2016 (7) TMI 827 - AT - Income Tax

Exemption u/s.11 entitlement - assessee trust has been carrying on micro financial activities to rural poor women - charitable or non charitable purpose - Held that - The assessee is lending money at commercial rate prevailing in the market. By advancing loans at that rate of interest, it cannot be considered as an activity carried on by the assessee as charitable and for the benefit of the public. When the assessee carried on micro finance activity in a commercial line, then it is not a charitable activity but an activity to expand the finance business by contracting weaker section of the public and it does not involve any charitable activity. Therefore, looking into the activities carried on by the assessee, we fully agree with the findings of the AO and this view of ours is squarely covered by the decision of the Tribunal in the case of Janalakshmi Social Services (2008 (8) TMI 606 - ITAT BANGALORE). The assessee relied on various judgments, which cannot be applied to the facts of the present case, as the assessee is carrying on micro finance business in a commercial manner so as to earn profit and there is no iota of charity carried on by the assessee so as to grant exemption under sec.11 of the Act. Hence, in our opinion, the CIT(A) not justified in granting exemption u/s.11 of the Act to the assessee. Accordingly, we reverse the order of the Ld.CIT(A) and restore the order of the AO. - Decided against assessee Allowance of bad debts - Held that - CIT(A) is not justified in granting deduction as bad debts as that business of assessee trust, which is not continuing during the relevant period and in case of discontinued business, the claim of assessee u/s.36(1)(vii) cannot be allowed. - Decided against assessee Addition to the capital account of the assessee Trust - Held that - The assessee took a plea befoe the AO that this impugned amount has been received on transfer of capital asset from M/s.Grama Vidiyal Trust to M/s.Grama Vidiyal Micro Finance Ltd. Contrary to this observation of the AO, the CIT(A) observed that there is no transfer of any asset, as such there is no levy of capital gain tax at ₹ 8,24,15,000/-. This findings of the CIT(A) is not based on any positive material. Hence, the facts brought on record not enough to give any findings on this issue. Therefore, the entire issue is remitted to the file of AO for fresh consideration after giving opportunity of hearing to the assessee. Allowability of depreciation on the assets on which the entire cost of assets has been allowed as application of income in earlier assessment years - Held that - There is no question of allowing any depreciation in the assessment year under consideration on the assets which Written down value (WDV) had become Nil . Thus, this ground of the Revenue is allowed.- Decided against assessee Allowance of claim corpus Donation - Held that - If the voluntary contributions received by the Trust created, partly or wholly, for charitable purpose, then in term of sec.2(24)(iia) of the Act it forms the part of the corpus fund of the Trust and it is a capital receipt. In the present case, since we have observed that assessee is not a charitable trust, it is engaged in the commercial activity and is not entitled for exemption u/s.11 of the Act. The assessee is required to give details of receipt of ₹ 3.70 crores and it is to be proved by assessee that it is not a revenue receipt and if it is in the field of capital receipt, capital receipt would not be liable for the exemption u/s.11 of the Act. Accordingly, this issue is remitted to the file of AO to examine afresh and assessee shall furnish necessary details. The ground of Revenue is partly allowed for statistical purposes.

Issues Involved:
1. Condonation of delay in filing appeals and cross objections.
2. Whether the activities of the assessee trust qualify as "charitable" under Section 2(15) of the Income Tax Act, 1961.
3. Entitlement to exemption under Section 11 of the Income Tax Act.
4. Treatment of income from microfinance activities.
5. Allowability of bad debts.
6. Treatment of transformation consideration as capital gains.
7. Allowability of depreciation on assets where the cost has already been allowed as application of income.
8. Treatment of corpus donations.

Detailed Analysis:

1. Condonation of Delay:
The Tribunal condoned the delays in filing appeals and cross objections by both the Revenue and the assessee, considering the reasons provided as bona fide. The delays were attributed to administrative issues such as mixing up of papers, election duty, and the illness of the Chartered Accountant.

2. Charitable Activities under Section 2(15):
The core issue was whether the assessee's activities, particularly microfinance, qualified as charitable under the amended Section 2(15) of the Income Tax Act. The Tribunal noted that the amendment excludes activities involving trade, commerce, or business from being considered as charitable. The assessee argued that their microfinance activities aimed at poverty alleviation and empowerment of women should be considered charitable. However, the Tribunal concluded that the microfinance activities were conducted in a commercial manner, involving interest rates comparable to market rates, and hence did not qualify as charitable activities under the amended Section 2(15).

3. Exemption under Section 11:
The Tribunal held that due to the commercial nature of the microfinance activities, the assessee was not entitled to exemption under Section 11 for the income generated from these activities. The Tribunal emphasized that the business of microfinance was not incidental to the attainment of the trust's objectives and, therefore, did not qualify for exemption.

4. Income from Microfinance Activities:
The Tribunal agreed with the Assessing Officer (AO) that the income from microfinance activities should be taxed as business income. The Tribunal referenced the decision in Janalakshmi Social Services, which supported the view that microfinance activities conducted in a commercial manner do not qualify for charitable status.

5. Allowability of Bad Debts:
The Tribunal reversed the CIT(A)'s decision to allow the deduction of bad debts amounting to ?10,75,525/-. It held that since the business of the assessee trust was not continuing during the relevant period, the claim for bad debts under Section 36(1)(vii) could not be allowed.

6. Transformation Consideration as Capital Gains:
The Tribunal remitted the issue of whether the transformation consideration of ?8,24,15,000/- received on the transfer of capital assets should be treated as capital gains back to the AO for fresh consideration. The CIT(A) had deleted the addition made by the AO, but the Tribunal found that the CIT(A)'s findings were not based on positive material.

7. Allowability of Depreciation:
The Tribunal held that depreciation could not be allowed on assets where the entire cost had already been allowed as application of income in earlier years. Allowing depreciation in such cases would amount to double deduction. This view was consistent with the Tribunal's decision in the case of M/s Kongunadu Arts & Science College Council.

8. Treatment of Corpus Donations:
The Tribunal remitted the issue of the treatment of corpus donations amounting to ?3.70 crores back to the AO. The AO was directed to examine whether these donations were capital receipts and not liable for exemption under Section 11, given that the assessee trust was not considered charitable.

Conclusion:
The Tribunal concluded that the assessee's microfinance activities were commercial in nature and did not qualify for exemption under Section 11. Consequently, the income from these activities was taxable as business income. The Tribunal also addressed other related issues, such as the allowability of bad debts, depreciation, and the treatment of corpus donations, providing specific directions for further examination by the AO where necessary.

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