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2015 (8) TMI 609 - ITAT CHENNAI

2015 (8) TMI 609 - ITAT CHENNAI - TMI - Entitlement to exemption u/s.11 and 12 - 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 - Held that:- In the present case, the assessee is having reserves and surplus at ₹ 50,89,576/-. Contrary to this, .....

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y 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 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 consid .....

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ly 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. Accordingly, we are inclined to uphold the order of the AO and revers .....

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fore the Tribunal. The Department has filed a petition praying for condonation of delay. After going through the reason given in the condonation petition, we are satisfied that there is a reasonable cause for the delay of 13 days in filing the appeal and the same is condoned and the appeal is admitted for adjudication. 3. The Revenue has raised the following grounds in this appeal : Ground No:2: 2.1 On the facts and circumstances of the case, the Id. CIT (A) erred on law in not appreciating that .....

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he assessee within the 1st & 2nd provisos to Sec.2(15) of the I.T. Act. 2.3 The Ld. CIT(A) failed to appreciate that after introduction of first proviso to section 2(15) w.e.f. 01.04.2009, irrespective of nature of use or application of such profits by a trust pursuing an object of general public utility , the same would not be held to be a charitable activity . This aspect has been correctly appreciated by the Hon ble ITAT, Panaji Bench in the case of Entertainment Society of Goa v. CIT (20 .....

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7; 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 pla .....

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Madurai s decision not to withdraw the registration U/s 12 AA(3) , ignoring the legal position that registration need not be withdrawn in cases where assessees are pursuing objects of general public utility as their gross annual receipts may vary from year to year. 5.2 The Ld CIT (A) erred in ignoring the provisions of Sec. 13(8) of the lncome Tax Act, which empowers the A.O to deny exemption to the assessee in any year when its turnover exceeds the limits prescribed under 2nd proviso to Sec. 2( .....

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e that the assessee is a company registered u/s.25 of the Companies Act. The assessee was granted registration u/s.12A of the Act by the CIT, Madurai in 2003. The assessee filed return of income for the assessment year 2009-10 on 24.9.2009 and was processed u/s.143(1) of the Act. The case was selected for scrutiny and notice u/s.143(2) was issued on 28.9.2009 and the case was heard on a number of occasions. 4.1. The assessee is a micro finance company operating as a financial intermediary betwee .....

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terest rates upto 11%. These were advanced at interest rates with some mark-up, which is not very high. According to the AO, as per the annual report, the net profit from out of the above operations was at 20.44% 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 len .....

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essee 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 credit facilities at lower rates vis-a vis private money lenders and also without insisting on s .....

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than the borrowing rate and it is an admitted fact that the assessee borrows from nationalized banks. This would mean that the assessee is lending at a rate higher than the rate of interest charged by the nationalized banks. In such a scenario, can the act of lending by the assessee at a rate higher than the rate charged by the nationalized banks be termed as relief to the poor ? Therefore, the claim that the assessee is providing relief to the poor is not borne out by facts. 6.1 The ld. DR fur .....

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states that the AO has accepted that the interest spread is less which proves that there is no profit motive. 6.2 According to the ld. DR, reference by the assessee to Circular No.110/24 dated 24th January 1973 in support of its claim is misplaced since there is no reference in the said circular to micro financing . 6.3 The ld. DR further submitted that the concept of res judicata relied upon by the assessee does not apply to income tax proceedings, because each year is a separate proceeding. 6 .....

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n 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 an .....

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ate that the assessee has no profit motive. 6.7. The ld. DR further contended that the assessee claims that all the main objects specifically restrict the operations of the assessee to be carried out for the poor, which is clearly evident by the repetitive use of the phrases such as .... of utility to poor individuals, group of persons belonging to the poorer sections , individuals belonging to the poorer sections fields of benefit and interest to the poor etc. in various clauses. Accordingly, t .....

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ections ... , ... fields of benefit and interest to the poor ... , etc., in various clauses. The assessee is carrying out its activities in accordance with these objects targetted only at the poor. There is no contrary finding by the Revenue or any other authority. The poor are the only beneficiaries of the assessee s activities. The following points indicate that the activities of the assessee is one of relief to the poor and thus fall within the first limb of section 2(15) of the Act: 1. Asses .....

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es is, itself, indicative of the financial position of the borrowers. 4. The fundamental 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 .....

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wellings; 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 any person. 8. Microfinance is seen as an effective tool to organise the unorganised and build their nested institutions through enabling the poor women. The primacy is on building the capacities of the poor and enabli .....

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inance with enabling approach provides space for people to practice democracy at grassroots while micro-credit with delivery approach reinforces dependence perpetually. The emphasis is on developing suitable institutions and financial services controlled by the users. 7.1 The ld. AR further submitted that even government policy considers microfinance to be an effective tool for poverty alleviation. This is evidenced by a statement to this effect made by the Finance Minister in his Budget Speech .....

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e interpretation of section 2(15). In section 2(15), the residuary limb, the advancement of any other object of general public utility cannot derogate from the first limb, relief of the poor . He relied on the judgment of the Supreme Court in CIT v. Shahzada Nand and Sons [1966] 60 ITR 392 (SC), wherein the apex court has affirmed this general principle of law as follows in the context of the tax laws: Another rule of construction which is relevant to the present enquiry is expressed in the maxi .....

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ust 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 with .....

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his argument. 1. ADIT(E) v. Bharatha Swamukti Samsthe [2009] 319 ITR 422, 434 (AT)(Bangalore). 2. Disha India Micro Credit v. CIT, Muzaffarnagar (I.T.A. No. 2. 1374/Del/2010) - 3. M/s. Kurinji Social Welfare Society v. ACIT, Trichy (I.T.A. No. 1594IMdsI2009). 7.3 Regarding ground Nos. 2.2 & 2.3, the ld. AR submitted that the assertion in ground 2.2 that the assessee earned interest and service charges of ₹ 1,27,24,442/- is based on an incorrect interpretation of the facts and the break .....

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s continue to charge the assessee) with amounts already charged being refunded in many cases. Interest Received 6,52,711 This represents interest received from the bank accounts/ deposits and has nothing to do with the borrowers at all. TOTAL 1,27,24,442 The ld. AR submitted that these two grounds deal with the application of the two provisos to section 2(15). In the light of his submissions in relation to ground 2.1 above, according to him, the assessee carries on activities falling under relie .....

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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 .....

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requisite of business is profit motive. It has been repeatedly held by various courts including the Supreme Court that the mere incidence of profits does not result in the activity being treated as business and that the intent to earn profits is a sine qua non for an activity to be treated as business. Dominant purpose test is to be applied. The Supreme Court has held that the incidence of profits will not, per se, vitiate the charitable character of organisations and he relied on the following .....

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Supreme Court s recent judgement in Queen s Education Society v. CIT [2015] 372 ITR 699 (SC). This principle (i.e., to determine whether the dominant intention is one to earn profit or not) has come to be known as the dominant purpose test. He also submitted that the reliance placed by the learned AO in his order on the judgements of the Supreme Court in Sole Trustee, Lok Shikshana Trust v. CIT [1975] 101 ITR 234 (SC) and in Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC) is misplaced. .....

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are carried out at an interest rate that is the borrowing rate plus a load of 2% of the amount of the borrowings. Therefore, where the interest rate on borrowings made by the assessee falls, the resultant benefit is passed on to the borrowers. This is demonstrated by the interest rates shown below. These facts have not been disputed by the Revenue thus far. In fact as per Non-Banking Financial Company - Microfinance Institutions (NBFC - MFI) Directions issued by the RBI, the margin cap laid down .....

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ally 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 .....

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0% Average annual percentage rate tabulated in Annexure 7 to the SIDBI Report varies between 15% and 50.09%. Assessee s APR is 13% (interest only) and varies between 13.12% and 13.44% (interest + fee) based on the quantum of loan. The average APR (interest + fee) of all the MFls covered is 28.19% as per annexure 7 to SIDBI Report. Further the assessee does not accept deposit or insist on insurance like these MFIs thus making it less burdensome for the poor. 7.8. The ld. AR further submitted that .....

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panies Act. He drew our attention to the decision of the Tribunal, Chennai Bench in the case of Socio Economic Development Association v. ITO, Ward II(4) Madurai [2011]-TIOL-754-ITAT-Mad, wherein it was observed as under: Nevertheless, such activities of giving micro-finance and earning interest can be okayed in the case of Companies registered u/s 25 of the Companies Act, 1956, because in that case, the company intends to apply its profit in promoting charity. 7.9. The ld. AR submitted that if .....

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lso 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 .....

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siness and earning incomes have sought to claim that their purposes would also fall under charitable purpose . Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organisations will not in any way be affected. Accordingly, the ld. AR submitted that the assessee is a genuine charitable organization and it must not be affected by this amendment. 7.10. The ld. AR submitted that Ground No. 2.3 refers to two pre .....

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s Circular No.11 of 2008, which was not considered in Entertainment Society of Goa(ESG) (supra). The ld. AR also placed reliance on the recent judgment of the High Court of Delhi in India Trade Promotion Organization v. DGIT (371 ITR 333) and he contended that the Panaji Bench did not have the benefit of judgment of the Delhi High Court in the case of Entertainment Society of Goa(supra) as it was passed subsequently. Accordingly, he submitted that the order of the Tribunal in the case of Enterta .....

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d. AR submitted that ground No.3, asserts that the interest spread is much more than 2% or 3% as charges are made under the caption service charges . This is factually incorrect as it is an admitted position that it is actually interest that is styled as service charges . The table of rates showing the relationship between the borrowing rates and the lending rates has not been controverted by the Revenue. 7.12. The ld. AR submitted that the reliance made by the Revenue in Socio Economic Developm .....

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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 .....

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lic utility which presumption is clearly incorrect and which has been addressed above. He contended that through ground 6.2, the revenue contends that the provisions of other pieces of legislation such as the Companies Act cannot override the provisions of the Income Tax Act, 1961 and places reliance on the judgement of the Supreme Court in Southern Technology Ltd. v. CIT [2010] 320 ITR 577 (SC). Presumably, the Revenue s argument is that the character of the assessee (viz. a company licensed un .....

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he application of law. He further submitted that the Revenue s contention is also incorrect as, to presume that the assessee is established with a profit motive would be either: To presume non- compliance with section 25 of the Companies Act, 1956; or to fully ignore the application of the Companies Act, 1956. Accordingly, he submitted that both these positions are clearly fallacious and do not deserve consideration. He also invited our attention to the following decisions for the preposition th .....

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prayed that 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 a .....

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f 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 consideration irrespective of the nature of use or application or retention of the income from such activity. The AO has taken a stand that by virtue of the amendment as above, the assessee is not entitled to exemption u/s.11 of the Act. 8.1. The ld. AR submitted that, the idea and understanding of the AO with regard to .....

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e mentioned in s. 2(15) by the words not involving the carrying on of any activity for profit . By virtue of the existence of these clarifying words, if there was any element of profit it was enough liable to be reckoned as charitable purpose right from the inception of the Act in 1961 till 1st April, 1984, when the words not involving the carrying on of any activity for profit were deleted. Thus the contention is that after 1st April, 1984, there is no allergy to profit and if the profit feeds .....

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iness or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under charitable purpose . Obviously, this was not the intention of Parliament and hence I propose to amend the law to exclude the aforesaid cases. Genuine charitable organizations will not in any way be affected (Emphasis supplied). 8.3 The learned counsel points out that, the amendment was brought about as a measure of rationalization and simpl .....

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usiness 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 .....

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ty is specified and hence, not entitled to any exemption. 8.4. To analyse the activities carried on by the assessee, we have to go through the nature of activities pursued by the assessee and perusal of that activities carried on by the assessee, cannot be oust the involvement of trade, commerce or business or any service in connection with trade, commerce or business as contemplated under the statute. Further, we note that there is substantial variation in the statutory position as it existed e .....

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(a) any activity in the nature of trade, commerce or business, (b) any activity of rendering any service in relation to any trade, commerce or business for a cess or a fee or any other consideration, irrespective of the nature of use or application or retention of the income from such activity. 8.5. The first limb of exclusion from charitable purpose under cl. (a) will be attracted, if the activity pursued by the institution involves any trade, commerce or business. But the situation contemplate .....

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o which the service is given by the assessee. If the said words are actually in respect of the trade, commerce or business of the assessee itself, 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 r .....

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ssee 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 specific activities of relief of the poor; education or medical relief. The correct way to express the nature of the activities carried on by the assessee is to .....

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tive of the application of the money. Therefore, the case of the assessee is hit by proviso to section 2(15) and the assessee is not entitled for the benefit of section 11 for that part of income generated in the hands of the assessee from running its micro finance business. Alternatively, one has to look into section 11 (4A). Sub-section (4A) provides that exemption shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business i .....

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t or not. By any stretch of imagination, it is not possible to hold that the business of micro finance is incidental to the above stated objectives of the assessee-trust. Incidental means offshoot of the main activities; inherent by-product of principal activities. Activities to compliment and support the main objectives are not in the nature of incidental to the business. They are supporting activities, at the maximum. The genesis of incidental activities must be from the principal activities t .....

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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 capita .....

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