2019 (3) TMI 1619 - HC - Income Tax

Exemption u/s. 10(23C) (iiiab) - assessee is not wholly or substantially financed by the Govt. in view of explanation to sub section (1) of section 14 of the CAG Act as the total Govt. grant during the year is less that 75% of the total expenditure of the assessee - assesses state that it was solely for educational purposes and the grants from the Government is in excess of over 50% of the total expenditure - scope of explanation inserted by Finance Act 2014 w.e.f. 1st April 2015 prospective or retrospective - HELD THAT - The meaning of the words substantially financed in the CAG Act could never have been invoked to understand the meaning of the words substantially financed in Section 10(23C)(iiiab). Thus no fault can be found with the impugned order of the Tribunal ignoring the meaning of substantially financed by Government as given in the CAG Act. The Assessing Officer had found on facts that the Respondent had received in the previous year relevant to the subject Assessment Year grant from the Government which were 56% of the total receipts of the institution i.e. in excess of 50%. Besides it was also found that the Institution received grants from the Government of Rs. 12.79 crores out of the total expenditure of Rs. 22.49 crores. This was undisputedly in excess of 50% but less that 75% of the total expenditure. Therefore on both tests i.e. percentage of Government grant in context of total receipts was in excess of 50% and percentage of Government grant in the context of total expenditure was also in excess of 50%. Thus the respondent satisfies the requirement now introduced by the explanation. Explanatory Notes to the provisions of Finance (No.2) Act 2014 and the Circular No.1 of 2015 dated 21st July 2015 issued by the Central Board of Direct Taxes the raison detre to introduce the Explanation to Section 10(23C)(iiiab) was that in the absence of definition of the phrase substantially financed by the Government therein has led to litigation and varying decision of various judicial fora leading to uncertainty in this regard. Thus it is clear that the Explanation to Section 10(23C)(iiiab) of the Act was to clarify the position/meaning of the words substantially financed by the Government . In the present facts the same measure as has been clarified by the Explanation introduced by the amendment viz. grant from Government is in excess of 50% of its total receipts it is substantially financed by the Government could be taken as the exposition of the Parliamentary intent of the unamended Section. Thus without holding the Explanation to Section 10(23C)(iiiab) of the Act inserted into the Act w.e.f. 1st April 2015 is retrospective the same is being used as an aid in construing the ambiguous provision. Therefore in the present facts the Revenue s appeal is required to be dismissed.

Summary

Issues Involved:
1. Whether the Tribunal was justified in confirming the order of the CIT(A) and directing the AO to allow exemption under Section 10(23C)(iiiab) of the Income Tax Act, 1961.
2. Whether the Tribunal was correct in holding the assessment under Section 147 of the Income Tax Act as valid.

Detailed Analysis:

Issue 1: Exemption under Section 10(23C)(iiiab)
The primary issue revolves around whether the assessee is "wholly or substantially financed by the Government" to qualify for the exemption under Section 10(23C)(iiiab) of the Income Tax Act, 1961. The Tribunal confirmed the CIT(A)'s order, directing the AO to allow the exemption. The Revenue argued that the assessee did not meet the criteria, referencing Section 14 of the Comptroller and Auditor General (Duties, Powers and Conditions of Services) Act, 1971, which considers an institution substantially financed if the government grant is at least 75% of the total expenditure.

The Respondent countered that the term "substantially financed" was not defined in the Income Tax Act at the relevant time and should not be interpreted using another statute like the CAG Act. The Tribunal and CIT(A) relied on judicial precedents, including decisions from the Karnataka High Court, which considered a 37% government grant as substantial. The Tribunal found that the Respondent received government grants exceeding 50% of its total receipts, thus qualifying for the exemption.

The Court upheld the Tribunal's decision, noting that the CAG Act's definition was not applicable and that the subsequent amendment to Section 10(23C)(iiiab) in 2014, which clarified "substantially financed" as 50% of total receipts, could be used to interpret the term retrospectively. The Court concluded that the Respondent met the criteria for being substantially financed by the Government, thus affirming the Tribunal's decision.

Issue 2: Validity of Assessment under Section 147
The second issue concerned the validity of the assessment under Section 147 of the Income Tax Act. For the assessment year 2006-07, the Tribunal held that reopening the assessment was invalid, relying on an earlier Tribunal order for the assessment year 2003-04, where the reopening was based on an assessment completed under Section 143(3). However, for the assessment year 2006-07, the earlier assessment was completed under Section 143(1).

The Respondent's Counsel conceded that the Tribunal's reliance on the earlier order was incorrect, as the circumstances differed. Consequently, the Court held that the reopening of the assessment for the assessment year 2006-07 was valid.

Judgment Summary:
- Income Tax Appeal No. 1179 of 2013 (A.Y. 2007-08): The appeal was dismissed. The Court held that the Respondent was substantially financed by the Government, entitling it to the exemption under Section 10(23C)(iiiab).
- Income Tax Appeal No. 1321 of 2016 (A.Y. 2006-07): The appeal was partly allowed. The Court upheld the exemption under Section 10(23C)(iiiab) but found the reopening of the assessment under Section 147 to be valid.
- Income Tax Appeal No. 1322 of 2016 (A.Y. 2004-05): The appeal was partly allowed. The Court upheld the exemption under Section 10(23C)(iiiab) but found the reopening of the assessment under Section 147 to be valid.

Final Outcome:
- Income Tax Appeal No. 1179 of 2013: Dismissed.
- Income Tax Appeal Nos. 1321 and 1322 of 2016: Partly allowed.