2015 (8) TMI 609 - AT - Income Tax

Micro-finance activities not charitable under Income Tax Act; Exemptions denied.

The Income-tax Officer, Madurai Versus Kalanjiam Development Financial

The Tribunal found that the micro-finance activities conducted by the assessee were commercial in nature and did not meet the criteria for charitable ... Entitlement to exemption u/s.11 and 12 - CIT(Appeals) observed that the assessee is a company without profit motive and the micro finance business carried on by the assessee falls under the category of ‘relief to poor’ and hence, it is carrying on charitable activity u/s.2(15) of the Act, so as to grant exemption u/s.11 and 12 of the Act - Held that:- In the present case, the assessee is having reserves and surplus at ₹ 50,89,576/-. Contrary to this, the assessee is having revolving fund at ₹ 66,33,800/-, which was availed by hypothecation of their debt to various necessary banks. Further, the assessee raised secured loans and unsecured loans @ 11% totalling to ₹ 16,35,54,090/-. Thus, it means that it has raised loans to advance to the customers by paying interest and the assessee is not having own corpus in a formal capital so as to advance the loan. The assessee is providing loans by association with various commercial banks by raising loans from them. Such kind of micro finance activity cannot be termed as charitable activity rather than it is a business activity. In order to become a charitable activity, the institution must have advance loans at a subsidised rate of interest. The assessee is availing loans from banks and advance the same and admitted that it has advanced the loans to the customers at 13%. It is a commercial rate prevailing in the market. By advancing loans at that rate of interest cannot be considered as an activity carried on by the assessee as charitable and for the benefit of the public. When the assessee carried on micro finance activity in a commercial line, then it is not a charitable activity but an activity to expand the finance business by contracting weaker section of the public and it does not involve any charitable activity. Therefore, looking into the activities carried on by the assessee, we fully agree with the findings of the AO and this view of ours is squarely covered by the decision of the Tribunal in the case of Janalakshmi Social Services (2008 (8) TMI 606 - ITAT BANGALORE ). The assessee relied on various judgments, which cannot be applied to the facts of the present case, as the assessee is carrying on micro finance business in a commercial manner so as to earn profit and there is no iota of charity carried on by the assessee so as to grant exemption under sec.11 of the Act. Accordingly, we are inclined to uphold the order of the AO and reverse the order of the CIT(Appeals). - Decided in favour of revenue. Issues Involved:1. Delay in filing the appeal.2. Classification of micro-finance activity under charitable purposes per section 2(15) of the Income Tax Act.3. Nature of income from micro-finance activities and its classification as business income.4. Relevance of previous judicial decisions and jurisdictional ITAT decisions on similar cases.5. Validity of registration under section 12AA(3) and its implications.6. Applicability of provisions of other Acts like the Companies Act in overriding the Income Tax Act.Detailed Analysis:1. Delay in Filing the Appeal:The Tribunal addressed the delay of 13 days in filing the appeal by the Revenue. The Department filed a petition for condonation of delay, and after reviewing the reasons provided, the Tribunal found a reasonable cause for the delay and admitted the appeal for adjudication.2. Classification of Micro-Finance Activity:The primary issue was whether the micro-finance activity falls under 'advancement of any other object of general public utility' or 'relief of poor' as defined in section 2(15) of the Income Tax Act. The CIT(A) held that the micro-finance activities of the assessee, a company registered under section 25 of the Companies Act, were for the relief of the poor and thus charitable. However, the Revenue argued that the activities were commercial in nature, involving substantial interest and service charges, and thus fell under 'advancement of any other object of general public utility,' which is not considered charitable if it involves trade, commerce, or business.3. Nature of Income from Micro-Finance Activities:The Tribunal examined the income generated from micro-finance activities, noting that the assessee collected significant amounts in interest and service charges. The Revenue contended that the interest spread and service charges indicated a profit motive, making the activities business-oriented. The Tribunal agreed with the Revenue, stating that the micro-finance activities were conducted in a commercial manner, with interest rates comparable to market rates, thus constituting a business rather than a charitable activity.4. Relevance of Previous Judicial Decisions:The Tribunal considered various judicial precedents cited by both parties. The Revenue relied on decisions from the Panaji and Bangalore ITAT benches, which held that micro-finance activities with high interest rates and service charges were commercial. The assessee cited several cases supporting the charitable nature of micro-finance activities. However, the Tribunal found the Revenue's arguments more compelling, emphasizing the commercial nature of the assessee's activities.5. Validity of Registration under Section 12AA(3):The Revenue argued that the CIT(A) erred in relying on the decision not to withdraw the registration under section 12AA(3), ignoring the legal position that registration need not be withdrawn if the assessee's activities are commercial. The Tribunal noted that the CIT-1, Madurai, had initiated but dropped proceedings to withdraw registration under section 12AA(3). The Tribunal agreed with the Revenue that the assessee's activities were not charitable and thus not entitled to exemption under sections 11 and 12.6. Applicability of Provisions of Other Acts:The Tribunal addressed the argument that the provisions of the Companies Act, which restrict profit distribution for section 25 companies, should not override the Income Tax Act. The Tribunal agreed with the Revenue that the character of the assessee as a section 25 company does not preclude it from being assessed under the Income Tax Act, emphasizing that the assessee's micro-finance activities were commercial and thus not charitable.Conclusion:The Tribunal concluded that the micro-finance activities carried out by the assessee were commercial in nature and did not qualify as charitable activities under section 2(15) of the Income Tax Act. Consequently, the assessee was not entitled to exemption under sections 11 and 12. The Tribunal reversed the order of the CIT(A) and upheld the assessment made by the AO, allowing the Revenue's appeal.