2025 (7) TMI 21 - AT - Income Tax

Revision u/s 263 - eligibility of exemption u/s 11 - CIT directing the AO to make inquiries with reference to the interest charged and interest paid verify the nature of activities vis- -vis the object of the assessee-trust and whether the assessee is entitled to exemption u/s.11 - principle of res judicata and principle of consistency HELD THAT - Cochin Bench of the Tribunal in assessee s own case for assessment year 2011-2012 had categorically held that the micro financing activities carried on by the assessee-trust is a charitable activity under the first limb of sec.11 of the Act. Also confirmed by HC 2016 (12) TMI 1920 - KERALA HIGH COURT which says that relief to the poor is incorporated as first limb of the Section to qualify as a charitable activity. Insofar as this case is concerned reading of the order impugned itself shows that the activity of the assessee is advancing loans to poor women from the villages. Such an activity to our mind qualifies to be relief to the poor is to be included in the first limb of the Section. Though the principle of res judicata is not applicable to the Income-tax proceedings and that each assessment year has to be viewed and examined separately with regard to the activities carried on by the assessee the principle of consistency has to be followed in situations where on the same set of facts are permeating through different years. In the instant cases we find that the activity carried on by the assessee was providing micro financing in rural areas as it was done by assessee for A.Y. 2011-2012. The said activity has been categorically held to be coming within the first limb of sec.2(15) of the Act and not that of objects of general public utility - Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

- Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking the revisionary jurisdiction under section 263 of the Income-tax Act, 1961, to revise the assessments for the years 2014-2015 to 2016-2017 and 2018-2019.

- Whether there was any error or illegality in the original assessment orders passed by the Assessing Officer (AO) granting exemption under section 11 of the Act to the assessee-trust.

- Whether the micro financing activities carried on by the assessee qualify as charitable activities within the meaning of section 2(15) of the Act, specifically under the first limb relating to relief to the poor.

- Whether the principle of consistency and precedents established in the assessee's own case for earlier assessment years and confirmed by the High Court should be applied to the present years.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of invoking revision under section 263 of the Act

Relevant legal framework and precedents: Section 263 of the Income-tax Act empowers the PCIT to revise an order passed by the AO if it is erroneous in so far as it is prejudicial to the interests of the revenue. However, this power is to be exercised sparingly and only when there is a clear error apparent on the face of the record.

Court's interpretation and reasoning: The Tribunal examined whether the PCIT had valid grounds to conclude that the AO's assessment orders contained any error warranting revision. The PCIT's orders directed inquiries into the nature of interest charged and the activities of the trust, questioning the entitlement to exemption under section 11.

Key evidence and findings: The AO had granted exemption under section 11 based on the trust's activities. The PCIT's revision orders did not identify any specific error in the AO's findings but sought further inquiry.

Application of law to facts: The Tribunal noted that the AO's orders were supported by detailed examination and were consistent with earlier years' assessments and judicial pronouncements. The PCIT's orders lacked demonstration of any error prejudicial to revenue.

Treatment of competing arguments: The assessee argued that the PCIT's invocation of section 263 was unjustified as the assessments were legally sound. The Revenue contended that the revision was necessary to verify the nature of activities and interest transactions. The Tribunal found the Revenue's contentions insufficient to establish error.

Conclusions: The Tribunal held that the PCIT's orders under section 263 were not sustainable as there was no error in the AO's assessment orders.

Issue 2: Whether micro financing activities constitute charitable activities under section 2(15) of the Act

Relevant legal framework and precedents: Section 2(15) defines charitable purpose, including relief to the poor as the first limb. The Tribunal relied heavily on its own earlier decision for assessment year 2011-2012 and the Kerala High Court decision confirming that micro financing to poor rural women is a charitable activity under this limb.

Court's interpretation and reasoning: The Tribunal analyzed the trust deed, activities, and financial transactions. It emphasized that the trust's dominant object was to alleviate poverty among rural women by providing financial assistance without security, at reasonable interest rates, for self-employment and rehabilitation.

Key evidence and findings: The trust's deed explicitly stated the objective of alleviating poverty and encouraging thrift among rural women. The lending was not commercial money lending but a social welfare activity. Interest collected partly funded a benevolent fund for beneficiaries, evidencing charitable intent. The trust's activities were consistent over years.

Application of law to facts: The Tribunal applied the definition of charitable purpose and distinguished the trust's micro financing from commercial money lending. The interest rates and recycling of repayments for further assistance supported the charitable nature.

Treatment of competing arguments: The Revenue argued that micro financing was akin to money lending and thus not charitable. The Tribunal rejected this, relying on earlier judicial findings that recognized micro financing as charitable, particularly when aimed at poor women without collateral.

Conclusions: The Tribunal reaffirmed that the micro financing activities qualify as charitable under the first limb of section 2(15) and thus are eligible for exemption under section 11.

Issue 3: Application of principle of consistency and precedents in the present cases

Relevant legal framework and precedents: Although the principle of res judicata does not strictly apply to income tax assessments for different years, the principle of consistency requires similar facts to be treated alike unless there is a change in circumstances or law.

Court's interpretation and reasoning: The Tribunal observed that the facts and activities of the assessee in the present years were identical to those in the 2011-2012 year, where exemption was granted and upheld by the High Court. The principle of consistency mandates adherence to this position.

Key evidence and findings: The trust's objects, mode of operation, and beneficiaries remained unchanged. The earlier decisions were binding on the issue of charitable status of micro financing activities.

Application of law to facts: The Tribunal applied the principle of consistency to prevent re-litigation of settled issues and to uphold the assessee's entitlement to exemption.

Treatment of competing arguments: The Revenue did not demonstrate any material change in facts or law to justify departure from earlier findings.

Conclusions: The Tribunal quashed the revisionary orders and allowed the appeals, thereby affirming the exemption granted by the AO.

3. SIGNIFICANT HOLDINGS

- "The micro financing activity is not money lending business as commercially understood. Funds are provided to the rural women folk, who do not have any security to offer for availing loan. These women cannot approach bank or lending institutions for help as they cannot afford to provide security for availing loans. The assessee is helping the socially and economically weaker sections of the Society."

- "The activity of the assessee is advancing loans to poor women from the villages. Such an activity qualifies to be relief to the poor and is included in the first limb of section 2(15) of the Income Tax Act."

- "The principle of consistency has to be followed in situations where the same set of facts permeate through different years. The activity carried on by the assessee was providing micro financing in rural areas as it was done for earlier assessment years where exemption was granted."

- "The PCIT's invocation of section 263 is not sustainable in the absence of any error apparent on the face of the record in the AO's assessment orders."

Core principles established include the recognition of micro financing to poor rural women as a charitable activity under the relief to the poor limb of section 2(15), the limited scope of revision under section 263, and the application of consistency in tax assessments across years with identical facts.

Final determinations:

- The revisionary orders passed by the PCIT under section 263 of the Income-tax Act for the assessment years 2014-2015 to 2016-2017 and 2018-2019 are quashed.

- The assessments granting exemption under section 11 of the Act to the assessee-trust for the said years are upheld.

- The micro financing activities carried out by the assessee qualify as charitable activities within the meaning of section 2(15) of the Act.