2024 (10) TMI 1275 - AT - Income Tax

ITAT quashes revision order, upholds Section 10(23C)(iiiab) exemption for including interest income in substantial financing calculation

ITAT Ahmedabad allowed the assessee's appeal and quashed the CIT(E)'s order under Section 263. The tribunal held that the AO's decision to grant exemption ... Revision u/s 263 - revising the assessment order passed by AO u/s 147 r.w.s. 144B accepting the assessee's claim for exemption u/s 10(23C)(iiiab) - HELD THAT:- The assessee provided detailed calculations showing that when interest income on government grants is included, the government financing exceeds 50% of the total income, thereby meeting the threshold for substantial financing. AO did not apply Rule 2BBB retrospectively, as the rule was introduced only from AY 2015-16. There was no legal requirement during AY 2014-15 to adhere to the 50% threshold outlined in Rule 2BBB. Moreover, the assessee relied on judicial precedents, such as Institute of Liver and Biliary Sciences and Indian Institute of Management, which support the inclusion of interest income in the calculation of Government financing. AO’s decision to allow the exemption based on the prevailing legal framework and facts of the case cannot be termed as erroneous. For an order to be prejudicial to the interests of revenue, it must result in a loss to the revenue. In this case, the AO properly accepted the assessee’s exemption claim after considering the applicable laws and facts. The assessee’s income was primarily derived from government grants and regulated fees, and the AO correctly determined that the university was substantially financed by the Government. CIT(E)’s conclusion that the AO’s order was prejudicial to revenue is based on the incorrect exclusion of interest income and an erroneous application of Rule 2BBB for AY 2014-15. As such, the order passed by the AO did not cause any loss to the Revenue. We find that the order passed by the AO was neither erroneous nor prejudicial to the interests of revenue. AO’s decision to allow the assessee’s exemption under Section 10(23C)(iiiab) of the Act was based on a correct appreciation of the facts and applicable law, and the principle of consistency must be upheld. CIT(E) erred in excluding interest income from the government grants and in attempting to apply Rule 2BBB retrospectively. Accordingly CIT(E)’s order invoking Section 263 of the Act is quashed - Appeal of the assessee is allowed. Issues Involved:1. Validity of the CIT(E)'s invocation of Section 263 of the Income Tax Act.2. Determination of whether the University was 'substantially financed' by the government for exemption under Section 10(23C)(iiiab).3. Consideration of interest income on government grants as part of government financing.4. Application of Rule 2BBB of the Income Tax Rules, 1962, for AY 2014-15.5. Consistency in the treatment of exemption claims in previous assessment years.Issue-wise Detailed Analysis:1. Validity of the CIT(E)'s Invocation of Section 263:The CIT(E) invoked Section 263 of the Income Tax Act, arguing that the Assessing Officer's (AO) order was erroneous and prejudicial to the interests of the revenue. The CIT(E) contended that the AO failed to adequately examine whether the University qualified as 'substantially financed' by the government. The Tribunal examined whether the AO's order met the criteria of being erroneous and prejudicial to the revenue. It concluded that the AO's decision was based on a correct appreciation of facts and applicable law, and thus, the CIT(E)'s invocation of Section 263 was invalid.2. Determination of 'Substantially Financed' by the Government:The CIT(E) argued that the University, with only 13% of its total income from government grants, did not meet the threshold for being 'substantially financed.' The assessee contended that when interest income on government grants was included, the financing exceeded 50%, thus qualifying for the exemption under Section 10(23C)(iiiab). The Tribunal found that the AO correctly accepted the exemption claim based on the prevailing legal framework and facts, and the CIT(E)'s exclusion of interest income was erroneous.3. Consideration of Interest Income on Government Grants:The CIT(E) excluded interest income on government grants from the calculation of government financing. The assessee argued, based on Rule 230(8) of the General Financial Rules, that interest should be considered part of the grant. The Tribunal agreed with the assessee, noting that interest income should be included in the calculation, thereby increasing the proportion of government financing to 54% of the total receipts.4. Application of Rule 2BBB for AY 2014-15:The CIT(E) indirectly applied Rule 2BBB, which defines 'substantially financed' as 50% or more of income from government grants, despite it being applicable prospectively from AY 2015-16. The Tribunal held that applying Rule 2BBB retrospectively to AY 2014-15 was incorrect, as there was no legal requirement at the time to adhere to the 50% threshold.5. Consistency in Treatment of Exemption Claims:The assessee highlighted that in previous assessment years, such as AY 2010-11 and AY 2012-13, the AO accepted its exemption claims under Section 10(23C)(iiiab) without issue. The Tribunal emphasized the principle of consistency, noting that the facts and circumstances had not changed significantly, and the AO's decision was consistent with past assessments.Conclusion:The Tribunal concluded that the AO's order was neither erroneous nor prejudicial to the interests of revenue. The CIT(E) erred in excluding interest income and applying Rule 2BBB retrospectively. The appeal filed by the assessee was allowed, and the CIT(E)'s order invoking Section 263 was quashed. The Tribunal upheld the AO's decision to grant the exemption under Section 10(23C)(iiiab) of the Act.