TaxTMI 
TaxTMI 
TaxTMI 
2015 (8) TMI 609
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....entioned in section 2(15) of the I.T. Act i.e., "advancement of any other object of general public utility", and wrongly holding that such activity falls under the head" relief of poor". 2.2 The Id. CIT (A) failed to take note that during the A.Y. 2009-10, the assessee earned interest and service charges of Rs. 1,27,24,442/-, which exceeded the threshold limit of Rs. 10 lakhs, thereby clearly bringing the assessee within the 1st & 2nd provisos to Sec.2(15) of the I.T. Act. 2.3 The Ld. CIT(A) failed to appreciate that after introduction of first proviso to section 2(15) w.e.f. 01.04.2009, irrespective of "nature of use" or "application" of such profits by a trust pursuing an object of "general public utility", the same would not be held to be a "charitable activity". This aspect has been correctly appreciated by the Hon'ble ITAT, Panaji Bench in the case of Entertainment Society of Goa v. CIT (2013) 34 taxmann.com 210 (Panaji-Trib.) at para 14 of its order, Amritsar ITAT in the case of Jammu Development Authority Vs CIT (2012)23 taxmann.com 343, against which SLP before Supreme Court stands dismissed vide SLP(C) No 4990/2014 dated 21.07.2014. Ground No.3: 3.1 The Id. CIT (A) err....
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.... of income for the assessment year 2009-10 on 24.9.2009 and was processed u/s.143(1) of the Act. The case was selected for scrutiny and notice u/s.143(2) was issued on 28.9.2009 and the case was heard on a number of occasions. 4.1. The assessee is a micro finance company operating as a financial intermediary between Banks and the SHGs. As per the annual report, main objective of the company is 'bridging the gap in micro finance to SHGs.' A perusal of their account books maintained revealed that as against the loans advanced to various SHGs, the assessee has raised overdraft facility and revolving fund assistance by hypothecation of their book debts with various nationalized banks. The AO noted that the assessee availed credit facilities from 12 different banks/financial institutions over the few years at interest rates upto 11%. These were advanced at interest rates with some mark-up, which is not very high. According to the AO, as per the annual report, the net profit from out of the above operations was at 20.44% in the financial year 2009-10. 4.2 The assessment was completed by assessing the income at Rs. 30,33,950/- by denying the exemption u/s.11 & 12 by invoking the provisi....
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....e made to its objects incorporating the words 'with interest' on 18.03.2003. The ld. DR also pointed out that this fact would also demolish the observation of the CIT(Appeals) made in para 7.4 where he states that the AO has accepted that the interest spread is less which proves that there is no profit motive. 6.2 According to the ld. DR, reference by the assessee to Circular No.110/24 dated 24th January 1973 in support of its claim is misplaced since there is no reference in the said circular to 'micro financing'. 6.3 The ld. DR further submitted that the concept of res judicata relied upon by the assessee does not apply to income tax proceedings, because each year is a separate proceeding. 6.4 Further, the ld. DR submitted that as per the claim of the assessee that as per the Memorandum of Association, the main object is 'relief for poor by all conceivable means'. According to the ld. DR, the word, 'poor' is a relative term and there cannot be a universal definition. However, as per the Report of the Expert Group to review the methodology for measurement of poverty by the Rangarajan Committee those spending more than Rs. 972 a month in rural areas and Rs. 1,407 a month in urba....
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.... of the assessee is one of relief to the poor and thus fall within the first limb of section 2(15) of the Act: 1. Assessee s loans are targetted at poor women who are organised in Self- Help Groups (SHGs) - usually of 20 women each. 2. During the relevant previous year, the reach of the assessee has gone up to 13174 SHGs. 3. The financial assistance is aimed at "livelihood security" and is lent for specific purposes such as agriculture, consumption, marriage, education, debt redemption, medical emergencies, income generating activities, house repairs etc., dairy farming, sanitation, etc. The nature of these purposes is, itself, indicative of the financial position of the borrowers. 4. The fundamental basis of the assessee's activities is that the assessee is able to extend financial assistance to people who are unable to access banks. The assessee does not (and cannot, by virtue of the restrictive nature of its objects) lend to the well-off (non-poor) sections of the population. 5. In any case, the assessee's relief to the poor extends far beyond just credit. The assessee also conducts and has conducted other activities such as training, capacity building, group promotion, and....
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....ed in the interpretation of section 2(15). In section 2(15), the residuary limb, "the advancement of any other object of general public utility" cannot derogate from the first limb, "relief of the poor". He relied on the judgment of the Supreme Court in CIT v. Shahzada Nand and Sons [1966] 60 ITR 392 (SC), wherein the apex court has affirmed this general principle of law as follows in the context of the tax laws: "Another rule of construction which is relevant to the present enquiry is expressed in the maxim, generalia specialibus non derogant, which means that when there is a conflict between a general and a special provision, the latter shall prevail. The said principle has been stated in Craies on Statute Law, 5th edition, at page 205, thus; "The rule is, that whenever there is a particular enactment and a general enactment in the same statute, and the latter, taken in its most comprehensive sense, would overrule the former, the particular enactment must be operative, and the general enactment must be taken to affect only the other parts of the statute to which it may properly apply. " But this rule of construction is not of universal application. It is subject to the conditi....
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....The application of the two provisos to section 2(15) is triggered only where the activities fall within the residuary limb, "the advancement of any other object of general public utility". Accordingly, he submitted that the two provisos have no application to the present case. 7.4 The ld. AR further submitted that the contention of the Revenue is based on the presumption that the microfinance activities are activities "in the nature of trade, commerce or business" as contemplated by the first proviso to section 2(15) and that the receipts therefrom are thus taxable. The ld. AR tried to establish that the activities of the assessee are not in the nature of trade commerce or business by giving following submissions. 7.5 The ld. AR submitted that the fact that the activities of the assessee are not in the nature of business is clear from the fact that the assessee comes within the scope of the Reserve Bank of India's (RBI) Notification No. DNBS.138/CGM(VSNM)-2000 dated January 13, 2000. The intention of this notification was to relieve entities like the assessee from the stringent procedural requirement (such as capital adequacy and registration with the RBI) applicable to for-profi....
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....by the assessee falls, the resultant benefit is passed on to the borrowers. This is demonstrated by the interest rates shown below. These facts have not been disputed by the Revenue thus far. In fact as per Non-Banking Financial Company - Microfinance Institutions (NBFC - MFI) Directions issued by the RBI, the margin cap laid down for micro loans to the poor is as high as 10% (loan portfolio exceeding Rs. 100 crores) and 12% (loan portfolio below Rs. I00 crores) based on the loan portfolio. The load of 2% cannot be done away with as it is a bare necessity to ensure the survival of the organisation. This load is applied towards administrative costs and bad debts. The surplus if any is only ploughed back for application towards its objects. In the light of the license under section 25 of the 1956 Act, the assessee actually has no other legally permissible option. To suggest that the load of 2% indicates an intention to earn profit and that this load would vitiate the charitable character would be to condemn the assessee to financial failure. Financial stability is a prerequisite for the survival of every entity including those carrying on charitable activities. To interpret section 2....
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....ans extended would not have been as low as they are; (v) other activities such as training, capacity building, promotion of SHGs and tsunami relief would not have been carried out; and (vi) the assessee would not have chosen to obtain a licence under section 25. He also drew our attention to the judgement of the Delhi High Court in Institute of Chartered Accountants of India v. DGIT( E) [2013] 358 ITR 91 (Delhi), where the Court held that the words "trade, commerce or business" occurring in section 2(15) must be interpreted restrictively while bearing the purposes of that subsection and the exemption provisions in mind. He also placed reliance on the judgment of the High Court of Andhra Pradesh in CIT v. Spandana Rural and Urban Development Organisation (ITA No.304 of 2013). Further, he placed reliance on the following paragraph in the speech of the Finance Minister in the context of the amendment of the first proviso to sec.2(15) of the Act: "180. "Charitable purpose" includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce....
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....between the borrowing rates and the lending rates has not been controverted by the Revenue. 7.12. The ld. AR submitted that the reliance made by the Revenue in Socio Economic Development Association v. ITO, Ward 11(4), Madurai [2011]-TIOL- 754-ITAT-Mad and in Janalakshmi Social Services v. DIT (Exemptions) [2009] 33 SOT 197 (Bang.)- is not relevant to the facts of the present case. 7.13. According to the ld. AR, the assessee is pursuing "the advancement of any other object of general public utility" which presumption is clearly incorrect and which has been addressed above. He submitted that in Entertainment Society of Goa (supra), registration was cancelled under section 12AA(3) invoking proviso to section 2 (15) which was upheld by the ITAT. However in this paragraph the ground states that registration cannot be cancelled under section 12 AA (3) invoking proviso to section 2 (15). The ld. AR submitted that the CIT - 1, Madurai initiated action u/s.12AA(3) invoking the proviso to section 2(15), but dropped the proceedings. Before the CIT-1, the assessee emphasised that it falls under relief of poor with oral and written submissions. He further submitted that ground 5.2 also deals....
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....ection 25 of Companies Act, profit making cannot be held to be the object of the entity and he prayed that the order of the CIT(Appeals) is to be confirmed. 8. We have heard both the parties and perused the material on record. Sec. 11 of the Act stipulates that the income from property held for charitable or religious purpose shall not be included in the total income of the previous year of the person in receipt of the income to be given effect in the manner as specified therein. The term 'charitable purpose' has not been defined under the statute; but for the inclusive nature of the term as specified under s. 2(15) of the Act, which as existed before the amendment is as follows : "Sec. 2(15) : "Charitable purpose" includes relief of the poor, education, medical relief and the advancement of any other object of general public utility." As per Finance Act, 2008, the said provision was amended adding a 'proviso' w.e.f. 1st April, 2009 as follows : "Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any....
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....rationalization and simplification, streamlining the definition of charitable purpose and not as a measure of taxation. It is also stated that the concept of charity in India is wider, simultaneously adding that, by virtue of the amendment, the position that existed prior to 1st Feb., 1984 has been brought back and that is all. This however will not tilt the balance in any manner in the case of the assessee so as to take the activities outside the charitable purpose, particularly in view of the fact that micro finance business will not constitute any trade or business. According to the ld. AR, to perform charity, income is inevitable and contended that the activities being pursued by the assessee may constitute a trade or business, if it is not applied for the purposes of charity. Contrary to this, the ld. DR submitted that though the object of the assessee is to carry on charitable activities, but it does not carry those charitable activities, and it was only carrying on micro finance business in a commercial manner, which cannot be construed as charitable activity. In other words, it was contended by the ld. DR that the assessee carried on activities in a business oriented manner....
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.... are actually in respect of the trade, commerce or business of the assessee itself, the said clause [second limb of the stipulation under cl. (b)] is rather otiose. Since the activity of the assessee involving any trade, commerce or business, is already excluded from the charitable purpose by virtue of the first limb [cl. (a)] itself, there is no necessity to stipulate further, by way of cl. (b), adding the words "or any activity of rendering any service in relation to any trade, commerce or business ..................". As it stands so, giving a purposive interpretation to the statute, it may have to be read and understood that the second limb of exclusion under cl. (b) in relation to the service rendered by the assessee, the terms "any trade, commerce or business" refers to the trade, commerce or business pursued by the recipient to whom the service is rendered and in such circumstances, the activities carried on by the assessee cannot be considered as charitable activities. 8.6. The activities carried on by the assessee cannot be considered as activities of medical relief or education or relief of the poor. It is true that the activities carried on by the assessee take care of ....
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....f the assessee were stated to be relief of poor, it was not possible to conclude that running of business in the form of micro finance is incidental to carrying on of main objective of the assessee-trust and it is the main business of the assessee. Therefore, the assessee is not protected by the provision stated in section 11 (4A), either." 8.7. In the present case, the assessee is having reserves and surplus at Rs. 50,89,576/-. Contrary to this, the assessee is having revolving fund at Rs. 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 Rs. 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.....