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2023 (9) TMI 256
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....r the facts and in the circumstances of the appellant'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 ca....
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.... appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant 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 kindergar....
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....ssist for development and research of forest protection and herbal cultivation. 18. To gather information regarding public health and to assist in providing herbal and Ayurvedic treatments. 19. To assist for providing sports, games, 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 ex....
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.... it is a non-profit entity and it receives funds to meet its operative cost without motive to earn profit. A perusal of the income and expenditure account for the year ended 31.03.2017 reveals Rs. 6,69,8,915/-as interest received on loans and Rs. 4,08,04,902/- as Insurance collection 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 n....
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....ries on, for procuring subsistence or profit; occupation or employment, etc. The meaning of "commerce" as given by the Concise Oxford Dictionary is "exchange of merchandise, specially on large scale". In ordinary parlance, trade, and commerce early with them the idea of purchase and sale with a view 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 ma....
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....tic approach to conduct and further the activity over a period of time. In the case of the appellant the borrowing is not made directly to the beneficiaries. In fact, financing is done to various SHGs. No assistance or grant has been received for micro financing. The loans have been raised on commercial lines. Profit is generated by financing the SHG'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 char....
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....the public and it does not involve any charitable activity. Hence, as per any of the definitions discussed above, the activity of the appellant is in the nature of business. 4.11 While the activities carried on by the appellant fake care of the poor people also, but those activities cannot be classified under any of the specific activities of relief of the poor; education or medical relief . 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 ....
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....years. To prove that providing micro finance cannot be held as a commercial activity, the Id. AR referred to the judgments of Hon'ble ITAT Bangalore in M/s Janodaya Trust v AC1T (Exemptions); ITA No. 763/Bang. /2016 which held charging to commercial rate of interest (14%) cannot make the activity commercial and of Hon'ble ITAT, Cuttack Bench in the case of ITO (Exemptions), Bhubaneshwar v Adhikar, Bhubaneshwar; 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 whic....
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....running of business in form of micro finance was not incidental to carrying on of main objective of assessee-trust but it was main business of assessee, then it was not protected by provision stated in section 11(4A). In the case of Assistant Commissioned: of Income-tax v. Grama Vidiyal Trust [20161 71 taxmann.com 88 (Chennai - Trib.), it was held that where assessee was running its micro finance business and lending money 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 Inc....
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....12. He submitted that, these loans do not carry any security other than the personal guarantee of the group members who are all poor people. The Ld.AR submitted that the assessee charges interest at the rate of 15% on the loans advanced to the SHG and in turn has to pay interest at the rate of 10% on the loan availed from SCDCC Bank. 13. He further submitted that these activities are consistently carried on by the assessee though SHG and the same has 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 t....
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....R vehemently supported the order of the Ld.CIT(E) in rejecting the claim of deduction under section 11 of the Act. The Ld.DR relied on the decision of Hon'ble Chennai Bench of the Tribunal in the case of ITO(E) Vs. Kalanjiam Development Financial Services reported in 156 ITD 213 wherein it is held that, the micro financing activity is commercial activity and upheld the action of the Ld.AO in denying the exemption u/s. 11 and 12 of the Act, to the assessee therein. 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 Tr....
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....ed to the assessee has not been rejected for the year under consideration. The ld.AR also argued that rule of consistency should be followed by placing his reliance on the decision of the Hon'ble SC in the case of Radhasoami Satsang reported in (1992) 60 Taxman 248, which held that the AO should not interfere with the fundamental aspect permitting through the difference assessment years. We have perused the submissions advanced by both sides in light of records placed before us. 20. Admittedly there are conflicting judgments of various 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, ....
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....ation for their services rendered to the trust. 2. Donations: The Trust encourages & gives financial support to Athletics, Kambala, Yakshagana, Temple Renovations etc. These donations are given for worthy causes in the district where many of the members of the SHG are situated. These donations are given for development of good relations and fostering a sense of community well-being amongst the members of SHG's since they participate in these activities in large number. The donations given for the purpose of these activities also aid the SHG's in the marketing 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. Henc....
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.... need. It is akin to donations. This also encourages the rural poor to approach the Trust for any aid/assistance required. 9. Insurance 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. The premium paid by the Trust aids the rural poor in accessing affordable health care. 10. Scholarship for Students: Meritorious students in the rural areas are provided scholarship in the form of financial aid to meet the cost of education and fees to be paid." 23. As we studied through the concept of microfinancing, 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 "mi....
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....ts or places or objects of artistic or historic interest, and the advancement of any other object of general public utility: 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: Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities 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....
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....ds the same to various SHG's by charging interest on the amounts lent. These SHG'S further utilises the money advanced by the assessee for its members or to any others who are in need of such funds. Hence, in our view, this activity of the assessee clearly gets covered under "Advancement of General Public Utility" and not under "relief of poor" as defined in Sec.2(15) of the Act. 30. The Ld.AR submitted that the financing activity carried by the assessee is not in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business. The Ld.AR also submitted that the extra 5% interest charged by the assessee from the lonee as against 10 % paid by the assessee 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 ....
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....financial cost for obtaining loans from banks and for regularizing the rest of the activities and to meet the expenses in that activities and other administrative activities of the trust the assessee has to charge the higher rate of interest from the poor members. The Tribunal further observed that object of the assessee was for alleviation of poverty by extending micro credits to poor rural women and it was not charging exorbitant interest and they are being nothing to suggest that the funds are ever used or misused for the personal benefits of the trustees. The relevant observation of the Tribunal are extracted hereunder for the sake of reference: "After going through the rival submissions and material on record, we find that the assessee 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: "....
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....libraries for the use of the public. (j) To establish, maintain, manage or finance separate funds like emergency fund, calamity fund etc., to help poor families at the time of distress. (k) To publish or to finance the publication of books, pamphlets, tracts, magazines, etc., for dissemination of useful knowledge amongst the public. (l) To undertake and carryout research in social sciences or statistical research. (m) To undertake and carry out programmes of conservation of natural resources or of afforestation. (n) To conduct, perform or carry on any of the above activities or any activity in pursuance of the above object either jointly or in collaboration with any other trust or institution. (o) To design, formulate, execute or carry out any scheme for the furtherance or attainment of any of the above objects. (p) To 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 th....
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....13 while considering the similar situation has observed as under: "The learned Tribunal has concluded on fact that the activities of the assessee are in the nature of charitable activities. It has been further held on appreciation of fact that micro financing activity in the instant case is a charitable activity. The learned Tribunal has also relied upon the judgment of the Bangalore Bench of the Tribunal on identical fact that the micro financing to the poor people is a charitable activity. Under such circumstances, the assessee was granted exemption u/s. 11 of the Income Tax Act, the Learned Tribunal further found that in order to achieve the main purpose of the charitable activity, the assessee has joined hands in some other financial organizations and banks. Such steps to collect money for micro financing does not defeat the real object in order to deprive of the exemption. We do 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....
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....tent. The beneficiaries are poor families. If the SHG members have to borrow money from the moneylenders, they would have to pay many times higher interest along with security 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 have 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 the trust were available for the personal benefit of the trustee and the board members. These are only used towards advancing credit to poor women for their poverty alleviation and for the benefit of the socio-economically weaker sections of the society. The Ld.AO has not substantiated his findings, that the work of the trust is not charitable and the interest charged by the assessee does not commensurate with the cost incurred 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 availa....