TaxTMI 
TaxTMI 
2016 (11) TMI 1759
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....ssing Officer verified the objects of the society and audited accounts filed alaongwith return of income and found that the assessee society was undertaking micro finance activities under the banner "Missio-Annapurna", besides running a centre for mentally ill and destitute woman in the name & style " Mission Ashra". For the purpose of carrying micro finance activities, the assessee society availed loans from various nationalized banks as well as other financial institutions such as Allahabad Bank, Oriental Bank of Commerce, Bank of India, SBI, Punjab National Bank, HDFC Bank Ltd., Development Credit Bank Ltd., Friends of WWB India, SIDBI and Rastriya Mahila Kosh. From the loan sanction letters the Assessing Officer observed that the assessee society has undertaken all responsibilities of availing loans @10% to 13% by offering collateral securities of its own, that the loans were advanced to Self Help Groups (SHGs) at a .higher rate of interest @24% to 26% per annum. Therefore, the Assessing officer opined that such financial transaction of the society would clearly indicate that the society was primarily carrying on some activities of financing to groups by charging higher rate of....
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....re, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that: (i) the business should be incidental to the attainment of the objectives of the entity, and (ii) Separate books of account should be maintained in respect of such business. Similarly, entities whose object is 'education' or 'medical relief would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above. Further the appellant's argument is that since it works for the welfare of the economically and socially disadvantaged or needy women and started the micro finance program by promoting and nurturing Self help Groups in different villages and started the livelihoo....
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....in redeployed for the development for the same set of people. So, this activity is squarely covered as per the Para No. 2.2 of the above referred circular and it is charitable in nature. In support of this argument further, the appellant referred to the Judgments of different ITATs namely Disha India Micro Credit Vs. CIT, Muzaffarnagar, vide ITA No. 1374/Del/2010 and Gram Utthan Vs. CIT, vide ITA No. 396/CTK/2010. Basing on the above submission the appellant claims to be falling under the first limb of definition of charitable purpose. Thereafter, the appellant, in Ground No. 3 claims that it had extended the finance to different SHGs basing on the RBI guidelines and of the sanctioning Banks/FIs. In support of the argument it has submitted the copies of the sanction letter of Banks/FIs. Further, it claimed that it sanctioned and disburse the loan as per the norms of the sanction letter and it does not enjoys the liberty to extend the finance as per its sweet will or at own desire. The appellant cite other two cases of ITAT in support of justification of micro financing activity charitable activities namely ADIT (Exemptions) Vs. Bharatha Swamuk' Sams....
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....he Appellant that the proviso to the said section introduced vide the Finance Act, 2008 w.e.f sought to keep out from the ambit of tax exemption all activities towards colourable objectives under the (residual) head "advancement of general public utility" (which being extremely generic in scope was prone to misuse)and not activities towards objectives that fell under the category-head (sic) "relief of The implication of the Appellant was that the microfinance and micro-credit activities carried out by it fell under the latter category and were therefore eminently eligible for tax exemption u/s. 2(15) r.w.s 11 of the Act. b) To present and understand this argument from a correct perspective, it is best to go to the Paragraph 180 of the Finance Act, 2008 that specifies the following reason for introducing the first proviso (emphases in bold italics supplied by me): '"Charitable purposes" 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, comer or business or providing services in relation to any trade, commerce....
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.... d) We therefore need to know what we understand by the phrase "relief of the poor". The Oxford Dictionary defines this to mean "financial assistance given to the poor from state or local community funds". The Merriam-Webster Dictionary defines it to mean "relief or assistance usually administered by local officials with funds from the local treasury for the aid of the needy in a community". In either definition, the common factors are that the assistance or relief provided is cost-free, such as in grants, and the fact that the government or the community is responsible for the same. Going by the same, the actions and activities of a private operator of whatever nature providing funds to the targeted "poor" or the "needy" at a cost being interest may not constitute "relief to the poor". This is despite the fact that the Government or the community has exempted such operator from taxation, thereby cloaking it with an implied sanction that these represented funds of the community held under trust, albeit a private trust. If such private operator needed to claim that its activities constituted "relief to the poor", then the loans/grants/payments/advances made to the target dem....
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....pulated u/s. 10(23C) or 11(4A) which state that: (i) The business should be incidental to the attainment of the objects of the entity; (ii) (ii) Separate books of accounts should be maintained in respect of such business. g) Since the CBDT's Circular referred above is binding on all officers and proceedings of the Department, what we really need to determine and decide in the context of the instant case of the Appellant are: (i) Whether the micro-finance and micro-credit activities can be considered to be activities that target the objective "relief of the poor" (ii) Whether the micro-finance and micro-credit activities as carried out by the Appellant can be considered and held to be activities that target the objective "relief of the poor" (ii) If the answers to the two questions above are both in the affirmative, and if any part of the activities of the Appellant can be considered to be business in nature, whether such business activity was incidental to the attainment of the objects of the Appellant; and b: whether separate books of accounts have been maintained in respect of such business activity. h)....
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.... a Randomized Evaluation" [Authors: Abhijit Banerjee, Esther Duflo, Rachel Glennerster and Cynthia Kinnan), the field study for which was funded by the ICICI Bank and Spandana (a trust working in the area of microfinance), and the results and findings of which have been published in American Economic Journal: Applied Economics [2015] 7(1): 22-53, the authors have determined as under: (i) Business activity: Access to credit increased small business investment, but only increased the profits of the most profitable pre-existing businesses. After 1.5 years, treatment households were no more likely to own a business or start new businesses, but they did invest more in existing businesses. To the extent that microcredit helped businesses, it may have helped the most profitable businesses the most. (ii) Household finances: Though microcredit access increased investment, it did not lead to a significant increase in income. There were no significant differences in total household expenditures (a proxy for material well-being) between treatment and comparison groups after 1.5 or three years. (iii) Education and female empowerment: Researchers found little evidence ....
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....t can go hand-in-hand with the motive of investor profits. According to Mohammed Yunus (referred supra) "Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people." The debate over preserving the field's saintly aura centres on how much interest and profits are acceptable and what constitutes exploitation. o) In the instant case, it has been determined by the AO from the records and the submission of the Appellant that the interest differentials earned by the Appellant through its micro-finance activities ranged around 13% to 14% [24%> to 26% per annum earned on loans advanced to SHGs less 10 to 13% per annum paid for loans supported by its own collateral securities]. The Appellant has stated in its submissions that it had obtained loans from different financial institutions and lent to Self Help Groups (SHGs)JLGs at a higher rate of 10.5% than the rate at which the borrowed which was "less than the Reserve bank of India recommended interest rate". When taken together, these mean an effective interest differential earned between 10.5% to 14% per annum. Whether these earni....
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.... 103 ITR 777(SC)] iii) For a trust to be accepted as a charitable trust for the purposes of exemption, it is necessary that the objects should be specific] so as to confirm to the requirement of income tax law in this regard. Where they are too wide, the trust may not qualify for exemption [Gangabai Charities [1992] 197 ITR 416 (SC); Assembly Rooms [2000] 241 ITR 76 (Mad)] iv) The \onus\ to prove that objects are of charitable nature is on the assessee [Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC)]. v) The establishment of an industrial or commercial concern ordinarily envisages a profit making activity and cannot be said to be a charitable purpose on the ground that it will provide employment to some poor persons [Dharmaposhanam Co. [1978] 114 ITR 463 (SC); Jaipur Charitable Trust [1971] 81 ITR 1 (Del); Yogiraj Charity Trust [1976] 103 ITR 777 (SC)]. (vi) To serve a charitable purpose, it is not necessary that the object should be to benefit the whole of mankind] or all persons in a particular country or state. It is sufficient if the intention to benefit a section of the public as distinguished from a specified individual, is prese....
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....with an interest component. Therefore, to categorize the Appellant's micro-finance activities under the definitional head "relief to the poor" - as has been elaborated above - would be less than honest. There is also no other object-clause in the Appellant's list of objects that deals with micro-finance or money lending. (iv) The Appellant has not discharged its onus of proving that its activities are charitable in nature under the roof "relief to the poor" when seen in the light of the first proviso to Section 2(15) of the Act. (v) The Appellant cannot be stated to be or considered as an industrial or commercial concern although it has been earning profits consistently through its activities. (vi) In the object-clause v) above and through its explanations about the nature and substance of its micro-finance activities, the community sought to be benefited has been sufficiently defined and identified by the Appellant by some common quality of a public or impersonal nature, by defining and identifying these as the "rural poor, backward, etc. " (vii) The Appellant can be considered to be "promoting common good" through the enhancement of its....
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....it of "relief to the poor" (which is clearly not applicable, as proved above, and is rejected) with the objective of wriggling out of the tricky question of business-commercial purpose and profit intent, it is apparent that we need to consider these seriously if a full and complete resolution of the dispute is to be obtained. v) One promising lead we have is the strength of Shri. Mohammed Yunus (referred to supra) that the differential interest earned by the Appellant falling within the range 10-15% is within the pale of acceptability in the world of micro-finance and microcredit. The said differential margin takes into account the higher logistical, client servicing and repayment monitoring costs that represent actual, the costs involved in the micro-managing of multiple smaller amounts and the need for premiums to absorb the additional risks created by the higher uncertainties involved in the repayment abilities of the target segment (the rural poor, et al). The range of the amounts of loans provided (the loan size), the urban-rural divide, the duration of the loan, the purpose of the loan, etc. are important driver-parameters that help decide the interest rate quoted by....
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....formly 12%, with the APR computed at 29.4% which is lower than the national average of 31.53%. Separately, the averages of the quoted minimum and maximum rates of interest of all the micro-finance players are computed at 17.57% and 17.78% per annum respect h too are significantly higher than the average rate of 12%. per annum quoted by the Appellant. Further in-depth analyses can be conducted on the date to allow and adjust for differences along the other driver -parameters such as the target population, purpose of the loan, tc., but the results will be seen to be not significantly different. x) In February, 2014, The Reserve Bank of India (RBI) removed the 26% interest rate cap on the loans given by the microfinance companies regulated by it and linked the interest rate to the cost of funds, providing a greater leeway to the lenders from April 1. As a result, such lenders will be able to charge more than 26% if their cost of borrowing from banks is higher. On the other hand, the lending rate will fall if the cost of borrowing goes down. RBI said the microfinance institutions (MFIs) should arrive at the lending rate by calculating their cost of funds plus a maximum 10% mar....
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....ic utility. aa) In the distinctive limbs situate within the definition of "charitable activity" u/s. 2(15) of the Act, while the dominant category-limbs 1 to 5 represent a much narrower group of charitable entities with distinctive nature of work, the residual category number 6 (viz., advancement of objects of general public utility) is more like an accumulation of various charitable activities with no clear distinction between main and ancillary objectives. However, to fall within the ambit of the residual category, the entity should not have any separate, independent or incidental activity which could be classified as business. The business activity should be intrinsically woven into the charitable activity undertaken by such an entity. bb) The Hon'ble Delhi High Court recently held, in the case of M/s GSl India v. Director Income Tax (Exemption), 2013-TIOL-772-HC-DEL-IT, that amendments made to the definition of 'charitable purpose' under Section 2(15)~ of the Income-tax Act vide the Finance Act, 2008 does not disqualify any residual category (general public utility) charitable entity from conducting business activity which is intrinsical....
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....arity or charitable activity is the anti-thesis to activities undertaken with a profiteering motive. To determine whether a residual-category charitable entity is engaged in any business activity, the issue of self-enrichment and self-gain should be carefully looked into. A small contribution by way of fee should not emulate the transaction or the given activity to be commercial in nature. dd) In its above decision, the Hon'ble Delhi High Court laid down the 'charitable activity test' to determine whether the legal terms "trade, commerce, or business " in Section 2(15) means activity with a view to make or earn profit. The four indicators as laid down by the court are: (a) profit motive is a critical factor to discern whether an activity is business, trade or commerce; (b) charitable activity should be devoid of selfishness or illiberal spirit; (c) the underlying propelling motive is not for commercial exploitation but general public good; and (d) fee charged if any should be nominal and based on commercial principles. Applying the above tests, the Hon'ble Court opined that a mere levy of fee is neither reflective of business aptitude nor indicative of prof....
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.... Commissioner of Income-tax [CITJ, Sambalpur has in a few cases under his jurisdiction granted registration u/s. 12AA to organizations that professedly carry out micro-finance activities. The case of Janlaxmi Social Services vs. DIT (Exemptions), Bangalore cited by the AO is distinguishable on facts in that the Appellant in that case had extended the financial assistances to the traders not to the SHGs or poorer women, as it professed to do. It is therefore important that the Government and the tax authorities speak in one voice on the issue and take a principled stand based on economic principles, the contextual factual matrix and the legal foundation. gg) In consequence, I hold that the activities of micro-finance and microcredit being carried out by the Appellant are of the nature and definition of "charitable activity" as defined u/s. 2(15) of the Income-tax Act being non-commercial in intent, purpose and content (as mandated by the amended first proviso to the said Section) and also since they fall within the definition of advancement of general public utility. The Income-tax exemptions offered u/s. 11 and 10(23C) of the Act clearly ap....
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....t Commissioner of Income Tax (2010) 48 DTR 0153 (Vis. Trib), the activity under consideration falls under the expression "relief to poor" as envisaged under section 2(15) of the Act. Therefore, in my considered view simply because an activity undertaken in commercial line in pursuance to furtherance of the object of society to poor does not make the activity non-charitable within the meaning of section 2(15) of the Act. In the circumstances, I do not find any good reason to interfere with the conclusion of the ld. CIT(A). Hence, this ground of the revenue is dismissed. 11. In Ground No. 4 of the appeal, the grievance of the revenue is that the ld. CIT (A) erred in deleting the addition made on account of violation of provisions of section 40(a)(ia) of the Act by not deducting tax at source on advertisement expenses of Rs. 1,31,687/- when the assessee is not eligible for exemption u/s. 11 of the Act in view of the violation of the proviso to section 2(15) of the Act. 12. Brief facts are that the Assessing Officer disallowed deduction of Rs. 1,31,687/- for advertisement expenses incurred by the assessee on the ground that the assessee has not deducted ....