The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) has held that interest accrued on unspent government grants temporarily parked in FDRs does not constitute an independent source of income, rather, it partakes of the same character as the underlying grants. Where the sole source of funding of an educational institution is government grants and contributions from government-owned entities (such as NTPC and NHPC) made for a specific public purpose, such institution must be regarded as wholly financed by the Government for the purposes of exemption u/s 10(23C)(iiiab), and the condition of Rule 2BBB is deemed satisfied.
The ITAT therefore directed the AO to grant the exemption u/s 10(23C)(iiiab) of the Income Tax Act as claimed by the assessee and to accept the returned income of the assessee.
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The Division Bench comprising Laliet Kumar (Judicial Member) and Manoj Kumar Aggarwal (Accountant Member) observed that the assessee’s only sources of funding were government grants, contributions from NTPC and NHPC, and interest accrued on unspent grants parked in FDRs. The Tribunal held that the interest income earned on FDRs was merely incidental to the grants and would bear the same colour and character as the source grants themselves. Accordingly, such interest could not be treated as an independent source of income for the assessee.
The Tribunal further noted that the entire surplus of Rs. 987.78 Lacs had been transferred to the Balance Sheet under the head “revenue grants,” reinforcing that the funds retained their character as grants. On these facts, the Tribunal concluded that the assessee was fully financed by the Government and that the condition under Rule 2BBB stood fully satisfied.
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Briefly, Hydro Engineering College Society, a society registered under the Societies Act and set up to establish and run an engineering college at Bilaspur, Himachal Pradesh, was affiliated with AICTE and HP Technical University, Hamirpur. The land for the college was allotted by the Government of Himachal Pradesh, and the construction funds were contributed by NTPC and NHPC. The college was still under construction during AY 2019-20, and no income was generated from its operations. Since the grants received were not immediately spent, they were parked in Fixed Deposit Receipts (FDRs), on which interest income accrued to the assessee. The assessee did not file its return of income, following which the case was reopened and a notice u/s 148 was issued. The assessee thereafter filed a return declaring ‘Nil’ income and claimed exemption u/s 10(23C)(iiiab) of the Income Tax Act.
The Assessing Officer (AO), in the proceeding u/s 147 r.w.s. 144B, noted that the total receipts of the assessee were Rs. 10.02 Crores, of which government grants amounted to Rs. 5 Crores, constituting only 49.89% of total receipts, falling marginally short of the 50% threshold prescribed under Rule 2BBB of the Income Tax Rules. On this basis, the AO denied the exemption u/s 10(23C)(iiiab), treated the assessee as an Association of Persons (AOP), and assessed the net surplus of Rs. 987.78 Lacs (i.e., Rs. 10.02 Crores less Rs. 14.39 Lacs spent on objectives) as business income. On appeal, the CIT(A), NFAC upheld this denial solely on the ground that the 50% threshold under Rule 2BBB was not met. A consequential penalty u/s 270A was also levied and confirmed.
