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2017 (12) TMI 1218 - AT - Income TaxDenial of exemption u/s 11 - cancellation of registration u/s 12AA(3) - proof of charitable activity - assessee is advancing loans to the poor and needy - micro finance activity of borrowing and lending to the poor people - Held that - Since the assessee is in the micro finance activity, the activity itself is a charitable activity as held by ITAT, Visakhapatnam in the case of Spandana (Rural and Urban Development Organization) Vs. ACIT (ITAT-VSP) (2010 (2) TMI 1166 - ITAT VISAKHAPATNAM) and Income-tax Officer, Ward-2, Rishikesh v. Swami Omkarnanda Saraswati Charitable Trust 2017 (12) TMI 1177 - ITAT DELHI On going through the applications, we observe that the applicants are rural poor with the meagre income of ₹ 10,000 to ₹ 20,000/- per annum. The applications placed before us establish that the advances were made to the rural poor. The DR could not controvert the above facts. Therefore, on this ground, the observation of the CIT, that the assessee failed to prove the advances and loans to the poor is without any foundation, hence unsustainable. The next objection of the CIT on violation of section 13(1)(c) the assessee has given a sum of ₹ 25,67,128/- to Sri V. Prabhu Das, the founder of the society and the assessee explained that the surplus funds were given as advance with interest and the entire sum was collected by the society. Though the Ld.AR argued that there was no violation u/s 13(1)(c), we are unable to accept the contention of the Ld.AR and following the decision in the case of Aggarwal Mitra Mandal Trust vs. DIT 2006 (9) TMI 214 - ITAT DELHI-A direct the AO to restrict the disallowance to the extent of violation but not on total income. Assessee is not registered u/s 25 of the Company s Act as envisaged u/s 11 to 13 - Held that - We have considered the order of the Ld.CIT and gone through the section 11 to 13 and we find that there is no requirement for section 11 to 13 that the institution should necessarily registered with Registrar of Company s Act. The society is registered under Societies Act, also eligible for grant of registration u/s 12AA of I.T.Act. The assesse society was already granted registration and the same was cancelled by the Ld.CIT. The Ld. DR during the appeal hearing did not place any case law supporting the contention of the CIT. CIT has not proved that there is no charitable activity and the society is not genuine and is running on commercial activity with tangible evidence. As per the discussion in the preceding paragraphs the society is carrying on charitable activities as per the objects. Therefore we hold that the cancellation of registration u/s 12AA of the Act is unsustainable and we set aside the order of the Ld. CIT and allow the registration already granted to be continued. However, we direct the AO to restrict the exemption u/s 11 with regard to the violation of section 13(1)(c) to the extent of the violation. Appeal of the assessee is partly allowed
Issues Involved:
1. Denial of exemption under Section 11 of the Income Tax Act. 2. Cancellation of registration under Section 12AA(3) of the Income Tax Act. 3. Alleged violation of Section 13(1)(c) of the Income Tax Act. 4. Requirement of registration under Section 25 of the Companies Act. Issue-wise Detailed Analysis: 1. Denial of Exemption under Section 11 of the Income Tax Act: The assessee, a society engaged in charitable activities, filed its return of income for the assessment year 2009-10, declaring a total income of ?6,24,14,468/- and claimed the entire income as exempt under Section 11 of the Income Tax Act. The Assessing Officer (AO) denied the exemption, citing an amendment to Section 2(15) which states that if the activities involve trade or commerce, the charitable nature is lost. The AO determined the total income at ?20,05,605/-. 2. Cancellation of Registration under Section 12AA(3) of the Income Tax Act: The Commissioner of Income Tax (CIT) initiated proceedings to cancel the registration under Section 12AA(3) based on the AO's observations. The CIT noted that the society's primary activity was microfinance, which was considered a commercial activity rather than charitable. The CIT observed that the society focused on lending and borrowing money, which did not align with its original charitable objectives. The CIT also noted that the society's financial statements indicated significant interest income and expenses related to microfinance activities, with no substantial expenditure towards charitable purposes. 3. Alleged Violation of Section 13(1)(c) of the Income Tax Act: The CIT observed that the society had advanced funds to its Secretary, which was seen as a violation of Section 13(1)(c). The assessee argued that the funds were advanced at a reasonable interest rate and were secured by personal guarantees. The CIT was not convinced and viewed the activities as commercial, leading to the cancellation of the registration. 4. Requirement of Registration under Section 25 of the Companies Act: The CIT raised an objection that the society was not registered under Section 25 of the Companies Act, which was seen as a requirement for institutions under Sections 11, 12, and 13 of the Income Tax Act. The assessee argued that there was no such requirement under the Income Tax Act, and the society was eligible for registration under Section 12AA. Judgment: The Tribunal analyzed the issues and provided the following judgments: Denial of Exemption under Section 11: The Tribunal noted that the microfinance activity was considered charitable by the ITAT Visakhapatnam in the case of Spandana (Rural and Urban Development Organization) Vs. ACIT, and upheld by the jurisdictional High Court. The Tribunal held that the microfinance activity of borrowing and lending to the poor is a charitable activity. Cancellation of Registration under Section 12AA(3): The Tribunal observed that the CIT's objection regarding the society's focus on microfinance was not sufficient to cancel the registration. The Tribunal referenced the case of Krupanidhi Educational Trust vs. Director of Income Tax, where it was held that amendments to objectives without prior approval do not warrant cancellation of registration. The Tribunal held that the society's microfinance activity was charitable and directed the continuation of the registration. Violation of Section 13(1)(c): The Tribunal acknowledged the violation of Section 13(1)(c) due to the advance given to the Secretary but directed the AO to restrict the disallowance to the extent of the violation, following the decision in Aggarwal Mitra Mandal Trust vs. DIT. Requirement of Registration under Section 25 of the Companies Act: The Tribunal found no requirement in Sections 11 to 13 of the Income Tax Act for registration under Section 25 of the Companies Act. The society's registration under the Societies Act was deemed sufficient for eligibility under Section 12AA. Conclusion: The Tribunal set aside the CIT's order canceling the registration under Section 12AA and allowed the registration to continue. However, it directed the AO to restrict the exemption under Section 11 concerning the violation of Section 13(1)(c) to the extent of the violation. The appeal of the assessee was partly allowed.
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