TMI Blog2015 (8) TMI 609X X X X Extracts X X X X X X X X Extracts X X X X ..... siness activity. In order to become a charitable activity, the institution must have advance loans at a subsidised rate of interest. The assessee is availing loans from banks and advance the same and admitted that it has advanced the loans to the customers at 13%. It is a commercial rate prevailing in the market. By advancing loans at that rate of interest 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before Supreme Court stands dismissed vide SLP(C) No 4990/2014 dated 21.07.2014. Ground No.3: 3.1 The Id. CIT (A) erred on fact in not appreciating that the assessee has collected an amount of ₹ 1,27,24,442/- (interest of ₹ 6,52,711/- and Service charges of ₹ 12,07,173/-) from the borrowers and paid only ₹ 84,56,011/- as interest and bank charges, which shows that the activity of the assessee is purely business in nature and is thus hit by proviso s to Sec.2(15) of the Act. A copy of the Income and Expenditure for the Year ended 31.3.2011 is enclosed as Annexure A ; 3.2 The Id. CIT (A) erred in holding that interest spread of the assessee is very small (2% to 3%) ignoring the fact that it is charging much more under the caption of service charges . Ground No.4: 4.1 The Id. CIT (A) failed to place reliance on the decision of the Jurisdictional ITAT in the case of Socio Economic Development Association v. ITO, Ward 11(4), Madurai [(2011)-TIOL-754-ITAT-Mad] and Bangalore ITAT in the case of Janalakshmi Social Services vs. DIT (Exemptions) [2009] 33 SOT 197 (BANG.) wherein micro-finance activities are held to be commercial in nature whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % in the financial year 2009-10. 4.2 The assessment was completed by assessing the income at ₹ 30,33,950/- by denying the exemption u/s.11 12 by invoking the provision of proviso to sec.2(15) on the ground that the assessee was doing business of banking (some form of money lending) which fell under 4th limb of proviso to sec.2(15) i.e. any other object of public utility. The assessee has raised a number of objections against AO s decision to invoke provisions of proviso to sec.2(15) of the Act. The AO rejected the assessee s contentions and justified his stand. Aggrieved, the assessee went in appeal before the CIT(Appeals). 5. On appeal, the CIT(Appeals) observed that the assessee is a company without profit motive and the micro finance business carried on by the assessee falls under the category of relief to poor and hence, it is carrying on charitable activity u/s.2(15) of the Act, so as to grant exemption u/s.11 and 12 of the Act.. Accordingly, he deleted the addition made by the AO. Hence, the Revenue is in appeal before us. 6. The ld. DR submitted that the observation of the CIT(Appeals) that the assessee provides relief to the poor by way of providing such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that as per the claim of the assessee that as per the Memorandum of Association, the main object is relief for poor by all conceivable means . According to the ld. DR, the word, poor is a relative term and there cannot be a universal definition. However, as per the Report of the Expert Group to review the methodology for measurement of poverty by the Rangarajan Committee those spending more than ₹ 972 a month in rural areas and ₹ 1,407 a month in urban areas in 2011-12 do not fall under the definition of poverty. The assessee has not established that it caters only to the poor. 6.5. According to the ld. DR, the findings of the Report of SIDBI cannot be taken as the last word on the subject, since SIDBI itself in the said Report admitted as follows: The sample size within each of subcategory analyzed in the study was not adequate to corroborate the findings. e.g. there are not many Not for Profit Institutions (seven Societies, three Trusts and one Section 25) in the study to confirm the findings of the study with respect to the entire population of such Institutions; 6.6. The ld. DR submitted that there is only one Section 25, company in sample taken up by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the assessee s activities is that the assessee is able to extend financial assistance to people who are unable to access banks. The assessee does not (and cannot, by virtue of the restrictive nature of its objects) lend to the well-off (non-poor) sections of the population. 5. In any case, the assessee s relief to the poor extends far beyond just credit. The assessee also conducts and has conducted other activities such as training, capacity building, group promotion, and tsunami relief at no cost to its beneficiaries. For these purposes, the assessee also gives nonreturnable financial grants. An aggregate amount of ₹ 71.83 lakhs has been spent on these activities from FY 2004-05 to FY 2009-10. 6. The quantum of the credit extended also makes it clear that the assessee lends to the poor. The limits are as follows: ₹ 4,00,0001- per SHG of 20 individuals where the loans are for dwellings; and ₹ 2,50,0001- per SHG of 20 individuals for other purposes. 7. KDFS does not have any profit motive distribute any dividend/profit to anyone pay remuneration to any of its board members involve any private gain and personal benefit to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iple has been stated in Craies on Statute Law, 5th edition, at page 205, thus; The rule is, that whenever there is a particular enactment and a general enactment in the same statute, and the latter, taken in its most comprehensive sense, would overrule the former, the particular enactment must be operative, and the general enactment must be taken to affect only the other parts of the statute to which it may properly apply. But this rule of construction is not of universal application. It is subject to the condition that there is nothing in the general provision, expressed or implied, indicating an intention to the contrary ... It is clear that there is nothing in the residuary limb of section 2 (15) that would suggest an intention to override the first limb of the said subsection. Thus the said subsection would not fall within the exception postulated by the Supreme Court either. The ld. AR also submitted that this principle has been applied in the interpretation of sec.2(15) by the ITAT, Chandigarh in Himachal Pradesh Environment Protection and Pollution Control Board v. CIT (9 ITR (Trib) 604). He has also drawn our attention to CBDT Circular 11/19 December 2008 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce activities are activities in the nature of trade, commerce or business as contemplated by the first proviso to section 2(15) and that the receipts therefrom are thus taxable. The ld. AR tried to establish that the activities of the assessee are not in the nature of trade commerce or business by giving following submissions. 7.5 The ld. AR submitted that the fact that the activities of the assessee are not in the nature of business is clear from the fact that the assessee comes within the scope of the Reserve Bank of India s (RBI) Notification No. DNBS.138/CGM(VSNM)-2000 dated January 13, 2000. The intention of this notification was to relieve entities like the assessee from the stringent procedural requirement (such as capital adequacy and registration with the RBI) applicable to for-profit microfinance NBFCs. The assessee is also supported by grants. Donors do not make grants to commercial entities. The assessee s aggregate grant receipts in the five financial years ending 31 March 2011 amounted to ₹ 63.55 lakhs. The basic prerequisite of business is profit motive. It has been repeatedly held by various courts including the Supreme Court that the mere incidence of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10% (loan portfolio exceeding ₹ 100 crores) and 12% (loan portfolio below Rs. I00 crores) based on the loan portfolio. The load of 2% cannot be done away with as it is a bare necessity to ensure the survival of the organisation. This load is applied towards administrative costs and bad debts. The surplus if any is only ploughed back for application towards its objects. In the light of the license under section 25 of the 1956 Act, the assessee actually has no other legally permissible option. To suggest that the load of 2% indicates an intention to earn profit and that this load would vitiate the charitable character would be to condemn the assessee to financial failure. Financial stability is a prerequisite for the survival of every entity including those carrying on charitable activities. To interpret section 2(15) as prohibiting earning even this income would be to defeat the intention of the exemption provisions. The rates of interest charged by the assessee are considerably lower than the rates of interest charged by other entities carrying out microfinance. This is evidenced by the data brought out in the Small Industries Development Bank of India (SIDBI) s Report titled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and tsunami relief would not have been carried out; and (vi) the assessee would not have chosen to obtain a licence under section 25. He also drew our attention to the judgement of the Delhi High Court in Institute of Chartered Accountants of India v. DGIT( E) [2013] 358 ITR 91 (Delhi), where the Court held that the words trade, commerce or business occurring in section 2(15) must be interpreted restrictively while bearing the purposes of that subsection and the exemption provisions in mind. He also placed reliance on the judgment of the High Court of Andhra Pradesh in CIT v. Spandana Rural and Urban Development Organisation (ITA No.304 of 2013). Further, he placed reliance on the following paragraph in the speech of the Finance Minister in the context of the amendment of the first proviso to sec.2(15) of the Act: 180. Charitable purpose 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, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the reliance made by the Revenue in Socio Economic Development Association v. ITO, Ward 11(4), Madurai [2011]-TIOL- 754-ITAT-Mad and in Janalakshmi Social Services v. DIT (Exemptions) [2009] 33 SOT 197 (Bang.)- is not relevant to the facts of the present case. 7.13. According to the ld. AR, the assessee is pursuing the advancement of any other object of general public utility which presumption is clearly incorrect and which has been addressed above. He submitted that in Entertainment Society of Goa (supra), registration was cancelled under section 12AA(3) invoking proviso to section 2 (15) which was upheld by the ITAT. However in this paragraph the ground states that registration cannot be cancelled under section 12 AA (3) invoking proviso to section 2 (15). The ld. AR submitted that the CIT - 1, Madurai initiated action u/s.12AA(3) invoking the proviso to section 2(15), but dropped the proceedings. Before the CIT-1, the assessee emphasised that it falls under relief of poor with oral and written submissions. He further submitted that ground 5.2 also deals with invoking the second proviso to section 2(15) and, consequently, the provisions of section 13(8). Once again, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the CIT(Appeals) is to be confirmed. 8. We have heard both the parties and perused the material on record. Sec. 11 of the Act stipulates that the income from property held for charitable or religious purpose shall not be included in the total income of the previous year of the person in receipt of the income to be given effect in the manner as specified therein. The term charitable purpose has not been defined under the statute; but for the inclusive nature of the term as specified under s. 2(15) of the Act, which as existed before the amendment is as follows : Sec. 2(15) : Charitable purpose includes relief of the poor, education, medical relief and the advancement of any other object of general public utility. As per Finance Act, 2008, the said provision was amended adding a proviso w.e.f. 1st April, 2009 as follows : Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not as a measure of taxation. It is also stated that the concept of charity in India is wider, simultaneously adding that, by virtue of the amendment, the position that existed prior to 1st Feb., 1984 has been brought back and that is all. This however will not tilt the balance in any manner in the case of the assessee so as to take the activities outside the charitable purpose, particularly in view of the fact that micro finance business will not constitute any trade or business. According to the ld. AR, to perform charity, income is inevitable and contended that the activities being pursued by the assessee may constitute a trade or business, if it is not applied for the purposes of charity. Contrary to this, the ld. DR submitted that though the object of the assessee is to carry on charitable activities, but it does not carry those charitable activities, and it was only carrying on micro finance business in a commercial manner, which cannot be construed as charitable activity. In other words, it was contended by the ld. DR that the assessee carried on activities in a business oriented manner, it will definitely come within the fourth limb of the amended sec.2(15) of the Act, wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the said clause [second limb of the stipulation under cl. (b)] is rather otiose. Since the activity of the assessee involving any trade, commerce or business, is already excluded from the charitable purpose by virtue of the first limb [cl. (a)] itself, there is no necessity to stipulate further, by way of cl. (b), adding the words or any activity of rendering any service in relation to any trade, commerce or business .................. . As it stands so, giving a purposive interpretation to the statute, it may have to be read and understood that the second limb of exclusion under cl. (b) in relation to the service rendered by the assessee, the terms any trade, commerce or business refers to the trade, commerce or business pursued by the recipient to whom the service is rendered and in such circumstances, the activities carried on by the assessee cannot be considered as charitable activities. 8.6. The activities carried on by the assessee cannot be considered as activities of medical relief or education or relief of the poor. It is true that the activities carried on by the assessee take care of the poor people also. But those activities cannot be classified under any of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that running of business in the form of micro finance is incidental to carrying on of main objective of the assessee-trust and it is the main business of the assessee. Therefore, the assessee is not protected by the provision stated in section 11 (4A), either. 8.7. In the present case, the assessee is having reserves and surplus at ₹ 50,89,576/-. Contrary to this, the assessee is having revolving fund at ₹ 66,33,800/-, which was availed by hypothecation of their debt to various necessary banks. Further, the assessee raised secured loans and unsecured loans @ 11% totalling to ₹ 16,35,54,090/-. Thus, it means that it has raised loans to advance to the customers by paying interest and the assessee is not having own corpus in a formal capital so as to advance the loan. The assessee is providing loans by association with various commercial banks by raising loans from them. Such kind of micro finance activity cannot be termed as charitable activity rather than it is a business activity. In order to become a charitable activity, the institution must have advance loans at a subsidised rate of interest. The assessee is availing loans from banks and advance the same an ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
