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2023 (11) TMI 1107 - AT - Income TaxExemption u/s 11 - charging of guarantee fees for services by the assessee trust - charitable activity u/s 2(15) - as per revenue assessee trust is engaged in the advancement of general public utility and is charging fee in relation to the services rendered to trade, commercial etc. - CIT(A) has also denied the claim of the assessee trust seeking benefit u/s 11 on the ground that “since the assessee trust is charging guarantee fee, which amount is substantial, the assessee trust is not carrying out any charitable activity - HELD THAT:- Assessee trust having been established by the Government of India with the object and purpose of ameliorating the difficulties of the small scale industries and micro enterprises in availing credit facilities from financial as well as banking institutions without having collateral security and/or third party guarantee which is being provided by the assessee trust with cost to cost or with a small mark up is pursuing the activity of advancement of general public utility without having an iota of activity of trade, commerce or business. Mere charging of guarantee fees for services by the assessee trust ipso facto is not sufficient to invoke the proviso to section 2(15) of the Act, that too without establishing that the object and purpose of the assessee is profit motive. Had it been so the assessee trust 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. Provision for guarantee claims - assessee is following mercantile system of accounting qua its receipts as well as payments - As per AO 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 guarantee claim cannot be allowed - CIT(A) has confirmed the disallowance on the disallowance of deduction claimed by the assessee trust - HELD THAT:- When we peruse the explanation to section 11 it has come on record that w.e.f. 01.04.2022 any some payable by the trust shall be considered as application of the previous year in which the payment is made irrespective of the year of incurring of expenditure. The AO proceeded on the wrong premise that the amount spent on the object of the trust 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. Hon’ble Supreme Court of India in case of Rotrock Control India Pvt. Ltd. [2009 (5) TMI 16 - SUPREME COURT] held provision on account of warranty in respect of product sold by the assessee as legitimate deduction. When the provision for guarantee claim made by the assessee is otherwise proved to be legitimate deduction, the correct income of the assessee cannot be calculated and as such claim of the assessee for deduction of provision for guarantee claim is an allowable deduction. So the AO is directed to allow the amount. Denial of claim of “set off” of brought forward deficit of the previous years against the current year income, due to the denial of benefit of section 11 & 12 - Since the assessee is found to be entitled for benefit of section 11 & 12 as per findings returned under the head ground No.2 in the preceding paras the AO is directed to process the claim of “set off” of the assessee trust accordingly, this ground being consequential in nature.
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