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2023 (9) TMI 256
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....;s case. 3. The learned CIT[A] has erred in holding that the microfinance activity carried on by the appellant would be in the nature of business and therefore, hit by the proviso to section 2[15] of the Act under the facts and in the circumstances of the appellant's case. 4. The learned CIT[A] erred in holding that the activities of the appellant are carried on for "commercial gins with predominant objective to make profit" on the insignificant consideration that the appellant is charging 50% higher rate of interest for the loans provided to SHG when compared to the borrowing cost, without appreciating that the higher rate of interest charged was only to cover the administrative costs and possibility of default in recovery from the beneficiaries especially since these loans were advanced without any security other than the personal guarantee of the poor people and therefore, the finding that the microfinance activity of the appellant was in the nature of business is opposed to law and facts of the appellant's case. 5. The learned CIT[A] is further not justified in holding that the activities carried on by the appellant would fall within the limb "advancement of any other....
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.... may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs." 2. The assessee, a charitable trust enjoys registration u/s. 12AA vide order in F.No. N-24/12A/CIT/MNG/2004-2005 dated 10.01.2005 of the CIT, Mangalore. 3. The assessee trust was formed in terms of the Deed of Trust dated 08.07.2004 and Amendment Deed dated 29.11.2004 and is engaged in the charitable activity of providing relief to the poor especially in rural areas. The objects of the assessee as per the trust deed, is as under: Main objects of the Trust: 1. To bring out people's awareness regarding financial, Social and Cultural Developments in rural areas and assist them to become good citizens. 2. To foster among rural women an awareness of their situation and promote their organization for their own betterment to promote self employment activities through trained people, to educate them in children care responsible parenthood, home science and happy family life. 3. To conduct and run nursery and kindergarten or Primary, Higher Primary, Secondary Schools and Colleges for facilitate children's full growth and to work for their healthy car....
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.... yoga etc. and to arrange all round development. 20. To provide help to self-helping institution by providing insurance or otherwise." 4. It is submitted that in accordance with the aforesaid object Clause No. 20 of the trust, the assessee helps Self-Help Groups [SHG's] comprising of rural poor people to avail benefits of insurance and microfinance. It is submitted that, the assessee gives loans without any security to these SHG's and also provides benefit of insurance for the members of these SHG's, and that such activity is being carried on by the assessee for the past several years. It is submitted that the 12AA certificate dated 10.01.2005 is valid for the year under consideration w.e.f. 08.07.2004. It is also submitted that the registration is granted to the assessee as a Public Charitable Trust. 5. For the year under appeal, the assessee filed its return of income on 30.10.2017 reporting Nil income after claiming exemption u/s. 11 of the act. The assessee computed its income based on the receipts and payments account and arrived at Nil income. 6. The case was selected for scrutiny and notice u/s. 143(2) of the act along with notice u/s. 142(1) was issued to the assessee ....
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....tion out of total receipt (Rs.13,14,55,733/- for the year. Thus, 82% of the total receipts for the year were received from the appellant from the activities of micro financing and insurance. In this regard it is mentioned that during the year appellant has generated a surplus of Rs. 5.74 crores. Here it would he. relevant to mention that if a charitable organization carrying out objects of 'advancement of general public utility' is involved in carrying on any activity in the nature of. trade, commerce, business or is charging fees for services in relation to any trade, commerce, business, then it is excluded from being 'charitable.' The profit motive behind such business, commerce or trade activity is not required to be separately examined and proved for applicability of proviso to section 2(15) of the Act. The specific amendment, by way of proviso to section 2(15) w.e.f. A.Y. 2009-10 does not provide for carrying out business trade or commerce per se for applicability of proviso, rather the stipulation in the proviso is 'in relation to' which is to be interpreted and applied in that context in a wider term and not to be confined to carrying out trade, busin....
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....w to make profit. If a person buys goods with a view to sell them for profit, it is 1111 ordinary case of trade. If the transitions are on a large scale it is called commerce. Nobody can define the volume, which would convert a trade into commerce. For the purpose of the first proviso to section 2(15), trade is sufficient, therefore, this aspect is not required to he examined in detail. The word "business" is the broadest term and it encompasses trade. commerce and other activities. Section 2(13) of the Income-tax Act defines the term "business" as under: Definitions....... (13) 'business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture." The word "business" is a word of large and indefinite import. Section 2(13) defines business to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The intention of' the Legislature is to make the definition extensive as the term "inclusive" has been used. The Legislature has deliberately departed from giving a definite import to the term "business" but made reference to several other gener....
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....s at a higher rate. The micro financing business is run on commercial lines. Further, the appellant raised loans @ 10% to advance to the customers at a higher rate of 15%. The appellant is not having own corpus in a formal capital so as to advance the loan. The appellant 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 it is a business activity. In order to become a charitable activity, the institution must have advance loans at a subsidized rate of interest. The assessee is availing loans from banks and advances the same to the customers at 15%. It is a commercial rate prevailing in the market. By advancing loans at that rate of interest cannot be considered as an activity carried on by the assessee as charitable and for the benefit of the public. It is also to be noted that after the amendment wherein proviso to section 2(15) was incorporated, advancement of "any other object of general public utility" can no longer remain as charitable purpose, if it involves carrying on of: (a) any activity in the nature of trade, commerce or business. (b) any activi....
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....ef . The correct way to express the nature of the activities carried on by the appellant is to say that the appellant is carrying on 'advancement of any other object of general public, utility'. When that is the case, the appellant is hit by the proviso given under section 2(15) . The proviso reads that 'advancement of any other object of general public utility' shall not be a charitable purpose, if it involves carrying on any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business for consideration, irrespective of the application of the money. Therefore, the case of the appellant is hit by proviso to section 2(15) and the appellant is not entitled for the benefit of section 11 for that part of income generated in the hands of the appellant from running its micro finance business. 4.12 Alternatively, one has to look into section 11(4A) of the Act. Subsection (4A) provides that exemption shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business incidental to the attainment of the objectives of the assessee and se....
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....aneshwar; ITA No. 265/CTK/2017which held that act of micro financing by an institution to self -help poor people amounts to providing relief to the poor. He also referred to the judgment of Delhi High Court in the ITPO case 371 1TR 333 (Del.) wherein it was held that dominant purpose has to be seen i.e., whether it is business activity dominantly or otherwise and merely profiteering by it will not make every activity commercial. As regards insurance activity, ld. AR averred that the mere fact that premium collected is more than the relief given during the specific year cannot make the activity commercial. 4.14 As regards the rule of consistency, the argument will have to be seen in light of the fact that that prior to adding proviso to section 2(15), the entities which got registration u/s. 12AA engaged in commercial activity claimed exemption on the ground that such activities were for advancement of objects of general public utility in terms of 4th limb of def inition to section 2(15) of the Act. The said benefit was taken away by adding proviso to section 2(15) of the Act, wherein it is clarified that the advancement of any other object, general public utility shall not be cha....
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....at commercial rate prevailing in market then such activities carried on by assessee trust could not be considered as activities of medical relief or education or relief of poor and hence, case of assessee was hit by proviso to section 2(15) and assessee would not be entitled for benefit of section 11. It was also held that even if activities of assessee were stated to be relief of the poor, it was not possible to conclude that running of business in form of micro finance was incidental to carrying on of main objective of assessee-trust and that assessee was not protected by provision stated in section 11(4A) and the Assessing Officer had rightly withdrawn exemption granted to assessee under section 11. In the case of Janalakshmi Social Services v. Director of Income-tax (Exemptions), Bangalore, [2009] 33 SOT 197 (Bangalore) it was held that where Assessee was availing of loan facility from banks/financial institutions at interest rates ranging from 8.5 per cent to 9 per cent and such loan facility was extended to so called poor people in urban areas at rates ranging between 18 per cent to 24 per cent per annum and where assessee-company was not reaching to individual beneficiaries ....
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....s been accepted as "charitable purposes" for all prior assessment years. Copies of the assessment orders passed for the assessment years 2012-13, 2014-15 and 2016-17 placed at pages 54-69. The Ld.AR has placed before us the expensed incurred by the assessee under various heads of services rendered by it through SHG as under: Table marked as Annexure 1 from the Note on application of Income 14. The Ld.AR submitted that assessee borrows money at 10% interest and lends the same at 15% interest per annum to SHG for the above services, which the Ld.AO has held to be commercial in nature which defies the requirement of section 2(15) of the act of "advancement of an object of general public utility". It is the submission of the Ld.AR that this additional 5% interest is charged in order to cover the administrative cost and allied expenses and that there is no proper motive in it. He placed reliance on the decision of Coordinate Bench of this Tribunal in case of M/s. Janodaya Trust in ITA No. 763/Bang/2016 by order dated 13.01.2021 wherein in a similar circumstances, the Coordinate Bench of this Tribunal held such observations to be based on surmises alone. It was submitted that this Trib....
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....The Ld.DR submitted that, the Ld.CIT(E ) rightly applied the decision of coordinate bench of this Tribunal in the case of Janalakshmi Social Services vs. DIT(E) reported in 33 SOT 197 to reject the exemption claimed by the assessee. He also placed reliance in support of his contentions: * Decision of the Hon'ble ITAT of Hyderabad in the case of Fernandez Foundation v Commissioner of Income Tax reported in TS 7315-ITAT- 2022 (Hyderabad) * Decision of the Hon'ble ITAT, Cochin in the case of M/s. Shalom Charitable Ministries of India Vs. ACIT in ITA Nos.79 & 80/Coch/2017 and S P Nos. 17 & 18/Coch/2017 * Decision of Hon'ble ITAT, Chennai in the case of ACIT V Grama Vidiyal Trust reported in 71 taxmann.com 88 (Chennai) 180 TTJ 579 (Chennai) * Decision of Hon'ble ITAT, Chennai in the case of ITO(Exemptions) Madurai V Kalanjiam Development Financial Services reported in 64 taxmann.com 255 (Chennai) 156 ITD 213(Chennai) * Decision of Hon'ble ITAT, Kolkata in the case of Sreema Mahila Samity V DCIT reported in 86 taxmann.com 216(Kolkata - Trib) 167 ITD 420 (Kolkata - Trib) 190 TTJ 857 (Kolkata - Trib) * Decision of Hon'ble Supreme Court of India in the ca....
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....ious benched of this Tribunal on this issue. Some of the decisions relied by both sides in favour of the assessee as well as the revenue has been listed herein above. It also noted that, the registration u/s. 12AA as a Public Charitable Trust has not been cancelled by the authorities below. The objects of the trusts has been listed herein above in the preceding paragraphs. 21. The issue before us is: Whether microfinance operations carried on by the assessee in the present facts of the case can be said to be in the nature "relief of poor" or merely "the advancement of any other object of general public utility"; and Consequently, whether the provisos to section 2(15) can apply in relation to the said activities. 22. It is noted that the assessee has advances loans of the SHGand encourage them to provide funds to its members to be utilised for the purposes of activities carried on by them which is in consonance with the objects of the trust. The brief description of the services provided by the SHG's with the finance provided by the assessee has been listed as under: "The following are the broad heads of application of income of the Trust. A chart showing the extent of such a....
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....g of their products by expanding their network and allowing them an opportunity to interact with villagers participating in such causes. During the year under appeal, the Trust has donated a sum of Rs. 10,00,000/- towards various institutions as per ledger enclosed herewith as Annexure-2. 3. New India Assurance Health Scheme Premium: The premium is paid by the Trust towards protection & security of the health of SHG members, medical & group personal accident benefit provided to SHG members. It is often the case that the rural poor does not have access to proper health care facilities and insurance. Hence, the Trust aids in proving the same to SHG members, which further protects them from the burden of paying for health care. During the year under appeal, the premium paid by the Trust was Rs. 41,26,200/- 4. Santhwana: During the year under appeal, the Trust has paid a sum of Rs. 1,65,000/- towards `Navodaya Santhwana' Scheme implemented by the Trust. Under this scheme upon the death of SHG Members, the Trust provides financial assistance to the dependent of deceased members. 5. Training Expenses: Navodaya Trust conducts Training programs & Samavesha for the SHG Members. Tr....
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....ncing, we note that Microfinance is lending carried out with small borrowers. The targets of microfinance are low-income individuals/families who require small quantities of short term finance for purposes such as agriculture, marriage, debt redemption, medical emergencies, etc. These loans are extended without collateral security. The definition of the term "qualifying asset" (being a loan extended by a microfinance entity) in the Non Banking Financial Company- Micro Finance Institutions (Reserve Bank) Directions, 2011, clarifies the relevance of the "micro" in "microfinance". Thus 'Microfinancing' penetrates into the rural sectors to serve the poor. We also note that the strict lending criteria, terms, and conditions that banks insist, cannot always be met by borrowers belonging to the weaker economic sector. And therefore microfinancing activity is considered to be a practical and workable source of funds. 24. We note that there is a broad line of distinction between the micro financing activities being carried out on commercial basis and for charitable purpose. If the micro financing facility is extended by charging exorbitant rate of interest and for a particular group of soc....
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....ities referred to therein is twenty-five lakh rupees or less in the previous year; Following proviso shall be substituted for the existing first and second provisos to clause (15) of section 2 by the Finance Act, 2015, w.e.f. 1-4- 2016: 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 service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless- (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;' 27. This definition of "charitable purpose" is inclusive in nature and includes relief of the poor, education, medical relief and th....
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....essee is appropriated towards administrative charges, and are further used in financing activities. It is also submitted that as assessee do not charge any processing fees or do not ask for any collateral securities, the extra charge of interest covers up any kind of contingencies in respect of failure in repayment by such lonee's. 31. The Ld.DR argued that the assessee was receiving funds from financial institutions and advancing loans to women and in the process is making profit. According to the Ld.AO, the activity of the assessee is not towards the 'relief of the poor' but 'advancement of general public utility'. According to him, in terms of the amended Section2(15) of the Act, the activity of the assessee cannot be treated as "charitable purpose". 32. Hon'ble Visakhapatnam Bench of this Tribunal in the case of SPANDANA (Rural & Urban Development Organisation) Vs. ACIT reported in (2010) 40 DTR 153 has dealt with this issue. Hon'ble Visakhapatnam Bench while addressing identical issue held as under: "Assessee borrowing money from banks and providing loans to poor women for their poverty alleviation can be said to be encouraged in Charitable activities entit....
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....ssessee trust was registered as a public charitable trust in September, 1997 for specific purpose of poverty alleviation and general for other related charitable activities under the name and style of M/s. Bharatha Swamukhi Samsthe (BSS). The poverty alleviation of poor women and through them, of their families as well was the object of the trust. For the sake of convenience, objects are extracted from the trust deed of the assessee: "(i) The main objective of the trust is to alleviate poverty in a sustainable and sustained manner, if even 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 over all social development of poor women, their families and their communities to the degree possible, with minimal possible additional financial input. The input will work to help establish institutions to ....
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....o do all such acts, deeds and things as are necessary or incidental to the furtherance or attainment of the above objects." 33. We find that the main focus of the objects of the assessee before us is alleviation of poverty by extending micro credits to poor rural women. The brief description regarding the services rendered to SHG's by the assessee has been reproduced. In addition, several other objects which are of Public charitable in nature such as providing training and support programmes for poverty alleviation, education are also listed as its other aims and objects. The For all these activities of the assessee small SHG's are formed who are provided with finance assistance by the assessee to carry out the objects of the trust. 34. From the table reproduced at page 18 of this order, it is clear that the application of income by the trust are towards animator expenses, donations, New India Assurance Health Scheme Premium, Santhwana, Training expenses, uniform, SHG formation expenses, Sahayadhana, Insurance Premium and Scholarship for students. All these activities are carried on by assessee for the members of Self Help Group (SHG) was through self help group for people who ap....
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.... not find any infirmity in the order of the learned Tribunal, which is based on fact finding and such facts attract the provision of exemption." 36. The ratio expressed by Hon'ble Andhra Pradesh High Court would answer the objection of the Ld.DR that the main purpose of the public charitable activity undertaken by assessee has to be looked into as a dominant purpose test and that collection of money for micro financing in the form of interest on the loans advanced to the self help group members will not defeat the real object in order to deprive of the exemption. 37. Hon'ble Supreme Court in case of Addl. CIT vs. Surat Art Silk Cloth Mfrs. Association reported in (1980) 121 ITR 1 also has held that the main test to find out whether an institution is run for charitable purpose is to find out what is the dominant or the primary purpose of the assessee. Hon'ble Supreme Court observed that it is necessary to analyse whether the purpose was to promote commerce and trade in Art Silk etc. or the advancement of the object of the general public utility. It was also held if the primary or dominant purpose of an institution is charitable, another object which by it may not be charitable but....
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....urred by it. The Ld.AO placed nothing on record to show that the assessee is charging exorbitant interest. The action of the Ld.AO might have justified, in case the poor ladies of SHG have option to avail credit at lower interest from other sources. In present case, the credits are available at interest rate without any security. There was no compulsion over parties to avail financing at the rate of interest offered by the assessee. The assessee can carry out its activity only after charging marginal higher rate of interest to run its activities. This perse cannot be the basis to come to the conclusion that the assessee is in money lending acitivty. The assessee is running various activities like Animator activities, Donations, Health Insurance premiums, Santhwana, Training, Uniform, SHG Formation, Sahayadhana, Insurance Premium & Scholarship for students in rural area to make the poor ladies aware of the scheme and to encourage their participation as the principle objects of the trust. All these things need some expenditure. The facts and circumstances show that the assessee is carrying out its charitable activities and the surplus funds are used for charitable purposes. 39. Ther....