TaxTMI 
TaxTMI 
2008 (12) TMI 310
X X X X Extracts X X X X
X X X X Extracts X X X X
....o lend money to whom so ever he thinks fit, does not amount to charitable activity. 4. The Commissioner of Income-tax (Appeals)-V has not appreciated the fact that charging of interest at exorbitant rate of 28 per cent. per annum (if calculated on reducing balance method) is nothing but, exploitation of the poor people who are in need of loan and not charitable activity. 5. The Commissioner of Income-tax (Appeals)-V has not appreciated the fact that charging of interest at exorbitant rate of 28 per cent. per annum (if calculated on reducing balance method) is nothing but exploitation of the poor people who are in need of loan and not charitable activity." In brief, the facts are that the assessee-trust based on the registration granted under section 12A of the Act was filing return of income and claiming exemption of its income year-to-year under section 11 of the Act. The assessee-trust has been registered under section 12A of the Act vide order of the Commissioner of Income-tax-II, Bangalore in No. Trust/718/10A/Vol.A.1/B.614/98-99/CIT-II dated April 23, 1998, with effect from September 3, 1997. Besides the trust has been notified under section 35AC of the Income-tax 1961, as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom money lenders and the interest charged by them are higher than the interest charged by the appellant; the appellant also incurred expenses on account of financial cost for obtaining loan from banks, pay of the employees, administrative cost; assets and income of the trust are not available for the personal benefit of the trustee and board members and micro credit to poor women for poverty alleviation and for the benefit of socio-economically weaker sections of the society. As already mentioned in paragraph 5.4 of this order, the only dispute between the appellant and the Department are that the work of the trust is not charitable and the interest charged by the appellant is exorbitant which the appellant strongly objected to it. 6.2 The Assessing Officer has not pointed out as to how the interest charged by the appellant is exorbitant, in his opinion. The appellant has to charge interest from the loans given to the members in order to effectively carry out its micro credit programme for poverty alleviation. The video recording clips showing the seminars conducted in rural areas, how the loans were made available to poor women and their participation in the programme have shown....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted the order of the Commissioner of Income-tax (Appeals). After going through the material on record and the rival submissions, we are not inclined to interfere with the order of the Commissioner of Income-tax (Appeals). We find it undisputed that the assessee was granted registration under section 12A of the Act, with effect from September 3, 1997. The Department also accepted the returns for the last many years allowing exemption under section 11 of the Act. It is only for the assessment year 2005-06, the Department is taking a different view. It is not in dispute that the assessee's work is lending money to the poor women for income generating activities. The loan given to project members are borrowed from bank. The beneficiaries are poor families. If the women in the assessee's project have to borrow money from the money lenders, they have to pay many times higher interest than what the assessee has charged. It is also not in dispute that the assessee incurs financial costs for obtaining loans from banks. The assessee also has to make payment towards salaries and other administrative activities of the trust. There is nothing on record to suggest that the assets and income of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e notice was issued on March 28, 2006 as to why the application for renewal of recognition under section 80G should not be rejected as the assessee's activities do not conform to provision of section 2(15) of the Income-tax Act. After considering the assessee's explanation with regard to recognition under section 80G the assessee's claim was rejected vide order dated June 28, 2006, by observing as under: "1. The assessee's primary activity has been availing the loans from various financial institutions at interest rates varying from 9 to 12 per cent. and disbursing the loans to the so called target group at exorbitant rates. A typical loan agreement with the borrower specified that an amount of Rs. 5,000 borrowed will have to be repaid in weekly instalments if Rs. 115 per week totalling to Rs. 5,750 in 50 installments. In addition an amount of 5 per cent. of the loan amount is collected as PSC charge or bank charge when the loan is disbursed. This works out to 15 per cent. flat per annum or approximately 28 per cent. on diminishing balance on monthly instalments. This rate of interest by no stretch of imagination can be called reasonable. The margin of interest is anything between....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hus the so called beneficiary population is actually getting loans at rates even higher than the rate at which the applicant-trust is receiving loans. The real purpose of establishing a trust as distinguished from the ostensible purpose appears to be making profit as evident from the rate of interest charged from the borrowers. Having received donations for charitable purposes instead of being spent on charity they are utilized for earning more returns indirectly in the garb of charity. It is clear that object involves carrying on a business activity for profit. The test which is to be applied is whether the pre-dominant object of the activity involved in carrying out the object of general public utility is to sub-serve the charitable purpose or earn profit. In the instant case it is that the profit motive appears to be pre-dominant and general public utility is only incidental. When profit making is the pre-dominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose." The assessee's earlier application filed on December 2, 2005 was rejected vide order No. DIT(E)/80G(R)/130/W-17(1)-2006-07 dated June 28, 2006. S....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee; "(i) The main objective of the trust is to alleviate poverty in a sustainable and sustained manner, of ever larger numbers of poor people, particularly poor women. (ii) The trust aims to facilitate entrepreneurial activities by provision of micro credit to poor rural women. It will also work to encourage savings habit amongst such poor people. It will work to help create financial resources to serve the poor women and their families to tide over the many emergencies they face regularly, such as ill health etc. The trust will work to facilitate overall social development of poor women, their families and their communities to the degree possible, with minimal possible additional financial input. The trust will work to help establish institutions to do all of the above in a sustained and sustainable manner for the long run. (iii) The trust may also engage in education, research, health promotion and any other object of general public utility. (iv) The other aims and objects of the trust shall be: a. To promote the principles of self-help and self-reliance amongst the poor sections of the population. b. To promote and administer schemes for self employment of the perso....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nded loan facility for the last four years under various groups. ------------------------------------------- Financial Amount of loans advanced year (Rs.) ------------------------------------------- 2002-03 1,30,16,000 2003-04 4,54,80,000 2004-05 9,49,23,000 2005-06 9,41,34,000 (up to Sept. 2005) ------------------------------------------- The loans were extended to the following categories of activities; 1. Agriculture 2. Horticulture 3. Animal husbandry 4. Petty services 5. Petty manufacturing 6. Petty trading 7. Life quality ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....widely recognized not only in India, but through out the developing world as well as in many developed countries. The assessee is undisputedly engaged in such a poverty alleviation programme and this point has also been considered by the Income-tax authorities in earlier years. While granting recognition under section 80G in 1997-98 and also during the renewal of recognition of previous year, which was granted by the Joint Commissioner of Income-tax, after carefully examining all the relevant facts, the assessee is running similar activities since its inception. So, there is nothing on record to justify the disqualification of trust for recognition under section 80G of the Income-tax Act. With regards to objection that loans are obtained on a very low interest ranging from 9.5 per cent. per annum by hypothecating the book debts and movable assets and lending at a substantially higher rate of interest to the beneficiaries is concerned, we find that the loans given by the financial institutions and banks are at the rates normally charged to any other micro credit organization and there is nothing on record to suggest that special benefit has accrued to the assessee-trust from the loa....