2018 (6) TMI 1310 - AT - Income Tax

Appeal denied for microfinance income exemption, trustee remuneration disallowed, cash payment disallowance overturned.

The appeal challenging the exemption for microfinance income under Section 11 was dismissed as the activities were deemed commercial rather than ... Exemption u/s 11 - microfinance activity - charging higher rate of interest from the poors - Held that:- Assessee was charging 29% interest which is far above the rate prescribed by the law i.e. The Kerala Money Lenders Act. This shows that the assessee is in the business of lending at 29% per annum to the poor, which is not as envisaged in the assessee-Trusts’s objects. By collecting interest at such a higher rate the assessee has deviated from its objective of doing charity, especially in view of the fact that the difference of interest over deposits and disbursement in cases of banks and non banking financial companies is less than 10%. Micro finance activity conducted by the assessee is strictly commercial in nature and with profit motive. The assessee had even collected penal interest from their defaulter which clearly shows that the trust was not even considerate with the poor loanees and was purely acting just as any money lender. From the above the activity of the assessee is business in nature and there is no element of charity involved in the activities of the assessee and it is purely commercial. In view of this, the action of the lower authorities in denying exemption u/s. 11 of the Act is confirmed. Disallowance u/s. 36(1)(vii) - Held that:- Going into the merit of the issue raised by the assessee, in our opinion under section 36(1)(vii) of the Act, only debts which were written off as irrecoverable in the books of accounts of the assessee in the previous year relating the assessment year is to be claimed as deduction as bad debts while computing the income of the assessee. There is no question of granting any relief towards provision for bad and doubtful debts while computing the business income of the assessee. No merit in the above ground raised by the assessee in both the years. This ground of appeals of the assessee is dismissed. Disallowance towards donations and gifts - Held that:- Since the donations/gifts are not expended wholly and exclusively for the purpose of business of the assessee and it is in the nature of charities, it cannot be allowed while computing the income of the assessee. Accordingly, the disallowance made by the Assessing Officer and confirmed by the CIT(A) is justified. Hence, this ground of appeal of the assessee for the assessment year 2009-10 is dismissed. Disallowance of remuneration paid - Held that:- There is no authorization in the Trust Deed to pay remuneration to Mr. Jayson Joy and Mr. Job M Joy. These unauthorized remunerations paid by the Trust to the employees have not been sanctioned in the Trust Deed. Hence, we find no infirmity in the order of the CIT(A) and confirm the same. Disallowance on self made vouchers - Held that:- The expenditure was disallowed on the basis of self made vouchers to the extent of ₹ 5 lakhs. In a normal trade practice, it is not possible to prove 100% bills and receipts from the recipients and there is every chance of making payments by way self made vouchers. However, there is every chance of inflating the expenditure by way of self made vouchers. Hence, we direct the Assessing Officer to disallow only 20% of ₹ 5 lakhs, i.e. ₹ 1 lakh towards self made vouchers. Hence, this ground of appeal of the assessee is partly allowed. Disallowance u/s. 40A(3) being 20% of ₹ 6,50,000/- paid as cash for land purchase - Held that:- The payment is made towards purchase of land. The capital expenditure is not charged to P&L account as expenditure. Being so, section 40A(3) have no application to the assessee’s case. Hence, this ground of the assessee is allowed. Issues Involved:1. Treatment of income from microfinance activity for exemption under Section 11 of the I.T. Act.2. Disallowance of provision for bad and doubtful debts.3. Disallowance of donations and gifts.4. Disallowance of remuneration paid to trustees.5. Disallowance of expenses based on self-made vouchers.6. Disallowance under Section 40A(3) for cash payments for land purchase.Detailed Analysis:1. Treatment of Income from Microfinance Activity:The primary issue was whether the income from the assessee's microfinance activity qualifies for exemption under Section 11 of the I.T. Act. The assessee, a charitable trust registered under Section 12A, claimed this income as exempt, arguing that the microfinance activity is a charitable activity under Section 2(15) of the Act. The Assessing Officer (AO) denied the exemption, asserting that charging 29% interest on loans borrowed at 12% constituted a business activity, not charity. The AO referenced the ITAT Bangalore Bench decision in Janalakshmi Social Services vs. DIT(Exemptions), which held that microfinance could be both charitable and business in nature. The CIT(A) upheld this decision.The Tribunal examined the scope of the amendment to Section 2(15) brought by the Finance Act, 2008, which excluded activities involving trade, commerce, or business from the definition of 'charitable purpose' if they involved any consideration. The Tribunal concluded that the assessee's activities were commercial in nature, as evidenced by the high-interest rates and penal interest charged, which deviated from the trust's charitable objectives. Consequently, the microfinance activity did not qualify for exemption under Section 11.2. Disallowance of Provision for Bad and Doubtful Debts:The assessee claimed provisions for bad and doubtful debts as deductions, which were disallowed by the AO under Section 36(1)(vii) of the Act. The CIT(A) confirmed this disallowance. The Tribunal upheld this decision, stating that only debts written off as irrecoverable in the books of accounts are deductible, not mere provisions for bad debts.3. Disallowance of Donations and Gifts:For the assessment year 2009-10, the assessee claimed deductions for donations and gifts, which were disallowed by the AO and upheld by the CIT(A). The Tribunal agreed with the lower authorities, stating that these expenses were not incurred wholly and exclusively for the business purposes of the assessee and were in the nature of charities, thus not allowable as deductions.4. Disallowance of Remuneration Paid to Trustees:The assessee paid remuneration to two trustees, which was disallowed by the AO on the grounds that the trust deed did not authorize such payments, and the trustees lacked professional qualifications. The CIT(A) confirmed this disallowance. The Tribunal upheld the decision, noting the lack of authorization in the trust deed for such payments.5. Disallowance of Expenses Based on Self-made Vouchers:The AO disallowed Rs. 5 lakhs of expenses supported by self-made vouchers, which was confirmed by the CIT(A). The Tribunal partially allowed the appeal, directing the AO to disallow only 20% of Rs. 5 lakhs (i.e., Rs. 1 lakh), acknowledging the practical difficulties in obtaining receipts for all transactions in rural areas but recognizing the potential for inflated expenses.6. Disallowance under Section 40A(3) for Cash Payments for Land Purchase:The AO disallowed 20% of Rs. 6,50,000 paid in cash for land purchase under Section 40A(3), which was confirmed by the CIT(A). The Tribunal allowed the appeal, stating that Section 40A(3) applies to expenditure charged to the profit and loss account, not to capital expenditure like land purchase.Conclusion:- The appeal regarding the exemption for microfinance income under Section 11 was dismissed.- The disallowance of provisions for bad debts, donations, and gifts was upheld.- The disallowance of remuneration to trustees was upheld.- The disallowance of expenses based on self-made vouchers was partially allowed.- The disallowance under Section 40A(3) for cash payments for land purchase was overturned.- The stay petitions were dismissed as infructuous.