2018 (9) TMI 2125 - AT - Income Tax

Exemption u/s. 11 - activity of micro finance squarely falls under the definition of trade, commerce or business which shall not be regarded as a 'charitable purpose' - Charitable activity u/s 2(15) or not? - As per revenue assessee obtained loan from financial institutions with interest and advanced loans to self help groups at a higher rate of 0.5% than the rate at which the loan is obtained from the bank/financial institutions - CIT(A) allowed exemption - HELD THAT - The assessee explained before us that in the activity of micro financing, the assessee obtained loan from banks and or financial institutions and advanced the same to self help group and poor persons. Above submissions of the assessee could not be controverted by the department. No material could be brought on record to show that the loan was advanced of any big amount or loan was advanced to any economically affluent persons. Thus, we find merit in the contention of the assessee that the activity was carried out with the object of providing relief to the poor. In the circumstances, we find no error in the order of the CIT(A), which was passed following the decisions of Spandana (Rural Urban Development Organisation) 2010 (2) TMI 1166 - ITAT VISAKHAPATNAM , Bharatha Swamukhi Samsthe 2008 (12) TMI 310 - ITAT BANGALORE , Disha India Micro Credit 2011 (1) TMI 693 - ITAT NEW DELHI , Bharat Integrated Social 2011 (5) TMI 1143 - ITAT CUTTACK , Agricultural Produce and Market Committee 2007 (3) TMI 213 - BOMBAY HIGH COURT and Sai Publication Fund 2002 (3) TMI 45 - SUPREME COURT . Therefore, we confirm the findings of the CIT(A). Appeal of the revenue is dismissed.

Summary

Issues Involved
1. Whether the activities of microfinance constitute a charitable activity under section 2(15) of the Income Tax Act.
2. Whether the assessee is eligible for exemption under section 11 of the Income Tax Act.

Detailed Analysis

1. Whether the activities of microfinance constitute a charitable activity under section 2(15) of the Income Tax Act.

The Assessing Officer (AO) argued that the microfinance activities of the assessee were conducted on commercial principles, making them non-charitable. The AO noted that the assessee showed a surplus income from microfinance activities and did not maintain separate books of accounts for these activities. The AO further observed that the loans were advanced at a higher interest rate than the rate at which the loans were obtained, thus categorizing the activity as business under the proviso to section 2(15) of the Income Tax Act.

The CIT(A) countered this by referring to multiple judicial precedents that considered microfinance activities as charitable. The CIT(A) cited the case of Spandana (Rural & Urban Development Organisation) v. ACIT, where microfinance was deemed charitable as it alleviated poverty and benefited socio-economically weaker sections. The CIT(A) also referenced the Bangalore Tribunal's decision in ADIT(E) v. Bharatha Swamukhi Samsthe, which held that lending money to poor women for income-generating activities was charitable, provided the interest rates were not exorbitant.

Additionally, the CIT(A) relied on the Delhi Tribunal's decision in Disha India Micro Credit v. CIT, which held that surplus from microfinance activities did not negate the charitable purpose, especially when profits were plowed back into charitable activities. The Cuttack Bench's decision in Bharat Integrated Social v. CIT also supported the view that microfinance activities were charitable if the interest rates were within permissible market rates and not aimed at profit-making.

2. Whether the assessee is eligible for exemption under section 11 of the Income Tax Act.

The AO denied the exemption under section 11, arguing that the microfinance activities were commercial in nature. The CIT(A), however, found that the assessee's activities were aligned with providing relief to the poor, thus qualifying as charitable under section 2(15). The CIT(A) emphasized that the existence of profit or surplus does not automatically disqualify an entity from being considered charitable, as long as the primary intent is not profit-making.

The CIT(A) also discussed the applicability of section 11(4A), which allows for incidental business activities if they are in line with the charitable objectives and separate books of accounts are maintained. The CIT(A) found that the assessee met these conditions and thus was eligible for the exemption.

Conclusion

The Tribunal upheld the CIT(A)'s decision, confirming that the microfinance activities of the assessee were indeed charitable and eligible for exemption under section 11. The Tribunal found no error in the CIT(A)'s order, which was consistent with various judicial precedents. Therefore, the appeal of the revenue was dismissed.