Mere charging guarantee fees for services by trust not sufficient to invoke proviso to section 2(15)

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.

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