Government-financed educational institution exemption upheld where incidental interest on grant funds did not defeat section 10(23C)(iiiab) relief.

Interest earned on unspent grant funds was treated as incidental to government financing where an educational society was created to establish and run an engineering college, the land was allotted by the State Government, and the institution remained at the construction stage. Because the only receipts were government grants and such incidental interest, the institution was held to be wholly financed by the Government and to satisfy Rule 2BBB; exemption under section 10(23C)(iiiab) was allowed and the returned income accepted. Once the quantum addition failed, the consequential penalty under section 270A also had no independent basis and did not survive.

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Issues: (i) Whether the assessee was entitled to exemption under section 10(23C)(iiiab) of the Income-tax Act, 1961 read with Rule 2BBB of the Income-tax Rules, 1962; (ii) Whether the consequential penalty under section 270A of the Income-tax Act, 1961 survived after the quantum relief.

Issue (i): Whether the assessee was entitled to exemption under section 10(23C)(iiiab) of the Income-tax Act, 1961 read with Rule 2BBB of the Income-tax Rules, 1962.

Analysis: The assessee-society was formed to establish and run an engineering college and the land was allotted by the State Government. The funds received from the Government and from NTPC/NHPC were for the specific purpose of setting up the institution, and during the relevant year the college remained at the construction stage. The only receipts were government grants and interest on unspent grant funds parked in fixed deposits. The interest income was held to be merely incidental to the grants and to bear the same character as the sourced grants. On these facts, the institution was treated as wholly financed by the Government and the condition in Rule 2BBB was held to be satisfied.

Conclusion: The assessee was held entitled to exemption under section 10(23C)(iiiab), and the returned income was to be accepted.

Issue (ii): Whether the consequential penalty under section 270A of the Income-tax Act, 1961 survived after the quantum relief.

Analysis: The penalty was consequential to the addition made in the quantum proceedings. Once the quantum addition was deleted and the exemption claim was allowed, the foundation for the penalty no longer remained.

Conclusion: The penalty under section 270A was held not to survive.

Final Conclusion: The assessee succeeded on the quantum issue, and the penalty appeal fell with it, resulting in complete relief in both appeals.

Ratio Decidendi: Interest earned on unspent grant funds retains the character of the grant where it is incidental to the governmental financing of an educational institution, and such incidental interest does not defeat the condition of being wholly or substantially financed by the Government for exemption purposes.

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