2020 (8) TMI 502 - AT - Income Tax

Assessee denied tax exemption for microfinance activities not deemed charitable under Income Tax Act

M/s. Shalom Charitable Ministries of India Versus The Asst. Commissioner of Income-tax, Circle 1 Palakkad.

M/s. Shalom Charitable Ministries of India Versus The Asst. Commissioner of Income-tax, Circle 1 Palakkad. - [2020] 81 ITR (Trib) 20 (ITAT [Coc]) Issues Involved:1. Whether the CIT(A) is justified in confirming the A.O.’s action in denying the benefit of the claim of deduction u/s 11 of the I.T. Act for the assessee's microfinance activities.Issue-Wise Detailed Analysis:1. Denial of Exemption u/s 11 of the I.T. Act:The assessee, a trust, claimed exemption under section 11 of the I.T. Act for the assessment years 2010-2011 and 2011-2012. The Assessing Officer (A.O.) denied this exemption on the grounds that the assessee was engaged in microfinance activities, charging exorbitant interest rates from its beneficiaries, which did not qualify as charitable activities. Consequently, the income claimed as exempt under section 11 was assessed as business income.Upon appeal, the CIT(A) upheld the A.O.'s decision, referencing the Tribunal's earlier order for the assessment years 2007-2008 and 2009-2010, where it was determined that the assessee's microfinance activities were not charitable in nature and thus not entitled to the benefit under section 11.Tribunal's Findings:The Tribunal reiterated its earlier decision, emphasizing that the term 'charitable purpose' under section 2(15) of the Act includes relief of the poor, education, medical relief, and advancement of any other object of general public utility. However, the proviso added by the Finance Act, 2008, excludes activities involving trade, commerce, or business from being considered charitable if they involve any activity of rendering service in relation to trade, commerce, or business for a fee, irrespective of the income's use or application.The Tribunal noted that the assessee's microfinance activities involved charging interest rates significantly higher than the borrowing rates from commercial banks, which indicated a profit motive rather than charitable intent. The interest rates charged by the assessee (29% per annum) were substantially above the rates prescribed under the Kerala Money Lenders Act, 1958, and the difference between the borrowing and lending rates was deemed excessive.The Tribunal also considered the Malegam Committee Report, which suggested a maximum interest rate of 24% for microfinance institutions, further supporting the view that the assessee's activities were not charitable.Legal Precedents:The Tribunal reviewed various judgments cited by the assessee, including decisions from the ITAT Visakhapatnam, ITAT Delhi, and ITAT Bangalore Benches, as well as Supreme Court rulings. However, it found that these cases were either not directly related to the issue at hand or supported the view that the assessee's activities were commercial rather than charitable.Conclusion:The Tribunal concluded that the microfinance activities conducted by the assessee were commercial in nature and did not qualify as charitable activities under section 2(15) of the Act. Consequently, the assessee was not entitled to the exemption under section 11 for the assessment years in question. The appeals and stay applications filed by the assessee were dismissed.Order Pronounced:The order was pronounced on the 5th day of March, 2020, dismissing the appeals and stay applications filed by the assessee.