Credit Guarantee Fund Trust For Micro And Small Enterprises Vs ITO (ITAT Mumbai)
ITAT Mumbai held that 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 Income Tax Act, that too without establishing that the object and purpose of the assessee is profit motive.
Facts-
The assessee trust is a irrevokable trust settled on 27.07.2000 by the Hon’ble President of India acting through the Ministry of Small Scale Industry (SSI) & Average Rate Index (ARI), Government of India and Small Industries Development Bank of India (SIDBI) for the purpose of providing effective credit guarantee and/or counter guarantee for Micro, Small & Medium Enterprises (MSME) and advances extended by eligible scheduled commercial banks and rural banks [Member Lending Institutions (MLIs)] without collateral security and/or third party guarantee.
Return of income filed by the assessee trust registered u/s. 12A of the Income Tax Act, 1961 for the year under consideration claiming exemption u/s. 11 of the Act was subjected to scrutiny. AO by following the earlier year invoked proviso to section 2(15) of the Act and issued the notice u/s. 142(1) of the Act. Declining the submissions raised by the assessee trust and by following the earlier assessment order, 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 u/s. 11 of the Act. 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. AO also disallowed deduction of Rs.9,92,75,616/- being 15% of the income derived by the assessee trust u/s. 11(1)(a) of the Act.
CIT(A) partly allowed the appeal. Being aggrieved, the present appeal is filed.
Conclusion-
Held 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.
When the provision for guarantee claim made by the assessee is otherwise proved to be legitimate deduction, the correct income of the assessee cannot be calculated and as such claim of the assessee for deduction of provision for guarantee claim is an allowable deduction.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The appellant, M/s. Credit Guarantee Fund Trust For Micro And Small Enterprises (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned order dated 22.08.2022 passed by the National Faceless Appeal Centre(NFAC) [Commissioner of Income Tax (Appeals), 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 the Act.
(ii) There is no change in the activity undertaken by the appellant trust during FY 2017-18 as compared to the previous years in respect of which cancelation of registration was restored. Thus, there is no reason for invoking the provisions of section 2(15) of the Act as said facts are already decided by the appellate authorities and accepted by the Income Tax Department in preceding year.
(iii) the appellant Trust has no profit motive and to fall within the proviso 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 has a profit motive and considering the focussed area/ objects of the appellant trust, it cannot be said that there is any profit motive so as to view the activities to be trade, commerce or business within the meaning of the proviso to Section 2(15) of the Act.
(iv) the services rendered by the appellant Trust are purely incidental or subservient to the main objects of the Trust which is a “charitable purpose” and that the fees received by the trust is only to recover the administrative operational cost and not to earn any profit or as a business activity.
(v) that the amended proviso to section 2(15) w.e.f. 01.04.2016 does not affect the position of the appellant trust as it does not carry on any trade, commerce or business as held by the Hon’ble ITAT vide order dated 20.01.2017 in appellant trust’s own case in ITA No. 6282/Mum/2014 for AY 2010-11.
(vi) that the object of the Trust can also be considered as for the benefit of underprivileged class of people and also falls within the meaning of ‘relief to the poor’ referred to in section 2(15) of the Act and that CBDT has 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 the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief.
3. (i) On the facts and in the circumstances of the case and in law, CIT(A) erred in disallowing the deduction of provision for guarantee claims of Rs. 3,47,04,32,777/- made on the basis of actuarial valuation and restricting the same to the actual payments during the year and the reasons assigned for doing so are wrong and contrary to the facts and circumstances of the case, the provisions of the Income Tax Act, 1961 and the Rules made thereunder.
