2008 (5) TMI 370 - AT - Income Tax

Eligibility of Exemption u/s 10(23C)(iiiab)/(vi) - Educational Institution - Institute is wholly and substantially financed by the Government or not - grants received from the Government and the balance amount is generated by the Institute out of fees and other income - fees collected exceed the grants received from the Government - fees received and credited in the Consolidated Fund of India. HELD THAT - This Bench in the case of Bangalore University held that in case in a year fees collected from students exceed the grants received from the Government will not render it outside the purview of being an educational institution existing solely for the education purpose. The fact that the university was being hitherto run by the Government funds cannot be ignored. The Tribunal allowed exemption to Bangalore University u/s. 10(23C)(iiiab). The ratio of law as laid down in that judgment is squarely applicable. From the figures as appearing in the balance sheet, it is clear that the finance has been provided by the Government and it cannot be said that the institute is not substantially financed by the Government. Therefore, we have no hesitation to hold that the institute is substantially financed by the Government. On Perusal of the letter from the Ministry of HRMD to the Director, IIM. It is clear that the revenue generated by the institute belongs to the Consolidated Fund of India and the Government after a conscious decision has permitted the IIMs to retain and spend the revenue so generated for their maintenance and growth. Thus, the fees which are being received and credited in the Consolidated Fund of India are made available to the institute by the Government as per power conferred to the Government under Art. 266(3) of the Constitution. This makes it abundantly clear that finances are provided by the Government. Income of an educational institution is exempt if it is existing solely for educational purposes and wholly and substantially financed by Government u/s 10(23C)(iiiab). In other cases, i.e., if it is not wholly and substantially financed by Government, the income is exempt u/s 10(23C)(iiiad) if receipts are less than one crore and exempt u/s 10(23C)(vi) if receipts exceed one crore. Eligible for exemption u/s 10(23C)(vi), the institute is to be approved by prescribed authority. The institute applied for approval u/s 10(23C)(vi) as the Revenue was taking a stand that income is not exempt u/s 10(23C)(iiiab). The application for notification u/s 10(23C)(vi) was not processed as according to the AO, the case of the assessee fell u/s 10(23C)(iiiab). Now the Revenue cannot take a different stand. It cannot be visualized that the case of the assessee will fall neither u/s 10(23C)(iiiab) nor 10(23C)(vi). Once application u/s 10(23C)(vi) was not preceded then it is to be held that the case of assessee falls u/s 10(23C)(iiiab). The Revenue cannot be permitted to blow hot and cold. Therfore, we hold that the learned CIT(A) was justified in holding that income of institute is exempt u/s 10(23C)(iiiab) and the appeal of Revenue is dismissed.

Summary

Issues Involved:
1. Whether the Institute is wholly and substantially financed by the Government.
2. Whether the income of the Institute is exempt under Section 10(23C)(iiiab) of the Income Tax Act.

Detailed Analysis:

Issue 1: Whether the Institute is wholly and substantially financed by the Government
The revenue contended that the Institute was not wholly and substantially financed by the Government as only 6.84% of its funds came from government grants. The balance was generated through fees and other income. The CIT(A) had previously ruled that the Institute was substantially financed by the Government, considering its establishment by the Ministry of Human Resources and Development, loans from the State Government, and the creation of assets from government funds.

The Tribunal noted that the term "wholly and substantially" is not defined in the Income Tax Act. The Tribunal emphasized that substantial financing does not require the entire funds to be provided by the Government. The Institute's initial setup, infrastructure, and land were provided by the Government, and it operates under significant government control, with government-appointed members on its Board of Governors. The Central and State Governments hold more than 50% voting rights, indicating government management.

The Tribunal also referenced the Comptroller and Auditor General of India's audit and the Ministry of Human Resource Development's letter, which stated that the Institute's revenue belongs to the Consolidated Fund of India, further supporting the claim of substantial government financing.

Issue 2: Whether the income of the Institute is exempt under Section 10(23C)(iiiab) of the Income Tax Act
The Assessing Officer denied the exemption, arguing that the Institute was only partly financed by the Government. However, the Tribunal found that the Institute met the criteria for exemption under Section 10(23C)(iiiab), as it existed solely for educational purposes and was substantially financed by the Government.

The Tribunal highlighted that the exemption under Section 10(23C)(iiiab) is based on financing, not receipts. The Institute's income, generated through fees and other sources, is used for its educational objectives, and this does not disqualify it from the exemption. The Tribunal also noted that the Institute had taken necessary steps for notification under Section 10(23C)(vi), but the application was not processed as the Assessing Officer considered the case under Section 10(23C)(iiiab).

The Tribunal referenced the directive principles of state policy, emphasizing the Government's duty to provide education and the role of institutions like the IIMs in making higher education accessible. The Tribunal also cited previous judgments, including the Bangalore University case, which supported the interpretation that substantial government financing includes initial setup and ongoing support.

In conclusion, the Tribunal upheld the CIT(A)'s decision that the Institute is substantially financed by the Government and its income is exempt under Section 10(23C)(iiiab). The appeal by the revenue was dismissed.