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TMI Blog2018 (9) TMI 2125X X X X Extracts X X X X X X X X Extracts X X X X ..... ,796/- from this activity. He observed that no separate books of account have been kept and maintained in respect of this activity. Further, he observed that the assessee obtained loan from financial institutions with interest and advanced loans to self help groups at a higher rate of 0.5% than the rate at which the loan is obtained from the bank/financial institutions. Hence, the above activities are nothing but a business activity. He observed that according to the provisions of section 2(15) of the Income tax Act, the charitable purpose includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forest and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. From the activities of the institution in the Memorandum of Association, it is observed that it is falling under the fourth limb of the above definition of charitable purpose as stated above, i.e. 'any other object of general public utility'. According to the proviso to section 2(15) of the Act, advancement of any other object of general public utility shall not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business. In the light of the above Circular, the AO is required to see whether the assessee eligible to claim application under section 11 and whether the proviso to section 2(15) gets attracted in the light of commercial nature of activities. Particularly, if the primary activity of the organization is in the nature of trade or business, then it is important to ensure that there is no dominant profit motive involved and it is not used as a mask for commercial activities and benefitting at the hands of the beneficiaries. If an organisation which has no source of generating surplus from its activity other than the beneficiary then existence of consistent and substantial surplus does raise a question regarding the commercial nature of the activity. If this question is not successfully defended and justified by the appellant then the invocation of the proviso to section 2(15) by the AO cannot be questioned. 6. The CIT(A) further observed that the assessee has relied on the ruling Visakhapat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities are concerned, by advancing a fund on interest to other organisations, assessee has accomplished its of microfinance to the socio-economically weaker sections of the society and to alleviate poverty beside collecting the interest on the advancement loan. Moreover, this fund was advanced for a shorter period and the assessee has also earned an interest thereon which was utilised in micro financing activity to the poor people. By joining hands with the banks or financial institutions for procuring funds/loans for its advancement to poor or needy people exemption under section 11 cannot be denied. While rejecting the claim of the assessee, the Revenue has not taken into account these factors that by doing this activity, assessee is helping the needy people or the socio-economically weaker sections of the society as no one is going to finance them to meet their requirements. By doing this, the assessee is at least helping the poor and weaker sections of the society in meeting their urgent needs." It is evident that the society was facing non-recovery of loan and therefore the Hon'ble ITAT in its wisdom rightly held that only high rate of interest was not enough to deny ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fy the exorbitant rate of Interest charged, in case the poor ladies in question have option to avail credit at lower Interest from other sources. In case, the credits are available at lower interest to the poor women in question then they were free to avail the same. There was no compulsion over parties to avail credit at higher rate of Interest. In case they have option to avail loan at lower rate of interest. The assessee can carry out its activities on or after charging marginal higher rate of interest to run its activities. The assessee is running seminar in rural area to make the poor ladies aware of the scheme and to encourage their participation. All these things need some expenditure. Initially, the assessee was in loss and it is only in the year under consideration some surplus is with the assessee trust. The facts and circumstances show that the assessee is carrying out its charitable activities and the surplus funds are used for charitable purposes. So, the CIT (A) was justified in holding that the assessee is engaged in charitable activities and qualify for exemption under section 11." It was noted that in the above case the assessee was sustaining losses in all the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1], wherein, it was held that the micro finance activity are per se charitable in nature and earning of interest was incidental in nature. The interest earned was also within permissible market rates, therefore, could not be treated as business of earning interest. The relevant extract is as under : "CIT has interpolated the activities of the charitable nature carried on by the assessee trust with that of the income resulting in interest earning against which he has not been able to establish whether he was trying to hold the activities as noncharitable on the basis of surplus identifiable as interest only. Obviously the assessee is said to have borrowed the amounts from banks and gives to the ultimate borrower by becoming a co-borrower, stands guarantee, surety concerned they have not given money for charitable purpose which the assessee has identified itself of carrying out the charitable activities. Earning of interest becomes Incidental for governing and controlling all the funds as utilized cannot be Isolated to derive a trading or commercial activity therein. We find merit in the contention of the learned Counsel for the assessee that having received various grants for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in test to find out whether an institution is run for charitable purposes is to find out what Is the dominant or primary purpose of the assessee-whether the purpose was to promote commerce and trade in art silk, etc., or the advancement of an object of general public utility. It was also held if the primary or dominant purpose of an institution is charitable, another object which by it may not be charitable but which is merely ancillary or incidental to the dominant purpose would not prevent the institution from being a charitable institution. It was further held that if the purpose of an institution is the advancement of an object of general public utility, it is that object and not its accomplishment which must not involve the carrying on of any activity for profit. So long as the dominant purpose of the institution does not involve the carrying on of any activity for profit, it is immaterial how the money for achieving that purpose is found, whether by carrying on an activity for profit or not. The Hon'ble Supreme Court has emphatically clarified that the primary activity cannot be run for profit, once the primary activity is not run with profit motive the organization can h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Interest. The A.O. was not given an opportunity to rebut the findings on report of APRs in above case. The applicability of APRs is not appreciated in the case discussed below. In the case of ITO (Exemption), Madurai Vrs. Kalanjiam Development Financial Services reported in [2015] 64 taxmann.com 255, the assessee is a micro finance company registered u/s.25 of Company Act and also u/s. l2AA of IT. Act, 1961 operating as a financial Intermediary between the banks and SHGs. The main objective of the company Is to bridge the gap in microfinance to SHGs. The A.O. observed that the assesses company took credit facilities from different banks at interest rate up to 11% and charged interest from SHGs at much higher rate so much so that net profit out of the above operations was 20.4% in the F.Y.2009-10. The assessment was completed by assessing the income at Rs. 30,33,950/- by denying exemption u/s. 11 and 12 and by invoking provisions of sec.2(15) on the ground that the assessee was doing business of banking which fail under 4th Limb of Proviso to Sec. 2(15) i.e. any other object of public utility. The CIT(Appeals) granted exemption u/s.11 & 12 of the Act by holding that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fying 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 charity, it stands cleared for exemption under s. 11 of the Act. 8.2 To analyse the scope and object of the amendment, we have gone through the "Budget Speech" of the Minister for Finance in the Finance Bill 2008, reported in (298 ITR (St.) 33 at page 65 "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 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 chari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2009. Yet another important aspect to be noted in this context is that, after the amendment by incorporating proviso to section 2(15), the 4th limb as to the advancement of "any other object of general public utility" will no longer remain as charitable purpose, if it involves carrying on of: (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 contemplated under the second limb [cl. (b)J stands entirely on a different pedestal, with regard to the service in relation to the trade, commerce or business mentioned therein. To put it more clear, when the matter comes to the service in relation to the trade, commerce or business, it has to be examined whether the words "any trade, commerce or business" as they appear in the second limb of cl. (b) are in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, 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 is incidental to the attainment of the objectives of the assessee and separate books of account are maintained by such trust or institution in respect of such business. In the present case, there is no dispute on the fact that the assessee is carrying on the business of micro finance. The assessee is maintaining separate accounts for the above business activities. But, the crucial question is whether running of micro finance is a business incidental to the attainment of the objectives of the trust 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 princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 reverse the order of the CIT(A). 9. In the result, the appeal of the revenue is allowed. In the above case, the Hon'ble Tribunal discussed about the argument of the Ld. Counsel of the assessee regarding APR (Average Annual Percentage Rate) of SIDBI Report, applicability of RBI Notification No. DNBS 138/CGM(VSNM)-2000, dt. 13.01.2000, CBDT Circular No.II of 19.12.2008 etc. as well. To sum up, in the light of the above discussion, it is apparent that the appellant has been running the micro finance activity on commercial principles which is amplified by the existence of profits year on year. Appellant's activities appear to have an idea of benefitting others but whether the same overrides the converse idea of benefiting oneself is unclear. The loans/payments are made to the target population but whether the latter have actually benefited and whether the intention of the appellant was to only "let the latter benefit" is unclear. Nevertheless, it is a settled law that existence of profit or surplus itself is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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