Microfinancing activity by charging exorbitant interest not charitable in nature: ITAT Bangalore

Sanghamitra Rural Financial Services Vs ACIT (Exemptions) (ITAT Bangalore)

ITAT Bangalore held that microfinancing activities by charging exorbitant interest cannot be considered to be charitable purpose in terms of section 2(15) of the Income Tax Act accordingly exemption claimed u/s 11 and 12 duly deniable.

Facts- Main issue involved here is whether the microfinancing activity conducted by the assessee falls under the first limb of section 2(15) of the Act or activities such as advancement of any other object of general public utility or any other activity, which falls outside the scope of section 2(15) of the Act.

Conclusion- If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service In relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of general public utility will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object are charitable purpose within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.

Held that the assessee is only doing the microfinancing activities by charging exorbitant interest, which does not commensurate with the prevailing rate. It is also noted that the activity is not also in lieu of any benefit to low-income group who are very vulnerable and are not in a position to cope up with such financial burdens. In order to consider the activity to be charitable in nature, the services rendered must commensurate with the benefit that may arise to such low-income group. The facts of the case relied by the ld. A.R. is quite opposite to the facts of the present case, which has been brought out in the earlier paragraphs of this order. It is also noted that nothing has been spent by the assessee, which could be considered in the nature of charity and therefore, the benefit under the proviso to section 2(15) of the Act is not available to the assessee.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

These appeals by assessee are directed against different orders of NFAC for the assessment years 2016-17 & 2017-18. The assessee has raised common grounds of appeal, which are as follows:

“1. The orders of the authorities below in so far as they are against the appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant’s case.

2. The appellant denies itself to be assessed at Rs. 7,08,37,639/- as against the returned income of Rs.NIL for the assessment year 2018-19 under the facts and circumstances of the case.

3. The learned CIT(A) is not justified in upholding the disallowance of the exemption claimed under section n of the Act, on the ground that the activities of the appellant are hit by the proviso to section 2(15) of the Act on the facts and circumstances of the case.

4. The authorities below failed to appreciate that the activities of the appellant fell under “relief to poor” and thus charitable, on the facts and circumstances of the case.

5. The authorities below were not justified in holding that the activity of providing financial assistance to poor people would fall within the limb “advancement of any other object of general public utility” and does not come within the ambit of ‘relief of the poor’ on the facts and circumstances of the case.

6. The learned CIT(A) erred in denying claim of deduction U/s 11 & 12, though admitting that the micro finance Activity is Charitable activity in the advancement of GPU and erroneously concluded that the appellant was hit by the Proviso to section 2(15), when the said proviso is only applicable to the incidental revenues generated and not the primary activity, on the facts and circumstances of the case.

7. The authorities below have erred in not allowing the exemption claimed under section 11 of the Act on the grounds that the appellant has made surplus from its activity without appreciating the fact that such surplus is again utilised for providing financial assistance to the poor on the facts and circumstances of the case.

8. The authorities below were not justified in holding that the appellant is providing financial assistance to select group of people and not to public at large is a perverse finding on the facts and circumstances of the case.

9. The authorities below have failed to appreciate that the appellant is a Section 8 Company under the Companies Act, 2013 and such registration is given only to companies engaged in charitable activities on the facts and circumstances of the case.

10. The appellant denies the liability to pay interest under section 234A, 2343 and 234C of the Act in view of the fact that there is no liability to additional tax as determined by the learned assessing officer. Without prejudice the rate, period and on what quantum the interest has been levied are not in accordance with law and further are not discernible from the order and hence deserves to be cancelled on the facts and circumstances of the case.

11. The appellant craves leave to add, alter, delete or substitute any of the grounds urged above.

12. In view of the above and other grounds that may be urged at the time of the hearing of the appeal, the appellant prays that the appeal may be allowed and appropriate relief be granted in the interest of justice and equity.”

2. The assessee has raised additional grounds of appeal as under:

1. “The order of assessment is unsigned and consequently is to be held that the order is without authority and quashed as being bad in law, on the facts and circumstances of the case.

2. The notice of demand and computation also do not contain a signature and consequently the same are required to be held as being non est and quashed, on the facts and circumstances of the case.

3. The Appellant craves leave to add, alter, amend, substitute, change and delete any of the grounds of appeal.”

3. At the time of hearing, the assessee has not pressed the additional grounds and accordingly, these additional grounds are dismissed.

3.1 The crux of above main grounds is that whether the microfinancing activity conducted by the assessee falls under the first limb of section 2(15) of the Act or activities such as advancement of any other object of general public utility or any other activity, which falls outside the scope of section 2(15) of the Act. Hence, we consider the entire arguments made by assessee in a cumulative manner instead of addressing each ground individually.

4. The brief facts of the case are as follows:

i. The Assessee is a trust registered under section 12A of the Act vide certificate issued by the Commissioner of Income Tax, Karnataka – II, Bangalore in No. TRUST/18/A-1/S-742/98-99/CIT-II dated 18.12.1998. the assessee has also been granted 80G vide order in F.No. DIT(E) BLR/80G/200/AAECS0038H/ITO(E)-3/Vol.2010-11, dt:16/08/2010. The said certificate U/s 12A and 80G have been both renewed on 24/09/2021.

ii. The Assessee Trust was formed with the objectives as reproduced in the order of assessment and the assessee has been carrying out activities to fulfil the objectives. The assessee has over the years consciously and in fulfilment of its objectives, lent monies to the downtrodden, who have no option of availing loans and has provided the means to install themselves as earning members of the community.

iii. The assessee has advanced monies to individuals and others in order to develop a belief of entrepreneurship and to inculcate a feeling of participation in the society, by earning and performing small activities. The assessee has advanced monies to imbibe a sense of responsibility in the individuals, in order to make them responsible citizens in earning income and being self-reliant.

iv. The individuals who receive the microfinance are people who are ineligible to apply for loans with financial institutions and banks, for want of proper documentation, lack of collateral sought by the large institutions, etc. The individuals receiving the loans are without means to pay the processing fees or are unaware of the procedure to be followed to avail a loan from a nationalised bank.

v. The loans lent are also minimal depending upon the ability to repay, which makes it a herculean task to apply for the loan in large financial institutions. The procedure and charges for obtaining and repayment of the loans are back breaking for small borrowers. The assessee has minimised the procedure to be done by the second level groups, which are active in the region.

vi. The Reserve Bank of India, has laid down the computation of rates of interest to be applied in respect of the loans, which is 2.75 X the average interest rate of five major banks, which when computed is in the region of 18% to 20%

vii. The ld. A.R. submitted that the private money lenders including NBFC / MFI`s charge interest and processing fees at 1% of loan disbursed, which the assessee does not charge and the rate of interest is also at exorbitant rates, which are upwards of 24% and goes on spiralling based upon the situation of the individual. The loans of the private lenders are often leading to suicides among the weaker sections of the society.

viii. The assessee with an intention to lend to such marginalised population has obtained loans and after incurring interest, overheads, offering incentives, etc. lends the same to individuals, through the self-help groups in a region and recovers an average 6% p.a. as cost of funds.

ix. The ld. A.R. submitted that the cost of over heads, to run the trust is at an average of 5%, which is the lowest in the industry and the assessee offers incentives of 1% to 2% odd to the NGO, self-help groups, etc which co-ordinate with the individuals and are the point of contact with the assessee. Thus, the assessee makes little or meagre surplus on the earnings from interest. The fact remains that the surplus is due to the multiplicity of the funds being repaid by the individual members. The assessee also provides capacity building training to members or borrowers, i.e. to make use of the credit facilities, which is an added cost to the assessee.

x. In other words, the assessee is lending to individuals through NGO, SHG, etc who in the regular course of their daily lives would not be eligible to avail a loan and at concessional rates of interest compared to the prevailing rate of interest from private financial institutions / NBFC.

xi. Without prejudice to the above, the ld. A.R. stated that the assessee does not receive any funds as donations, grants, etc and has to operate solely on the borrowings to fund the demand, which is on a higher scale and thus the necessity to avail loans and the markup on the loans availed are necessary to cover the cost of overheads, travelling, conducting camps, recovery drives, litigation, etc.

xii. The assessee has by being prudent in its lending and effective control of the disbursements, ensured that there was a surplus in the years, which cannot be construed to be a profit motive and the activities of the assessee was being conducted for earning profit.

xiii. The ld. A.R. submitted that the learned AO ought not to have been merely swayed by the financials of the assessee to hold that the assessee was earning profits consistently, rather ought to have appreciated that the assessee was under taking a large responsibility of upliftment of the downtrodden, which has not been appreciated in the right perspective.

xiv. The assessing officer ought to have viewed the activities of the assessee first and then appreciated the financials and the mere surplus in the financials would not infer that the assessee was undertaking activities for the purpose of profit.

xv. The ld. A.R. submitted that it has been undertaking charitable activity in pursuance to the objectives of the Section 8 Company. The learned assessing officer has not made a due diligence as to the activities of the Section 8 company and has merely relied on the financials of the company to arrive at a conclusion that the assessee was engaged in commercial activity.

xvi. The ld. A.R. submitted that though it is involved in microfinance, the learned assessing officer ought to have given consideration to the fact that the advances were mostly lent to individual who could not obtain any loan from the organised financial system due to lack of availability of security as collateral.

xvii. The ld. A.R. submitted that it is acting as a bridge for the deprived class of the society in meeting their necessities and wants as they are denied advances owing to their critical state of finances.

xviii. The assessee is lending a helping hand to such individuals who need a second chance and to such people who do not have the ability to avail loan by providing security towards loan.

xix. The assessee is rendering a much needed service to the individuals by infusing credit into the system, which is required to revive the rural economy, without which it would be difficult for the individuals to join and participate in the main stream of the economy.

xx. Thus, the activities of the assessee have to be looked from a macro angle and not from micro angle and consider them as charitable activities.

xxi. The ld. A.R. placed reliance on the decision of the Hon’ble Jurisdictional Bangalore Tribunal in the case of ADIT(E) v. BHARATHA SWAMUKHI SAMSTHE in ITA No. 1121/Bang/2008 dated 24.12.2008 (28 DTR 13) (Bang. Trib)

xxii. The ld. A.R. placed further reliance on the decision of the Hon’ble Delhi Tribunal ‘B’ Bench in the case of Disha India Micro Credit in ITA No.1374/Del/2010 dated 28.01.2011, wherein it was held;

“14. Now, the question arises as to whether the activities of promoting micro finance services, as permitted from time to time by the Reserve Bank of India, exclusively to large number of poor persons, in their villages, towns etc. for income-generation; and thus to help them and their family to rise out of poverty not with the motive of profit, can be considered to be charitable purpose within the meaning of sec. 2(15) of the Act.

15. …..

16. ……..

17. On perusal of the aforesaid meaning of relief of the poor, it is clear that it encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy people. It would include within its ambit, purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid.

Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under sec. 11(4A) or the seventh proviso to sec. 10(23C) of the Act.

xxiii. The ld. A.R. placed further reliance on the decision of the Hon’ble Cuttack Tribunal in the case of Bharat Integrated Social Welfare Agency in ITA No.115/CTK/2011 dated 27.05.2011, wherein it was held;

“5. The amounts received from the financial institutions and the amounts distributed as loan to carry out its activities therefore falls in balance to commensurate to the main object of the assessee trust which has not been disturbed or pointed any fault with by the learned CIT in his order. We fully endorse the reasons for granting registration to the respective assessees in the case laws cited by the learned Counsel for the assessee, namely Disha India Micro Credit v. CIT by ITAT, Delhi Bench (supra) and Asst.DIT(Exemptions) v. Bharatha Swamukhi Samsthe by ITAT, Bangalore Bench (supra), which elaborately consider the cases of the respective assessees seeking registration to be elligible for registration u/s.12AA in the same set of facts as have been considered by the learned CIT in the impugned order.”

xxiv. The ld. A.R. placed further reliance on the decision of the Hon’ble Jaipur Tribunal.

4.1 The ld. A.R. submitted that the learned AO is not justified in stating that the assessee was earning surplus and hence was not charitable in nature Grounds of Appeal No.(4):

i. The ld. A.R. submitted that it borrows money from banks and financial institutions and lend money to poor and destitute people through the assistance of Self-Help Groups (hereinafter “SHG”).

ii. The ld. A.R. submitted that it provides financial assistance to the underprivileged people whose cry for assistance is ignored since the loan applicant does not have the ability to repay as per the risk assessment by banks and financial institutions.

iii. The ld. A.R. submitted that it has to cover its overheads such as administrative expenses, interest expenses, offering incentives to SHG etc.,. The assessee in order to cover its administrative expenses and to protect itself from bad loans maintains a meagre margin in the loan disbursed to downtrodden people.

iv. The ld. A.R. submitted that the loans are disbursed to people who do not have any collateral and are living below the poverty line, thus, the risk of default is at the higher end.

v. The ld. A.R. submitted that irrespective of whether it receives the interest, principal from the people, it has to regularly honour its loan instalment to maintain its credible image.

vi. The ld. A.R. submitted that mere profit in the financial statement shall not be a yard stick to draw an inference that the assessee in undertaking activities for the purpose of profit.

vii. The ld. A.R. further submitted that the surplus generated by the assessee year after year would not dis-entitle it from claiming exemption under section 11 of the Act, when the surplus are used for the object of the trust.

viii. The ld. A.R. placed reliance on the parity of reasoning of the decision of the Hon’ble Apex court in the case of ACIT v. Surat Art Silk Cloth Manufacturer Association reported in [1978] 121 ITR 1, wherein the constitutional bench held;

17… “The test which has, therefore, now to be applied is whether the predominant object of two activities involved in carrying out the object of general public utility is to subserve this charitable purpose or to earn profit. Where profitmaking is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principle of management. We, therefore, agree with Beg, J. when he said in Sole Trustee, Loka Sikshana Trust case (supra) that “if the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust.”

ix. The ld. A.R. placed further reliance on the decision of the Hon’ble Apex Court in the case of Queens Educational Society v. CIT reported in [2015] 55 Taxmann.com 255(SC) wherein it was held;

(1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes incidental surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit.

(2) The predominant object test must be applied – the purpose of education should not be submerged by a profit making motive.

(3) A distinction must be drawn between the making of a surplus and an institution being carried on ‘for profit’. No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit.

(4) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes.

4.2 The ld. A.R. submitted that the assessee is not hit by the proviso to section 2(15) of the Act and is eligible for exemption under section 11 & 12 of the Act- Grounds of appeal No.(6) & (7):

i. The ld. A.R. submitted that it has been fulfilling the objectives of the trust of being charitable in nature, by financing individuals below the poverty line and extending a line of credit to ensure that loans are available to the poorest of the poor, which is not extended by commercial banks and NBFC.

ii. The assessee is lending a helping hand to such individuals who need a second chance and to such people who do not have the ability to avail a loan by providing security towards the loan.

iii. The assessee is rendering a much needed service to the individuals by infusing credit into the system, which is required to revive the rural economy, without which it would be difficult for the individuals to join the main stream of the economy.

iv. The learned Assessing Officer has merely relied upon the figures as appearing in the financials, has arrived at the conclusion that the assessee was not carrying on charitable activity, without appreciating the nature of the work carried on, by the assessee.

v. He submitted that the nature of charitable activity cannot be construed by a mere glance at the financial data, but the AO ought to have appreciated the purpose and the intent behind the activities being undertaken by the assessee.

vi. The AO ought to have appreciated that the assessee’s activity was to be appreciated by considering the surrounding circumstances under which it operates, the individuals to whom benefit is accruing, the extent of the revival in the economy it is aiding in, to arrive at the conclusion that the assessee was not doing charitable activity.

vii. In view of the above, the ld. A.R. submitted that the AO has taken a narrow view of the activities of the assessee by relying upon the financial data alone to arrive at the erroneous conclusion that the assessee was not charitable in nature.

viii. The ld. A.R. submitted that the reports filed during the course of assessment proceedings filed two reports in respect of the impact of the activities of the assessee to demonstrate that the loans were disbursed for diverse reasons and impacting a large diaspora of the population, which have not been appreciated by the AO, in proper light.

ix. The ld. A.R. submitted that it has already filed detailed data, to demonstrate that the assessee’s activity are in the nature of charity and for providing relief to the poor.

x. Hence, he prayed to hold that the activities of the assessee are charitable in nature and not hit by the proviso to section 2(15) of the Act, and further that the assessee is eligible for the claim of deduction under section 11 and 12 of the Act.

xi. The ld. A.R. submitted that the activity of lending money to the underprivileged squarely falls under ‘relief of the poor’ and does not come under the purview of ‘advancement of any other object of general public utility’.

xii. The ld. A.R. submitted that the proviso to section 2(15) is applicable only if a charitable trust has its activities in the nature of ‘advancement of any other object of general public utility’.

xiii. The ld. A.R. therefore submitted that the proviso to section 2(15) finds no force under the facts and circumstances of the case. The relevant portion of section 2(15) is extracted here under;

Sec 2.

(15) “charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of 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 a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless—

(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;

xiv. The ld. A.R. submitted that it borrows money from banks and financial institutions and advances to the needy people. The learned assessing officer has also concurred at para 5.9 of page 6 in the impugned order of assessment that the assessee does not have its own corpus. The relevant portion is extracted hereunder;

5.9 …Further, the assessee has raised secured loans and unsecured loans at the rate of from banks. Thus, it means it has raised loans to advance to customer by paying interest and the assessee is not having own corpus in a formal capital so as to advance the loan. Borrowed funds of the assessee have been utilised to lend loans to the public and the rate of interest charged is with a view to generate profit.

xv. The ld. A.R. submitted that the learned assessing officer has held that the assessee is engaged in business activity and denied the exemption under section 11 of the Act purely based on the surmise that the assessee is charging exorbitant interest on loan advanced to poor people.

xvi. The ld. A.R. submitted that the micro-financing activity to the poor, weaker section of the people comes under the purview of ‘relief of the poor’ as these people are farfetched from financial assistance from banks and financial institutions.

xvii. The ld. A.R. submitted that it helps poor people to improve their standard of life by providing them loans without any collateral, thereby exposing itself to magnificent risk of non-repayment of loans.

xviii. The ld. A.R. submitted that “relief of the poor” consists of a wide range of activities for the benefit and welfare of socially and economically downtrodden people and the said term has a farfetched exhaustive definition and should be interpreted from a macro angle.

xix. The learned assessing officer has treated the activities of the assessee as commercial and denied the benefit of section 11 exemption solely on the basis that the assessee is disbursing the loans after adding a mark-up to its cost of borrowing, such an observation is very narrow and has failed to appreciate the purpose and intent behind the assessee’s activities.

xx. The ld. A.R. further submitted that the learned assessing officer has failed to appreciate the impact assessment report submitted by the assessee during the course of assessment, wherein a detailed study has been made on the activities of the assessee and its impact on the beneficiaries.

xxi. The ld. A.R. submitted that private money lenders often charge exorbitant interest from the weaker section of the society which results in suicides being committed by the desperate people.

xxii. Without prejudice to the above, the ld. A.R. submitted that the proviso to section 2(15) would apply to those entities whose object of ‘advancement of general public utility’ is only a colourable device to hide the true purpose of trade, commerce, or business.

xxiii. Thus, the activity carried by the assessee is in the nature of relief of the poor and the proviso to section 2(15) is not attracted under the facts of the case.

xxiv. The ld. A.R. further submitted that the Central Board of Direct Taxes (“CBDT”) vide its Circular No. 11/2008, dated 19.12.2008 has stated that the proviso to section 2(15) will apply only to those entities whose purpose is ‘advancement of general public utility’ and not in respect of the first three limbs of section 2(15) of the Act. The relevant portion is extracted hereunder;

2. The following implications arise from this amendment –

2.1 The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves the carrying on of commercial activities.

2.2. ‘Relief of the poor’ encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that

(i) the business should be incidental to the attainment of the objectives of the entity, and

(ii) separate books of account should be maintained in respect of such business.

Similarly, entities whose object is ‘education’ or ‘medical relief’ would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above.

3. The newly inserted proviso to section 2(15) will apply only to entities whose purpose is ‘advancement of any other object of general public utility’ i.e. the fourth limb of the definition of ‘charitable purpose’ contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.

xxv. The ld. A.R. submitted that it adds a meagre margin on its cost of funds to ensure its survival and that the learned assessing officer has not made a due diligence as to the activities of the trust and has merely verified the financials to arrive at a conclusion that the assessee in engaged in commercial activity.

xxvi. The ld. A.R. placed reliance on the decision of the Hon’ble Jurisdictional Tribunal in the case of M/s Janodaya Trust v. ACIT(E) in ITA No.763/Bang/2016 dated 16.02.2021.

xxvii. Thus, the ld. A.R. submitted that the facts in the case of Janodaya Trust(supra) are similar to its case and that the decision of the Hon’ble Jurisdictional Tribunal is in its favour.

xxviii. The ld. A.R. placed further reliance on the decision of the Visakhapatnam Tribunal in the case of SPANDANA (Rural and Urban Development Organisation) in ITA No. 364/Vizag/2009 dated 17.2.2010, wherein it was held;

“19. In the aforesaid case assessee was mainly engaged in micro financing activities and the money was lent to its project members at a rate of interest higher than that of the rate of interest the loan was borrowed. In that case also assessee has borrowed the funds either from the bank or other financial institutions and was lent to the project members. The Tribunal has taken a view that this micro finance activity was undertaken to alleviate the poverty and for the benefit of socio-economically weaker sections of the society and for doing this activity a proper organized sector is required in which lots of expenses are to be incurred. To meet that expenses, assessee is bound to charge higher rate of interest from the project members. Otherwise, assessee could not undertake the microfinance activities at the same rate of interest. The similar is the position in the instant case. Since the Tribunal has taken a view in a particular set of facts and held that micro finance activity is a charitable activity as it alleviates the poverty and also for the benefit of the socioeconomically weaker sections of the society, we find no reason to take a contrary view in this appeal with regard to the nature of activity undertaken by the assessee. We therefore hold that the micro finance activity in the instant case is a charitable activity. Since the registration has already been granted to the assessee under s. 12A assessee is eligible for exemption under s. 11 of the Act.”

4.3. Regarding Interest under section 234 of the Act- Grounds of appeal No.(8) the ld. A.R. for the assessee submitted that :

i. The ld. A.R. submitted that the rate, period and quantum on which interest under section 234of the Act has been levied is not discernible. The levy is not in accordance with law and further the Assessee was not given the basis and method of calculation of interest under Section 234 of the Act for the purpose of verification of the correctness of the charge of interest.

ii. Without prejudice to the above, the ld. A.R. submitted that in the event any divergent views are taken by different appellate authorities, High Courts, the interpretation favourable to the assessee should be adopted as held by the Hon’ble Apex Court in the case of Vegetable Products Ltd reported in 88 ITR 192 (SC).

iii. The ld. A.R. for the assessee also relied on the following judgements:

1. M/s. Navodaya Grama Vikas Charitable Trust, ITA No.172/Bang/2022 Dated 31.8.2023.

2. Bharatha Swamukhi Samsthe (2009) 319 ITR (Trib) 0422 (Bang-Tribunal)

3. Disha India Micro Credit, ITA No.1374/Del/2010, Delhi dated 28.01.2011.

4. Bharat Integrated Social Welfare Agency, ITA No.115/CTK/2011 dated 27.05.2011.

5. The ld. D.R. relied on the order of lower authorities and submitted that the assessee is charging exorbitant rate of interest to its borrowers and the activity of the assessee cannot be considered as charitable activities and exemption u/s 11 of the Act cannot be granted to the assessee.

6. We have heard the rival submissions and perused the materials available on record. In this case, the assessee has advanced loans to members of Self-Help Groups (SHGs) and not to all poor members of society. It works with poor bankable. The assessee is not providing relief for the poor in the sense that it is not providing food, shelter, clothes to the poor people in the time of need. The ld. AO given ample opportunity of hearing to the assessee to provide details for providing relief in times of natural and other calamities to the people, improvement of basic amenities like water supply, electricity rates, women and child welfare etc. as mentioned in its object’s clause of the assessee, which has not been produced. The assessee has focused on micro finance activities through SHGs. It is a network of 70 branches and it has run professionally. The assessee so as to expand the business of microfinance, it offers incentives of 1% to 2% to the NGO & SHG and incurred expenditure of Rs.70,17,226/- during the financial year 2015-16 and Rs.1,61,84,245/- in the financial year 2017-18. The assessee has charged about 6% to 8% over and above the bank rate of interest to the members of SHG which works out to 18% to 20% as against the borrowable rate of 10% to 11.75% p.a. As a result of professional management, assessee has earned profit of 28.76% in assessment year 2016-17 and 24.94% in the assessment year 2018-19 and also reserves surplus of Rs.34,01,24,035/- in the assessment year 2016-17 and Rs.45,91,43,949/- in the assessment year 2018-19. Thus, the assessee has not lend any money to its borrowers at subsidized rate. On the other hand, it charged exorbitant rate to its borrowers and there has been no relief to the poor.

6.1 Now the contention of the assessee before us is that the assessee is a Charitable Institution carried business of microfinance in terms of section 2(15) of the Act and exemption to be granted. The charitable purpose is defined u/s 2(15) of the Act, where it states that exemption can be granted to the institutions which are involved in charitable purposes namely relief to poor, education, medical relief and advancement of any object of general public utility. But, however, an amendment came into force by Finance Act, 2008, wherein proviso was added to section 2(15) of the Act, which states that the advancement of any other object of general public utility shall not be charitable purpose if it involves carrying of any activity in the nature of trade, commerce or business or any activity of rendering any services in relation to trade, commerce or business. Therefore, the exemption is not available in view of adding proviso to section 2(15) of the Act, particularly the 4t^h limb definition of Charitable Purpose. We find that assessee did not lend loans to beneficiaries directly as it was advanced to various SHGs. The said loans are raised on commercial lines and profit was being generated by levying heavy/exorbitant rate of interest and it has carried on the business in parallel to commercial banks.

6.2 Before us, ld. A.R. placed reliance on various judgements and submitted that charging higher rate of interest as compared to rate of interest charged by banks cannot disentitle the assessee in claiming exemption u/s 11 of the Act and higher rate of interest has been charged, so as to meet the administrative charges and chances of high rate of bad debts. One more argument made by the ld. A.R. is that the approval granted u/s 12AA of the Act has not been cancelled, as such, the exemption u/s 11 of the Act to be granted.

6.3 We find that after going through the activities carried on by the assessee, which is in very commercial manner with the high profit motive. Further granting of approval u/s 12AA of the Act is not automatically entitle the assessee to claim exemption u/s 11 of the Act and the ld. AO while framing the assessment is at liberty to look into the activities carried on by the assessee whether it falls within the purview of section 2(15) of the Act r.w. provisions thereto. It is seen that assessee has been created u/s 25 of the Companies Act.

6.4 It is also noted that assessee has been granted the registration u/s 11 of the Act vide section 12AA & 80G of the Act w.e.f. 8.12.1998 vide approval dated 8.12.1998 and 16.8.2010 respectively. The objects of the assessee for which it has been formed are as follows have been approved by the competent authority while granting the approval u/s 12AA of the Act:

(A) “THE MAIN OBJECTS TO BE PURSUED BY THE COMPANY ON ITS INCORPORATION ARE.

(a) to carry out and undertake the financing and providing credit on interest or otherwise to group of persons belonging to the poorer sections joined together based on the concept o Self Help Groups (SHGs) both in rural and urban areas with active support of Non-Government Organisations (NGOs) based in India and abroad

(b) To Provide consultancy and the required infrastructural and training facilities to the group members.

(c) To receive money on deposit at interest and provide financial and other support to the members of SHGs.

2. …

(a) To organise survey and investigation for assessing the scope and expansion of existing rural industries and establishment of new industries for the benefit of group members.

(b) To formulate plans for providing required credit to the group members.

(c) To raise necessary funds for carrying out the objectives of the financial service by borrowing, donations, grants, gifts or otherwise from India and abroad.

(d) To provide finance for economic activities relating to production, trade and business undertaken by the group members.

(e) To arrange for direct financing of the group members by the Commercial Banks and other financing agencies and provide necessary guarantee to them.

3. To undertake and assist rural development and relief for poor by all conceivable means and especially in the areas relating to relief in times Of natural and other calamities, improvement of basic amenities like water supply, electricity, roads, transport, drainage and sanitation, town and country planning, development of education, medical and health care, women and child welfare, promotion of social interaction and sports, development of small and cottage industries, industrial and agricultural development and for purposes of achievement of the aforesaid objects to establish, maintain, and run educational institutions, hospitals and health centres, social clubs, theatres, auditorium, community halls, research and training centres, laboratories, workshops, sports complexes, shopping complexes, chambers of commerce and industry and the like and to interact with and make representations before public bodies and authorities in pursuance of the main objectives.

4. To promote and assist Research and Development activities in all branches of science and technology, activities relating to literature and fine arts, to promote public awareness and to generally promote and assist in the implementation of social welfare and consumer protection measures and to engage in public charitable activities, which shall not be restricted to any area or class or persons.

(B) THE OBJECTS INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF THE MAIN OBJECTS:

1. To purchase, take on lease or exchange, hire or otherwise acquire any real or personal estate which may be deemed necessary or convenient for any of the purposes of the Company.

2. To construct, maintain and alter any houses, buildings or works necessary or convenient for the purposes of the Company.

3. To take any gift or property, whether subject to any special trust or not, for any one or more of the objects of the Company.

4. To take such steps by personal or written appeals, public meetings or otherwise, as may from time to time be deemed expedient for the purposes of procuring contributions to the funds of the Company in the shape of donations or otherwise.

5. To print and publish any newspapers, periodicals, books or leaflets that the Company may think desirable for the promotion of its objects.

6. To manage, lease, mortgage, dispose of or otherwise deal with all or any part of the property of the Company.

7. To create a charge over all or any of the assets of the Company whether moveable or immovable by mortgage, hypothecation, pledge or otherwise for purposes of securing the repayment of any moneys borrowed.

8. To borrow and raise money in such manner as the Company may think fit.

9. To invest the monies of the Company not immediately required for its purposes in or upon such investments/securities and in the modes specified under the provisions of Section 13(1)(d) read with Section 11(5) of the Income Tax Act. 1961 as amended from time to time.

10. To undertake and execute any trusts or any agency which may seem directly ir indirectly conducive to any of the objects of the Company.

11. To subscribe to any local or other charities and to grant donations for any public purposes and to provide a superannuation fund for the servants of the Company or otherwise to assist any such servants, their widows and children.

12. To establish and support and to aid in the establishment and support Of any other Company formed for all or any of the Objects of this Company.

13. To amalgamate with any Companies, Institutions, societies or associations having objects similar to those Of this Company.

14. To purchase or otherwise acquire and undertake all to any part of the property, assets, liabilities ad engagements at any one or more of the Companies, institutions, societies or associations with which the Company is authorised to amalgamate.

15. To transfer all or any part of the property, assets, liabilities and engagements of this Company to any one or more Of the Companies, institutions, societies or associations having objects similar to those of the Company with which this cc is authorised to amalgamate.

16. To enter into agreements and contracts with Indian and Foreign individuals, Companies or other organisations for technical, financial or any other assistance for carrying out all or any of the objects of the Company.

17. To enter into partnerships or into any arrangement with no profit motive.

18. To open accounts with any individual, firm or Company or with any bank or banks and to pay into and withdraw monies from such account or accounts.

19. To provide for the welfare of the employees or ex-employees as of the Company or their wives, families or dependents by grants of pensions, gratuity, bonus, payment towards insurance or other payment or by creating from time to time, subscribing or contributing to, aiding or supporting provident funds or conveniences and by providing, subscribing or contributing towards places of instruction or recreation, hospitals and dispensaries, medical and other assistance as the Company shall think fit.

20. To do all such other lawful things as are incidental or conducive to the attainment of the above objects or any of them.

21. To devise incentive schemes or reward system for the supporting staff belonging to administration, finance, purchase, marketing and other related sections, so that they can effectively contribute towards the attainment of the Company’s objectives.

22. To encourage and support participation of economists, financial experts, bankers and research scholars in the conferences, seminars and exhibitions in India and abroad for activities relating to the areas of interest to the Company.

23. To promote, develop and improve exchange of knowledge as well as technical cooperation between institutions, associations, bodies and agencies having objects similar to that of the Company.

24. To conduct conferences, refresher course, lectures, seminars, demonstrations and exhibitions, relating to the areas of interest to the Company.

(B) THE OTHER OBJECTS NOT INCLUDED IN (A) AND (B) ABOVE:

Provided that the Company shall not support with its funds or endeavour to impose on or procure to be observed by, its members or others, any regulation or restrictions which, if any object of the Company, would make it a Trade union.

II. The objects of the Company extend to the whole of India

III.

1. The income and property of the Company, whensoever derived, shall be applied solely for the promotion of its objects as set forth in this Memorandum.

2. No portion of the income or property aforesaid shall be paid or transferred directly or indirectly, by way of dividend, bonus or otherwise by way of profit, to persons who at any time are or have been members of the Company or to any one or more of them or to any person claiming through any one or many of them.

3. Except with previous approval Of the Central Government, no remuneration or other benefit in money or monies worth shall be given by the Company to any of its members, whether officers or servants of the Company or not, except payment of out of pocket expenses, reasonable and proper rent on premises let out to the Company.

4. Except with previous approval of the Central Government, no member shall be appointed to any office under the Company, which is remunerated by salary, fees or in any other manner not excepted by sub-clause (3).

5. Nothing in this clause shall prevent the payment by the Company in good faith if reasonable remuneration to any of its officers or servants (not being members) or to any other person (not being member) in return for any services actually rendered to the Company.

IV. No alteration shall be made to this Memorandum of Association or to the Articles of Association of the Company which are for the time being in force, unless the alteration has been previously submitted to and approved by the Regional Director.

V. The Liability of the members is limited.

VI. Each member undertakes to contribute to the assets of the Company in the event of its being wound up while he is a member or within one year afterwards for payment of the debts or liabilities of toe Company contracted before he ceases to be member and of the costs, charges and expenses of winding up and for adjustment of the rights of the contributories among themselves such amounts as may be required not exceeding a sum of Rs. 1,000/(Rupees one thousand only).

VII. True accounts shall be kept of all sums of money received and expended by the Company and the matters in respect of which such receipts and expenditures take place, and of the property, creditors and liabilities of the Company, and the subject to any reasonable restrictions as to the time and manner of inspecting the same that may be imposed in accordance with the regulations of the Company for the time being in force, the accounts shall be open for inspection of the members. Once at least in every year the accounts of the cc shall be examined and the correctness of the balance sheet and the income and expenditure account ascertained by one or more properly qualified Chartered Accountant.

VIII. If upon winding up or dissolution of the Company, there remains, after the satisfaction of all the debts and liabilities, any property whatsoever, the same shall not be distributed amongst the members of the Company but shall be given or transferred to such other Company having objects similar to the objects of this Company, to be determined by the members of the Company at or before the time of dissolution or in default thereof, by the High Court of Judicature that has or may acquire jurisdiction in the matter.

IX. We, the several persons whose names, addresses, designations and occupations are hereunto subscribed are desirous of being formed into a Company not for profit, in pursuance of this Memorandum of Association:”

6.5 As seen from the above object clause along with income and expenditure account of the assessee for these assessment years, assessee has carried on object clauses 1 & 2 only and it has not carried out any charitable activities stated in clause 3 & 4 of the Articles of Association. Therefore, we are not in agreement with the argument of the ld. A.R. that the lower authorities have ignored the approval to the assessee u/s 12AA of the Act in denying claim of the exemption. The ld. A.R. has stated that in earlier year exemption u/s 11 of the Act has been granted and hence, rule of consistency to be followed. In our opinion, prior to adding proviso to section 2(15) of the Act, the entities which got registration u/s 12AA of the Act, engaged in commercial activity claimed exemption on the ground that such activities were for advancement of object of general public utility in terms of 4^th limb of definition to section 2(15) of the Act. We find that the said benefit was taken away by adding proviso to section 2(15) of the Act, wherein it explains that the advancement of any other object of general public utility shall not be charitable purpose. In the present case, lower authorities have categorically brought on record that assessee has conducted its activities on commercial line in the nature of trade, commerce or business. The assessee provides services to the SHGs in the name of “Charity” by collecting high rate of interest from them saying that such exorbitant interest has been charged with a defence that to meet the administrative expenses. Though the assessee claims that it is offering services to the poor, there are no services/charity provided to them “free of cost”. In our opinion, there was no element of “charity” and the activities of the society is solely to be considered as “commercial”, since the activities of the assessee has resulted in huge profits, which is not expected from this kind of assessee though the element of profit is not strange to the provisions of section 11 of the Act. However, profit motive cannot be predominant object of the assessee as in the present case. Thus, the activity of microfinancing is activity in the nature of trade/commerce/business, which cannot be considered as “Charitable”. The proviso to section 2(15) of the Act further clarifies that even if the income generated is ploughed back into its own microfinance activity or for any other activity with the intention to make profit as stipulated in its object clause, it cannot be considered as charitable. Here in this case, the surplus/profit is applied to earn more income by ploughing it back into microfinance activity. In other words, the surplus earned from microfinance activity cannot be exempt, no matter how the surplus has been applied. The issue what we have to see is whether assessee is engaged in charitable activities or not. In the present case, by going through the microfinance activity of the assessee, which is carried on in a commercial manner and to be considered as a commercial activity as defined in section 2(15) of the Act, the provisions of section 13(8) becomes operative. Exemption u/s 11 of the Act cannot be granted unless assessee is engaged in charitable activities.

6.6 On the contrary, the ld. A.R. made an argument that microfinance activity carried on by the assessee takes care of the poor people who cannot step into the commercial banks for availing financial assistance. In our opinion, the activity carried on by the assessee cannot be considered as an activity of medical relief or education or relief to the poor and it does not fall under any specific activity to relief of the poor, education, medical relief. The correct way to express the nature of activities carried on by the assessee is to say that the assessee is carrying on “advancement of any other object of general public utility”. When that is the case, the assessee is hit by the proviso given u/s 2(15) of the Act. The proviso reads that “advancement of any other object of general public utility” shall not be a charitable purpose, if it is 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 money. Therefore, in the case of assessee, it is hit by proviso to section 2(15) of the Act and assessee is not entitled for the benefit of section 11 of the Act for that part of income generated in the hands of assessee from running into microfinance business. Alternatively, one has to look into section 11(4A) of the Act. It provides that exemption shall not apply in relation to any income of a Trust or an Institution, being profit & gains of business, unless the business is incidental to the attainment of the object of the assessee and separate books of accounts are maintained by such trust or institution in respect of such business. In the present case, there is no dispute on the fact that assessee is carrying on the business of micro finance. The assessee is maintaining separate account for the above business activities. But the crucial question is whether running into micro finance is business incidental to the attainment of the object of the trust or not? By any stretch of imagination, it is not possible to hold that the business of micro finance is incidental to the above stated objects of the assessee’s trust. “Incidental” means offshoot of the main activities; inherent by a 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 11(4A), either.

6.7 In the present case, from the details given in the assessment order, it is seen that the assessee was charging interest @ 18% to 20% per annum from its clients. The assessee admitted that they were taking loan from commercial banks at an interest rate below 11.75% per annum for disbursing these loans. Therefore, the difference between these rates was 6% to 8% which is very substantial. As per the Trust Deed, the main object of the assessee is shown as providing finance to the poor. If that is the real object, they would have provided loans at interest rate below bank rates or by taking a nominal margin on the money they borrowed from banks. This shows that the assessee is in the business of lending at 18% to 20% per annum to the poor, which is not as envisaged in the assessee-Trust’s objects. By collecting interest at such a higher rate the assessee has deviated from its objective of doing charity, especially in view of the fact that the difference of interest over deposits and disbursement in cases of banks and non-banking financial companies is less than 12%. As such the micro finance activity conducted by the assessee is strictly commercial in nature and with profit motive. The assessee had even collecting overdue interest from their defaulter which clearly shows that the trust was not even considerate with the poor loanees and was purely acting just as any money lender. From the above the activity of the assessee is business in nature and there is no element of charity involved in the activities of the assessee and it is purely commercial.

6.8 Further the Ld. AR made an argument that the assessee was already granted approval under section 12AA of the Act after considering the object clause of the assessee-Trust. As such granting of exemption u/s. 11 is automatic and it cannot be disturbed. As discussed earlier, granting of exemption u/s 11 of the Act is not automatic and it could be examined at each stage of assessment in each assessment year. Trust was not even considerate with the poor borrowers and the assessee-Trust is nothing but doing money lending business as like a private banker and there is no element of charity in its activities.

6.9 Further, contrary to the findings in the assessment order, the Ld. AR submitted that the assessee has borrowed funds for advancing loans to the public at interest of 11.75% per annum from the Banks. Later, the assessee lent that amount to the public at average rate of 18% to 20%. It means that even there is a gap of 6 to 8% between borrowing and lending the amount to the public.

6.10 According to the Ld. AR, it was recommended by the various committees to charge interest from the public at 24% per annum since there was administrative expenditure incurred by the micro finance institutions. Even going by the Malegam Committee Report of the RBI, the interest charged by the assessee is 18% to 20% which is very high. Hence, the activity carried on by the assessee cannot be considered as charitable so as to grant exemption u/s. 11 of the Act.

6.11 The Ld. AR relied on various judgments of Tribunals and Supreme Court. The Ld AR relied on the decision of the ITAT, Visakhapatnam in the case of Spandana (Rural & Urban Development Organisation) vs. ACIT in ITA No. 364/Vizag/2009 dated 17/02/2019 which is related to grant of approval u/s. 12AA of the Act. In this order, the Tribunal considered the micro finance activities as charitable activities as the assessee was charging interest at 15% per annum. In the order of the ITAT, Delhi Benches in the case of Disha India Micro Credit vs. CIT in ITA No. 1374/Del/2010 dated 28/01/2011, the issue was related to approval u/s. 12AA of the Act and not with regard to granting of exemption u/s. 11 of the Act while passing assessment order u/s. 143(3) of the Act.

6.12 The assessee relied on the following judgements which we will consider one by one.

(A) The Bangalore Bench of the Tribunal in the case of ADIT(E) v. Bharatha Swamukhi Samsthe [2009] 28 DTR 13 (Bangalore – Tribunal) has held that the work of lending money to poor women for income generating activities was charitable in nature as there was nothing on record to show that the interest charged by the assessee was exorbitant, which is missing in present case. The following extract from the case is crucial to understand the statutory and judicial interpretations in this regard:

“It is not in dispute that the assessee’s work is lending money to the poor women for income generating activities. The loan given to project members are borrowed from bank; the beneficiaries are poor families. If the women in the assessee’s project have to borrow money from the money lenders they have to pay many times higher interest than what the assessee has charged. It is also not in dispute that the assessee incurs financial costs for ling loans from banks. The assessees also have to make payment towards salaries and other administrative activities of the Trust. There is nothing on record to suggest that the assets and income of the trust were available for the personal benefit of the trustee and the board members, are only used for micro credit to poor women for their poverty alleviation and for the benefit of the socio-economically weaker sections of the society. The AO has not substantiated its findings that the work of the trust is not charitable and the interest charged by the assessee is exorbitant. The AO placed nothing on record to show that the assessee is charging exorbitant interest. The AO may justify the exorbitant rate of Interest charged, in case the poor ladies in question have option to avail credit at lower Interest from other sources. In case, the credits are available at lower interest to the poor women in question then they were free to avail the same. There was no compulsion over parties to avail credit at higher rate of Interest. In case they have option to avail loan at lower rate of interest. The assessee can carry out its activities on or after charging marginal higher rate of interest to run its activities. The assessee is running seminar in rural area to make the poor ladies aware of the scheme and to encourage their participation. All these things need some expenditure. Initially, the assessee was in loss and it is only in the year under consideration some surplus is with the assessee trust. The facts and circumstances show that the assessee is carrying out its charitable activities and the surplus funds are used for charitable purposes. So, the CIT (A) was justified in holding that the assessee is engaged in charitable activities and qualify for exemption under section 11.”

(B)    Further, the ld. A.R. relied on the decision of the Delhi Bench of the Tribunal in the case of Disha India Micro Credit v. CIT 120111 Tax Pub (DT) 873 (Del-Trib)/38(II) ITCL 301, where the assessee was a micro finance company registered under section 25 of the Companies Act, 1956. It had applied for registration under section 12A in Form No. 10A. The assessee’s application for registration under section 12A was rejected by the CIT. The CIT had observed that the various clauses of the Memorandum of the company would clearly show that the assessee had a motive of profit also, along with the stated motive of service to the poor and needy people as claimed by the assessee. He further observed that such profit even if to be ploughed back as claimed by the assessee, liable to income-tax under IT Act. It was held that merely because there was a surplus from the activity of micro financing, that by itself, cannot be a ground to say that the assessee did, not exist for charitable purpose particularly when under the Memorandum of Association and Articles of Association, it had been clearly provided that the profit shall not be distributed amongst the members but shall be utilized towards its objects, and in the case of dissolution, any property remaining after meeting out the liability shall be transferred to the association having similar object. Therefore, the rejection of the registration of trust on this score was also found by the Hon’ble Tribunal as unjustified. This case Disha India Micro Credit also does not help the assessee as it is about treating micro finance a charitable activity at the time of 12A registration, which in any case is not disputed. At the assessment stage only the application and charitable nature is seen.

(C) The ld. A.R. further referred to the decision of the Cuttack Bench of the Tribunal in the case of Bharat Integrated Social v. CIT, Sambalpur [ITA NO.115/CTK/2011], wherein, it was held that the micro finance activity are per se charitable in nature and earning of interest was incidental in nature. The interest earned was also within permissible market rates, therefore, could not be treated as business of earning interest. The relevant extract is as under:

“CIT has interpolated the activities of the charitable nature carried on by the assessee trust with that of the income resulting in interest earning against which he has not been able to establish whether he was trying to hold the activities as noncharitable on the basis of surplus identifiable as interest only. Obviously the assessee is said to have borrowed the amounts from banks and gives to the ultimate borrower by becoming a co-borrower, stands guarantee, surety concerned they have not given money for charitable purpose which the assessee has identified itself of carrying out the charitable activities. Earning of interest becomes Incidental for governing and controlling all the funds as utilized cannot be Isolated to derive a trading or commercial activity therein. We find merit in the contention of the learned Counsel for the assessee that having received various grants for the charitable purposes from the Government and semi-Government concerns, the interest received is not beyond the permissible market rates in order to render surplus to the assessee to hold a view that the assessee is conducting the business of earning Interest.”

It was again noted that the Hon’ble ITAT, Cuttack Bench, Cuttack again has been consistent with the various other rulings, in both the above cases the facts and circumstances did not reflect surpluses made from MFI activity to justify profit intent. The observation, “the interest received is not beyond the permissible market rates in order to render surplus to the assessee to hold a view that the assessee is conducting the business of earning interest” The Judgment of the Hon”ble ITAT, Cuttack in these two cases makes it clear that two conditions should be complied with; firstly, the rate should be comparable with the market and secondly, it should not be such that it generates profit at the cost of the beneficiaries. “‘]

The appellant has cited the Supreme Court ruling in CIT v. Thanthi Trust [2001J 247 ITR 785. In this case the Hon’ble Apex Court held that income from incidental business was permissible if the amount was applied for charitable purposes. The appellant has totally misunderstood the ruling and nowhere it suggests that the primary charitable activity can be run for profit on commercial principles. The ruling was specifically confined to sub section (4A) of section 11 which regulates incidental businesses and therefore not relevant.”

(D) In the case of Sakhi-Saheli Micro finance Forum reported in [2019] 108 taxmann.com 435 (Jaipur-Trib.), wherein it was held;

“5….Further, the ld. CIT(E) has arrived to the conclusion that the activities of the assessee are not charitable in nature by considering the nature of objects and activities being providing finance to weaker and destitute persons of the society and primarily to the economically weaker women. Therefore, the primary object of the assessee is to provide micro finance assistance to the weaker section of the society at concessional rate of interest and without any security. The activity of the assessee has to be analyzed in light of the objects of the assessee that the formation of the assessee company with charitable objects and not with profit motive.

The expression charitable purpose as per provisions of Section 2(15) of the Act includes any other objects and general public utility and therefore, if the objects of the assessee are in advancement of any object to benefit to public or a section of public then it is distinguished from benefit to an individual or group of individual and would be regarded as charitable purpose. We find that the primary and predominant object of the assessee are to promote the welfare of the economically weaker and destitute persons of the society by way of providing finance at concessional rate of interest and without asking for any security. Thus prima facie the object of the assessee are charitable in nature in terms of Section 2(15) of the Act.”

As seen from the above order of the Tribunal, primary and predominant object of the assessee was to promote the welfare of the economically weaker and destitute persons of the society by way of providing finance at concessional rate of interest and without asking for any security and object was charitable in nature and there was no finding that assessee has charged exorbitant rate of interest and the resource has been used to help the weaker sex, poor socially and weaker sections of society and the activities of those assessee companies are in consonance with the objects. However, in the present case, the activity carried on by the assessee is of microfinance activity with the predominant intention of making profit and no activity other than microfinance activity was conducted by the assessee in the nature of charity. Therefore, the facts of that case is not similar to the facts of the present case before us.

(E) Hon’ble Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association cited (supra) has held that main test to find out whether an institution is run for charitable purpose is to find out what is the dominant or primary purpose of the assessee. It was observed by Hon’ble Supreme Court that it is necessary to analyse whether the purpose was to promote commerce and trade in Art Silk etc. or the advancement of the object of the general public utility. It was also held if the primary or dominant purpose of an institution is charitable, another object which by it may not be charitable but which is merely ancillary or incidental to the dominant purpose would not prevent the institution from being a charitable institution. It was further held that if the purpose of an institution is the advancement of an object of general public utility, it is that object and not its accomplishment which must not involve the carrying on of any activity for profit. So long as the dominant purpose of the institution does not involve the carrying on of any activity for profit, it is immaterial how the money for achieving that purpose is found, whether by carrying on an activity for profit or not. The Hon’ble Supreme Court has emphatically clarified 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. Hence, the argument of ld. A.R. is that microfinance activity is itself a charitable activity cannot be accepted as the activity of the assessee carried on by it with a predominant and principal object of making profit and no charitable activity has been carried out and it also cannot be said that it was carried on towards advancement of any other object of general public utility. Hence, ratio of above Hon’ble Supreme Court judgement cannot be applied.

(F) The Apex Court in the case of Queens Educational Society cited (supra) wherein held that predominant object test to be applied.

In the present case, if we apply the ratio of above judgement, it could be seen that the assessee has carried on the microfinance activity solely with the motive of making profit and charged exorbitant rate of interest and the ld. AO has clearly brought on record that assessee has been earning profit @ 28.76% in the assessment year 2016-17 and 24.94% in the assessment year 2018-19 and accumulated huge reserves without carrying on any charitable activities. The activities of the assessee are just like any other commercial banks for which exemption u/s 11 of the Act cannot be granted.

(G) In the case of M/s Janodaya Trust v. ACIT(E) in ITA No.763/Bang/2016 dated 16.02.2021, wherein the ITAT, Bangalore ‘B’ Bench held as under;

“16. Now we shall examine various reasons given by the AO for rejecting the claim of exemption u/s 11 of the Act. The first reason given is that the assessee is charging exorbitant interest rates on the loan given to the women. The AO has observed that the assessee has availed loans from banks, financial institutions etc at interest rate ranging from 9.5% to 11.50% and it has charged interest on the loans given by it @ 14%. The AO has also observed that the assessee has charged Rs.200/- – Rs.300/- over and above the interest rate of 14%. Accordingly he has held that the effective rate of interest would work out to 17% to 18%. As contended by Ld A.R, the AO has not given the basis for observing that the effective rate of interest would work out to 17% to 18%. Hence, we are of the view that it is merely a surmise entertained by the AO. The question is whether the rate of interest of 14% charged by the assessee is an exorbitant rate?. The Ld A.R submitted that the assessee is constrained to charge interest at a higher rate than the cost of borrowing, so that it can absorb administrative and allied expenses and also possible defaults by the borrowers, which is an inherent risk in the financing activities. The Ld A.R submitted that the assessee has charged interest @ 14%, which is normal interest charged by commercial banks for lending during the period under consideration. Accordingly the ld A.R has contended that the rate of interest charged by the assessee cannot be considered to be exorbitant. We find merit in the said contentions. As submitted by Ld A.R, the rate of interest of 14% is the normal rate charged by the banks for its lending and hence the said rate cannot be considered to be at exorbitant rate, as observed by the tax authorities. Hence the case laws relied upon by the tax authorities, viz., Kalanjiam development financial services (supra) and Janalakshmi Social Services (supra) are distinguishable on facts.

17. The next reason given by the AO is that the assessee is generating surplus year after year. Further, its income from financing activities has been increasing year after year. The important point to be noted here is that, so long as the assessee has been utilizing its income derived from the property held under the trust for its charitable objectives, the provisions of sec.11 do not deny exemption to a charitable trust. Hence, mere generation of surplus cannot be a reason to deny exemption u/s 11 of the Act. The AO might have highlighted this aspect to drive the point that the activities of the assessee are carried on commercial lines and hence the proviso to sec.2 (15) would be hit. Before us, the Ld A.R placed her reliance on the decision rendered by Hon’ble Allahabad High Court in the case of Lucknow Development Authority (supra) and Ahmedabad Urban Development Authority (supra). In both the cases, it was held that when the profit making was neither the aim nor object of the trust, then the incidental surplus generated while carrying on its activities would not render any activity in the nature of trade, commerce or business. Hence, this reasoning of the AO would also fail.

18. The next reasoning given by the AO is that the micro finance activities carried on by the trust would be hit by the proviso to sec. 2(15) of the Act. The decision rendered by Hon’ble Allahabad High Court in the case of Lucknow Development Authority (supra) and Ahmedabad Urban Development Authority (supra), which is referred above, also addresses this point. In the absence of profit motive, the activities cannot be considered as involving trade, commerce or business. The Ld A.R further submitted that the activities carried on by the assessee would fall under the category of “relief to poor” and hence the proviso to sec,2(15) would not be applicable. In view of the above, this reasoning would also fail.”

As seen from the above judgement, ld. AO has not given basis for observing that the rate of interest would work out to 17 to 18% and it was only surmise. It was also noted by the Tribunal that assessee has been utilizing income derived from property held under the trust for its charitable activities, as such exemption u/s 11 of the Act cannot be denied. It was also noted by the Tribunal that profit motive was absent and the activities of that assessee cannot be considered as involving trade, commerce or business. But in the case of present assessee, the ld. AO clearly brought on assessee is charging interest at 18 to 20% after borrowing the same @ 10 to 11.75% and made huge profit from year to year, after analyzing the facts of the assessee’s case and his finding is not surmice or conjecture.

(H) The ld. A.R. placed further reliance on the decision of the Visakhapatnam Tribunal in the case of SPANDANA (Rural and Urban Development Organisation) in ITA No. 364/Vizag/2009 dated 17.2.2010, wherein it was held;

“19. In the aforesaid case assessee was mainly engaged in micro financing activities and the money was lent to its project members at a rate of interest higher than that of the rate of interest the loan was borrowed. In that case also assessee has borrowed the funds either from the bank or other financial institutions and was lent to the project members. The Tribunal has taken a view that this micro finance activity was undertaken to alleviate the poverty and for the benefit of socio-economically weaker sections of the society and for doing this activity a proper organized sector is required in which lots of expenses are to be incurred. To meet that expenses, assessee is bound to charge higher rate of interest from the project members. Otherwise, assessee could not undertake the microfinance activities at the same rate of interest. The similar is the position in the instant case. Since the Tribunal has taken a view in a particular set of facts and held that micro finance activity is a charitable activity as it alleviates the poverty and also for the benefit of the socioeconomically weaker sections of the society, we find no reason to take a contrary view in this appeal with regard to the nature of activity undertaken by the assessee. We therefore hold that the micro finance activity in the instant case is a charitable activity. Since the registration has already been granted to the assessee under s. 12A assessee is eligible for exemption under s. 11 of the Act.”

(I) In the case of Spandana (Rural & Urban Development Organisation) v ACIT [2010] 40 DTR 153 (Visakha-Trib.) which held that micro finance activity is a charitable activity as it alleviates poverty and also benefits socio-economically weaker sections of the society. The Hon’ble Tribunal held that the Micro finance activity was charitable in nature because of the following reasons:

(i) The loan is advanced to weaker sections of the society to meet their urgent needs.

(ii) Even if reasonable or slightly higher interest is charged, it cannot be held uncharitable because the cost of recovery is very high and the possibility of bad debt is also high.

(iii) The funds are given without any surety or guarantee. The relevant extract from the case are provided as under;

“Micro finance activity requires an organised sector for procuring a loan from the banks or other financial institutions for its disbursement/advancement of loan to poor or weaker sections of the society in which the assessee has to incur a lot of expenditure. Moreover, when a loan was given to the poor women, they do not have any surety or guarantee to stand and most of the times the loan could not be recovered from them and that aspect Is also to be taken into account by the assessee while granting a loan to the poor woman. Suppose a loan was given to some of the poor women and they would not be in a position to repay the loans what the assessee will do. He cannot enforce the recovery of the loan by other means and ultimately he has to write off the loan. Meaning hereby, in these types of micro finance activities most of the times the assessee could not recover the loans granted to the poor women as no one stood as the guarantor for them at the time of advancement of the loan. No doubt assessee is that charging higher rate of interest from the poor women or the downtrodden or socio-economically weaker section of the society. The reason behind is that most of the time the assessee could not recover the loan from these poor and weaker sections of the society, besides incurring heavy expenditure In maintaining the organised sector. These poor and weaker sections happily agreed with the assessee for loan at higher rate, because they could not get advancement of certain funds by the assessee to other organisations who were also engaged in similar type of activities are concerned, by advancing a fund on interest to other organisations, assessee has accomplished its of microfinance to the socio-economically weaker sections of the society and to alleviate poverty beside collecting the interest on the advancement loan. Moreover, this fund was advanced for a shorter period and the assessee has also earned an interest thereon which was utilised in micro financing activity to the poor people. By joining hands with the banks or financial institutions for procuring funds/loans for its advancement to poor or needy people exemption under section 11 cannot be denied.

While rejecting the claim of the assessee, the Revenue has not taken into account these factors that by doing this activity, assessee is helping the needy people or the socio-economically weaker sections of the society as no one is going to finance them to meet their requirements. By doing this, the assessee is at least helping the poor and weaker sections of the society in meeting their urgent needs.”

It is evident that the society was facing non-recovery of loan and therefore the Hon’ble ITAT in its wisdom rightly held that only high rate of interest was not enough to deny the charitable nature. The ratio of the case clearly exemplifies the absence of profit motive, as the assessee was not making any real surplus or profit due to high cost and NPAs. Therefore, the rate of interest in itself could not have been the determining factor to pass a judgement on the charitable character of the institution. The case in fact casts a greater responsibility on the AO to study the Income and expenditure to ensure that the assessee is not benefiting at the cost of the beneficiaries. In the present case in hand, the assessee is making huge profits on a consistent basis. Therefore, the facts and circumstances of this case do not provide any credible support to the assessee regarding the charitable character of activities.

In the above case, the ld. AO has not substantiated his findings that the work of the trust is not charitable and the interest charged by the assessee is exorbitant. The ld. AO placed nothing on record to show that the assessee is charging exorbitant interest. Further, the assessee was also running a seminar in rural area to make the poor ladies aware of the scheme and to encourage their participation. It was noted that in the above case the assessee was sustaining losses in all the previous years and therefore the, Hon’ble ITAT rightly upheld the charitable character of the assessee as there was no reason to believe that the assessee was benefiting at the cost of the beneficiaries and there was profit intent. Again, the fact and circumstances of this case do not provide any credible support to the claim of the assessee regarding the charitable character of activities due to its high profit margin maintained consistently for several years.

6.12 Further, specifically in the case of Navodaya Grama Vikas Charitable Trust cited (supra) relied by the assessee counsel, there was a specific finding by the Tribunal that funds are utilized to the benefit of the poor and also carrying out various charitable activities and assessee was running various activities like animator activities, donations, payment of Health insurance premiums, Shantwana training, Uniform giving, SHG formation, Sahaya Dhana, Insurance premium payment, Scholarship awarding for students in rural area to make the poor ladies aware of the scheme and to encourage their participation, which are the principal objects of the assessee trust. Further, there was a clear finding that assessee is carrying out its charitable activities and surplus funds are used for charitable purpose., which is evident from the following para of that order.

“38. To sum up, in our opinion, it is undisputed that the assessee was granted registration under s. 12A w.e.f. 8^th July, 2004. The Department also accepted the returns for the last many years allowing exemption under s. 11. It is only for the asst. yr. 2017-18, the Department is taking a different view. It is not in dispute that the assessee’s work is lending money to the poor women for income generating activities. The financial assistance given to Self Help Group (SHG) members are borrowed from bank to certain extent. The beneficiaries are poor families. If the SHG members have to borrow money from the moneylenders, they would have to pay many times higher interest along with security than what the assessee has charged. It is also not in dispute that the assessee incurs financial costs for obtaining loans from banks. The assessee also have to make payment towards salaries and other administrative activities of the trust. There is nothing on record to suggest that the assets and income of the trust were available for the personal benefit of the trustee and the board members. These are only used towards advancing credit to poor women for their poverty alleviation and for the benefit of the socio-economically weaker sections of the society. The Ld.AO has not substantiated his findings, that the work of the trust is not charitable and the interest charged by the assessee does not commensurate with the cost incurred by it. The Ld.AO placed nothing on record to show that the assessee is charging exorbitant interest. The action of the Ld.AO might have justified, in case the poor ladies of SHG have option to avail credit at lower interest from other sources. In present case, the credits are available at interest rate without any security. There was no compulsion over parties to avail financing at the rate of interest offered by the assessee. The assessee can carry out its activity only after charging marginal higher rate of interest to run its activities. This perse cannot be the basis to come to the conclusion that the assessee is in money lending acitivty. The assessee is running various activities like Animator activities, Donations, Health Insurance premiums, Santhwana, Training, Uniform, SHG Formation, Sahayadhana, Insurance Premium & Scholarship for students in rural area to make the poor ladies aware of the scheme and to encourage their participation as the principle objects of the trust. All these things need some expenditure. The facts and circumstances show that the assessee is carrying out its charitable activities and the surplus funds are used for charitable purposes.”

6.13 However, in the present case, surplus funds are not at all used for charitable purpose and used for carrying out further microfinance activities as such ratio of that order cannot be applied.

6.14 Further, the High Court of Bombay ruling in the case of Commissioner of Income-tax v. Agricultural Produce and Market Committee [2007] TAXMAN 359 (BOM.). In this ruling, it was held that even if there was some profit in activity carried on by trust/institution, so long as dominant object was of general public utility, it cannot be said that said trust/ institution is not established for charitable purposes. The case was at the stage of 12AA registration where it was held that existence of some profit or charging of fees could not be a reason for denying 12AA registration as long as the dominant objects remained charitable. In this case the court relied on the Supreme court decision in Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1 (SC) where held that the main test to find out whether an institution is run for charitable purposes is to find out what is the dominant or primary purpose of the assessee – whether the purpose was to promote commerce and trade in art silk, etc., or the advancement of an object of general public utility. It was also held if the primary or dominant purpose of an institution is charitable, another object which by it may not be charitable but which is merely ancillary or incidental to the dominant purpose would not prevent the institution from being a charitable institution. It was further held that if the purpose of an institution is the advancement of an object of general public utility, it is that object and not its accomplishment which must not involve the carrying on of any activity for profit. So long as the dominant purpose of the institution does not involve the carrying on of any activity for profit, it is immaterial how the money for achieving that purpose is found, whether by carrying on an activity for profit or not. The Hon’ble Supreme Court has emphatically clarified 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. In assessee’s case, micro finance is the primary activity under which profits are generated continuously and throughout the years.

6.15 Further, in our opinion, the dominant activity should not be in the nature of business: The Hon’ble Supreme Court decision in the case of Commissioner of Sales Tax v. Sai Publication Fund (2002) 258 ITR 70 (SC) held that:

“Thus, if the dominant activity of the assessee was not business, then any incidental or ancillary activity would also not fall within the definition of business.”

6.16 The above ruling again re-affirms the law that a charitable organization cannot be allowed to run its primary activity on commercial principles with profit intent. The incidental activity may generate income and feed the primary activity but if the primary activity is with profit intent then there will be no primary purpose left for the organization. The primary activity may have profit but cannot have profit intent to benefit out of the beneficiaries.

6.17 In the case of ITO (Exemption), Madurai Vrs. Kalanjiam Development Financial Services reported in [2015] 64 taxmann.com 255, the assessee is a micro finance company registered u/s.25 of Company Act and also u/s. 12AA of IT. Act, 1961 operating as a financial Intermediary between the banks and SHGs. The main objective of the company Is to bridge the gap in microfinance to SHGs. The A.O. observed that the assesses company took credit facilities from different banks at interest rate up to 11% and charged interest from SHGs at much higher rate so much so that net profit out of the above operations was 20.4% in the F.Y.2009-10. The assessment was completed by assessing the income at Rs.30,33,950/- by denying exemption u/s.11 and 12 and by invoking provisions of sec.2(15) on the ground that the assessee was doing business of banking which fail under 4t^h Limb of Proviso to Sec.2(15) i.e. any other object of public utility. The CIT(Appeals) granted exemption u/s.11 & 12 of the Act by holding that the assess is carrying on charitable activities u/s.2(15) of the Act. The Revenue was in Appeal before Hon’ble Tribunal, Chennai Bench-C, and Chennai. The Hon’ble Tribunal set aside the order of the CIT(Appeals) and decided the issue in favour of the Revenue by following thus:-

“8. We have heard both the parties and perused the material on record. Sec. 11 of the Act stipulates that the income from property held for charitable or religious purpose shall not be included in the total income of the previous year of the person in receipt of the income to be given effect in the manner as specified therein: The term ‘charitable purpose’ has not been defined under the statute; but for the inclusive nature of the term as specified under s. 2(15) of the Act, which as existed before the amendment is as follows :

‘Sec. 2(15): “Charitable purpose” includes relief of the poor, education, medical relief and the advancement of any other object of general public utility.’

As per Finance Act, 2008, the said provision was amended adding a ‘proviso’ w.e.f 1st April, 2009 as follows :

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of 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 a cess or fee or any other consideration irrespective of the nature of use or application or retention of the income from such activity.”

The AO has taken a stand that by virtue of the amendment as above, the assessee is not entitled to exemption u/s.11 of the Act.

8.1 The Id. AR submitted that, the idea and understanding of the AO with regard to the scope of amendment to sec.2(15) is thoroughly wrong and misconceived. There is no trade or business in the activities pursued by the assessee in running of micro finance business and will not take it outside the purview of charity and hence, that the “proviso” added to sec 2(15) of the Act, is not at attracted to the case in hand. He also submitted that the statute, as it stood earlier, had clarified the charitable purpose mentioned in sec.2(15) of the Act, had clarified the charitable purpose mentioned in s. 2(15) by the words “not involving the carrying on of any activity for profit”. By virtue of the existence of these clarifying words, if there was any element of profit it was enough liable to be reckoned as charitable purpose right from the inception of the Act in 1961 till 1st April, 1984, when the words “not involving the carrying on of any activity for profit” were deleted. Thus the contention is that after 1st April, 1984, there is no allergy to profit and if the profit feeds charity, it stands cleared for exemption under s. 11 of the Act.

8.2 To analyse the scope and object of the amendment, we have gone through the “Budget Speech” of the Minister for Finance in the Finance Bill 2008, reported in (298 ITR (St.) 33 at page 65

“180 ‘Charitable purpose’ 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, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under ‘charitable purpose’. Obviously, this was not the intention of Parliament and hence I propose to amend the Law to exclude the aforesaid cases. Genuine charitable organizations will not in any way is affected (Emphasis supplied).

8.3 The learned counsel points out that, the amendment was brought about as a measure of rationalization and simplification, streamlining the definition of charitable purpose and not as a measure of taxation. It is also stated that the concept of charity in India is wider, simultaneously adding that, by virtue of the amendment, the position that existed prior to 1st Feb., 1984 has been brought back and that is all. This however will not tilt the balance in any manner in the case of the assessee so as to take the activities outside the charitable purpose, particularly in view of the fact that micro finance business will not constitute any trade or business. According to the Id. AR, to perform charity, income is inevitable and contended that the activities being pursued by the assessee may constitute a trade or business, if it is not applied for the purposes of charity. Contrary to this, the Id. DR submitted that though the object of the assessee is to carry on charitable activities, but it does not carry those charitable activities, and it was only carrying on micro finance business in a commercial manner, which cannot be construed as charitable activity. In other words, it was contended by the Id, OR that the assessee carried on activities in a business oriented manner, it will definitely come within the fourth limb of the amended sec.2(15) of the Act, where the prohibition of activity in the nature of trade, commerce or business for any activity of rendering service or any other consideration, irrespective of the nature of the use or application or retention of the income of such activity is specified and hence, not entitled to any exemption.

8.4 To analyse the activities carried on by the assessee, we have to go through the nature of activities pursued by the assessee and perusal of that activities carried on by the assessee, cannot be oust the involvement of “trade, commerce or business” or “any service in connection with trade, commerce or business” as contemplated under the statute. Further, we note that there is substantial variation in the statutory position as it existed earlier to 1st April, 2009, where the assessee has been given exemption under section 11 of the Act and the position available after amendment to section 2(15) of the Act, brought into effect from 1st April, 2009. Yet another important aspect to be noted in this context is that, after the amendment by incorporating proviso to section 2(15), the 4th limb as to the advancement of “any other object of general public utility” will no longer remain as charitable purpose, if it involves carrying on oft

(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.

8.5 The first limb of exclusion from charitable purpose under cl.

(a) will be attracted, if the activity pursued by the institution involves any trade, commerce or business. But the Situation contemplated under the second limb [cl. (b)J stands entirely on a different pedestal, with regard to the service in relation to the trade, commerce or business mentioned therein. To put it more clear, when the matter 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 the second limb of cl. (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 assessee. If the said words are actually in respect of the trade, commerce or business of the assessee itself, the said clause [second limb of the stipulation under cl. (b)J is rather otiose. Since the activity of the assessee involving any trade commerce or business, is already excluded from the charitable purpose by virtue of the first limb [cl. (a)] itself, there is no necessity to stipulate further, by way of cl. (b), adding the words “or any activity of rendering any service in relation to any trade, commerce or business…………. “, As it Stands so, giving a purposive interpretation to the statute, it may have to be read and understood that the second limb of exclusion under cl. (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,

8.6 The activities carried on by the assessee cannot be considered as activities of medical relief or education or relief of the poor. It is true that the activities carried on by the assessee take 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 assessee is to say that the assessee is carrying on ‘advancement of any other object of general public utility’. When that is the case, the assessee 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 assessee is hit by proviso to section 2(15) and the assessee is not entitled for the benefit of section 11 for that part of income generated in the hands of the assessee Running its micro finance business. Alternatively, one has to look into section 11(4A).. 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 is 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 assessee is carrying on the business of micro finance. The assessee is maintaining separate accounts for the above business activities. But, the crucial question is whether running of micro finance is a business incidental to the attainment of the objectives of the trust or not. 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 by­product 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 11(4A), either.”

8.7 In the present case, the assessee is having reserves and surplus at Rs. 50,89,576!-. Contrary to this, the assessee is having revolving fund at Rs. 66,33,800!-, which was availed by hypothecation of their debt to various necessary banks. Further, the assessee raised secured loans and unsecured loans @ 11%, totalling to Rs. 16,35,54,090/-. Thus, it means that it has raised loans to advance to the customers by paying interest and the assessee is not having own corpus in a formal capital so as to advance the loan. The assessee 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 than it is business activity. In order to become a charitable activity, the institution must have advanced loans at a subsidised rate of interest. The assessee is availing loans from banks and advances the same and admitted that it has advanced the loans to the customers at 13%. 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. 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. Therefore, looking into the activities carried on by the assessee, we fully agree with the findings of the AO and this view of ours is squarely covered by the decision of the Tribunal in the case of Janalakshmi Social Services (supra). The assessee relied on various Judgments, which cannot be applied to the facts of the present case, as the assessee is carrying on micro finance business in a commercial manner so as to earn profit and there is no iota of charity carried on by the assessee so as to grant exemption under sec.11 of the Act . Accordingly, we are inclined to uphold the order of the AO and reverse the order of the CIT(A).

9. In the result, the appeal of the revenue is allowed.”

6.18 Further, same view was taken by Cochin Bench of Tribunal in the case of Shalom Charitable Ministries of India Vs. ACIT in ITA Nos.79 & 80/coch/2017 & SP Nos.17 & 18/Coch/2017 dated 25.4.2018.

6.19 Further, in the case of Sreema Mahila Samity Vs. DCIT reported 167 ITD 420, wherein held as under:

“Amendment came into force by the Finance Act 2008, wherein proviso was added to section 2(15) states that the advancement of any other object of general public utility shall not be charitable purpose if it involves carrying on any activity in the nature, trade, commerce or bus/ness or any activity of rendering in services in relation to trade, commerce or business. Therefore, the exemption is not available in view of adding of proviso to section 15 particularly the 4^th limbs definition of the charitable purpose. We find that the assessee did not lend loans to beneficiaries directly as it was advanced to various self-help groups. The said loans also raised on commercial lines and the profit was being generated by levying higher rate of interest and CIT-A by distinguishing the case laws held that the said microfinancing as conducted by the assessee was on commercial lines and confirmed the order of the AO denying the exemption in view of adding proviso to section 2(15) of the Act. The CIT-A also discussed and distinguished the decisions in the case of Disha India Micro Credit of Delhi Tribunal with that of Janalakshmi Social Services and held that the facts of Janalakshmi Social Services are clearly, applicable to the case of hand and held that the assessee undertaken only business of micro financing and had not done any activity to show that it had been done as charitable act. (Para 22)

Before Tribunal the Id.AR placed his reliance on the decisions of various High Courts and Supreme Court and argued that the AO has no power to deny the exemption as registration u/s 12AA is in force. Tribunal find that the registration u/s. 12AA is granted subject to fulfillment of certain conditions contemplated in section 2(15) of the Act. Therefore, we are not in agreement with the arguments of the Id.AR that the AO has ignored the registration of the assessee granted u/s. 12AA of the Act in denying the claim of exemption. The Id.AR also argued that rule of consistency should be followed by placing his reliance on the decision of the Hon’ble SC in the case of Radha Swamty Satsang supra, which held that the AO should not interfere with the fundamental aspect permitting through the difference assessment years. In Tribunal opinion 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 4^th limb of definition to section 2(15) of the Act. Tribunal find that the said benefit was taken away by adding proviso to section 2(15) of the Act, wherein it explains that the advancement of any other object, general public utility shall not be charitable purpose. In Tribunal opinion that the AO and the CIT-A opined that the assessee conducted its activities on commercial line in the nature of trade, -commerce or business. Therefore, they rightly denied the exemption by following statutory provisions. Tribunal do not find any infirmity in the impugned order of the CIT-A. Tribunal find that the ratio laid down by the decisions as relied upon by the Id.AR are not applicable to the facts of this case. Tribunal uphold the same. This issue of the assessee is dismissed. (Para 23)

Conclusion:

Where assessee conducted its activities on commercial line in nature of trade, commerce or bus/ness, therefore, addition made on account of income from micro finance justified.”

6.20 Further, in the case of Janalakshmi Social Service Vs. DIT (Exemptions) reported in 27 CCH 618 (2008) (Bang.), wherein held that “where assessee being a company registered u/s 25 of the Companies Act, was engaged in providing microfinance to traders charging interest at 25% on commercial lines, there being no charitable activity, it is not entitled to registration u/s 12AA of the Act.”

6.21 Further, in the case of ACIT Vs. Grama Vidiyal Trust reported in 180 TTJ 559 (2016) (Chny), wherein held as under:

“Even if activities of Assessee were stated to be relief of 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 and it was main business of Assessee. Assessee was not protected by provision stated in s. 11 (4A). (Para 8.6)

Assessee was lending money at commercial rate prevailing in market. By advancing loans at that rate of interest, it could not be considered as activity carried on by Assessee as charitable and for benefit of public. When Assessee carried on micro finance activity in commercial line, then it was not charitable activity but activity to expand finance business by contracting weaker section of public and it did not involve any charitable activity. Assessee carrying on micro finance business in commercial manner so as to earn profit and there was no iota of chanty carried on by Assessee so as to grant exempt/on u/s. 11. (Para 8.7)

CIT(A) not justified in granting exemption u/s.ll to Assessee. Regarding allowing of bad debts CIT(A) was not justified in granting deduction as bad debts as that business of Assessee trust, which was not continuing during relevant period and in case of discontinued business, claim of Assessee u/s.36(l)(vii) could not be allowed. (Para 11)

Conclusion:  

Assessee carrying on micro finance business in commercial manner so as to earn profit and there is no iota of charity carried on by Assessee so as to grant exemption u/s.11.”

6.22 The ld. A.R. has also submitted that benefit of judgments which are in favour of the assessee to be given in view of the judgement of Hon’ble Supreme Court in the case of Vegetable Products reported in 88 ITR 192 (SC). As we noted earlier, the assessee is not at all carried on any charitable activities and carried the microfinance activities with the sole motive of earning profit. There is no question of following the ratio laid down by judgements, which are in favour of the assessee as the facts are not similar to the assessee’s case. In our opinion, when the facts considered by the Courts are similar to assessee’s case the ratio of that judgements could be applied to the assessee. However, in the present case, it is not the case.

6.23 It has been observed that the proviso to section 2(15) which restricts incidental business activities to Rs.25 lakh per year, in Asst. Year 2011-12, gets attracted if the organisation is engaged in business activities or the charitable activities are masked commercial activities. The explanatory Circular No. 11/2008 [F.No.l34/34//2008-TPL on proviso to Section 2(15) has provided the clarification regarding its applicability. It provides that the entities which run commercial activities under the mask of charitable activities are also covered. However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of charitable purpose.

6.24 In our opinion, whether the assessee has for its object the advancement of any other object of general public utility is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service In relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of general public utility will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object are charitable purpose within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.

6.25 In our opinion, the AO is required to see whether the assessee eligible to claim application under section 11 and whether the proviso to section 2(15) gets attracted in the light of commercial nature of activities. Particularly, if the primary activity of the organization is in the nature of trade or business, then it is important to ensure that there is no dominant profit motive involved and it is not used as a mask for commercial activities and benefitting at the hands of the beneficiaries. If an organisation which has no source of generating surplus from its activity other than the beneficiary then existence of consistent and substantial surplus does raise a question regarding the commercial nature of the activity. If this question is not successfully defended and justified by the assessee then the invocation of the proviso to section 2(15) by the AO cannot be questioned. In the present case, assessee is only carrying the microfinancing activity by charging exorbitant rate of interest like any other commercial banks which is not expected from this assessee, which is registered u/s 12AA of the Act so as to claim exemption u/s 11 of the Act. The activity of the assessee is nothing but commercial activity carried on with the intention of making maximum profit. If we consider the plea of the assessee, then the exemption u/s 11 of the Act could also be claimed by the Co-operative Societies, Regional Rural Banks and Commercial banks also as the activity of these banks are similar to the assessee’s case.

6.26 We have also taken into account of the ‘Report of the Sub­committee of the Central Board of Directors of Reserve Bank of India’ issued during the year January, 2011 produced before us by the Ld. A.R, which is reproduced herein below:-

“2. The Micro finance sector

2.1. Microfinance is an economic development tool whose objective is to assist the poor to work their way out of poverty. It covers a range of services which include, in addition to the provision of credit, many other services such as savings, insurance, money transfers, counselling, etc.

2.2. For the purposes of this report, the Sub-Committee has confined itself to only one aspect of Microfinance, namely, the provision of credit to low income groups.

2.3 The provision of credit to the Microfinance sector is based on the following postulates:

(a) It addresses the concerns of poverty alleviation by encouraging the poor to work their way out of poverty.

(b) It provides credit to that section of society that is unable to obtain credit at reasonable rates from traditional sources.

(c) It enables women’s empowerment by routing credit directly to women, thereby enhancing their status within their families, the community and society at large.

(d) Easy access to credit is more important: for the poor than cheaper credit which might involve lengthy bureaucratic procedures and delays.

(e) The poor are often not in a position to offer collateral security to the credit.

(f) Given the imperfect market in which the sector operates and the small size of individual loans, high transaction costs are unavoidable. However, when communities set up their own institutions, such as SHG federations and co·operative the transaction costs are lower.

(g) Transaction costs, can be reduced through economies of scale.

However, increases in scale cannot be achieved, both for individual operations and for the sector as a whole in the absence of cost recovery and profit incentive.

2.4 Given the above considerations, the essential features of credit for Microfinance which have evolved are as under:-

(a) The borrowers are low-income groups.

(b) The loans are for small amounts.

(c) The loans are without collateral.

(d) The loans are generally taken for income-generating activities, although loans are also provided for consumption, housing and other purposes.

(e)The tenure of the loans is short.

(f) The frequency of repayments is greater than for traditional commercial loans.

2.5 The players in the Microfinance sector can be classified as falling into three main groups

(a) The SHG-Bank linkage Model accounting for about 58% of the outstanding loan portfolio

(b) Non-Banking Finance Companies accounting for about 34% of the outstanding loan portfolio

(c) Others including trusts, societies, etc, accounting for the balance 8% of the outstanding loan portfolio. Primary Agricultural Co-operative Societies numbering 95,663, covering every village in the country, with a combined membership of over 13 crores and loans outstanding of over Rs.64, 044 crores as on 31.03.09 have a much longer history and are under a different regulatory framework. Thrift and credit co-operatives are scattered across the country and there is no centralized information available about them.”

6.27 If we examine the activities of the present assessee in the light of above report of Sub-committee of the Central Board of Directors of Reserve Bank of India, the assessee is only doing the microfinancing activities by charging exorbitant interest, which does not commensurate with the prevailing rate. It is also noted that the activity is not also in lieu of any benefit to low-income group who are very vulnerable and are not in a position to cope up with such financial burdens. In order to consider the activity to be charitable in nature, the services rendered must commensurate with the benefit that may arise to such low-income group. The facts of the case relied by the ld. A.R. is quite opposite to the facts of the present case, which has been brought out in the earlier paragraphs of this order. It is also noted that nothing has been spent by the assessee, which could be considered in the nature of charity and therefore, the benefit under the proviso to section 2(15) of the Act is not available to the assessee. The facts of the case relied by the ld. A.R. therefore, does not help the present facts of the case in hand.

6.28 In view of this, we do not find any merit in the argument of the ld. A.R. to support various grounds raised by the assessee. Accordingly, all the grounds of assessee are dismissed and appeals of the assessee are dismissed.

7. In the result, appeals of the assessee are dismissed. Order pronounced in the open court on 3rd Jan, 2024