2017 (1) TMI 1833 - AT - Income Tax

Exemption u/s 11 in view of amended provisions of section 2(15) - surplus earned from business activities of Micro Financing - HELD THAT - As decided in own case 2016 (11) TMI 1759 - ITAT CUTTACK 2011-12 Tribunal while adjudicating the issue held that the undisputed facts are that the assessee is a society registered u/s 12A of the I.T.Act. During the year under appeal, the assessee was, inter alia, engaged in the activity of micro finance . In this activity, the assessee secured loan from banks and advanced loan to Self Help Groups as also carried out in earlier years. CIT (A) held that the surplus generated is eligible for deduction u/s. 11 of the Act. In holding so, ld CIT (A) followed the orders of his predecessors passed in the case of the assessee itself for the earlier assessment years 2009-10 and 2010-2011. Before us D.R. could not point out that the orders passed in the earlier years by the ld CIT (A) were reversed by any higher authority on an appeal filed there against. Also further find that in view of the decisions of Bharatha Swamukhi Samsthe 2008 (12) TMI 310 - ITAT BANGALORE and Spandana (Rural Urban Development Organisation) 2010 (2) TMI 1166 - ITAT VISAKHAPATNAM the activity under consideration falls under the expression relief to poor as envisaged under section 2(15) of the Act. Therefore, simply because an activity undertaken in commercial line in pursuance to furtherance of the object of society to poor does not make the activity non-charitable within the meaning of section 2(15) of the Act. No good reason to interfere with the conclusion of the ld CIT (A). Hence, this ground of the revenue is dismissed. Disallowance of provision of loan loss as the same has neither been expended nor any amount loan has become bad during the previous year - Revenue has brought no material on record to show that the provision of bad debt was not bonafide. Therefore, as relying on National Association of Software and Services Companies 2012 (5) TMI 204 - DELHI HIGH COURT find no good and justifiable reason to interfere with the order of the CIT (A), which is hereby confirmed. Hence, this ground of appeal of the revenue dismissed.

Summary

Issues Involved:
1. Eligibility for exemption under Section 11 of the Income Tax Act.
2. Nature of micro-financing activities as charitable or commercial.
3. Provision for loan loss as an allowable expenditure.

Issue-wise Detailed Analysis:

1. Eligibility for exemption under Section 11 of the Income Tax Act:
The primary issue addressed was whether the assessee's activities qualified for exemption under Section 11 of the Income Tax Act. The revenue contested that the assessee's surplus from micro-financing activities did not qualify as charitable under the amended Section 2(15). The assessee argued that its activities fell under the "relief of the poor" category, one of the first three limbs of Section 2(15), which remained unaffected by the amendment. The CIT (A) and the Tribunal both concluded that the micro-financing activities were indeed charitable, as they targeted economically disadvantaged women, providing them with collateral-free loans and other support, which aligned with the relief of the poor.

2. Nature of micro-financing activities as charitable or commercial:
The Assessing Officer (AO) had initially determined that the assessee's micro-financing activities were commercial in nature, citing that the loans were given at higher interest rates than those borrowed, thus generating a surplus. The CIT (A) and Tribunal, however, found that the interest rates charged were within acceptable limits and not exorbitant. They emphasized that the activities were aimed at alleviating poverty and empowering women, which constituted a charitable purpose under the "advancement of any other object of general public utility" limb of Section 2(15). The Tribunal referenced previous decisions, including those of Spandana and Disha India Micro Credit, to support its conclusion.

3. Provision for loan loss as an allowable expenditure:
The AO disallowed the provision for loan loss amounting to Rs. 4,37,714, arguing it was a provision for future contingencies and not an actual expenditure. The CIT (A) reversed this decision, accepting the assessee's argument that the provision was made in line with Reserve Bank of India (RBI) norms and was necessary due to the high-risk nature of the loans provided to economically weaker sections. The Tribunal upheld this view, referencing the Delhi High Court's decision in the case of Director of Income Tax (Exemption) vs. National Association of Software and Services Companies, which allowed for provisions reasonably made for potential losses to be deducted when computing income for charitable purposes.

Conclusion:
The Tribunal dismissed the revenue's appeal and upheld the CIT (A)'s order, affirming that the assessee's micro-financing activities were charitable and eligible for exemption under Section 11. The provision for loan loss was also deemed an allowable expenditure. The cross-objection filed by the assessee was dismissed as infructuous, given the Tribunal's decision to uphold the CIT (A)'s order.