TMI Blog2010 (2) TMI 1166X X X X Extracts X X X X X X X X Extracts X X X X ..... to be granted to SPANDANA (Rural Urban Development Organisation). Nature of activities undertaken by the assessees - Micro financing activities - HELD THAT:- We find that the assessee is a society registered with the Registrar of Societies in 1992 in the name of SPANDANA (Rural Development Organisation). Later on certain amendments were made in the objects of the society. The copy of the objects are placed on record and from its perusal, we find the objects of the assessees are almost for charitable activities. We therefore hold that the micro finance activity in the instant case is a charitable activity. Since the registration has already been granted to the assessees u/s 12A assessee is eligible for exemption u/s 11. We are of the view that by advancing a fund on interest to other organisations, assessee has accomplished its object of micro finance to the socio-economically weaker sections of the society and also to alleviate poverty beside collecting the interest on the advanced loan. Moreover, this fund was advanced for a shorter period and the assessee has also earned an interest thereon which was utilized in micro financing activity to the poor people. We therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e course of its regular activity. 5) Appellant submits that the CIT(A) is not justified in holding that it had violated the provisions of section 11 in advancing an amount to M/s. SPANDANA MUTUAL BENEFIT TRUST, whereas the said amount has been advanced only in the course of its regular operations towards acquisition of an asset and does not amount to any violation of the provisions of section 11 of the Income Tax Act. 6) Appellant submits that the CIT(A) is not justified in upholding the assessing officer s action in disallowing the amount of ₹ 38,31,698/- made towards provision of loan loss. 2. Though the assessee has raised various grounds of appeal, but they relate mainly on two issues i.e.:- i) Whether the registration u/s 12A was properly granted to the assessees. ii) Whether the activities undertaken by the assessees are charitable activities and its income is eligible for deduction u/s 11 12 of the I.T. Act. 3. We have heard the rival submissions and carefully perused the orders of the authorities below and documents placed on record and we find that the assessing officer has out rightly disallowed the claim of exemption of the income on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of dates in the application and the dates mentioned in the registration certificate. But the revenue has not brought out any other application in which the name of the assessee was mentioned as SPANDANA (Rural Development Organisation), in response to which the registration dated 22.1.1998 was granted. The Ld. Counsel for the assessee has also placed a reliance upon the registration certificate granted by the Registrar of Societies, which is appearing at pg. 21 of the compilation of the assessees. During the course of hearing of the appeal, assessee was asked to file some other evidence in order to prove that after filing of this application or grant of registration assessees has been using its name only as SPANDANA (Rural Urban Development Organisation). In response thereto assessee has filed the copies of return of income for the assessment year 2002-03, 2003-04, 2004- 05 2005-06, in which the name of the assessee was mentioned as SPANDANA (Rural Urban Development Organisation). These copies of returns are available at pg.118 to 121 of the compilation of the assessees. The Ld. Counsel for the assessee further contended that the error in the name of the assessee in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its Chartered Accountant in which the seal of the office of the Commissioner of Income Tax, Vijayawada is there. This document is available at pg.23 of the compilation. No doubt in the registration certificate the date of application was stated to be 26.11.1997, whereas the date of application appearing at pg.22 is dated 23.11.1997 and it was submitted to CIT office on 27.11.1997. But the revenue has not brought out any other application on record to state that this is a correct application in response to which the registration u/s 12A was granted to the assessees. Revenue authorities have simply drawn an inference on the variation in the dates that this was not the application which was submitted to the office of the CIT. We have also carefully examined the registration certificate appearing at pg. 24 and we find that the registration certificate was sent to the President, SPANDANA (Rural Development Organisation) on the same address of the SPANDANA (Rural Urban Development Organisation). The error is only with regard to the word And Urban which are to be inserted between the words Rural and Development . Since the mistake is invisible, the assessee might have lost its sight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption cannot be denied to the assessees for this reasons only. We however, direct the revenue to make necessary correction in the name of the registration certificate granted to the assessee and shall treat it to be granted to SPANDANA (Rural Urban Development Organisation). 9. The next issue relating to the nature of activities undertaken by the assessees. The assessee society was engaged in micro financing activities and was operating in various districts of the Andhra Pradesh. Micro finance is a supply of loans, savings and the basic financial services to the poor. Micro financing loans are small loans granted to the basic sectors, on the basis of the borrower s cash flow and the other loans granted to the poor and low income households for their micro enterprises and small businesses to enable them to raise their income levels and improve their living standards. The assessee has also undertaken work in other areas such as health. Its primary focus continues to be micro finance. Initially the demand was so huge that promoters had to struggle for loan funds. Funds were raised through innovative local fund raising campaigns like collecting and selling old news papers. Sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferring the benefit to the borrowers by way of low interest rate among peers. 11. It was further contended before the CIT(A) that in 2002 an internal analysis by ICICI Bank revealed that despite consistent evidence of rival demand from clients, access to MFI was constrained due to the organisation based financing model adopted until then. 12. It was further explained to the CIT(A) that in order to avail the financial help, the assessee has joined hands with the ICICI Bank and other financial institutions so that funds can be arranged for the micro finance to the poorer or the needy people. The CIT(A) examined the issue but was not convinced with the contentions of the assessees and he observed that micro financing as an activity is not included the definition of charitable activity that is u/s 2(15) of the Act. Section 2(15) includes the relief to the poor. He further observed that a micro financing activity is to be treated as a business activity helping to provide relief to poor, the requirement of section, that is maintenance of the separate books of accounts with respect to such business activity, needs to be fulfilled. The assessee has not maintained the separate books o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to which one more objective was added to the objects of the society. The Ld. Counsel for the assessees further contended if the assessee is engaged in charitable activities, whatever income is generated during the course of that activity, the same is to be exempted u/s 11 of the Act. The revenue s main objection is only with regard to the advancement of loan to certain institutions which are also engaged in these type of activities though having not obtained the registration u/s 12A of the I.T. Act. But the advance was given to them for a short period on which interest was earned. The said interest was also utilized in micro financing activities. Thus the assessee is entitled for the exemption u/s 11 of the I.T. Act. 15. The Ld. D.R. on the other hand has placed a heavy reliance upon the order of the CIT(A). He however argued that from the activities of the assessee, it can be found out that society has been borrowing funds from banks and other institutions at an average floating rate of interest at 10% p.a. and lending to poor women at an average fixed rate interest of 15%. In addition, society has been collecting the loan fee at 1% of the loan amount pass book fees at ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommission with service charges. The ICICI bank is a commercial bank doing micro finance business as one of its business activity. The society instead of doing charitable activity of providing relief to the poor is acting as an agent to private commercial bank and earning commission and hence it is nothing but a business activity which again not incidental to attain its objectives. The Ld. D.R. further contended that the society has advanced funds to SPANDANA Sphoorty Innovative Financial Services Ltd., a company doing micro finance business and SPANDANA Mutual Benefit Society both its sister organisation and members of the society are having interest in such organisation. The SSIFSL Ltd. has paid an interest @ 10% p.a. on the borrowed funds from the society, whereas the (SMBT) SPANDANA Mutual Benefit Society has not paid any interest on the funds borrowed from the society. The Ld. D.R. further contended that the Small Business Industries Development Bank of India (SIDBI) had directed the assessee society to transform into more organized and regulated organisation and get converted into NBFC. For this process the SIDBI has given a grant of 1 crore to carry out the process. The socie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of activities and they have categorically held that micro finance activity is a charitable activity and assessee is entitled for exemption u/s 11 and is also eligible for renewals and recognition of section 80G(5) of the Act. While holding so, the Tribunal has observed that loan was given to project members out of the funds borrowed from the banks. The beneficiaries are poor families. If the women in the assessee s project have to borrow money from the money lenders, they have to pay many times higher interest than what the assessee has charged. The Tribunal further observed that in these type of activities, assessee has to incur financial cost for obtaining loans from banks and for regularizing the rest of the activities and to meet the expenses in that activities and other administrative activities of the trust the assessee has to charge the higher rate of interest from the poor members. The Tribunal further observed that object of the assessee was for alleviation of poverty by extending micro credits to poor rural women and it was not charging exorbitant interest and they are being nothing to suggest that the funds are ever used or misused for the personal benefits of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ganize training programmes and to provide educational facilities to the poorer sections of the community. (g) To establish administer, maintain, manage or to finance the establishment and maintenance of vocational training centres and institutions for providing formal and informal education benefit of the poorer and disadvantaged sections of the community. (h) To organize lectures/seminars/demonstrations/exhibitions/symposia etc., to disseminate useful information to the public. (i) To establish, maintain, manage or finance the establishment and maintenance of libraries for the use of the public. (j) To establish, maintain, manage or finance separate funds like emergency fund, calamity fund etc., to help poor families at the time of distress. (k) To publish or to finance the publication of books, pamphlets, tracts, magazines, etc., for dissemination of useful knowledge amongst the public. (l) To undertake and carryout research in social sciences or statistical research. (m) To undertake and carry out programmes of conservation of natural resources or of afforestation. (n) To conduct, perform or carry on any of the above activities or any ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see trust carried interest rates ranging from 9 to 12 per cent payable in monthly instalments. In some of the loan agreement the lender has prescribed the maximum rate of interest at 20 per cent flat per annum. Sec. 2(15) of IT Act defines :Charitable purposes as under: Charitable purpose includes relief of the poor, education, medical relief and the advancement of any other object of general public utility . Thus, the object of the trust is mainly constitute alleviation of bottom line poor rural and urban women and their families by means of micro credit facilities. The programme is known as BSS Micro Loan Project which is presently extending its help to all poor women. The assessee trust has found that the rural and urban poor women have benefited from the trust s funding activities and were about to come out of the depths of their poverty to a great extent to be able to lead a normal life like any other citizen. This goes to show that the relief to the poor has been aimed at by the trust s micro loan and this is clearly a charitable purpose confirming to the provisions of s. 2(15) of the I.T. Act, 1961 both as relief to poor as well as an object of general pub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. So, it is not justifiable to level the assessee as a profit making body alone. Further, there is nothing on record to justify that the assessee is a charging exhorbitant rate of interest from the poor women mentioned above. There is nothing on record to suggest that these poor women are capable of receiving loan at lesser interest than offered by the assessee. In case, there is availability of funds/loans at lower rate of interest, nobody including the assessee can force these poor women for such alleged higher rate of interest on the loans. There is nothing on record to suggest that the funds of the trust are used or misused for personal benefit of the trustees or their relatives or near and dear ones. The Revenue has brought nothing on record that surplus generated in the above said activities are not ploughed back into the organisation for the benefit of poor. The financial sustainability as a method of achieving our ultimate objectives, should not be termed as profit motive . Because the organisation aims and work to alleviate poverty of poor women. It is not out of contest to mention here that Dr. Ramesh BellamKonda, trustee and project director, is a medical doctor by b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, that this micro finance activity requires an organised sector for procuring a loan from the banks or other financial institutions for its disbursement/advancement of loan to poor or weaker section of the society in which the assessee has to incur a lot of expenditure. More over when a loan was given to the poor women, they do not have any surety or guarantee to stand and most of the times the loan could not be recovered from them and that aspect is also to be taken into account by the assessees while granting a lone to the poor women. Suppose a loan was given to some of the poor women and they would not be in a position to repay the loans what the assessee will do. He cannot enforce the recovery of the loan by other means and ultimately he has to write off the loan. Meaning hereby in these type of micro finance activity most of times the assessee could not recover the loan granted to the poor women as no one stood as the guarantor for them at the time of advancement of the loan. No doubt assessee is charging higher rate of interest from the poor women or the downtrodden or socio-economically weaker sections of the society. The reason behind is that most of time the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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