TaxTMI 
TaxTMI 
2023 (11) TMI 1107
X X X X Extracts X X X X
X X X X Extracts X X X X
....wed the principle of natural justice and therefore the said order needs to be quashed. 2. On the facts and in the circumstances of the case and in law, CIT(A) erred in invoking the proviso to section 2(15) of the Income Tax Act and thereby rejecting the claim of exemption u/s 11 of the Act by relying on the findings given in assessment orders for AYS 2016-17 and 2017-18 without appreciating the facts that: (i) the objects of the Trust are covered within the meaning of charitable purpose and the Trust was granted registration u/s. 12A of the Act. The Hon'ble ITAT has held in the appellant's own case for AY 2010-11, AY 2011-12 and AY 2014-15 that the proviso to section 2(15) of the Act cannot be invoked in appellant's case and that it is eligible for the benefits of sections 11 and 12 of the Act. (ii) There is no change in the activity undertaken by the appellant trust during FY 2017-18 as compared to the previous years in respect of which cancelation of registration was restored. Thus, there is no reason for invoking the provisions of section 2(15) of the Act as said facts are already decided by the appellate authorities and accepted by the Inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ting and has made the provision for guarantee claims in the books of accounts on the basis of the actuarial valuation; b. Provision for guarantee claims is made as per the recognised and accepted accounting principles/ standards under mercantile system; c. As regards to recognition of revenue from guarantee fees, the same is in accordance with the Accounting Standard 9-Revenue Recognition, as per which the revenue is recognised only when it is reasonably certain that the ultimate collection will be made; d. The appellant has ensured that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities in accordance with AS 29 Provisions, Contingent Liabilities and Contingent Assets. e. The present value of a future liability, properly ascertained and discounted i.e. accounted for on actuarial basis, is allowable u/s 37(1) of the Act; f. The provisions made in the books of accounts amounts to application of income u/s 11 of the Act g. Provision is only 4.24% of the Guarantees issued and outstanding, which is fair and reasonable. which is wrong and contrary to the facts of the ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the circumstances of the case and in law, the lower authorities erred in disallowing deduction of Rs. 9,92,75,616/- being 15% of the income derived by the trust under section 11(1)(a) of the Act and not doing so is wrong and contrary to the facts of the case, the provisions of the Income Tax Act, 1961 and Rules made thereunder. (ii) CIT(A) also erred in disallowing the sum of Rs. 9,92,75,616/- being 15% of the income derived by the trust under section 11(1)(a) without appreciating the facts that: a) the Hon'ble ITAT has already held in the appellant's own case for AY 2010-11, AY 2011-12 and AY 2014-15 that the proviso to section 2(15) of the Act cannot be invoked in appellant's case and that it is eligible for the benefits of sections 11 and 12 of the Act. b) as per CBDT - Circular No. 11/2008, dated 19-12-2008, the newly inserted proviso to section 2(15) of the Act will not apply in respect of the first three limbs of section 2(15) of the Act i.e. relief of the poor, education or medical relief and as the purpose of the appellant trust is relief of the poor, proviso to Section 2(15) will not apply in appellant's case. (iii) W....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessee trust and by following the earlier assessment order for A.Y. 2016-17 & 2017-18, the AO proceeded to hold that the assessee's case is hit by proviso to section 2(15) of the Act and thereby rejected the claim of exemption under section 11 of the Act. The AO also made a disallowance of the deduction of provision for guarantee claims of Rs. 3,47,04,32,777/- made on the basis of collateral valuation and restricting the same to the actual payment on the ground that the provision of expenses are not allowable under the Act assessee's claim for deduction of provisions of guarantee to the tune of Rs. 9,67,79,67,223/- [Rs.3,47,04,32,777/- (-)(minus) Rs. 13,14,84,00,000/-] out of the aggregation of funds claimed during the year under consideration. The AO also disallowed deduction of Rs. 9,92,75,616/- being 15% of the income derived by the assessee trust under section 11(1)(a) of the Act. The AO accordingly framed the assessment under section 143(3) read with section 144B of the Act. 3. The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has partly allowed the same. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the assessee h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssary for the proper and efficient management of the Trust, and to do all other acts or things as may be necessary or conducive to the attainment of the objectives; (d) To receive grants, donations, contributions from national and international donors / agencies. (e) To do such other acts and things as may be incidental to, or consequential to the objectives hereinabove provided." 7. Pursuant to the enactment of the Micro, Small & Medium Enterprises Development Act, 2006, the Ministry of SSI & ARI has been named as Ministry of Micro, Small & Medium Enterprises vide notification dated May 09, 2007 and as such the activities are also changed in the concept of Micro, Small & Medium Enterprises. Therefore, in order to carry out the activities of the trust SSI are substituted by the words "Micro & Small Enterprises (MSE)" and the "SSI loans" are substituted by the word "MSE Loans". Ground No.1 8. During the course of argument ground No.1 was not pressed hence, the same is dismissed as not pressed. Ground No.2 9. In the backdrop of the aforesaid facts the assessee trust has claimed benefits available under section 11 & 12 of the Act. However, the AO by in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t on 18.10.2001, which was withdrawn vide order dated 07.12.2011 by the Director of Income Tax (Exemption) [DIT(E)], Mumbai. It is also not in dispute that order of withdrawal of registration under section 12A of the Act passed by DIT(E), Mumbai has been set aside by the Tribunal and Tribunal's order has been upheld by the Hon'ble Bombay High Court vide order dated 02.08.2017. It is also not in dispute that the assessee trust provides guarantee to the lending institutions who give loan to the MSME without collateral security and/or third party guarantee, for which it (assessee trust) charges guarantee fee and service charges to the lending institutions. It is also not in dispute that the issue as to the applicability of proviso to section 2(15) of the Act has already been decided by the Tribunal in favour of the assessee in A.Y. 2010-11, 2011-12 & 2014-15. It is also not in dispute that there is no change of activities being undertaken by the assessee trust during the year under consideration vis-à-vis earlier years. It is also not in dispute that in A.Y. 2016-17 & 2017-18 the AO has invoked the proviso to section 2(15) of the Act by denying the benefit of section 11 of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e trust are to be considered for the benefit of underprivileged class of people and also falls within the meaning of relief to poor referred to in section 2(15) of the Act and the Central Board of Direct Taxation (CBDT) has issued circular vide circular No.11/2008 dated 19.12.2008 clarified that newly inserted proviso to section 2(15) of the Act will not apply in respect of 1st three limbs of section 2(25) of the Act i.e. relief of the poor, education or medical relief; that the Ld. CIT(A) has erred in not following the order passed by the Tribunal in assessee's own case for A.Y. 2010-11, 2011-12 & 2014-15 wherein it is held that proviso to section 2(15) of the Act cannot be invoked in case of the assessee. 15. The Ld. A.R. for the assessee challenging the impugned order contended that the assessee is into the charitable activities in as much as it is engaged in advancement of objects of general public utility and it is not hit by proviso to section 2(15) of the Act. 16. However, on the other hand, the Ld. D.R. for the Revenue in order to repel the arguments addressed by the Ld. A.R. for the assessee relied upon the order passed by the Ld. CIT(A) by contending that since the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ivity of advancement of general public utility and is in activity of trade, commerce or business of charging fee for services, the assessment order passed by the AO for A.Y. 2016-17 & 2017-18 is pending adjudication before the Ld. CIT(A). (iii) that in order to determine the issue raised in this case as to whether the assessee trust having pursued the activity of advancement of general public utility is into activity of trade, commerce or business of charging fee for services, we are to examine profile and activities carried out by the assessee trust. (iv) that so far as profile of the assessee trust is concerned, the same has been constituted by the Hon'ble President of India and as per trust deed its settler viz. Government of India and SIDBI noticed that the small scale industries in India are facing difficulties in getting credit facilities from primary lending institutions, banks, state finance corporation, state industrial development corporation, regional rural development banks etc. for want of collateral security and/or third party guarantee. It is a matter of common knowledge that small scale industries are facing real time difficulties in getting loan w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y such profit motive the activities would have been discontinued long back because of consistent loss. (viii) that when we further examine the contribution made by the Government of India and SIDBI towards corpus of the assessee trust, available at page 13 of the paper book, annual report of the assessee it is proved that the assessee trust received Rs. 3699.90 crores towards corpus contributed by the Government of India and Rs. 500 crores contributed by SIDBI, which shows that the Government of India and SIDBI have contributed crores of Rupees to run the charitable activities of the assessee trust. Othewise had there been any motive of the assessee trust to earn profit or to be into trading activities crores of Rupees would not have been pumped into the corpus of the assessee trust. This fact shows that the assessee trust is being run purely for the purpose of general public utility without having any element of activity of trading, commerce or business by charging fee for services. (ix) that Hon'ble Gujarat High Court in case of CIT (Exemptions) vs. Gujarat Industrial Development Corporation (2023) 452 ITR 27 (Guj.) wherein the assessee being a state industrial ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hs w.e.f. 01.04.2012; and now 20% of total receipts of the previous year, w.e.f. 01.04.2016); A.3. Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be "trade, commerce, or business" or any services in relation thereto. It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of "cess, or fee, or any other consideration" towards "trade, commerce or business". In this regard, the Court has clarified through illustrations what kind of services or goods provided on cost or nominal basis would normally be excluded from the mischief of trade, commerce, or business, in the body of the judgment. A.4. Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidenta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st being charitable and for advancement of general public utility are further proved from the legislative changes carried out by the Parliament by inserting section 10(46B) by the Finance Act, 2023 w.e.f. 01.04.2024, which are though not applicable for the year under consideration but it certainly makes the intention of the legislature clear that the credit guarantee fund trust for micro and small scale enterprises, the assessee in this case has been exempted from any income tax. The relevant provisions contained under section 10(46B) are extracted for ready perusal as under: "S. 10(468) any income accruing or arising to- (i) ....... (ii) ......... (iii) Credit Guarantee Fund Trust for Micro and Small Enterprises, being a trust created by the Government of India and the Small Industries Development Bank of India established under sub- section (1) of section 3 of the Small Industries Development Bank of India Act, 1989 (39 of 1989)." (xvi) that the assessee trust being a statutory authority constituted by the President of India with the funds being provided by the Government of India and SIDBI is purely involved in the advancement of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rust would not have been running into deficit of about Rs. 400 crores every year. So in these circumstances the impugned findings returned by the Ld. CIT(A) that "since the assessee is charging guarantee fee on substantial scale, it is not carrying out any charitable activities, hence not entitled for benefit of section 11 & 12 of the Act", are not sustainable, hence set aside. Ground No. 2 is determined in favour of the assessee. Ground No.3 21. During the year under consideration the assessee trust has claimed provision for guarantee claims to the tune of Rs. 13,14,84,00,000/-. During the year under consideration the payment of Rs. 9,67,29,67,223/- were made towards guarantee claim. Declining the contentions raised by the assessee trust that the liability has accrued during this year and is ascertained through actuarial valuation and accordingly provision is made, the AO proceeded to disallow the same on the ground that since the assessee is a registered trust under section 12A of the Act the application is to be allowed on actuarial basis and no provision is allowable and that the assessee has itself recognized guarantee fee income on payment basis as such provision for gu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is considered as application of the income in the case of trust "by holding that the assessee is following cash system of accounting" whereas assessee trust is proved to be following the mercantile system of accounting. So in these circumstances the amount not paid by the assessee trust cannot be treated as application of the trust. 27. So far as observation made by the Ld. CIT(A) that there is no provision in the Income Tax Act which allows deduction for the provision for guarantee claim, the Ld. A.R. for the assessee contended that the Ld. CIT(A) has arrived at wrong conclusion. Because under the mercantile system of accounting provisions have to be made in respect of all possible liabilities which is incurred but yet to be quantified and/or paid. When the accounting standard mandates creating of provision, so in the absence of such provisions financial result would give distorted picture of financial affair of the assessee trust. 28. Hon'ble Supreme Court of India in case of Rotrock Control India Pvt. Ltd. vs. CIT 314 ITR 62 held provision on account of warranty in respect of product sold by the assessee as legitimate deduction. Hon'ble Supreme Court of India in case of P....