Facts of the Case

The respondent-assessee, M/s Institute of Liver and Biliary Sciences, is a hospital engaged in philanthropic medical services. For AY 2013–14, it received a government grant of ₹66 crores from the Government of NCT of Delhi, constituting 41.78% of total receipts.

The Assessing Officer denied exemption under Section 10(23C)(iiiac), holding that the institution was not “substantially financed” as the grant did not exceed 50% of total receipts. Consequently, income was assessed at ₹20.72 crores.

However, the CIT(A) and subsequently the ITAT allowed the exemption by:

  • Including interest earned on grants as part of government funding
  • Adopting a broader interpretation of “substantial financing”

The Revenue appealed before the Delhi High Court.

Issues Involved

  1. Whether interest earned on government grants should be included while determining “substantial financing” under Section 10(23C)(iiiac)?
  2. Whether the assessee qualifies as being “wholly or substantially financed by the Government” when grant (including interest) exceeds 50%?
  3. Whether the Tribunal’s interpretation warrants interference as a substantial question of law?

Petitioner’s Arguments (Revenue)

  • Interest income cannot be treated as part of government grant.
  • The direct grant constituted only 41.78% of total receipts, below the 50% threshold prescribed under Rule 2BBB.
  • Therefore, exemption under Section 10(23C)(iiiac) should not be granted.

Respondent’s Arguments (Assessee)

  • Interest earned on grants must be included as it is intrinsically linked to government funding.
  • As per financial rules, such interest is either:
    • Adjusted against future grants, or
    • Returned to the Consolidated Fund of India
  • Thus, it retains the character of government funding.
  • When interest is included, total grant exceeds 50%, satisfying Rule 2BBB.

Court Findings / Order

The Delhi High Court upheld the findings of the CIT(A) and ITAT and dismissed the Revenue’s appeal, holding:

  • Interest on government grants must be included in computing total government financing.
  • Such interest is not independent income; it is intrinsically connected with grant-in-aid.
  • If not adjusted, the interest must be returned to the Government, reinforcing its character as part of the grant.
  • Once interest is included, government funding exceeds 50%, fulfilling Rule 2BBB criteria.
  • No substantial question of law arises.

Important Clarification

  • The expression “substantially financed” must be interpreted pragmatically and not narrowly.
  • Government support includes not only direct grants but also:
    • Interest accrued on such grants
    • Infrastructure support (land, buildings, etc.)
  • The ruling reinforces that substance prevails over form in determining eligibility for exemption.

 Link to download the order - https://delhihighcourt.nic.in/app/showFileJudgment/RAS11072023ITA3622023_113922.pdf

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