appeal lies to the High Court only if a substantial question of law arises for determination.
  • Starting with just six benches, currently, the ITAT has 63 Benches at 27 different stations covering almost all the cities having a seat of the High Court.
  • The ITAT draws inspiration from its motto ‘Nishpaksh Sulabh Satvar Nyay’, which means impartial, easy and speedy justice.
  • More importantly, it is the success of the ITAT, which has prompted the Government of India to constitute similar Appellate Tribunals for indirect taxes i.e., Customs, Excise, Service Tax Appellate Tribunal (CESTAT), Central Administrative Tribunal (CAT), Railway Claims Tribunal, Foreign Exchange Appellate Board, etc.

Concern over the collection of capitation fees:

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


  • Corruption: The capitation fee has been one of the major contributors to corruption in education and society.
  • Promote unethical practices: Those who complete their course by paying the capitation fee are looking for a "return on investment". Such attempts to recover investment fuel unethical practices.
  • Hike in healthcare costs: The capitation fee has also been considered to be one of the reasons for the exorbitant hike in healthcare costs and deteriorating medical standards.
  • Tool of Extortion: The capitation fee comes as a surprise to the student when the student may have forsaken admission deadlines at other institutions. Choosing not to pay additional fees may even lead to a form of extortion, by withholding the degree from students. Parents often pay so that there is no ill bearing that affects their ward’s scores or standing.
  • Nonuniformity and unaccountability: The fee might not be uniformly applied. The donation money is often not accounted for, and its usage and allocation are mismanaged and not reported to income tax. In such cases of malpractice, students overpay for substandard education.
  • Misguiding students: Some institutions add the capitation fee along with the fee approved by regulatory norms. That combined fee is projected as the actual fee to the students.

Earlier Judgement:

  • In the Mohini Jain V/s State of Karnataka case, the Supreme Court declared that charging capitation fees was arbitrary, unfair, and in violation of the fundamental right to equality in Article 14 of the Constitution.
  • In the case of the TMA Pai Foundation case, it was held that there shall not be any profiteering or acceptance of the capitation fee.

Earlier bills regarding Capitation fees:

  • The Prohibition of Unfair Practices in Technical Educational Institutions, Medical Institutions, and Universities Bill 2010 recognized capitation fees as a cognisable offense.
  • It defines a capitation fee as any amount that is
    • Demanded or charged or collected, directly or indirectly, for, or, on behalf of any institution, or paid by any person in consideration for admitting any persona as a student in such institution; and which is more than the fee payable towards tuition fee and other fees and other charges declared by any institution in its prospectus for admitting any persona as a student in such institution; or
    • Paid or demanded or charged or collected, by way of donation, for, or, on behalf of any institution, or paid by any person in consideration for admitting any person as a student in such institution.

Do you know?

Amicus Curiae

  • In simple language, “amicus curiae” means “friend of the court”. The “traditional” amicus curiae is the one who is asked to represent the accused in a criminal appeal – when the Accused is too poor and/or requests the court to provide him a lawyer or when the criminal does not engage his own lawyer to defend him against the State.
  • In some cases, the courts appoint amicus curiae, to assist them in formulating a viewpoint and to make inquiries and reports.
    • In several major PIL judgments on prison reform, terrorism, environment, mentally deficient litigants, freedom of the media, unauthorised occupation of government premises and unauthorised constructions, decisions have been based on the assistance provided by the amicus.
    • There is another kind of amicus curiae, appointed in cases that are not PILs, where important questions of law are involved and both parties are represented but the court still wants a senior lawyer to assist it.
  • Supreme Court and the High Court maintain panels of lawyers who are assigned amicus work in criminal appeals.
  • The Supreme Court has mandated that legal aid, that is, a lawyer representing a poor accused, is a must in criminal cases.

A few suggestions:

  • In the matter of 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 included
    • 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.
    • 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.
    • While fixing the fee, the Fee Fixation Committeesof the States should take into account all the components of the fee, leaving no scope for managements to charge any additional amounts apart from what has been prescribed by the fee fixation committee from time to time.
    • If the management intends to charge additional amounts over and above the price band fixed by the Fee Fixation Committee, or for any component not included in the structure fixed by the Fee Fixation Committee, the same can only be done with the concurrence of the Fee Fixation Committee


  • The method of admission has to be regulated so that the admissions are based on merit and transparency if the charging of capitation fee and profiteering has to be kept in check.

Source: The Hindu BL

Mains Question:

Q. The charging capitation fee by educational institutions represents the hard realities of the commercialisation of education. Discuss.