2025 (10) TMI 292 - AT - Income Tax

CIT's s.263 revision quashed; CBDT notification exempts CCTNS grant-in-aid and interest; s.10(46) exemption upheld for no-profit implementing body

ITAT CHANDIGARH - AT held that the CIT's revision under s.263 was unjustified and quashed the impugned order. The tribunal found the CBDT notification ... Revision u/s 263 - grant-in-aid as received from the Ministry of Home Affairs and interest there upon - Commissioner was of the view that alleged interest income cannot be characterized akin to the grant-in-aid and it will not enjoy exemption u/s 10(46) and as per AO has erred in granting exemption u/s 10(46) on this interest income also - scope of Notification issued by the Government of India, Ministry of Finance (CBDT) dated 22.12.2017 HELD THAT:- A perusal of the Notification would reveal that it provide exemptions to two amounts; amounts received in the form of grant-in-aid and interest accrued on CCTNS Fund. This CCTNS Fund is nothing than alleged grant-in-aid. The CCTNS Fund is a consolidated fund which is to be applied on a Project vide which Crime, Criminal, Tracking and Networking System is to be developed and implemented in the Police Stations. Thus, the CBDT Notification itself grants exemption on the interest accrued on this fund whose source is grant-in-aid from the Ministry of Home Affairs. As further alleged by the assessee that it is a no profit organization. It does not indulge in any commercial undertaking. Its sole objective is to implement the project conceived by the Central Government. Therefore, Commissioner has erred in finding an error in the order of the AO. The assessment order is neither erroneous nor it caused any prejudice to the Revenue. Therefore, impugned order of the CIT passed under Section 263 is quashed and appeal of the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Commissioner's action under Section 263 of the Income Tax Act was justified in holding the assessment order passed under Section 143(3) to be erroneous and prejudicial to Revenue for granting exemption under Section 10(46) to interest earned on fixed deposits funded by grant-in-aid. 2. Whether interest earned on unspent grant monies (interest on FDRs) constitutes 'interest accrued on CCTNS fund' and thereby falls within the scope of the Central Government notification issued under clause (46) of Section 10, rendering such interest exempt under Section 10(46). 3. Whether the Assessing Officer erred in treating the grant-in-aid and interest thereon as distinct taxable receipts such that allowing exemption for the interest caused prejudice to Revenue. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of exercise of power under Section 263 (whether assessment was erroneous and prejudicial to Revenue) Legal framework: Section 263 empowers the Commissioner to revise an assessment if it is found to be erroneous and prejudicial to the interests of Revenue. Precedent Treatment: No judicial precedent was relied upon or discussed in the impugned order or in the materials before the Tribunal. Interpretation and reasoning: The Tribunal examined the assessment record, the notification under clause (46) of Section 10 and the factual matrix showing that the assessee is a society established to implement a government project (CCTNS), that its receipts derived from Ministry of Home Affairs grants and that interest arose solely from deposits of those unspent grants. The notification specifically notifies the body 'in respect of the following specified income ... (a) amount received in the form of Grant-in-aid; and (b) interest accrued on CCTNS fund.' Given the express scope of the notification and the factual finding that the interest was earned on the same CCTNS grant funds, the Tribunal found no error in the AO's allowance of exemption and no resultant prejudice to Revenue. The Commissioner's conclusion that interest and grant are distinct taxable receipts was held to be contrary to the notification and the documentary material placed on record (including departmental explanation of CCTNS fund and accounts showing source of receipts). Ratio vs. Obiter: The determination that the assessment was not erroneous and not prejudicial to Revenue (thus that Section 263 could not be invoked) is ratio decidendi for the appeal. Conclusion: The exercise of power under Section 263 was not justified; the CIT's order under Section 263 was quashed. Issue 2 - Whether interest on unspent grants is exempt as 'interest accrued on CCTNS fund' under the Notification issued under clause (46) of Section 10 Legal framework: Clause (46) of Section 10 (as applied by the CBDT notification) can exempt specified income of notified bodies. The notification in question expressly notifies the society 'in respect of the following specified income ... (a) amount received in the form of Grant-in-aid; and (b) interest accrued on CCTNS fund,' subject to stated conditions (no commercial activity, unchanged activities/specimen income, filing of return under subsection 139(4C)(g)). Precedent Treatment: No prior authorities were cited or distinguished; the Tribunal's analysis is based on the text of the notification and record facts. Interpretation and reasoning: The notification's language plainly covers both the grant-in-aid and interest accrued on the CCTNS fund. The Tribunal accepted the assessee's evidence and departmental explanation that CCTNS fund is essentially the consolidated grant-in-aid provided for the project, and that interest arose from temporary deposits of those grant funds. The Tribunal applied a purposive and textual construction of the notification: where the notification explicitly exempts 'interest accrued on CCTNS fund' and the interest is shown to arise from the CCTNS grant corpus, such interest falls within the notified specified income and is exempt under Section 10(46). The Tribunal also noted statutory conditions in the notification (no commercial activity, consistency of activities/income, specified return filing) and found them satisfied on the record. Ratio vs. Obiter: The holding that interest on unspent CCTNS grant funds is exempt under the notification is a ratio decidendi supporting reversal of the Section 263 order; related factual observations about non-commercial character and source of funds are supporting findings of fact integrated into the ratio. Conclusion: Interest earned on the FDRs constituted 'interest accrued on CCTNS fund' as notified and was therefore exempt under Section 10(46); the AO's grant of exemption was proper. Issue 3 - Characterization of interest as a separate taxable receipt (whether interest earned on unspent grant is a 'second degree' income assessable to tax) Legal framework: Distinction in tax law between primary receipt (grant-in-aid) and income generated from its investment (interest) can affect taxation unless a statutory or notified exemption extends to the latter. Precedent Treatment: No authority was cited by the Revenue; the Tribunal relied on the notification and the factual matrix to resolve characterization. Interpretation and reasoning: While the Revenue argued that interest on an unutilized grant is a separate item of income and therefore taxable, the notification specifically contemplates and exempts interest accrued on the CCTNS fund. Where Parliament (through executive notification empowered by statute) has expressly exempted interest arising from a particular funded project, the general proposition that interest is a separate taxable receipt cannot override the specific exemption. The Tribunal also observed that the society had no other funds or commercial activities; interest arose solely as an incident of holding unspent grant money pending application to project purposes, thus reinforcing the connection between grant and interest and the applicability of the notification. Ratio vs. Obiter: The holding that interest, though a secondary receipt generically, is rendered exempt by the specific notification is ratio; the general proposition about 'second degree' income remains obiter insofar as it is subordinated by the specific statutory/notification grant. Conclusion: The interest in question, though constituting income derived from deposit of unspent grants, is covered by the notification and not taxable; the Revenue's contention to the contrary does not establish error or prejudice under Section 263. Cross-reference The conclusions on Issues 2 and 3 directly inform Issue 1: because the notification explicitly exempts both grant-in-aid and interest accrued on the CCTNS fund and the factual record demonstrates that the interest arose from the notified CCTNS grant, the AO's allowance of exemption was not erroneous and did not prejudice Revenue; therefore the Commissioner's Section 263 revision was unwarranted. Final Disposition The Commissioner's order under Section 263 setting aside the assessment was quashed and the appeal of the assessee was allowed, on the ground that the notification under clause (46) of Section 10 covers both the grant-in-aid and the interest accrued on the CCTNS fund and the assessment was not erroneous nor prejudicial to Revenue.