2010 (2) TMI 1166 - AT - Income Tax

Exemption u/s 11 - no registration u/s 12A was granted in the name of the assessees - Whether registration u/s 12A was properly granted to the assessee? - error in assessee name in the registration certificate - AO hold that since the claim of exemption of income was raised without having a valid registration in the name of the assessees the assessee has no right or locus-standii to raise such claim and thus rejected - HELD THAT - We are of the opinion that the error in the name of the assessee appearing in the registration certificate is occurred due to the mistake on account of negligence on the part of the staff of the CIT and not the assessees and as such he cannot be held responsible for the mistake. Thus the benefit of exemption cannot be denied to the assessees for this reasons only. We however, direct the revenue to make necessary correction in the name of the registration certificate granted to the assessee and shall treat it to be granted to SPANDANA (Rural Urban Development Organisation). Nature of activities undertaken by the assessees - Micro financing activities - HELD THAT - We find that the assessee is a society registered with the Registrar of Societies in 1992 in the name of SPANDANA (Rural Development Organisation). Later on certain amendments were made in the objects of the society. The copy of the objects are placed on record and from its perusal, we find the objects of the assessees are almost for charitable activities. 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 assessees u/s 12A assessee is eligible for exemption u/s 11. We are of the view that by advancing a fund on interest to other organisations, assessee has accomplished its object of micro finance to the socio-economically weaker sections of the society and also to alleviate poverty beside collecting the interest on the advanced loan. Moreover, this fund was advanced for a shorter period and the assessee has also earned an interest thereon which was utilized in micro financing activity to the poor people. We therefore of the view that by joining hands with the banks or financial institutions for procuring funds/loans for its advancement to poor or needy people exemption u/s 11 cannot be denied. We accordingly, set aside the order of the CIT(A) and direct the A.O. to allow the exemption u/s 11. Disallowance towards provisions of loan loss - In this regard, no argument was advanced during the course of hearing of the appeal. We however carefully examined this ground and we find no infirmity in the order of the CIT(A). This claim can only be allowed either in the case of NBFC or banking institutions. Since the assessee is a charitable society, the provision for loan loss cannot be allowed. Accordingly, we confirm the order of the CIT(A) in this regard and reject the ground of the assessee. Appeal of the assessee is partly allowed for statistical purpose.

Summary

Issues Involved:
1. Whether the registration under Section 12A was properly granted to the assessee.
2. Whether the activities undertaken by the assessee are charitable activities and its income is eligible for deduction under Sections 11 and 12 of the Income Tax Act.
3. Whether the assessee violated the provisions of Section 11 by diverting funds to other entities.
4. Whether the disallowance of Rs. 38,31,698 towards provision for loan loss was justified.

Issue-Wise Detailed Analysis:

1. Registration under Section 12A:
The primary issue was whether the registration under Section 12A was correctly granted to the assessee. The assessing officer (A.O.) disallowed the exemption claim, asserting that the registration was granted to "SPANDANA (Rural Development Organisation)" instead of the assessee, "SPANDANA (Rural & Urban Development Organisation)." The assessee provided evidence, including an application filed with the Commissioner of Income Tax (CIT) and returns filed under the correct name, to demonstrate that the error was due to a clerical mistake by the CIT's office. The Tribunal concluded that the error in the name was not the assessee's fault and directed the revenue to correct the registration certificate, thereby allowing the exemption under Section 11.

2. Charitable Nature of Activities:
The Tribunal examined whether the micro-financing activities of the assessee constituted charitable activities under Section 2(15) of the Income Tax Act. The A.O. and CIT(A) had denied the exemption, arguing that micro-financing was a business activity. The assessee contended that micro-financing provided relief to the poor, a recognized charitable purpose. The Tribunal referred to a precedent where micro-financing was deemed charitable and concluded that the assessee's activities were indeed charitable. The Tribunal held that the micro-financing activities aimed at poverty alleviation and socio-economic upliftment of poor women were charitable, and thus, the income from these activities was eligible for exemption under Sections 11 and 12.

3. Alleged Violation of Section 11:
The A.O. and CIT(A) argued that the assessee violated Section 11 by advancing funds to "SPANDANA Mutual Benefit Trust" and "SPANDANA Sphoorty Innovative Financial Services Ltd. (SSIFSL)," entities not registered under Section 12A. The Tribunal found that these advances were for short periods and interest was earned and utilized for charitable purposes. The Tribunal concluded that advancing funds to other organizations engaged in similar activities did not violate Section 11, as the primary objective of micro-financing and poverty alleviation was maintained.

4. Disallowance of Provision for Loan Loss:
The assessee contested the disallowance of Rs. 38,31,698 towards provision for loan loss. The Tribunal noted that no arguments were advanced on this issue during the hearing. It upheld the CIT(A)'s decision, stating that such provisions are allowable only for NBFCs or banking institutions, not for charitable societies. Thus, the disallowance was confirmed.

Conclusion:
The Tribunal allowed the appeal partly, directing the revenue to correct the registration certificate and grant exemption under Sections 11 and 12 for the assessee's charitable activities. The disallowance of the provision for loan loss was upheld. The decision emphasized the importance of recognizing micro-financing as a charitable activity aimed at poverty alleviation.