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2015 (8) TMI 609
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....' comes under the last limb of the charitable purpose mentioned 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 4990/20....
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....istration u/s.12A of the Act by the CIT, Madurai in 2003. The assessee filed return 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....
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....s not mean that there is no profit motive. The motive of the assessee to garner profits manifests itself by the amendment the assessee 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 f....
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....e Revenue or any other authority. The poor are the only beneficiaries of the assessee's activities. The following points indicate that the activities 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 t....
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....t been so proven in the present case. The Latin maxim "generalia specialibus non derogant" (i.e., the general provision will not derogate from the special provision) must be applied 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 mus....
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....on of the two provisos to section 2(15). In the light of his submissions in relation to ground 2.1 above, according to him, the assessee carries on activities falling under "relief of the poor", being the first limb of the subsection. 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....
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....aritable. 7.7 The ld. AR contended that the assessee's micro-lending activities are carried out at an interest rate that is the borrowing rate plus a load of 2% of the amount of the borrowings. Therefore, where the interest rate on borrowings made 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 th....
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....pply its profit in promoting charity." 7.9. The ld. AR submitted that if the assessee's intention was to earn profit: (i) the assessee would not have given grants; (ii) the assessee's spread would not have been as low as 2%; (iii) the poor would not have been the only focus; (iv) the monetary limits of loans 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....
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.... ld. AR submitted that ground No.3, asserts that the interest spread is much more than 2% or 3% as charges are made under the caption "service charges". This is factually incorrect as it is an admitted position that it is actually interest that is styled as "service charges". The table of rates showing the relationship 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 provi....
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....of section 2 (15) and its provisos. 1. Socio Economic Development Association (supra) 2. Paragraph 9 of the decision of ITAT, Delhi in Disha Micro Credit He also relied on the judgement in the case of India Trade Promotion (371 ITR 333, 364), where the Delhi High court has held that in view of the statutory provisions of section 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 Fin....
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....oses would also fall under 'charitable purpose'. Obviously, this was not the intention of Parliament and hence I propose to amend the law to exclude the aforesaid cases. Genuine charitable organizations will not in any way be affected" (Emphasis supplied). 8.3 The learned counsel points out that, the amendment was brought about as a measure of 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 obje....
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....mes to the service in relation to the trade, commerce or business, it has to be examined whether the words "any trade, commerce or business" as they appear in the second limb of cl. (b) are in connection with the service referred to the trade, commerce or business pursued by the institutions to which the service is given by the assessee. If the said words 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....
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....support the main objectives are not in the nature of incidental to the business. They are supporting activities, at the maximum. The genesis of incidental activities must be from the principal activities themselves. There cannot be one source for the principal activities and another source for incidental activities. In the present case, even if activities of 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 s....