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2016 (7) TMI 827 - AT - Income Tax


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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