Facts of the Case

The assessee, Hidayatullah National Law University, a State-established institution engaged in imparting legal education, claimed exemption under Section 10(23C)(iiiab) for Assessment Years 2016-17 and 2017-18.

During assessment proceedings, the Assessing Officer examined the University's receipts and Government grants and observed that:

  • Government grants constituted 47.85% of total receipts for AY 2016-17.
  • Government grants constituted 9.77% of total receipts for AY 2017-18.

The Assessing Officer held that Rule 2BBB mandates that Government grants must exceed 50% of total receipts during the relevant previous year for an institution to be regarded as substantially financed by the Government. Since the prescribed threshold was not met, exemption under Section 10(23C)(iiiab) was denied.

The assessee contended that cumulative Government support, including grants, infrastructure, land allotment and financial assistance received since inception, should be considered while determining substantial financing.

The CIT(A)/NFAC upheld the Assessing Officer's action. Aggrieved, the assessee preferred an appeal before the Income Tax Appellate Tribunal.

 

Issues Involved

  1. Whether the expression “substantially financed by the Government” under Section 10(23C)(iiiab) is governed by Rule 2BBB.
  2. Whether cumulative Government funding received since inception can be considered for determining substantial Government financing.
  3. Whether land allotment, infrastructure support and capital assistance can be included while computing Government financing under Rule 2BBB.
  4. Whether an educational institution can claim exemption under Section 10(23C)(iiiab) when Government grants during the relevant previous year are less than 50% of total receipts.

 

Petitioner’s Arguments

The assessee-University submitted that:

1. Government-Created Educational Institution

The University was established under a State enactment and operated under Government supervision and control.

2. Holistic Approach to Government Financing

The test of substantial financing should not be confined to grants received during a single previous year.

3. Consideration of Capital and Infrastructure Support

Government contributions through:

  • Initial corpus funding
  • Capital grants
  • Land allotment
  • Infrastructure support
  • Other financial assistance

should also be considered.

Respondent’s Arguments

The Revenue contended that:

1. Mandatory Statutory Requirement

Section 10(23C)(iiiab) applies only where an institution is wholly or substantially financed by the Government.

2. Rule 2BBB Provides the Definitive Test

Rule 2BBB clearly prescribes that Government grants must exceed 50% of total receipts during the relevant previous year.

3. Threshold Not Satisfied

Government grants constituted:

  • 47.85% for AY 2016-17
  • 9.77% for AY 2017-18

Therefore, the statutory benchmark was not met.

4. Relevant Previous Year is Determinative

Only Government grants received during the relevant previous year can be considered.

5. Capital Support Irrelevant

Land allotment, infrastructure facilities and historical assistance cannot be considered under Rule 2BBB.

6. Strict Interpretation of Exemption Provisions

Exemption provisions must be strictly construed and the statutory conditions must be satisfied exactly.

7. Distinguishable Judicial Precedents

The decisions relied upon by the assessee were distinguishable and could not override the specific framework introduced through Rule 2BBB.

 

Court Findings / ITAT Observations

1. Rule 2BBB is the Governing Provision

The Tribunal held that the expression “substantially financed by the Government” must be interpreted strictly in accordance with Rule 2BBB.

2. Year-wise Examination is Mandatory

The Rule requires examination of:

  • Government grants received during the relevant previous year; and
  • Total receipts of the same previous year.

3. Historical Funding Cannot Be Considered

The Tribunal rejected the argument that cumulative Government funding since inception should be considered.

4. Land and Capital Assistance Excluded

Government support through land allotment, infrastructure creation, corpus contributions and capital grants cannot substitute the statutory requirement under Rule 2BBB.

5. Failure to Meet the 50% Benchmark

Government grants were below the prescribed threshold in both years.

6. Strict Construction of Exemption Provisions

Once Rule 2BBB prescribes a numerical benchmark, Courts cannot substitute alternative tests based on equitable considerations.

7. Karnataka High Court Decision Distinguished

The decision in CIT v. Indian Institute of Management was distinguished on facts and legal context.

 

Court Order

The ITAT held that:

  • Government grants constituted only 47.85% of total receipts for AY 2016-17.
  • Government grants constituted only 9.77% of total receipts for AY 2017-18.
  • The statutory threshold prescribed under Rule 2BBB was not satisfied.
  • The University could not be regarded as substantially financed by the Government.

Accordingly:

  • Exemption under Section 10(23C)(iiiab) was denied.
  • Orders of the Assessing Officer and CIT(A) were upheld.
  • Appeals of the assessee were dismissed.

 

Important Clarification

The Tribunal categorically clarified that:

·         Only Government grants received during the relevant previous year are relevant.

·         Cumulative Government funding since inception is irrelevant.

·         Historical grants cannot be aggregated with current-year grants.

·         Land allotment, infrastructure support and capital assistance cannot be considered for satisfying Rule 2BBB.

·         Government grants must exceed 50% of total receipts in the relevant previous year.

·         Even a marginal shortfall below 50% results in denial of exemption.

 

Sections Involved

  • Section 10(23C)(iiiab), Income-tax Act, 1961
  • Rule 2BBB of the Income-tax Rules, 1962
  • Explanation to Section 10(23C)(iiiab)