2022 (5) TMI 1415 - HC - Income Tax

Exemption u/s 11 - whether the grant-in-aid received by the assessee was capital receipt or revenue receipt? - HELD THAT - The assessee was under obligation to deposit the amount in a separate bank account and interest earned thereon was also liable to be accounted for and utilized for the same scheme/purpose. The funds could not be utilized for any other purpose. The grant-in-aid was one time assistance. Thus, there is no doubt that the assessee could not have spent the amount received by it through the grant-in-aid except for the purpose specified in the aforesaid communication. A sum of Rs.77 lacs was towards non-recurring expenditure, which as per the details noticed above, cannot be said to be receipt in the nature of revenue. Similarly, remaining amount of Rs.23 lacs was also towards the capital receipt. There is nothing on record to suggest that the assessee is a profit earning organization or has been constituted as a profit making venture. The matter can be viewed from another angle. The term income as defined in Section 2(24) is inclusive of various heads mentioned therein. Prior to amending Act 20 of 2015, there was nothing specific in Section 2(24) of the Act which would include grant-in-aid by the Central or the State Government called by whatever name. It was only by way of said amendment, made effective from 01.04.2016 that such monetary release by State or Central Government has been incorporated as income by way of Section 2(24) (xviii). Even in this clause exemption has been carved out in respect of subsidy or grant by Central Government for the purpose of corpus of a trust or institution established by the Central Government or State Government, as the case may be. This clearly illustrates the legislative intent that prior to 01.04.2016, the type of grant as is the subject matter of instant lis was not specifically included as income. The latter inclusion of such provision will not have retrospective application. Even by way of aforesaid amendment, exemption is available to the institutions like the assessee, as noticed above. In Kalpna Palace vs. Commissioner of Income Tax 2004 (8) TMI 65 - ALLAHABAD HIGH COURT examined the fall out of the grant in aid and incentives etc., provided by the government. It was held that grant-in-aid received by assessee, in that case, was capital receipt. The grant -in-aid, in that case, was provided by the State Government for construction of permanent Cinema Halls during a specified period. The Court after analysing the facts found that since the grant-in-aid was only for specific purpose of construction of Cinema Halls in the rural areas, it could not be termed as revenue receipt. Applying the purpose test to the facts of that case, it was held that the payment received by assessee under the scheme was not in the course of a trade but was of a capital nature. In Ponni Sugars case 2008 (9) TMI 14 - SUPREME COURT the incentive conferred was in the nature of higher free sale sugar quota and allowance to collect excise duty even on the sale price of free sale sugar. The purpose obviously was to promote the concerned business. ITAT has definitely not considered the matter in the above noted context. The fact that the assessee received only one time grant with a specific purpose which nowhere suggested scope of profit generation or revenue for the assessee, the amount received by the assessee by way of grant-in-aid thus could not be termed to be revenue receipt. Substantial questions of law No. (c) and (d) are accordingly decided in favour of the assessee and against the revenue.

Issues Involved:
1. Entitlement to exemption under Section 10(23C)(iiiab) of the Income Tax Act.
2. Entitlement to benefits under Sections 11, 12, and 13 of the Income Tax Act.
3. Classification of grant-in-aid as a voluntary contribution and income under Section 2(24)(iia) of the Income Tax Act.
4. Correct application of provisions of law by the Income Tax Appellate Tribunal.

Issue-wise Detailed Analysis:

1. Entitlement to exemption under Section 10(23C)(iiiab) of the Income Tax Act:
The appellant (Assessee) challenged the Income Tax Appellate Tribunal's decision that it was not entitled to exemption under Section 10(23C)(iiiab) of the Income Tax Act. The Tribunal held that the primary object of the appellant, which was to regulate the standard of nursing education and training, did not qualify it for the exemption. However, this issue was rendered redundant as the court concluded that the grant-in-aid received was not income.

2. Entitlement to benefits under Sections 11, 12, and 13 of the Income Tax Act:
The Tribunal also held that the appellant was not entitled to benefits under Sections 11, 12, and 13 because its registration under Section 12AA was effective from 01.04.2010, relevant for the assessment year 2011-2012. This issue was also rendered redundant as the court concluded that the grant-in-aid received was not income.

3. Classification of grant-in-aid as a voluntary contribution and income under Section 2(24)(iia) of the Income Tax Act:
The primary issue was whether the grant-in-aid received by the assessee was a capital receipt or revenue receipt. The court analyzed the nature of the transaction and concluded that the grant-in-aid was issued for a specific purpose, i.e., upgradation and strengthening of the institution. The court noted that the funds were to be deposited in a separate bank account and could not be utilized for any other purpose, indicating that the grant was not for generating revenue. The court referred to precedents such as Lachit Filma vs. Commissioner of Income Tax and Commissioner Income Tax vs. Ponni Sugars and Chemical Ltd., which supported the view that grants for specific purposes are capital receipts. The court also noted that the legislative intent, as illustrated by the amendment made effective from 01.04.2016, indicated that such grants were not considered income prior to this date. Therefore, the court held that the grant-in-aid received by the assessee was not income under Section 2(24)(iia).

4. Correct application of provisions of law by the Income Tax Appellate Tribunal:
The court found that the Tribunal had not considered the matter in the proper context. The assessee received a one-time grant for a specific purpose, which did not suggest any scope for profit generation or revenue. The court concluded that the amount received by the assessee by way of grant-in-aid could not be termed as revenue receipt. Thus, the Tribunal's decision was based on an incorrect application of the provisions of law.

Conclusion:
The court allowed the appeal, setting aside the order of the Income Tax Appellate Tribunal and the Commissioner of Income Tax (Appeals), Shimla. The court held that the grant-in-aid received by the assessee was not income accrued to the assessee, and thus, the substantial questions of law were decided in favor of the assessee. The issues regarding exemption under Section 10(23C)(iiiab) and benefits under Sections 11, 12, and 13 were rendered redundant. No order as to costs was made, and any pending applications were disposed of.

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