2017 (10) TMI 727 - AT - Income Tax

Exemption u/s 12AA denied - Income from micro finance and provision for doubtful debts - Held that - Prior to adding proviso to section 2(15), the entities which got registration u/s. 12AA engaged in commercial activity claimed exemption on the ground that such activities were for advancement of objects of general public utility in terms of 4th limb of definition to section 2(15) of the Act. 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, general pubic utility shall not be charitable purpose. In our 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. We do not find any infirmity in the impugned order of the CIT-A. We find that the ratio laid down by the decisions as relied upon by the ld.AR are not applicable to the facts of this case. We uphold the same. This issue of the assessee is dismissed. Claim of provision for bad & doubtful debts - Held that - We find that the assessee has shown other receipts of ₹ 70,49,240/- which includes provision for bad and doubtful debt of last year (Schedule 11 & 14) of ₹ 53,60,345/-. The assessee in its written submission stated that cost of recovery is very high and the possibility of bad debt is also high as the loans were advanced without any surety or guarantee. We find from the record that the assessee has shown a provision of bad and doubtful debt in the last year for a sum of ₹ 53,61,345/-, which is more than the amount in the year under consideration and the AO has already deducted the same while computing the income of the assessee for the year under consideration. The assessee, therefore, cannot be said to have any grievance of the assessee on this issue.

Issues Involved:
1. Additions of ?71,68,803/- on account of income from microfinance.
2. Additions of ?38,27,197/- on account of provision for doubtful debts.
3. Additions of ?2,15,548/- and ?29,077/- on account of foreign grant and local grant respectively.

Issue-wise Detailed Analysis:

1. Additions of ?71,68,803/- on Account of Income from Microfinance:

The assessee, a charitable institution, declared total income as Nil. During the assessment proceedings, the Assessing Officer (AO) observed that the assessee carried out money lending activities through its branches, earning interest income of ?3,15,52,949/-. The AO opined that these activities were in the nature of trade, commerce, or business, and not charitable, thus proposing to treat the profit as taxable income. The assessee argued that the microfinance activities were charitable, aimed at alleviating poverty and benefiting socio-economically weaker sections, citing various judicial precedents supporting this view.

The AO, however, relying on the amendment to section 2(15) of the Income Tax Act effective from AY 2009-10, concluded that the money lending business did not qualify as a charitable purpose. Consequently, the AO added the excess income over expenditure from microfinance activities amounting to ?71,68,803/- to the total income of the assessee.

On appeal, the CIT-A upheld the AO's decision, noting that the loans were raised on commercial lines and the microfinance business was run commercially, generating profit by financing SHGs at higher rates. The CIT-A distinguished the assessee’s case from other cited cases, emphasizing that the financing was not directly to poor beneficiaries but through SHGs, which indicated a commercial operation.

The Tribunal, considering the arguments and records, agreed with the AO and CIT-A, finding that the assessee's microfinance activities were conducted on commercial lines, thus not qualifying for exemption under section 2(15) of the Act. The Tribunal dismissed the assessee's appeal on this issue.

2. Additions of ?38,27,197/- on Account of Provision for Doubtful Debts:

The AO denied the assessee's claim for provision for bad and doubtful debts amounting to ?38,27,197/-, stating it was not deductible. The CIT-A observed that the assessee failed to fulfill the conditions under section 36(2) of the Act.

The Tribunal found that the assessee had shown other receipts of ?70,49,240/-, including a provision for bad and doubtful debts from the previous year amounting to ?53,60,345/-. Since the AO had already deducted this amount while computing the income for the current year, the Tribunal concluded that the assessee had no grievance on this issue. The appeal on this ground was dismissed.

3. Additions of ?2,15,548/- and ?29,077/- on Account of Foreign Grant and Local Grant Respectively:

The assessee did not present any arguments or submissions regarding the additions of ?2,15,548/- and ?29,077/- on account of foreign and local grants respectively. Consequently, the Tribunal found no basis to address this issue and dismissed the appeal on this ground as well.

Conclusion:

The Tribunal upheld the AO and CIT-A's decisions, dismissing the assessee's appeal on all grounds. The microfinance activities were deemed commercial, thus not eligible for exemption under section 2(15), and the provision for doubtful debts was already accounted for in the previous year's assessment. The lack of arguments on the foreign and local grants led to the dismissal of that ground as well. The appeal was dismissed in its entirety.

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