2014 (1) TMI 1902 - AT - Income Tax

Tribunal remits matter to DIT(E) for reassessment on validity of registration under section 12AA

M/s. Microcredit Foundation of India, Versus  The Asst. Commissioner of Income Tax (Exemptions) -IV, Chennai.

The Tribunal allowed both appeals of the assessee for statistical purposes, remitting the matter back to the DIT(E) to re-examine the conduct and ... Exemption u/s 11 - cancelling the registration granted to the assessee u/s 12AA invoking the provisions of the sec.12AA(3) - HELD THAT:- The matter has to be remitted back to the file of Ld. DIT(E) who shall examine the conduct of the assessee with respect to its activities performed during the relevant previous year and if they fall beyond the scope of Sec.2(15) and its objects, in this case, objects being ”relief to the poor”, Ld. DIT(E) may pass appropriate order as per law by canceling the registration invoking the section 12AA(3). DIT(E) shall also take note of ‘Report of the Subcommittee of the Central Board of Directors of Reserve Bank of India’ issued during the year January, 2011and the decisions in the case of Sinhagad Technical Education Society [2012 (3) TMI 262 - BOMBAY HIGH COURT] and in the case of CIT V. National Institute of Aeronautical Engineering Educational Society [2009 (7) TMI 94 - UTTARAKHAND HIGH COURT] in order to assess whether the activity conducted by the trust falls under the first limb of sec.2(15) of the Act or activities such as advancement of any other object of general public utility or any other activity which falls outside the scope of the sec.2(15) of the Act. The assessee company is engaged in any activity predominantly beyond the scope of Sec.2(15) of the Act and intents to grab the benefits of the relevant provisions of the Act under the garb of charity as a colorable device, Ld. DIT(E) shall be at liberty to invoke the provisions of Sec.12AA(3) of the Act. Appeals of assessee are allowed for statistical purposes. Issues Involved:1. Cancellation of registration under section 12AA(3) of the Income Tax Act.2. Assessment based on the cancellation of registration under section 12AA(3).Detailed Analysis:Issue 1: Cancellation of Registration under Section 12AA(3) of the Income Tax ActThe assessee, M/s. Microcredit Foundation of India (MFI), filed an appeal against the order of the Director of Income-tax (Exemptions) [DIT(E)] dated 21.12.2011, which canceled the registration under section 12AA(3) of the Income Tax Act, 1961. The primary contention was that the DIT(E) erred by canceling the registration, which was opposed to the law, facts, and circumstances of the case.The assessee, registered under section 225 of the Companies Act, had its registration under section 12AA of the Income Tax Act granted on 17.09.2012. The main objects of the assessee-company included channelizing funds to rural and urban poor, organizing Self Help Groups (SHGs), encouraging village development, and providing training and consultancy services.The DIT(E) analyzed the activities and income of the company, noting significant fees received from ICICI Bank, Madura Micro Finance Ltd., and insurance commissions from ICICI Prudential Life Insurance and Bajaj Allianz. The DIT(E) concluded that the assessee was engaged in the business of micro-finance, earning professional fees, and that the activities were in the nature of business ventures.The assessee argued that its main activity was 'relief to the poor' by organizing SHGs and assisting them in obtaining finance from banks and financial institutions. The fees collected from these institutions were to meet expenses and loan defaults, not from the SHG members.However, the DIT(E) concluded that the interest charged by financial institutions was higher due to the fees granted to the assessee, indicating a business nature. The DIT(E) held that the activities were not charitable and invoked section 12AA(3) to cancel the registration.Upon review, it was found that the DIT(E) did not examine the structure of the SHGs or the category of members to ascertain if the poor were benefitted. If the assessee extended its services to the poor, it would fall under 'relief to the poor' as per section 2(15) of the Act. However, if the activities were commercial, the benefits under sections 11 & 12 would not apply, and the registration could be canceled.The Tribunal cited various cases, including CIT Vs. Sarvodaya Ilakkiya Pannai, Kurinji Social Welfare Society Vs. ACIT, Disha India Micro Credit Mohalla, Mandir Ji-Vs CIT, and others, but found the facts of the present case distinct. The Tribunal noted that the DIT(E) failed to consider the entire facts and remitted the matter back to the DIT(E) for a thorough examination of the assessee's activities and their alignment with section 2(15).Issue 2: Assessment Based on the Cancellation of Registration under Section 12AA(3)Since the issue of cancellation of registration was remitted back for re-examination, the Tribunal also remitted the assessment case (ITA No.075/Mds./2013) back to the Assessing Officer. The Assessing Officer was directed to finalize the assessment afresh after the outcome of the proceedings before the DIT(E), ensuring sufficient opportunity for both parties to be heard.Conclusion:The Tribunal allowed both appeals of the assessee for statistical purposes, remitting the matter back to the DIT(E) to re-examine the conduct and activities of the assessee company. The DIT(E) was instructed to assess whether the activities fell under 'relief to the poor' or were commercial in nature, thereby determining the validity of the registration under section 12AA. The Assessing Officer was directed to reassess based on the outcome of the DIT(E)'s findings.Order pronounced on 09th January, 2014 at Chennai.