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TMI Blog2017 (1) TMI 1833X X X X Extracts X X X X X X X X Extracts X X X X ..... /-. The Assessing Officer held that the assessee is not entitled for exemption u/s. 11 of the Act in respect of surplus of Rs.28,99,119/- earned from business activities of Micro Financing by observing as under: "(i) It was ascertained that the Appellant had availed these loans from banks/financial institutions at interest rates ranging between 9 to 14% per annum supported by its own collateral securities. These loans were subsequently advanced to SHGs/LHGs at interest rates that were higher by 10.5% annum. The Appellant was stated to be not only charging high rates of interest, but also collecting processing fees, cash security, insurance fee and membership fee from the beneficiaries. The differential amount of interest received from the beneficiaries were stated by the AO to be only utilized towards the Appellant's personnel cost and other expenses, which meant that the activity of lending money carried out by the Appellant could not be regarded as a charitable purpose. (ii) The AO held that the borrowing and lending of money and earning interest thereon was nothing but a commercial activity because the assessee had earned interest after meeting its liability towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are falling under the 1st limb of the definition of charitable purpose within the meaning of section 2(15) of the Act. That the section 2(15) of the Act defines the "charitable purpose" and as per the provisions the charitable purposes are: i) Relief of poor ii) Education iii) Medical relief and, iv) The advancement of other objects of general utility. An entity with a charitable object will be eligible to get the exemption u/s. 11 of the Act. But it was seen that many of the orgnisation engaged in commercial activities are also claiming exemption as charitable organization. Therefore, the provision of section 2(15) was amended and the CBDT had issued a circular vide No. 11 dt. 19.12.2008 in which the charitable purposes was defined and also clarified. As per the circular vide para no.2 the new provisions of section 2(15) will not apply to 1st three limbs and for the fourth limb (i.e. advancement of general public utility) there will be restriction which are as per the amended provisions. For the better appreciation of the provision the para no. 2.1 is reproduced as below: 2.1 The newly inserted proviso to section 2(15) will not apply in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Mission Annapurna". Further, it provides adequate training, capacity building, business support, market linkages and financial support in the form of loan & grant. This activity is a self sustained program and loans are mobilized from banks and are further lend to the poor and vulnerable women at an interest rate which cover the cost of the organization like salary, administrative expenses and cost of procuring the loan from the bank. These loans are extended to them without collateral or mortgage, for pursuance of their economic activity as they do not have any property or valuable article to be bankable by the banks. The loans were given to the weaker sections of the society to meet their urgent needs. This is very high risk activity as it does not have collateral, this is only meant to strength the financial and social status of the poor women of the state. Most of the time, these poor and women from the weaker sections of the society failed to repay these loans which ultimately lead to the write-up of the loan. Means, the loans granted to these poor women do not have a guarantee of return for which the organization made provisions to cover these costs. The organization charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at, as per the RBI guidelines the Banks/FIs are financing the loan to the SHGs or weaker section of the society for eradication of the poverty. The appellant is working only as a facilitator in between the Banks/FIs and the loanees. The appellant does not enjoy the liberty to finance to anybody in any manner. It only extends the loans as per the guidelines provided by the Banks. Only thing is that the appellant keeps the leverage of 10.5% in between to meet the documentation charges, upfront fee, processing fees and all other service charges charged by the Bank/Financial Institutions from time to time. There is no profit element involved in these transactions. Further if some surplus is generated from these transaction that has been utilized for the objects of the Society, i.e. for charitable purpose. So the contention of the Ld. Assessing Officer that the appellant is doing the business activity is wrong. In a business activity the organization enjoys the autonomy and can finance as per his sweet will which is not present in the present case. Therefore the activities carried out by the appellant are purely in charitable nature and eligible for benefits of section 11 of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2008 w.e.f sought to keep out from the ambit of tax exemption all activities towards colourable objectives under the (residual) head "advancement of general public utility" (which being extremely generic in scope was prone to misuse)and not activities towards objectives that fell under the category-head (sic) "relief of The implication of the Appellant was that the micro-finance and micro-credit activities carried out by it fell under the latter category and were therefore eminently eligible for tax exemption u/s 2(15) r.w.s 11 of the Act. b) To present and understand this argument from a correct perspective, it is best to go to the Paragraph 180 of the Finance Act, 2008 that specifies the following reason for introducing the first proviso (emphases in bold italics supplied by me): '"Charitable purposes" 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, comer or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim their purposes would also fall under "Charita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r from state or local community funds". The Merriam-Webster Dictionary defines it to mean "relief or assistance usually administered by local officials with funds from the local treasury for the aid of the needy in a community". In either definition, the common factors are that the assistance or relief provided is cost-free, such as in grants, and the fact that the government or the community is responsible for the same. Going by the same, the actions and activities of a private operator of whatever nature providing funds to the targeted "poor" or the "needy" at a cost being interest may not constitute "relief to the poor". This is despite the fact that the Government or the community has exempted such operator from taxation, thereby cloaking it with an implied sanction that these represented funds of the community held under trust, albeit a private trust. If such private operator needed to claim that its activities constituted "relief to the poor", then the loans/grants/payments/advances made to the target demographic segment(s) need to be at rates that add-on to the cost of obtaining the funds only such premiums as to cover its necessary operating expenses. This would mean that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintained in respect of such business. g) Since the CBDT's Circular referred above is binding on all officers and proceedings of the Department, what we really need to determine and decide in the context of the instant case of the Appellant are: (i) Whether the micro-finance and micro-credit activities can be considered to be activities that target the objective "relief of the poor" ii) Whether the micro-finance and micro-credit activities as carried out by the Appellant can be considered and held to be activities that target the objective "relief of the poor" (ii) If the answers to the two questions above are both in the affirmative, and if any part of the activities of the Appellant can be considered to be business in nature, whether such business activity was incidental to the attainment of the objects of the Appellant; and b: whether separate books of accounts have been maintained in respect of such business activity. h) Microcredit in modern finance and commerce is defined as the extension of very small loans (microloans) to poor borrowers who typically lack collaterals (to offer in exchange support), steady employment and a verifiable credit history. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h have been published in American Economic Journal: Applied Economics [2015] 7(1): 22-53, the authors have determined as under: (i) Business activity: Access to credit increased small business investment, but only increased the profits of the most profitable pre-existing businesses. After 1.5 years, treatment households were no more likely to own a business or start new businesses, but they did invest more in existing businesses. To the extent that microcredit helped businesses, it may have helped the most profitable businesses the most. (ii) Household finances: Though microcredit access increased investment, it did not lead to a significant increase in income. There were no significant differences in total household expenditures (a proxy for material well-being) between treatment and comparison groups after 1.5 or three years. (iii) Education and female empowerment: Researchers found little evidence to suggest that microcredit empowered women or improved investment in children's education in this context. Women in treatment areas were more likely to manage more selfemployment activities than those in comparison areas, but they were no more likely to make decisions abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld's saintly aura centres on how much interest and profits are acceptable and what constitutes exploitation. o) In the instant case, it has been determined by the AO from the records and the submission of the Appellant that the interest differentials earned by the Appellant through its micro-finance activities ranged around 13% to 14% [24%> to 26% per annum earned on loans advanced to SHGs less 10 to 13% per annum paid for loans supported by its own collateral securities]. The Appellant has stated in its submissions that it had obtained loans from different financial institutions and lent to Self Help Groups (SHGs)JLGs at a higher rate of 10.5% than the rate at which the borrowed which was "less than the Reserve bank of India recommended interest rate". When taken together, these mean an effective interest differential earned between 10.5% to 14% per annum. Whether these earnings are extortionist in nature is to be decided in line with what the market yardsticks state about the interest earnings based on the lending rates of similar sums of money by commercial organizations of a similar nature, operating on scales and volumes of similar orders. According to Mohammed Yunus ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... embly Rooms [2000] 241 ITR 76 (Mad)] iv) The \onus\ to prove that objects are of charitable nature is on the assessee [Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC)]. v) The establishment of an industrial or commercial concern ordinarily envisages a profit making activity and cannot be said to be a charitable purpose on the ground that it will provide employment to some poor persons [Dharmaposhanam Co. [1978] 114 ITR 463 (SC); Jaipur Charitable Trust [1971] 81 ITR 1 (Del); Yogiraj Charity Trust [1976] 103 ITR 777 (SC)]. (vi) To serve a charitable purpose, it is not necessary that the object should be to benefit the whole of mankind] or all persons in a particular country or state. It is sufficient if the intention to benefit a section of the public as distinguished from a specified individual, is present. However, the section of the Community sought to be benefited must be sufficiently defined and identifiable by some common quality of a public or impersonal nature\ [Ahmedabad Rana Caste Association [1971] 82 ITR 704 (SC)]. (vii) An institution set up with the object of promoting trade or commerce] is a charitable institution as it promotes common good throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities are charitable in nature under the roof "relief to the poor" when seen in the light of the first proviso to Section 2(15) of the Act. (v) The Appellant cannot be stated to be or considered as an industrial or commercial concern although it has been earning profits consistently through its activities. (vi) In the object-clause v) above and through its explanations about the nature and substance of its micro-finance activities, the community sought to be benefited has been sufficiently defined and identified by the Appellant by some common quality of a public or impersonal nature, by defining and identifying these as the "rural poor, backward, etc. " (vii) The Appellant can be considered to be "promoting common good" through the enhancement of its activities in its target area of activities; (viii) The Appellant's activities cannot be held to be "merely regulating or enhancing the business of its members" s) With the changing role of not-for-profit entities from being players of "vanilla philanthropy" to becoming game changers in the country's social and economic growth, many operate in the role of catalysts in various fields like social enterprise, so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned by the Appellant falling within the range 10-15% is within the pale of acceptability in the world of micro-finance and microcredit. The said differential margin takes into account the higher logistical, client servicing and repayment monitoring costs that represent actual, the costs involved in the micro-managing of multiple smaller amounts and the need for premiums to absorb the additional risks created by the higher uncertainties involved in the repayment abilities of the target segment (the rural poor, et al). The range of the amounts of loans provided (the loan size), the urban-rural divide, the duration of the loan, the purpose of the loan, etc. are important driver-parameters that help decide the interest rate quoted by the micro-finance provider to the recipient. An overview-chart obtained through a recent comprehensive study made in this regard that computed the of the Annual Percentage Rates (APRs) of the interest charged from the relevant data collected from several Indian microfinance players (which includes data collected from the Appellant being People's Forum), by MF Transparency. a leading data aggregating and monitoring agency, as extracted from its webs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fall if the cost of borrowing goes down. RBI said the microfinance institutions (MFIs) should arrive at the lending rate by calculating their cost of funds plus a maximum 10% margin or the average base rate of the five largest commercial banks by assets multiplied by 2.75 times, whichever is lower. This again goes to show that the differential interest rates earned by the Appellant in the range of 10.5% represent leveraged earnings by the Appellant that is not abnormal, and which, for the impugned FY. 2009-10, are lower than the RBI-prescribed rate. y) All of the above would mean that the interest rates offered by the Appellant to its target segment (the rural poor, et al) that ranges between 10.5% to 14% can be held as not driven by commercial motivations and calculations. z) It can also be derived that the activity of micro-finance and micro-credit per se, as directly objectified and implemented by the Appellant targeting weaker economic sections of society falls within the definitional ambit of "advancement of any other object of general public utility ". The lack of banking facilities in remote rural locales is still a pressing problem in the country and a matter of much ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any residual category (general public utility) charitable entity from conducting business activity which is intrinsically connected with the charitable activity, and that the carrying out of such business activity does not result in denial of tax exemption status. The case involved was that of GSI, registered as a charitable entity under the residuary clause of section 2(15) of the IT A being general public utility that was granted exemption under Section 12A and under Section 10(23C) of the Act from the A.Y. 1996-1997 onwards. In 2008, the Director of Income Tax Exemption/ denied the said registration on the grounds that such activities were in the nature of trade, commerce or business, and that the incomes earned from the use of IPR for consideration ^royalty income/ were significantly higher than the direct costs. Further, GSI India did not maintain separate books of accounts for the business/commercial activity which was in violation of the specified conditions of Section 10(23C)(iv). In this regard, the petitioner approached the Delhi HC to issue mandamus directing the tax authorities to grant registration. cc) With regard to the scenario prior to 2008 amendment, the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Court opined that a mere levy of fee is neither reflective of business aptitude nor indicative of profit oriented intent, and held that when the propelling motive is not to earn profit but "general public good", the charitable entity will fail the business test and meet the touchstone of charity. It was further held that merely charging fee on IPR sans profit motive does not amount to commercial exploitation. Moreover, when the fee charged is commensurate and based on commercial or business principles, the charitable activity test is fulfilled. The Hon'ble Court ruled that as the primary or pre-dominant activity is charitable in nature, the nominal fee charged is important to cover the operational costs of the petitioner. Thus, keeping in view the 'charitable activity test' it was held that the business activity of the petitioner is integral to its charitable purpose and the question of requirement of separate books of accounts for the business activity was redundant. ee) A careful consideration of the facts in the instant case of the Appellant would reveal that the decision of the Hon'ble Delhi High Court referenced above is applicable on most counts. Impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions offered u/s 11 and 10(23C) of the Act clearly apply in favour of the Appellant. The enhancement made by the AO to the taxable income of the Appellant of Rs. 56,55,297 being the total income/profits generated from the micro-finance activities is directed to be deleted. Grounds Numbered 2 and 3 preferred by the Appellant are accordingly allowed. In the year under reference, the appellant's APR is 26.6% which is lower than average APR of India at 27.2%. Since the issue is already covered in appellant's own case, I am inclined to hold that the micro financing activities as carried out by the appellant are charitable and eligible for exemption u/s 11. In the result, the ground Nos.2 & 3 of the appellant are accepted." 7. Before me, ld D.R. relied on the order of the Assessing Officer, whereas the ld A.R. of the assessee relied on the order of the ld CIT (A). Ld A.R. of the assessee submitted that the issue is squarely covered in favour of the assessee by the decision of this Bench of the Tribunal in the assessee's own case in ITA No. 81/CTK/2016 for the assessment year 2011-12 order dated 30.11.2016. 8. In the rejoinder, ld D.R. agreed to above submission of ld A.R. of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. In Ground No. 4 of the appeal, the grievance of the revenue is that the ld CIT (A) erred in deleting the disallowance of provision of loan loss amounting to Rs.4,37,714/- as the same has neither been expended nor any amount loan has become bad during the previous year. 12. Brief facts are that the Assessing Officer observed that the provision of loan of Rs.4,37,714/- cannot be allowed as expenditure because the same has neither been expended nor any amount of loan has become bad during the previous year. It is merely a provision for future contingencies. The provision has been made in anticipation of loan loss in future, therefore, same is not an allowable expenditure. 13. On appeal, ld CIT (A) held as under: "Ground Number 4 preferred by the Appellant relates to the issue of a uloan loss provision'' of Rs. 4,37,714 which was allowed by the AO on account of the same being a mere provision (with a corresponding credit entry in the Balance Sheet) and not an expense met and paid out in cash that had transited the financial system of the Appellant. a) The Appellant has argued that as per the provisioning norms of the Reserve Bank of India (RBI), 0.5% of the good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance with the strict provisions of the Act but should be computed in accordance with commercial principles. Under commercial principles it has always been recognized that a provision, reasonably made for a loss or an outgoing, can be deducted from the income if there is apprehension that the debt might become bad. There was nothing brought on record to show that the provision was not made bonafide. While computing the income available to the trust for application to charitable purposes in India in accordance with section 11(1)(a) the provision for doubtful debts must be deducted." 16. In the instant case also, the Revenue has brought no material on record to show that the provision of bad debt of Rs.4,37,714/- was not bonafide. Therefore, respectfully following the above quoted decision of Hon'ble Delhi High Court, I find no good and justifiable reason to interfere with the order of the CIT (A), which is hereby confirmed. Hence, this ground of appeal of the revenue dismissed. 17. The cross objection filed by the assessee is in support of the order of the CIT (A). 18. Since, I have upheld the order of the CIT (A), the cross objection filed by the assessee has become infructuous a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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