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2017 (1) TMI 1145 - ITAT MUMBAI

2017 (1) TMI 1145 - ITAT MUMBAI - TMI - Claim for exemption under section 11 - applicability of the proviso to section 2(15) - non charitable activity - Held that:- Mere action of charging fee for services, by itself, would not justify invoking of the proviso to section 2(15) of the Act unless it is established that the purpose and object is profit motive. Considering the entirety of circumstances we are unable to find any credible reasoning taken by the Revenue to say that the purpose and objec .....

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regular ‘trade, commerce or business’ and on the contrary it is an entity which is essentially existing for charitable purposes but conducting some activities for consideration or fee. In this background, the proviso to section 2(15) of the Act cannot be invoked to exclude assessee Trust from the purview of section 2(15) of the Act since the said proviso only seeks to exclude institutions which are carrying on regular business, as inferred by us following the legal position explained by the Hon’ .....

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iled by the assessee pertaining to assessment year 2010-11 is directed against an order passed by CIT(A)-1, Mumbai dated 28/07/2014, which in turn, arises out of an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short the Act ) dated 05/03/2013. 2. In this appeal, assessee has raised the following Grounds of appeal:- GROUNDS OF APPEAL: The grounds of appeal set out below are without prejudice to each other: l(a) On the facts and in the circumstances of .....

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elated to applicability of section 11 for the year without appreciating that this ground of appeal is independent and not at all related to income of current year in any manner and the reasons given by him for doing so are wrong and contrary to the facts of the case, provisions of the Income Tax Act, 1961 and Rules made thereunder. (c) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals )has erred in dismissing this ground of appeal witho .....

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ted till the expiry of period allowed u/s 11(3) of the Act would be taxable in the previous year immediately following the expiry of that period and hence the addition in this year is totally wrong and contrary to the provisions of the Income Tax Act, 1961 and Rules made thereunder. (e) On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) failed to appreciate that the appellant trust has considered the amount accumulated under section 11 ( .....

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rned Assessing officer to frame assessment afresh after considering the amount accumulated and set apart in A.Y. 2007- 08 and 2008-09 as income of the trust for A.Y. 2009-10 which shows that addition of this amount cannot be made or sustained in this year. 2(a) On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in confirming addition of ₹ 166,41,00,000/- being the contribution received from Settlers, namely Government of Indi .....

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year in any manner and the reasons given by him for doing are wrong and contrary to the facts of the case, provisions of the Income Tax Act, 1961 and Rules made thereunder. (c) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has erred in dismissing this ground of appeal without considering the detailed submissions of the appellant which is wrong and contrary to the provisions of the Income Tax Act, 1961 and Rules made thereunder. (d) .....

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2(15) of the Act and is not eligible for benefits u/s 11 to 13 of the Act, then no addition of the contributions can be made by invoking the deeming provisions of section 12(I)of the Act. (f) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) failed to appreciate that all receipts of the appellant and in particular receipt of capital nature cannot be deemed to be income and covered u/s 2(24) of the Act. 3. On the facts and in the circu .....

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Income. 4. On the facts and in the circumstance of the case and in law the Id CIT(A) erred in giving contradictory decisions in respect of different grounds of appeal in as much as he has held that the sections 11,12 and 13 of the Act are not applicable during the year but has confirmed the additions to total income by taking recourse to section 11(3) and 12(1) of the Act and thereby confirming additions of amounts accumulated in earlier years and contributions to the corpus of the trust in term .....

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rary to the facts of the case, the provisions of the Income Tax Act, 1961, and Rules made thereunder. (b) On the facts and in the circumstances of the case and in law, the authorities below failed to appreciate - (i) that the objects of the Trust are covered within the meaning of charitable purpose and the Trust was granted registration u/s.12A of the Act. The order of cancellation of the registration u/s.l2A has been set aside by the Hon'ble Income Tax Appellate Tribunal. (ii) that the obje .....

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to section 2(15) of the Act, rendering of service to trade, commerce or business must be such that it is in the course of carrying on business and for has a profit motive. (v) that the services rendered by the appellant Trust are purely incidental or subservient to the main object of the Trust which is a "charitable purpose". (vi) that the fees received by the Trust is only to recover the administrative operational cost and not to earn any profit/income or as a business activity. (c) .....

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in denying the claim of exemption made by the assessee-trust under sections 11 & 12 of the Act. Before we proceed to deal with the specific Grounds of appeal raised before us, it would be appropriate to briefly touch upon the manner and the purpose for which assessee-trust has been formed and also the history of the past assessments in the case of the assessee. For the said purpose, the following discussions is relevant. 4. The appellant before us is a Trust, which has been settled on 27/07/ .....

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nal Rural Banks(RRB) for want of collateral securities and/or third party guarantees. The Government of India decided to introduce a Credit Guarantee Fund Scheme for the small industries, in order to provide effective credit guarantee for SSI loans; for guaranteeing the loans and advances extended without collateral and/or third party guarantees to small industries by the Scheduled Commercial Banks and others. With these objectives the settlors i.e. Government of India and SIDBI decided to creat .....

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ing out of corpus fund shall be spent towards fulfilling the objectives of the Trust and even savings effected in any year were to be transferred to the corpus fund to be spent towards fulfilling the objectives of the Trust. The trust-deed also prescribes the manner in which the scheme is to be implemented and it also provides for a Board of Trustees, whereby the Chairman & Managing Director of SIDBI is to be its Exofficio Chairman and other members being drawn from the officials of the Gove .....

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d/or third party guarantees to the new or existing SSI manufacturing units including information technology (IT) and software industries or such other industry(ies) as may be decided by the settlers from time to time; and levy guarantee fee/annual service fee/other charges on the lending institutions as may be decided by the Trust from time to time. (b) To undertake securitisation of the guaranteed loans and to do all other acts or things as may be necessary therefore, either directly or otherwi .....

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objectives hereinabove provided. The operational detailing of the scheme has also been annexed as a part of the trust-deed. In nutshell, the scheme seeks to provide guarantee for the credit facilities aggregating upto Rupees Ten lacs sanctioned and disbursed by the lending institutions to the new or existing Small Scale Industrial manufacturing units, including IT and Software Industries, without any collateral security and/or third party guarantee. 4.1 The Trust was registered under section 12A .....

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ssment finalized under section 143(3)(ii) of the Act dated 24/12/2009 and the total income was assessed at Nil . Pertinently, in coming to such assessment, the Assessing Officer allowed the claim of the assessee for accumulation of income under section 11(2)(a) of the Act for ₹ 94,34,84,008/-. Similarly, in assessment year 2008-09 also assessee s claim for exemption under sections 11 & 12 of the Act was accepted by the Assessing Officer and vide an order dated 30/12/2010 passed under s .....

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12 of the Act on the premise that the registration granted to the assessee under section 12A of the Act earlier on 18/10/2001 was withdrawn vide an order passed under section 12AA(3) of the Act on 07/12/2011 by the DIT(E), Mumbai. 4.2 Now, we may come to the assessment year under consideration, wherein assessee originally filed a return of income on 30/09/2010 declaring total income of ₹ 357,98,99,601/- without availing exemption under sections 11 & 12 of the Act. However, in the cours .....

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derstood as follows. Firstly, the Assessing Officer denied the claim of the assessee for exemption under sections 11 & 12 of the Act and noted that so far as the receipts of income by way of interest on investment, guarantee fee, annual service fee, miscellaneous receipts, pension interest income and recoveries by MLI s on claim paid are concerned, the same are from activities in the nature of trade, commerce or business and, therefore, hit by the proviso to section 2(15) of the Act. Secondl .....

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tions provided in the regime of sections 11 to13 of the Act. Further, the Assessing Officer noted the accumulation made by the assessee in assessment years 2007-08 and 2008-09 and held that in view of the cancellation of registration under section 12A of the Act, the benefit of accumulation was no longer available to the assessee, and he has accordingly brought to tax such sums of ₹ 94,38,84,008/- and ₹ 154,61,84,037/- respectively. Thus, the assessment of total income at ₹ 773 .....

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ssing Officer. In sub-and-substance, the CIT(A) has affirmed the ultimate stand of the Assessing Officer on two grounds. Firstly, according to the CIT(A), the activities of the assessee are confined to serve the interests of the businesses of the Small Scale Industrial Undertakings and Micro Enterprises, which cannot be construed to be an activity falling within the purview of section 2(15) of the Act. Therefore, according to the CIT(A) assessee is not engaged in carrying out charitable activiti .....

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rying out any charitable activities in terms of section 2(15) of the Act. 5.1 In this background, rival counsels have made their submissions. In so far as the stage of assessment is concerned, it is quite clear that sum and substance of the stand of the Assessing Officer was the withdrawal of registration by the DIT(E) under section 12AA(3) of the Act. Ostensibly, the said reason no longer holds good as the Tribunal vide its order dated 28/05/2014 has restored the registration, a fact which has .....

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n the meaning of the expression charitable purpose contained in section 2(15) of the Act. In support, reliance has been placed on the following judgments: (i) Hira Lal Bhagwati V CIT 246 ITR 188(Guj) (ii) Sonepat Hindu Educational and Charitable Society vs. CIT, 278 ITR 262(P&H) (iii) Madhya Pradesh Madhyam vs. CIT, 256 ITR 277(M.P) 5.2 On this aspect of the matter, the Ld. CIT-DR has merely reiterated the stand of the CIT(A), while not joining issues so far as the ratio laid down in the abo .....

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under which assessee is covered. Notably, section 2(15) of the Act provides an inclusive definition of charitable purpose to include relief to the poor, education, medical relief, preservation of environment and preservation of monuments or places or objects of artistic or historic interest, and the advancement of other object of general public utility. Be that as it may, there is no denying the fact that as of now the registration granted to the assessee under section 12A of the Act by DIT(E) .....

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f section12A of the Act obligate the Commissioner to examine that the applicant before him is really a charitable trust or institution eligible for registration The Hon ble Punjab & Haryana High Court in the case of Sonepat Hindu Educational and Charitable Society (supra) observed that registration of an institution under section. 12A is sufficient proof of the institution having been established for charitable purposes. Therefore, in view of the aforesaid undisputed judicial view about the .....

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egistration granted under section 12A of the Act to say that assessee was not existing for any charitable purposes. In fact, the Ld. Representative for the assessee has rightly relied upon the judgment of the Madhya Pradesh High Court in the case of Madhya Pradesh Madhyam (supra), wherein distinction between the proceedings for registration and the assessment proceedings has been appreciated. As per the Hon ble High Court, the income-tax authorities are bound by the registration and once an inst .....

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ing to say is that during the subsistence of registration under section 12A of the Act, it is not competent for the assessing authority to revisit the nature of the objects of the assessee Trust and say that the same does not fall within the meaning of charitable purpose defined in section 2(15) of the Act. Therefore, in view of our aforesaid discussion, we are enable to approve the stand of the CIT(A) that assessee is an institution existing without any charitable purpose. 5.4 The second object .....

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consideration, irrespective of the nature of use or application, or retention, of the income from such activity. We may briefly cull out the effect of the proviso and the argument set up by the Revenue thereof. Ostensibly, the expression, charitable purpose has been defined in section 2(15) of the Act to include certain categories of activities and one of it is advancement of any other object of general public utility . The aforesaid proviso to section 2(15) seeks to carve out an exception to sa .....

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id proviso, the CIT(A) noted that the objects of the assessee are to protect business interest of small scale industries and micro enterprise and, therefore, assessee s activities are not charitable in nature. Before us also, the Ld. CIT-DR has taken similar arguments and pointed out that the assessee Trust is providing guarantees and/or counter guarantees for credit facilities enjoyed by small scale industries from various lending institutions against charging of fee and other charges. Ld. CIT- .....

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t the activity and the objects of the assessee to guarantee loans and advances disbursed by the lending institution without any collateral securities to small scale industries and micro enterprises is to help such enterprises, which do not have sufficient financial strength to obtain loans. Ld. Representative for the assessee emphasized that none of the objects are being carried out on commercial basis or with a profit motive so as to fall within the scope of the proviso to section 2(15) of the .....

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India v. DGIT(E), 360 ITR 138(Del) (iv) India Trade Promotion Organization vs. DGIT(E) & Others, 371 ITR 333 (Del) 5.6 We have carefully considered the rival submissions. Before we proceed to address the controversy relating to invoking of the proviso to section 2(15) of the Act, we may briefly recapitulate the fact-situation. As noted earlier, the main object and purpose of the assessee Trust is to give guarantee for loans and advances disbursed by lending institutions to the small scale in .....

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iso to section 2(15) of the Act. The proviso is applicable to the object of charitable purpose, which is in the category of advancement of any other object of general public utility . The proviso seeks to cover an object which involves the carrying on of any activity in the nature of trade, commerce or business; and, also rendering service in relation to any trade, commerce or business. In the case of the Institute of Chartered Accountants of India & Another (supra), the claim for exemption .....

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iew of charitable purposes. The Hon ble High Court considered the expression, trade, commerce or business occurring in the first proviso to section 2(15) of the Act and observed that it must be interpreted restrictively so as not to exclude entities, where the dominant object is charitable. The Hon ble High Court held that the purpose and the dominant object for which an institution carries on its activities is material to determine whether the activities are in the nature of business or not. Th .....

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t be construed to be in the nature of trade, commerce or business so as to fall in the scope of the proviso to section 2(15) of the Act. 5.8 Similarly, in the case of GSI India (supra), the Hon ble Delhi High Court, again considered the import of the proviso to section 2(15) of the Act. As per the Hon ble High Court, the expression trade, commerce or business in section 2(15) of the Act would mean an activity, which is undertaken with a view to make or earn profits. In other words, it was emphas .....

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has been noted that charitable activities require operation/running expenses as well as capital expenses to be able to sustain itself in the long run. The Hon ble Court explained that the proviso to section 2(15) cannot be understood to mean that a charitable institution with the object of advancement of general public utility is to be wholly, substantially or in part funded only by way of voluntary contributions. 5.9 Similarly, the Hon ble Delhi High Court in the case of India Trade Promotion O .....

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and income from food and beverage outlets in Pragati Maidan, etc. it was hit by the proviso to section 2(15) of the Act. The stand of the assessee was that its activities did not fall within the ambit of trade, commerce or business and further that it was also not engaged in rendering of any service in relation to trade, commerce or business so as to fall within the purview of section 2(15) of the Act. Though the Hon ble High Court has passed a detailed judgment upholding the constitutional vali .....

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on to any trade, commerce or business, the existence or otherwise of an element of profit making cannot be ignored. 5.10 In view of the legal position explained in the aforesaid judgments, it can be safely deduced that in the context of the application of the proviso to section 2(15) of the Act, what is critical is to examine as to whether the assessee Trust has been established for charitable purpose or not; and, the fact that it earns some income, by itself, would not be fatal and conclusive t .....

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ection 2(15) of the Act. 5.11 In this background, now we may go back to the facts of the present case. In the instant case, the object and purpose of the assessee Trust is to enable the small scale industries and micro enterprises to pursue their income generation activities. The said object is sought to be achieved by providing guarantees or counter guarantees to the lending institutions who disburse loans or provide other credit facilities to the small scale industries and micro enterprises. W .....

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e by the Revenue that the quantum or object of fee charged by the assessee Trust betrays any profit motive. In fact, the income-tax authorities do not dispute the fact that the purpose and object behind the assessee Trust is not to carry on trade, commerce or business, but the only point made is that certain fee/charges have been levied for activities rendered to the beneficiaries, and therefore, it should be seen as trade, commerce or business . As we have seen earlier, mere action of charging .....

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ust has been settled on 27/07/2000 by the Government of India and SIDBI. The trust deed brings out the objects and purpose for which the assessee Trust has been set up, namely, to mitigate the difficulties faced by the small scale industries and micro enterprises in availing credit facilities from various lending institutions. It is also to be noted that the object and purpose of the Trust is focussed on small scale industries and micro enterprises and is not available to entrepreneurs at large. .....

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n our considered opinion, on facts, it is not possible to infer that assessee Trust is carrying on any regular trade, commerce or business and on the contrary it is an entity which is essentially existing for charitable purposes but conducting some activities for consideration or fee. In this background, the proviso to section 2(15) of the Act cannot be invoked to exclude assessee Trust from the purview of section 2(15) of the Act since the said proviso only seeks to exclude institutions which a .....

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