The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) upheld Dr. Babasaheb Ambedkar Open University’s ( BAOU ),the assessee’s exemption under Section 10(23C)(iiiab) of the Income Tax Act,1961 for Assessment Year(AY) 2014-15, which was previously denied by the Commissioner of Income Tax (Exemptions) [CIT(E)].
Dr.Babasaheb Ambedkar Open University,appellant-assessee,a government-funded educational institution under the State Open University Act, 1994, did not initially file its income return for AY 2014-15. Consequently, a reassessment notice under Section 148 of the Act was issued on March 24, 2021.
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In response, the assessee filed its return under Section 147 on April 30, 2021, followed by a scrutiny assessment notice under Section 143(2) on June 15, 2021. Additional information was requested through Section 142(1) notices, to which the assessee responded via the e-filing portal. After review, the Assessing Officer(AO) accepted the exemption claim under Section 10(23C)(iiiab) of the Act.
The CIT(E) invoked Section 263 of the Act, questioning the assessee’s eligibility for exemption under Section 10(23C)(iiiab) for AY 2014-15, as it was not “substantially financed” by the government. The CIT(E) noted that government grants constituted only 13% of the total income of Rs.25,03,59,292/-, below the 50% threshold defined in Rule 2BBB (effective from AY 2015-16).
Additionally, the CIT(E) excluded Rs.10,17,71,205/- in interest income on government grants from government financing, despite the assessee’s claim under Rule 230(8) of the GFR to treat it as part of the grant. Citing the Visvesvaraya Technological University v. ACIT ruling, the CIT(E) concluded the institution was not substantially financed and directed the AO to reassess the exemption eligibility after verifying the facts.
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Aggrieved by the order of the CIT(E) the assessee appealed before the tribunal.
The Tribunal carefully considered the assessee’s submissions, the CIT(E)’s order under Section 263, and relevant judicial precedents. Section 263 empowered the CIT(E) to revise the AO’s order if it was both erroneous and prejudicial to revenue.
In this case, the CIT(E) had challenged the university’s exemption under Section 10(23C)(iiiab), contending that government grants (constituting 13% of total income) did not meet the “substantially financed” threshold. The CIT(E) excluded interest income on government grants from government financing and indirectly applied Rule 2BBB, which came into effect from AY 2015-16.
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The appellate bench noted that the assessee argued that interest earned on government grants should have been included in government financing per Rule 230(8) of the GFR, bringing government funding to 54%, and noted that similar exemptions had been accepted in prior years.
The AO, after examining the facts, had accepted the exemption without applying Rule 2BBB retrospectively, as it was not applicable for AY 2014-15, and relied on judicial precedents supporting the inclusion of interest income.
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The two member bench comprising Suchitra Kamble(Judicial Member) and Makarand V.Mahadeokar(Accountant Member) found that the AO’s order was neither erroneous nor prejudicial to revenue, as it was based on a correct application of law and facts. The CIT(E)’s exclusion of interest income and retroactive application of Rule 2BBB were incorrect.
In conclusion,the tribunal quashed the CIT(E)’s order under Section 263, allowing the assessee’s appeal.
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