2025 (2) TMI 281 - AT - Income Tax

Exemption u/s. 10(23C)(iiiac) - As contented government grants received by the assessee during the financial year 2016-17 relevant to the assessment year 2017-18 had fallen short of the stipulated 50% of the total receipts - HELD THAT - Interest received on the fixed deposits made out of the unspent grants also would be treated as a grant and if the said interest amount is added to the total grants received during the AY it will exceed the 50% prescribed u/s. 10(23C)(iiiac). Therefore we found that apart from the grants received during the assessment year the assessee is also receiving interest income on the unspent grants which is also a grant and in that circumstances CIT(A) had granted the relief which is in accordance with law. The Ld.CIT(A) in his order had considered the said facts and also considered the fact that the assessee is an institute wholly and substantially managed by the Government of Karnataka and therefore they are entitled for deduction u/s. 10(23C)(iiiac). The assessee is eligible for exemption u/s. 10(23C)(iiiac) of the Act and also u/s. 11(2) of the Act. In these circumstances we find no merit in the contention of the Ld.DR - Decided against revenue.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment involve:

1. Whether the assessee is entitled to exemption under Section 10(23C)(iiiac) of the Income Tax Act, 1961, given the contention that government grants received were less than the stipulated 50% of total receipts.

2. Whether the assessee qualifies as "wholly or substantially financed by the Government" under Section 10(23C)(iiiac) of the Income Tax Act, 1961, read with Rule 2BBB of the Income Tax Rules, 1962.

3. Whether the assessee is eligible for exemption under Section 11(2) of the Income Tax Act, 1961, despite the delayed submission of Form 10.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to Exemption under Section 10(23C)(iiiac)

- Relevant Legal Framework and Precedents: Section 10(23C)(iiiac) provides tax exemption for institutions wholly or substantially financed by the Government. The stipulation is that government grants should constitute at least 50% of total receipts.

- Court's Interpretation and Reasoning: The Tribunal considered whether the interest income from unspent government grants should be treated as part of the government grants. The Tribunal agreed with the assessee's argument that interest accrued on unspent grants should be included as part of government grants.

- Key Evidence and Findings: The assessee received Rs. 5.63 crores in government grants and Rs. 2,79,53,567/- in interest from unspent grants. The Tribunal found that including this interest as part of the government grants would meet the 50% requirement.

- Application of Law to Facts: By adding the interest income to the government grants, the Tribunal determined that the assessee met the 50% threshold under Section 10(23C)(iiiac).

- Treatment of Competing Arguments: The revenue argued that the government grants fell short of 50%, while the assessee contended that interest on unspent grants should be included. The Tribunal sided with the assessee.

- Conclusions: The Tribunal concluded that the assessee is entitled to exemption under Section 10(23C)(iiiac) as the grants, including interest, exceeded 50% of total receipts.

Issue 2: Qualification as "Wholly or Substantially Financed by the Government"

- Relevant Legal Framework and Precedents: The definition of "wholly or substantially financed by the Government" includes factors beyond annual grants, such as government investment in infrastructure.

- Court's Interpretation and Reasoning: The Tribunal referenced the Karnataka High Court's decision in CIT Vs. IIM, Bengaluru, emphasizing a broader interpretation of government financing.

- Key Evidence and Findings: The Tribunal noted that the governing council of the assessee trust consisted entirely of government officials, indicating substantial government management.

- Application of Law to Facts: The Tribunal found that the assessee was wholly managed by the Government of Karnataka, satisfying the criteria for substantial government financing.

- Treatment of Competing Arguments: The revenue did not present new facts to counter the Tribunal's findings on substantial government management.

- Conclusions: The Tribunal held that the assessee qualifies as an institution wholly or substantially financed by the Government.

Issue 3: Eligibility for Exemption under Section 11(2)

- Relevant Legal Framework and Precedents: Section 11(2) requires timely submission of Form 10 for exemption. The Tribunal considered precedents allowing procedural leniency.

- Court's Interpretation and Reasoning: The Tribunal relied on the Calcutta High Court's precedent that filing the audit report with the return is procedural, not substantive.

- Key Evidence and Findings: The assessee submitted Form 10 belatedly but before assessment completion.

- Application of Law to Facts: The Tribunal found that the procedural delay did not disqualify the assessee from exemption under Section 11(2).

- Treatment of Competing Arguments: The revenue's argument focused on procedural non-compliance, which the Tribunal found insufficient.

- Conclusions: The Tribunal concluded that the assessee is eligible for exemption under Section 11(2).

SIGNIFICANT HOLDINGS

- Core Principles Established: The inclusion of interest on unspent grants as part of government grants is permissible, and procedural delays in filing do not necessarily negate exemption eligibility.

- Final Determinations on Each Issue: The Tribunal dismissed the revenue's appeals, upholding the assessee's entitlement to exemptions under both Section 10(23C)(iiiac) and Section 11(2).

- Verbatim Quotes of Crucial Legal Reasoning: The Tribunal emphasized that "interest on term deposits constitutes accumulated grants of the government" and that the assessee is "wholly and substantially managed by the Government of Karnataka."