TMI Blog2023 (11) TMI 1107X X X X Extracts X X X X X X X X Extracts X X X X ..... ark up is pursuing the activity of advancement of general public utility without having an iota of activity of trade, commerce or business. Mere charging of guarantee fees for services by the assessee trust ipso facto is not sufficient to invoke the proviso to section 2(15) of the Act, that too without establishing that the object and purpose of the assessee is profit motive. Had it been so the assessee trust would not have been running into deficit of about Rs. 400 crores every year. So in these circumstances the impugned findings returned by the Ld. CIT(A) that since the assessee is charging guarantee fee on substantial scale, it is not carrying out any charitable activities, hence not entitled for benefit of section 11 12 of the Act , are not sustainable, hence set aside. Ground No. 2 is determined in favour of the assessee. Provision for guarantee claims - assessee is following mercantile system of accounting qua its receipts as well as payments - As per AO since the assessee is a registered trust under section 12A of the Act the application is to be allowed on actuarial basis and no provision is allowable and that the assessee has itself recognized guarantee fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s), Delhi] (hereinafter referred to as CIT(A)] qua the assessment year 2018-19 on the grounds inter-alia that :- 1. On the facts and in the circumstances of the case and in law, CIT(A) erred in passing the said order without giving opportunity of being heard through video conferencing in spite of specific request made by the appellant in written submission, thereby not followed the principle of natural justice and therefore the said order needs to be quashed. 2. On the facts and in the circumstances of the case and in law, CIT(A) erred in invoking the proviso to section 2(15) of the Income Tax Act and thereby rejecting the claim of exemption u/s 11 of the Act by relying on the findings given in assessment orders for AYS 2016-17 and 2017-18 without appreciating the facts that: (i) 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 Hon'ble ITAT has held in the appellant's own case for AY 2010-11, AY 2011-12 and AY 2014-15 that the proviso to section 2(15) of the Act cannot be invoked in appellant's case and that it is eligible for the benefits of sections 11 and 12 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax Act, 1961 and the Rules made thereunder. (ii) On the facts and in the circumstances of the case and in law, the learned Assessing Officer erred in disallowing provision for guarantee claims to the extent of Rs. 3,47,04,32,777/- without appreciating the facts that: a. The appellant trust follows mercantile system of accounting and has made the provision for guarantee claims in the books of accounts on the basis of the actuarial valuation; b. Provision for guarantee claims is made as per the recognised and accepted accounting principles/ standards under mercantile system; c. As regards to recognition of revenue from guarantee fees, the same is in accordance with the Accounting Standard 9-Revenue Recognition, as per which the revenue is recognised only when it is reasonably certain that the ultimate collection will be made; d. The appellant has ensured that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities in accordance with AS 29 Provisions, Contingent Liabilities and Contingent Assets. e. The present value of a future liability, properly ascertained and discounted i.e. accounted for on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply in respect of the first three limbs of section 2(15) of the Act i.e. relief of the poor, education or medical relief and as the purpose of the appellant trust is relief of the poor, proviso to Section 2(15) will not apply in appellant's case. 5 (i) On the facts and in the circumstances of the case and in law, the lower authorities erred in disallowing deduction of Rs. 9,92,75,616/- being 15% of the income derived by the trust under section 11(1)(a) of the Act and not doing so is wrong and contrary to the facts of the case, the provisions of the Income Tax Act, 1961 and Rules made thereunder. (ii) CIT(A) also erred in disallowing the sum of Rs. 9,92,75,616/- being 15% of the income derived by the trust under section 11(1)(a) without appreciating the facts that: a) the Hon'ble ITAT has already held in the appellant's own case for AY 2010-11, AY 2011-12 and AY 2014-15 that the proviso to section 2(15) of the Act cannot be invoked in appellant's case and that it is eligible for the benefits of sections 11 and 12 of the Act. b) as per CBDT - Circular No. 11/2008, dated 19-12-2008, the newly inserted proviso to section 2(15) of the Act will not app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under section 11 of the Act was subjected to scrutiny. The Assessing Officer (AO) by following the earlier year invoked proviso to section 2(15) of the Act and issued the notice under section 142(1) of the Act. Declining the submissions raised by the assessee trust and by following the earlier assessment order for A.Y. 2016-17 2017-18, the AO proceeded to hold that the assessee s case is hit by proviso to section 2(15) of the Act and thereby rejected the claim of exemption under section 11 of the Act. The AO also made a disallowance of the deduction of provision for guarantee claims of Rs. 3,47,04,32,777/- made on the basis of collateral valuation and restricting the same to the actual payment on the ground that the provision of expenses are not allowable under the Act assessee s claim for deduction of provisions of guarantee to the tune of Rs. 9,67,79,67,223/- [Rs.3,47,04,32,777/- ( - ) (minus) Rs. 13,14,84,00,000/-] out of the aggregation of funds claimed during the year under consideration. The AO also disallowed deduction of Rs. 9,92,75,616/- being 15% of the income derived by the assessee trust under section 11(1)(a) of the Act. The AO accordingly framed the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings as may be necessary therefor, either directly or otherwise, in such manner as may be decided by the Board of Trustees; (c) To appoint staff, to acquire, hold and dispose of property, to meet all expenses necessary for the proper and efficient management of the Trust, and to do all other acts or things as may be necessary or conducive to the attainment of the objectives; (d) To receive grants, donations, contributions from national and international donors / agencies. (e) To do such other acts and things as may be incidental to, or consequential to the objectives hereinabove provided. 7. Pursuant to the enactment of the Micro, Small Medium Enterprises Development Act, 2006, the Ministry of SSI ARI has been named as Ministry of Micro, Small Medium Enterprises vide notification dated May 09, 2007 and as such the activities are also changed in the concept of Micro, Small Medium Enterprises. Therefore, in order to carry out the activities of the trust SSI are substituted by the words Micro Small Enterprises (MSE) and the SSI loans are substituted by the word MSE Loans . Ground No.1 8. During the course of argument ground No.1 was not pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial fund as well as further contribution to the trust are made by the Government of India and SIDBI. It is also not in dispute that the assessee trust was granted registration under section 12A of the Act on 18.10.2001, which was withdrawn vide order dated 07.12.2011 by the Director of Income Tax (Exemption) [DIT(E)], Mumbai. It is also not in dispute that order of withdrawal of registration under section 12A of the Act passed by DIT(E), Mumbai has been set aside by the Tribunal and Tribunal s order has been upheld by the Hon ble Bombay High Court vide order dated 02.08.2017. It is also not in dispute that the assessee trust provides guarantee to the lending institutions who give loan to the MSME without collateral security and/or third party guarantee, for which it (assessee trust) charges guarantee fee and service charges to the lending institutions. It is also not in dispute that the issue as to the applicability of proviso to section 2(15) of the Act has already been decided by the Tribunal in favour of the assessee in A.Y. 2010-11, 2011-12 2014-15. It is also not in dispute that there is no change of activities being undertaken by the assessee trust during the year under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business; that services rendered by the assessee trust are purely institutional or subservient to the main objects of the trust which are charitable purposes ; that objects of the trust are to be considered for the benefit of underprivileged class of people and also falls within the meaning of relief to poor referred to in section 2(15) of the Act and the Central Board of Direct Taxation (CBDT) has issued circular vide circular No.11/2008 dated 19.12.2008 clarified that newly inserted proviso to section 2(15) of the Act will not apply in respect of 1st three limbs of section 2(25) of the Act i.e. relief of the poor, education or medical relief; that the Ld. CIT(A) has erred in not following the order passed by the Tribunal in assessee s own case for A.Y. 2010-11, 2011-12 2014-15 wherein it is held that proviso to section 2(15) of the Act cannot be invoked in case of the assessee. 15. The Ld. A.R. for the assessee challenging the impugned order contended that the assessee is into the charitable activities in as much as it is engaged in advancement of objects of general public utility and it is not hit by proviso to section 2(15) of the Act. 16. However, on the other hand, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014-15, order of which has already been attained finality. The AO in A.Y. 2016-17 2017-18 has taken a diverse view that the assessee is pursuing the activity of advancement of general public utility and is in activity of trade, commerce or business of charging fee for services, the assessment order passed by the AO for A.Y. 2016-17 2017-18 is pending adjudication before the Ld. CIT(A). (iii) that in order to determine the issue raised in this case as to whether the assessee trust having pursued the activity of advancement of general public utility is into activity of trade, commerce or business of charging fee for services, we are to examine profile and activities carried out by the assessee trust. (iv) that so far as profile of the assessee trust is concerned, the same has been constituted by the Hon ble President of India and as per trust deed its settler viz. Government of India and SIDBI noticed that the small scale industries in India are facing difficulties in getting credit facilities from primary lending institutions, banks, state finance corporation, state industrial development corporation, regional rural development banks etc. for want of collateral security ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2021-22 1,442.79 2,082.88 (640.08) 9. 2022-23 1,728.92 2,333.08 (604.16) (vi) that when we take the figure of receipt by the assessee trust from collecting the guarantee fee and its expenditure for the year under consideration i.e. 2018-19, it is apparently clear that the assessee trust has received amount of Rs. 830.79 crores whereas incurred the expenses in providing guarantees to the recipient of loan for setting up small scale industry is Rs. 1322.76 crores and faced with the deficit of Rs. 491.98 crores. (vii) that right from A.Y. 2014-15 till 2022-23 the assessee trust is constantly running deficit from the activities of providing guarantee. These facts go to prove that there is no profit motive or trading activity in running this trust. Had there been any such profit motive the activities would have been discontinued long back because of consistent loss. (viii) that when we further examine the contribution made by the Government of India and SIDBI towards corpus of the assessee trust, avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or ready perusal: A. General test under Section 2(15) A.1. It is clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration ( cess, or fee, or any other consideration ); A.2. However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that (i) the activities of trade, commerce or business are connected ( actual carrying out... inserted w.e.f. 01.04.2016) to the achievement of its objects of GPU; and (ii) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, as amended over the years (Rs. 10 lakhs w.e.f. 01.04.2009; then Rs. 25 lakhs w.e.f. 01.04.2012; and now 20% of total receipts of the previous year, w.e.f. 01.04.2016); A.3. Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. (xiv) that the assessee trust being a statutory body being run by Government of India has the only object of general public utility without having any element of trade, commerce or business in providing services to the small scale industries. (xv) that the contention raised by the Ld. D.R. for the revenue trust that assessee is catering to commercial activities of the banks is not sustainable because banking institutions are running their business as per the rules and regulations formulated by the Reserve Bank of India and they are not giving any preferential treatment to the small scale industries rather insisting upon providing credit guarantee by the assessee trust in case of providing credit to the small scale industries, so element of commercial activities is not there (xvii) that the nature of the activities being carried out by the assessee trust being charitable and for advancement of general public utility are further proved from the legislative changes carried out by the Parliament by inserting section 10(46B) by the Finance Act, 2023 w.e.f. 01.04.2024, which are though not applicable for the year under consideration but it certainly makes the intention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew that assessee trust having been established by the Government of India with the object and purpose of ameliorating the difficulties of the small scale industries and micro enterprises in availing credit facilities from financial as well as banking institutions without having collateral security and/or third party guarantee which is being provided by the assessee trust with cost to cost or with a small mark up is pursuing the activity of advancement of general public utility without having an iota of activity of trade, commerce or business. So in other words mere charging of guarantee fees for services by the assessee trust ipso facto is not sufficient to invoke the proviso to section 2(15) of the Act, that too without establishing that the object and purpose of the assessee is profit motive. Had it been so the assessee trust would not have been running into deficit of about Rs. 400 crores every year. So in these circumstances the impugned findings returned by the Ld. CIT(A) that since the assessee is charging guarantee fee on substantial scale, it is not carrying out any charitable activities, hence not entitled for benefit of section 11 12 of the Act , are not sustainable, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention towards explanation added to section 11 of the Act w.e.f. 01.04.2022 which reads as under: Explanation.- For the purpose of this section, any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it (irrespective of the previous year in which the liability to pay such sum was incurred by the trust or institution according to the method of accounting regularly employed by it). 26. When we peruse the explanation to section 11 it has come on record that w.e.f. 01.04.2022 any some payable by the trust shall be considered as application of the previous year in which the payment is made irrespective of the year of incurring of expenditure. The AO proceeded on the wrong premise that the amount spent on the object of the trust is considered as application of the income in the case of trust by holding that the assessee is following cash system of accounting whereas assessee trust is proved to be following the mercantile system of accounting. So in these circumstances the amount not paid by the assessee trust cannot be treated as application of the trust. 27. So far as observation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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