2025 (6) TMI 1314 - AT - Income Tax

Educational institution wins exemption under Section 10(23C)(iiiab) with 31.76% government financing as Rule 2BBB applies prospectively from 2015-16

Guru Nanak Dev University Versus DCIT Circle-1 (Exemption) Chandigarh

The Tribunal allowed the educational institution's appeal for AY 2012-13, granting exemption under Section 10(23C)(iiiab) despite government financing of ... Denial of deduction u/s 10(23C)(iiiab) - interpretation the meaning of ‘substantial financing’ for the purpose of these provisions - assessee was established at Amritsar by State Legislature Act No.21 of 1969, residential and an affiliated university. HELD THAT:- The interpretation of expression ‘substantially finance’, prior to amendment w.e.f. AY 2015-16, has been dealt in various judicial decisions. As in the case of Indian Institute of Management [2010 (8) TMI 890 - KARNATAKA HIGH COURT] held that financing to the extent of 37.85% would constitute substantial financing. In subsequent decision in the case of Dhamapakasha Rajakarya Prasakta B.M. Sreenivasaiah Educational Trust [2015 (5) TMI 219 - KARNATAKA HIGH COURT] again held that government grant to the extent of 25% would constitute substantial financing. Following the decision in Indian Institute of Management (supra), Hon’ble High Court of Punjab and Haryana concurred with the finding of Tribunal that government financing to the extent of 44.52% would constitute substantial financing. Thus, we would hold that the assessee was substantially financed by the government in this year and it was eligible to lay claim on impugned deduction as claimed by it u/s 10(23C)(iiiab). AO is directed to grant impugned exemption to the assessee 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered was the interpretation of the phrase 'substantially financed' in Section 10(23C)(iiiab) of the Income Tax Act for the Assessment Year 2012-13. Specifically, whether the appellant, an educational institution established by a State Legislature Act and receiving government grants amounting to approximately 31.76% of its total receipts, qualified for exemption under Section 10(23C)(iiiab) as being 'wholly or substantially financed' by the Government. The applicability of Rule 2BBB, which prescribes a threshold of more than 50% government funding for substantial financing, and its retrospective or prospective effect was also considered. The issue involved determining the correct percentage of government financing that constitutes 'substantial financing' for the purpose of tax exemption prior to the amendment effective from AY 2015-16.2. ISSUE-WISE DETAILED ANALYSISInterpretation of 'Substantially Financed' under Section 10(23C)(iiiab) for AY 2012-13Relevant legal framework and precedents: Section 10(23C)(iiiab) exempts income of any university or educational institution existing solely for educational purposes and not for profit, which is wholly or substantially financed by the Government. The amendment introducing Rule 2BBB, prescribing that government grants must exceed 50% of total receipts to qualify as substantial financing, took effect from 01-04-2015 (AY 2015-16 onwards), as clarified by CBDT Circular No. 01/2015 dated 21-01-2015.Judicial precedents prior to this amendment were examined, including:Swami Ganga Giri Janta Girls College: The Punjab and Haryana High Court held that Rule 2BBB was not applicable retrospectively and came into force only from 12-12-2014, thus not applicable for AY 2012-13.Indian Institute of Management (Karnataka High Court): Held that government financing of 37.85% constituted substantial financing.Dhamapakasha Rajakarya Prasakta B.M. Sreenivasaiah Educational Trust (Karnataka High Court): Held that 25% government grant constituted substantial financing.Punjab and Haryana High Court following Indian Institute of Management: Held that 44.52% government financing amounted to substantial financing.Court's interpretation and reasoning: The Tribunal noted that the AO's reliance on Rule 2BBB and the 50% threshold was misplaced for AY 2012-13, as the rule was prospective and clarificatory in nature. The CBDT Circular explicitly limited the amendment's applicability to AY 2015-16 onwards. The Tribunal found that the AO's computation of 31.76% government financing, though lower than the 50% threshold, was sufficient under the pre-amendment legal regime and judicial interpretations to constitute substantial financing.Key evidence and findings: The appellant's chart of receipts showed government grants as 47% of total receipts, while the AO recomputed it to 31.76%. The Tribunal accepted the AO's figure but still found it sufficient based on judicial precedents.Application of law to facts: Applying the pre-amendment judicial standards, government financing of 31.76% was held to be substantial. The institution being established by State Legislature Act and existing solely for educational purposes further supported the exemption claim under Section 10(23C)(iiiab).Treatment of competing arguments: The AO and CIT(A) argued that the 50% threshold from Rule 2BBB applied, denying exemption. The Tribunal rejected this, relying on the legislative intent and judicial precedents that the amendment was not retrospective. The CIT(A)'s confirmation of the assessment was also overturned on this basis.Conclusions: The Tribunal concluded that the appellant was substantially financed by the Government within the meaning of Section 10(23C)(iiiab) for AY 2012-13 and was entitled to the exemption claimed. Other grounds raised by the appellant were rendered academic and thus not adjudicated.3. SIGNIFICANT HOLDINGS'The Hon'ble High Court of Punjab and Haryana in the case of Swami Ganga Giri Janta Girls College ... clearly negates the action of Ld. AO. Even the CBDT Circular No.01/2015 dated 21-01-2015 clearly state that the amendment to Sec.10(23C) shall take effect from 01-04-2015 and accordingly, apply in relation to AY 2015-16 and for subsequent years.''Respectfully following all these decisions, we would hold that the assessee was substantially financed by the government in this year and it was eligible to lay claim on impugned deduction as claimed by it u/s 10(23C)(iiiab).'Core principles established include:The amendment introducing a 50% threshold for 'substantial financing' under Rule 2BBB is prospective and does not apply to AYs prior to 2015-16.Government financing less than 50% but in the range of approximately 25% to 45% can constitute substantial financing under the pre-amendment regime.An educational institution established by State Legislature Act and existing solely for educational purposes qualifies for exemption under Section 10(23C)(iiiab) if substantially financed by the Government.Final determination: The appellant's claim for exemption under Section 10(23C)(iiiab) for AY 2012-13 is allowed, and the assessment order denying the exemption is set aside. The AO is directed to grant the exemption accordingly.