Grant-in-aid computation includes linked interest for determining substantial government financing under tax exemption rules.

Interest earned on a government grant was treated as part of the grant-in-aid computation when assessing whether a hospital was wholly or substantially financed by the Government under section 10(23C)(iiiac) read with Rule 2BBB. The court accepted that the linked interest formed part of the grant arrangement and, if not adjusted, was liable to be returned to the Government under the financial rules. On that basis, the grant exceeded the prescribed 50 per cent threshold of total receipts, so the exemption test was satisfied. The court also noted that no substantial question of law arose on the facts found by the Tribunal.

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Issues: Whether interest earned on government grant was to be included while determining whether the assessee hospital was wholly or substantially financed by the Government for the purpose of exemption under section 10(23C)(iiiac) of the Income-tax Act, 1961 read with Rule 2BBB of the Income-tax Rules, 1962.

Analysis: The exemption turns on whether the government grant exceeds the prescribed percentage of total receipts including voluntary contributions. For the relevant year, the governing threshold was 50 per cent. The reasoning accepted that the interest earned on the grant was part of the grant-in-aid computation, particularly since such interest was linked to the grant and, if not adjusted, was required to be returned to the Government under the financial rules. On that basis, the grant component exceeded 50 per cent of total receipts. The court also noted that no substantial question of law arose on the facts found by the Tribunal.

Conclusion: The interest was rightly included in the grant computation, and the assessee satisfied the test of being substantially financed by the Government. The exemption claim under section 10(23C)(iiiac) was therefore sustainable.

Ratio Decidendi: For determining whether an institution is substantially financed by the Government under section 10(23C)(iiiac), the grant computation may include interest earned on the grant where it forms part of the grant-in-aid arrangement and affects the prescribed percentage of total receipts.

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