Navodaya Grama Vikas Charitable Trust Vs DCIT (ITAT Bangalore)
ITAT Bangalore held that denial of exemption under section 11 of the Income Tax Act unjustified as the primary activity of charitable trust is not run with profit motive. Accordingly, collection of money for micro financing in the form of interest on the loans advanced to the self help group members will not defeat the real object in order to deprive of the exemption.
Facts- The assessee trust was formed in terms of the Deed of Trust dated 08.07.2004 and Amendment Deed dated 29.11.2004 and is engaged in the charitable activity of providing relief to the poor especially in rural areas.
For the year under appeal, the assessee filed its return of income on 30.10.2017 reporting Nil income after claiming exemption u/s. 11 of the act.
The case was selected for scrutiny and notice u/s. 143(2) of the act along with notice u/s. 142(1) was issued to the assessee calling for various details and particulars. AO issued a show cause notice to the assessee calling upon the assessee to state as to why provisions of Section 13(8) red with 1st proviso to clause 15 of Section 2 of the Act should not be applied. According to the AO, the activities of the assessee in providing microfinance and insurance was in the nature of trade, commerce or business and hence, the same was hit by the 1st proviso to Section 2(15) of the Act and therefore, the assessee was not entitled to benefit of Section 11 of the Act. AO rejected the contentions of the assessee and has invoked the provisions of Section 13(8) r.w.s 2(15) of the act to reject the claim of exemption u/s. 11 of the act.
Conclusion- Held that the main purpose of the public charitable activity undertaken by assessee has to be looked into as a dominant purpose test and that collection of money for micro financing in the form of interest on the loans advanced to the self help group members will not defeat the real object in order to deprive of the exemption.
Held that the primary activity cannot be run for profit, once the primary activity is not run with profit motive the organization can have other activities which may generate profit. There is a fundamental difference between running the primary activity for profit and having incidental profit-making activities.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Present appeal is filed by assessee against the order dated 07.03.2022 passed by Ld.CIT(A)-2, Panaji for A.Y. 2017-18 on following grounds of appeal:
“1. The orders of the authorities below in so far as they are against the appellant are opposed to law. equity, weight of evidence. probabilities, facts and circumstances of the case.
2. The learned CIT [A] is not justified in upholding the disallowance of the exemption claimed u/s. 11 of the Act, on the ground that the activities of the appellant are hit by the provisions of section 1 3[8] rws the proviso to section 2[15] of the Act, under the facts and in the circumstances of the appellant’s case.
3. The learned CIT[A] has erred in holding that the microfinance activity carried on by the appellant would be in the nature of business and therefore, hit by the proviso to section 2[1 5] of the Act under the facts and in the circumstances of the appellant’s case.
4. The learned CIT[A] erred in holding that the activities of the appellant are carried on for “commercial gins with predominant objective to make profit” on the insignificant consideration that the appellant is charging 50% higher rate of interest for the loans provided to SHG when compared to the borrowing cost, without appreciating that the higher rate of interest charged was only to cover the administrative costs and possibility of default in recovery from the beneficiaries especially since these loans were advanced without any security other than the personal guarantee of the poor people and therefore, the finding that the microfinance activity of the appellant was in the nature of business is opposed to law and facts of the appellant’s case.
5. The learned CIT[A] is further not justified in holding that the activities carried on by the appellant would fall within the limb “advancement of any other object of general public utility” and cannot be classified as “relief to the poor” as claimed by the appellant and therefore, the proviso to section 2[1 5] of the Act would be squarely attracted to the case of the appellant and hence, the appellant was not entitled to exemption u/s. 11 of the Act.
6. The learned CIT[A] is also not justified in holding that alternatively the provisions of section 1 1[4A] of the Act were attracted to the case of the appellant and hence, the appellant was not entitled to exemption u/s. 11 of the Act for violation of the provisions of section 1 1[4A] of the Act, without appreciating that the main objects of the appellant related to providing relief to the poor by means of lending to Self Help Groups [SHG] and thus these activities carried on by the appellant cannot be termed to be business activities “incidental to the attainment of the objectives” to invoke provisions of Section 1 1[4A] of the Act under the facts and in the circumstances of the appellant’s case.
7. The learned CIT[A] ought not to have rejected the plea of the appellant that the activities of the appellant were examined in course of the earlier assessments framed and hence, a different view ought not to have been taken in violation of the principles of consistency on the ground that the registration u/s 12A of the Act was obtained prior to the insertion of the proviso to section 2[1 5] of the Act, vide which the benefit of exemption to trusts carrying on activities for the “advancement of any other object of general public utility” was taken away, without appreciating that the benefit of exemption u/s 11 of the Act was made available to the appellant even after the insertion of the proviso to Section 2[1 5] of the Act, and thus the stand adopted by the learned A.O. and sustained by the learned CIT[A] goes against the principles of consistency under the facts and in the circumstances of the appellant’s case.
8. Without prejudice to the right to seek waiver with the Hon’ble CCIT/DG. the appellant denies itself liable to be charged to interest u/s.234-B of the Act, which under the facts and in the circumstances of the appellant’s case deserves to be cancelled.
9. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.”
2. The assessee, a charitable trust enjoys registration u/s. 12AA vide order in F.No. N-24/ 12A/CIT/MNG/2004-2005 dated 0 1.2005 of the CIT, Mangalore.
3. The assessee trust was formed in terms of the Deed of Trust dated 08.07.2004 and Amendment Deed dated 29.11.2004 and is engaged in the charitable activity of providing relief to the poor especially in rural areas. The objects of the assessee as per the trust deed, is as under:
Main objects of the Trust:
1. To bring out people’s awareness regarding financial, Social and Cultural Developments in rural areas and assist them to become good citizens.
2. To foster among rural women an awareness of their situation and promote their organization for their own betterment to promote self employment activities through trained people, to educate them in children care responsible parenthood, home science and happy family life.
3. To conduct and run nursery and kindergarten or Primary, Higher Primary, Secondary Schools and Colleges for facilitate children’s full growth and to work for their healthy care and to assist poor school going children to have better education and health.
4. To provide guidance regarding wild life, perform inter notion wild life programme with principal ideas and make awareness of the same with the people of rural areas and also to conduct run and assist veterinary hospitals etc.
5. To provide proper knowledge about agriculture, run farm, animal centers etc. and provide profitable employment to the people of rural areas.
6. To make awareness of human rights and other new things in rural areas by providing good leadership, make arrangements for implementation of good ideas for them and to make awareness of strong will power, love, service and patriotism etc.
7. Offering the opportunity to develop personality and avenues for their intelligent participation in Nation
8. To guide them to equip themselves for the struggle for life in changing Society.
9. To open Schools, College and Technical Institutions in District, State and inter State level for providing proper training for rural people regarding cooperative Associates, Co-operative Bank etc. and regarding self-employment, self-unity and help etc.
10. To provide library, T. V., Data etc. to unemployed educated people in rural areas with a view to assist them to take self-employment.
11. To strengthen rural youth clubs by giving proper guidance. In this connection, to work hand in hand with State and Central Government Departments.
12. To provide information about the plans of State and Central Government to the concerned persons of the Public.
13. To create training facilities in rural areas for development of Industry and self-employment.
14. To enable the awakened and affected youth to come together to bring about development and new environments.
15. To provide security to the assets of Association, Co-operative concerns of rural and urban areas and to open training centers to such security. This family will be provided to urban and rural areas if necessary.
16. To guide self-helping clubs in developing financial, social and cultural activities in rural areas. To provide trained persons in that regard.
17. To assist for development and research of forest protection and herbal cultivation.
18. To gather information regarding public health and to assist in providing herbal and Ayurvedic treatments.
19. To assist for providing sports, games, yoga etc. and to arrange all round development.
20. To provide help to self-helping institution by providing insurance or otherwise.”
4. It is submitted that in accordance with the aforesaid object Clause No. 20 of the trust, the assessee helps Self-Help Groups [SHG’s] comprising of rural poor people to avail benefits of insurance and microfinance. It is submitted that, the assessee gives loans without any security to these SHG’s and also provides benefit of insurance for the members of these SHG’s, and that such activity is being carried on by the assessee for the past several years. It is submitted that the 12AA certificate dated 10.01.2005 is valid for the year under consideration w. e. f. 07.2004. It is also submitted that the registration is granted to the assessee as a Public Charitable Trust.
5. For the year under appeal, the assessee filed its return of income on 30.10.2017 reporting Nil income after claiming exemption u/s. 11 of the act. The assessee computed its income based on the receipts and payments account and arrived at Nil income.
6. The case was selected for scrutiny and notice u/s. 143(2) of the act along with notice u/s. 142(1) was issued to the assessee calling for various details and particulars. In response, the AR of the assessee appeared and filed the details as called for.
7. The Ld.AO issued a show cause notice to the assessee calling upon the assessee to state as to why provisions of section 13(8) red with 1st proviso to clause 15 of section 2 of the Act should not be applied. According to the Ld.AO, the activities of the assessee in providing microfinance and insurance was in the nature of trade, commerce or business and hence, the same was hit by the 1st proviso to section 2(15) of the Act and therefore, the assessee was not entitled to benefit of section 11 of the Act.
8. In response, the assessee filed reply dated 07.12.2019, wherein it was submitted that the microfinance and insurance provided by the assessee to SHG’s falls within the limb “Relief of Poor” u/s. 2(15) of the Act and hence, the 1st proviso to section 2(15) of the act was not applicable as the same related only to activities that comes within the limb “Any other object of general public utility”. Secondly, the assessee also submitted that, the aforesaid activities were carried on even in the earlier years and the same was never regarded as trade, commerce or business and hence, according to the principles of consistency, would apply to the present facts. Finally, it was also contended that, the activity cannot be considered as trade, commerce or business having regard to the dominant purpose test and therefore, it cannot be held as trade, commerce or business.
The Ld.AO rejected the contentions of the assessee and has invoked the provisions of section 13(8) r.w.s 2(15) of the act to reject the claim of exemption u/s. 11 of the act.
9. The Ld.AO concluded the assessment by the impugned order passed u/s. 143(3) of the act dated 2 1.12.2019 determining the total income of the assessee trust at Rs.6,2 1,47,053/ – as against the Nil income returned reported by the assessee in the original return. Aggrieved by the order of the Ld.AO, the assessee filed appeal before the Ld. CIT(A).
10. The Ld. CIT(A) observed and held as under:
“4.4 The appellant contends that it is a non-profit entity and it receives funds to meet its operative cost without motive to earn profit. A perusal of the income and expenditure account for the year ended 31.03.2017 reveals Rs.6,69,8,915/-as interest received on loans and Rs.4,08,04,902/- as Insurance collection out of total receipt (Rs. 13,14,55,733/- for the year. Thus, 82% of the total receipts for the year were received from the appellant from the activities of micro financing and insurance. In this regard it is mentioned that during the year appellant has generated a surplus of Rs. 5.74 crores. Here it would he. relevant to mention that if a charitable organization carrying out objects of ‘advancement of general public utility’ is involved in carrying on any activity in the nature of. trade, commerce, business or is charging fees for services in relation to any trade, commerce, business, then it is excluded from being ‘charitable.’ The profit motive behind such business, commerce or trade activity is not required to be separately examined and proved for applicability of proviso to section 2(15) of the Act. The specific amendment, by way of proviso to section 2(15) w.e.f. A.Y. 2009-10 does not provide for carrying out business trade or commerce per se for applicability of proviso, rather the stipulation in the proviso is ‘in relation to’ which is to be interpreted and applied in that context in a wider term and not to be confined to carrying out trade, business and profession, It was held in the case of Subhram Trust v. DIT (E) (2009) 317 ITR (AT)(Bang.) that ‘the term in relation to should be broadly interpreted i.e., to say if any activity which directly or indirectly facilitates the rendering of any service in relation to any trade, commerce or business, is carried on by trust, then it will be covered under proviso to section 2(15)’. The proviso to section 2(15) of the Act is attracted even in a chase where the assessee is not carrying out business, trade, commerce by itself. The charging of fees and consideration ‘in relation to’ services for any trade, business and commerce or ‘involvement’ in trade, commerce and business is sufficient to attract the proviso to section 2(15).
4.5 The appellant has contended that none of its activities are carried out with an object or any motive to earn profit or surplus. That the earning of revenue is only incidental to the predominant object of providing help to the poor. However, this submission is quite in contradiction to the fact that the appellant is charging 50 `A higher rate of interest for the loans it provides to the self-help groups. The appellant receives grants and these grants should. in the normal course, have been used for meeting the administrative expenses with the loans to the SHGs being provided at a lower rate approximating the rates at which the appellant itself got it. Charging a 50% higher rate of interest shows that type of services being provided by the appellant are certainly for commercial gains with predominant objective to make profit.
4.6 In the case of Institute of Chartered Accountants of India v. Director General of Income tax (Exemptions) 120121 347 ITR 99,”the Honible Delhi High Court discussed the definitions trade, commerce and business reproduced below –
‘Trude, as per the Webster’s New Twentieth Century Dictionary (2nd edition), means, amongst others, “a means of earning one’s living, occupation or work. In Black’s Law Dictionary, “trade” means a business which a person has learnt or he carries on, for procuring subsistence or profit; occupation or employment, etc.
The meaning of “commerce” as given by the Concise Oxford Dictionary is “exchange of merchandise, specially on large scale”. In ordinary parlance, trade, and commerce early with them the idea of purchase and sale with a view to make profit. If a person buys goods with a view to sell them for profit, it is 1111 ordinary case of trade. If the transitions are on a large scale it is called commerce. Nobody can define the volume, which would convert a trade into commerce. For the purpose of the first proviso to section 2(15), trade is sufficient, therefore, this aspect is not required to he examined in detail.
The word “business” is the broadest term and it encompasses trade. commerce and other activities. Section 2(13) of the Income-tax Act defines the term “business” as under:
Definitions.___ (13) ‘business’ includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.”
The word “business” is a word of large and indefinite import. Section 2(13) defines business to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The intention of’ the Legislature is to make the definition extensive as the term “inclusive” has been used. The Legislature has deliberately departed from giving a definite import to the term “business” but made reference to several other general terms like “trade”, “commerce”, “manufacture” and “adventure or concern in the nature of trade, commerce and manufacture”.
4.7 According to Sampath lyengar’s Law of Income Tax (9th edition), a business activity has four essential characteristics. Firstly, a business must be a continuous and systematic exercise of activity. Business is defined as an active occupation continuously earned on. Business vocation connotes some real, substantive and systematic course of activity or conduct with a set purpose. The second essential characteristic is profit motive or capable of producing profit. To regard an activity as business, there must be a course of dealings continued, or contemplated to be continued, normally with an object of making profit and not for sport or pleasure (Bharat Development P. Ltd. v. CIT [1982] 133 ITR 470 (Delhi)). The third essential characteristic is that a business transaction must be between two persons. Business is not a unilateral act. It is brought about by a transaction between two or more persons. And, lastly, the business activity usually involves a twin activity. There is usually an element of reciprocity involved in a business transaction.
4.8 The Delhi High Court in the case of GS1 India v. DGIT(E) [20131 38 taxmann.com 364 held that legal terms “trade, commerce, or business” in Section 2(15), means an activity undertaken with a view to make or earn profit. Profit motive is determinative and a critical factor to discern whether an activity is business, trade or commerce.
4.9 The activity of the appellant predominantly is to take loans from banks at a lower rate and thereafter extend it to SHGs at a 50% higher rate. The appellant has an established set up for this activity and propagates this activity through use of Animators, on whom an expenditure of approximately Rs.2. 08 crores were incurred during the course of the year. The activity is therefore between persons where transactions are conducted by the appellant with a profit motive and the appellant has a systematic approach to conduct and further the activity over a period of time. In the case of the appellant the borrowing is not made directly to the beneficiaries. In fact, financing is done to various SHGs. No assistance or grant has been received for micro financing. The loans have been raised on commercial lines. Profit is generated by financing the SHG’s at a higher rate. The micro financing business is run on commercial lines. Further, the appellant raised loans @ 10% to advance to the customers at a higher rate of 15%. The appellant is not having own corpus in a formal capital so as to advance the loan. The appellant is providing loans by association with various commercial banks by raising loans from them. Such kind of micro finance activity cannot be termed as charitable activity rather it is a business activity. In order to become a charitable activity, the institution must have advance loans at a subsidized rate of interest. The assessee is availing loans from banks and advances the same to the customers at 15%. It is a commercial rate prevailing in the market. By advancing loans at that rate of interest cannot be considered as an activity carried on by the assessee as charitable and for the benefit of the public. It is also to be noted that after the amendment wherein proviso to section 2(15) was incorporated, advancement of “any other object of general public utility” can 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.
Exclusion from charitable purpose under cl. (a) will he attracted, if the activity pursued by the institution involves any trade, commerce or business. The situation contemplated under the clause (b) with regard to the service in relation to the trade, commerce or business mentioned therein means that when the M:zitter 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 clause (b) are in connection with the service referred to the trade, commerce or business pursued by the institutions to which the service is given by the appellant. If the said words are actually in respect of the trade, commerce or business of the assessee itself, clause (b) will be otiose since the activity of the assessee involving any trade, commerce or business, is already excluded from the charitable purpose by virtue of clause (a) itself and hence there was no necessity to stipulate further, by way of clause (b), adding the words “or any activity of rendering any service in relation to any trade, commerce or business.
………………..” To render a purposive interpretation to the statute, it needs to be read and understood that as per the provisions of clause (b) in relation to the service rendered by the assessee, the terms “any trade, commerce or business” refers to the trade, commerce or business pursued by the recipient to whom the service is rendered and, in such circumstances, the activities carried on by the assessee cannot be considered as charitable activities.
4.10 When the assessee carried on micro finance activity in a commercial line, then it is not a charitable activity but an activity to expand the finance business by contracting weaker section of ‘the public and it does not involve any charitable activity. Hence, as per any of the definitions discussed above, the activity of the appellant is in the nature of business.
4.11 While the activities carried on by the appellant fake care of the poor people also, but those activities cannot be classified under any of the specific activities of relief of the poor; education or medical relief. The correct way to express the nature of the activities carried on by the appellant is to say that the appellant is carrying on ‘advancement of any other object of general public, utility’. When that is the case, the appellant is hit by the proviso given under section 2(15). The proviso reads that ‘advancement of any other object of general public utility’ shall not be a charitable purpose, if it involves carrying on any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business for consideration, irrespective of the application of the money. Therefore, the case of the appellant is hit by proviso to section 2(15) and the appellant is not entitled for the benefit of section 11 for that part of income generated in the hands of the appellant from running its micro finance business.
4.12 Alternatively, one has to look into section 1 1(4A) of the Act. 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 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 appellant is carrying on the business of micro finance. Leaving the issue of maintaining separate_ books aside, the crucial question initially is whether running of micro finance is a business incidental to the attainment or the objectives of the trust or not. As rightly held by the AO, 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 principal activities themselves. There cannot be one source for the principal activities and another source for incidental activities. In the present case, even if activities of the assessee were stated to be relief of poor, it was not possible to conclude that running of business in the form of micro finance is incidental to carrying on of main objective of the assessee-trust and it is the main business of the assessee. Therefore, the assessee is not protected by the provision stated in section 1 1 (4A), either.
4.13 The ld.AR, during the course of hearing on 04.03.2022, argued that in earlier years also the Trust was carrying similar activities and the same were held as not commercial even in orders passed under section 143(3) of the Act for A. Y 2016,17, 2013-14, and 2012-13 and therefore the rule of consistency should be followed. He placed reliance on the decision of Hon’ble Supreme Court in the case of Radhasoami Satsang v. CIT, which held that the AO should not interfere with the fundamental aspect permitting through the difference assessment years. To prove that providing micro finance cannot be held as a commercial activity, the Id. AR referred to the judgments of Hon’ble ITAT Bangalore in M/s Janodaya Trust v AC1T (Exemptions); ITA No. 763/Bang. /2016 which held charging to commercial rate of interest (14%) cannot make the activity commercial and of Hon’ble ITAT, Cuttack Bench in the case of ITO (Exemptions), Bhubaneshwar v Adhikar, Bhubaneshwar; ITA No. 265/CTK/201 7which held that act of micro financing by an institution to self-help poor people amounts to providing relief to the poor. He also referred to the judgment of Delhi High Court in the ITPO case 371 1TR 333 (Del.) wherein it was held that dominant purpose has to be seen i.e., whether it is business activity dominantly or otherwise and merely profiteering by it will not make every activity commercial. As regards insurance activity, ld. AR averred that the mere fact that premium collected is more than the relief given during the specific year cannot make the activity commercial.
4.14 As regards the rule of consistency, the argument will have to be seen in light of the fact that that prior to adding proviso to section 2(15), the entities which got registration u/s. 12AA engaged in commercial activity claimed exemption on the ground that such activities were for advancement of objects of general public utility in terms of 4th limb of definition to section 2(15) of the Act. The said benefit was taken away by adding proviso to section 2(15) of the Act, wherein it is clarified that the advancement of any other object, general public utility shall not be charitable purpose. Once it was clear that the appellant conducted its activities on commercial line in the nature of trade, commerce or business, ate AO rightly denied the exemption by following statutory provisions. No infirmity can be stated to exist in the order of the A0and the ratio laid down by the decision of the relied upon by the ld. AR of the Hon’ble Supreme Court in the case of Radhasoami Satsang is not applicable to the facts of this case.
4.15 As regards other cases quoted by the Id. AR, it needs to be pointed out that every case has its own specifics and there are many judgments holding that the act of providing micro finance and earning interest income thereon is a business activity and not for a charitable purpose. In the case of Sreema Mahila Samity v. Deputy Commissioner of Income-tax, Circle-Nadia (20171 86 taxmann.com 216 (Kolkata – Trib.), it was held that where assessee, charitable institution, carried micro financing business and provided loan to general public and Self-Help Group (SHG) and earned interest income, then this activity would not be a charitable purpose. In the case of Income-tax Officer (Exemptions), Madurai v. Kalanjiam Development Financial Services [20151 64 taxmann.com 255 (Chennai – Trib.), it was held that where Assessee was a micro finance company operating as a financial intermediary between banks and SHGs where its main objective was bridging gap in micro finance to SHGs and for that purpose, it availed credit facilities from different banks/financial institutions over few years on interest and these were advanced to SHGs at interest rates with some mark-up, then assessee was carrying on micro finance business in a commercial line and it was not a charitable activity but an activity to expand finance business by contracting weaker section of public and was therefore hit by proviso to section 2(15). It was also held that even if activities of assessee were stated to be relief to poor, since running of business in form of micro finance was not incidental to carrying on of main objective of assessee-trust but it was main business of assessee, then it was not protected by provision stated in section 11 (4A). In the case of Assistant Commissioned: of Income-tax v. Grama Vidiyal Trust [20161 71 taxmann.com 88 (Chennai – Trib.), it was held that where assessee was running its micro finance business and lending money at commercial rate prevailing in market then such activities carried on by assessee trust could not be considered as activities of medical relief or education or relief of poor and hence, case of assessee was hit by proviso to section 2(15) and assessee would not be entitled for benefit of section 11. It was also held that even if activities of assessee were stated to be relief of the poor, it was not possible to conclude that running of business in form of micro finance was incidental to carrying on of main objective of assessee-trust and that assessee was not protected by provision stated in section 11(4A) and the Assessing Officer had rightly withdrawn exemption granted to assessee under section 11. In the case of Janalakshmi Social Services v. Director of Income-tax (Exemptions), Bangalore, [2009] 33 SOT 197 (Bangalore) it was held that where Assessee was availing of loan facility from banks/financial institutions at interest rates ranging from 8.5 per cent to 9 per cent and such loan facility was extended to so called poor people in urban areas at rates ranging between 18 per cent to 24 per cent per annum and where assessee-company was not reaching to individual beneficiaries directly but was doing so through NGOs and SHGs from whom it charged high interest rate, then Director (Exemptions) was right in holding that assessee was undertaking only business of micro-financing and had not done any charitable act and, therefore registration could not be granted to the assessee.
4.16 The specifics of every case being distinct, no solace can be afforded to the appellant on the basis of the judgments quoted by the Id. AR. It is also noted that Hon’ble Supreme Court has admitted SLP against the order of the Hon’ble Delhi High Court in ITPO case (2017) 84 Taxmatin.Com 283 (SC) refers.
4.17 The argument of the Id. AR that the mere fact that premium collected towards instance is more than the relief given during the specific year cannot make the activity commercial, is well received but the same may not have any material impact on the contours of the case as the case mainly, hinges on the nature of micro financing activity of the appellant. Insurance activity being a corollary of the micro finance activity, whatever holds true for the latter is equally germane for the former.
4.18 This ground of appeal is accordingly dismissed
Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.
11. The Ld.AR submitted that all the issues raised are in respect of disallowance of exemption claimed by the assessee u/s. 11 of the Act. The Ld.AR submitted that the assessee is engaged in the charitable activity of relief to the poor by forming Self Help Groups (SHG) of the rural poor and encouraging them to become financially self-sufficient. He submitted that the modus operandi followed by the assessee is to advance loans to SHGs and encourage them to in turn provide the funds to the members to be utilized for purposes of any activity carried on by them. He submitted that the object of such activity is to empower the rural poor and give them access to easy finance.
12. He submitted that, these loans do not carry any security other than the personal guarantee of the group members who are all poor people. The Ld.AR submitted that the assessee charges interest at the rate of 15% on the loans advanced to the SHG and in turn has to pay interest at the rate of 10% on the loan availed from SCDCC Bank.
13. He further submitted that these activities are consistently carried on by the assessee though SHG and the same has been accepted as “charitable purposes” for all prior assessment years. Copies of the assessment orders passed for the assessment years 20 12-13, 20 14-15 and 20 16-17 placed at pages 54-69. The AR has placed before us the expensed incurred by the assessee under various heads of services rendered by it through SHG as under:
Table marked as Annexure 1 from the Note on application of Income
14. The Ld.AR submitted that assessee borrows money at 10% interest and lends the same at 15% interest per annum to SHG for the above services, which the Ld.AO has held to be commercial in nature which defies the requirement of section 2(15) of the act of “advancement of an object of general public utility”. It is the submission of the Ld.AR that this additional 5% interest is charged in order to cover the administrative cost and allied expenses and that there is no proper motive in it. He placed reliance on the decision of Coordinate Bench of this Tribunal in case of M/s. Janodaya Trust in ITA No. 763/Bang/2016 by order dated 13.01.2021 wherein in a similar circumstances, the Coordinate Bench of this Tribunal held such observations to be based on surmises alone. It was submitted that this Tribunal found merit in the contention of the assessee that charging of interest with the mark-up was to cover administrative and allied expenses and also possible defaults by the borrowers which is an inherent risk in the financing activity. He also relied on the decision of Hon’ble Cuttack Bench in case of Adhikar in ITA No. 265/CTK/201 7 by order dated 24.09.2018 wherein it is held the activity of microfinance to be a charitable in nature. He also relied on the following observation of Hon’ble Cuttack Bench in case of Adhikar (supra).
“15. The assessee explained before us that in the activity of micro financing, the assessee obtained loan from banks and or financial institutions and advanced the same to self help group and poor persons. Above submissions of the assessee could not be controverted by the department. No material could be brought on record to show that the loan was advanced of any big amount or loan was advanced to any economically affluent persons. Thus, we find merit in the contention of the assessee that the activity was carried out with the object of providing relief to the poor, In the circumstances, we find no error in the order of the CIT(A), which was passed following the decisions of Visakhapatnam Bench of the Tribunal in the case of Spandana (Rural & Urban Development Organisation) (supra), Bangalore Bench of the Tribunal n the case of ADIT (E) vs Bharatha Swamukhi Sams the (supra), Delhi Bench of the Tribunal in the case of Disha India Page 19 I 20 ITA No. 2 65/CT K/ 2017 Asse ssment Year : 20 09- 10 Micro Credit (supra), Cuttack Bench of the Tribunal in the case of Bharat Integrated Social (supra), Hon’ble High Court of Bombay in the case of CIT vs. Agricultural Produce and Market Committee (supra), Hon’ble Supreme Court in the case of CIT vs. Sales Tax vs Sai Publication Fund (supra). Therefore, we confirm the findings of the C1 T(A)”.
15. On the other hand the Ld. DR vehemently supported the order of the Ld. CIT(E) in rejecting the claim of deduction under section 11 of the Act. The Ld. DR relied on the decision of Hon’ble Chennai Bench of the Tribunal in the case of ITO(E) Vs. Kalanjiam Development Financial Services reported in 156 ITD 213 wherein it is held that, the micro financing activity is commercial activity and upheld the action of the Ld.AO in denying the exemption u/s. 11 and 12 of the Act, to the assessee therein. The Ld. DR submitted that, the Ld. CIT(E ) rightly applied the decision of coordinate bench of this Tribunal in the case of Janalakshmi Social Services vs. DIT(E) reported in 33 SOT 197 to reject the exemption claimed by the assessee. He also placed reliance in support of his contentions:
