2024 (5) TMI 1010 - AT - Income Tax

Exemption u/s 11 - microfinancing activity conducted by the assessee - assessee is charging exorbitant rate of interest to its borrowers - charitable v/s commercial activity - whether activities falls under the first limb of section 2(15) or activities such as advancement of any other object of general public utility or any other activity, which falls outside the scope of section 2(15)? - As argued assessee is rendering a much needed service to the individuals by infusing credit into the system, which is required to revive the rural economy, without which it would be difficult for the individuals to join and participate in the main stream of the economy HELD THAT - AO is required to see whether the assessee eligible to claim application under section 11 and whether the proviso to section 2(15) gets attracted in the light of commercial nature of activities. Particularly, if the primary activity of the organization is in the nature of trade or business, then it is important to ensure that there is no dominant profit motive involved and it is not used as a mask for commercial activities and benefitting at the hands of the beneficiaries. If an organisation which has no source of generating surplus from its activity other than the beneficiary then existence of consistent and substantial surplus does raise a question regarding the commercial nature of the activity. If this question is not successfully defended and justified by the assessee then the invocation of the proviso to section 2(15) by the AO cannot be questioned. In the present case, assessee is only carrying the microfinancing activity by charging exorbitant rate of interest like any other commercial banks which is not expected from this assessee, which is registered u/s 12AA of the Act so as to claim exemption u/s 11 of the Act. The activity of the assessee is nothing but commercial activity carried on with the intention of making maximum profit. If we consider the plea of the assessee, then the exemption u/s 11 of the Act could also be claimed by the Co-operative Societies, Regional Rural Banks and Commercial banks also as the activity of these banks are similar to the assessee s case. If we examine the activities of the present assessee in the light of above report of Sub-committee of the Central Board of Directors of Reserve Bank of India, the assessee is only doing the microfinancing activities by charging exorbitant interest, which does not commensurate with the prevailing rate. It is also noted that the activity is not also in lieu of any benefit to low-income group who are very vulnerable and are not in a position to cope up with such financial burdens. In order to consider the activity to be charitable in nature, the services rendered must commensurate with the benefit that may arise to such low-income group. The facts of the case relied by the A.R. is quite opposite to the facts of the present case, which has been brought out in the earlier paragraphs of this order. It is also noted that nothing has been spent by the assessee, which could be considered in the nature of charity and therefore, the benefit under the proviso to section 2(15) of the Act is not available to the assessee. The facts of the case relied by the ld. A.R. therefore, does not help the present facts of the case in hand. Decided in favour of revenue.

Issues Involved:

1. Whether the microfinancing activity conducted by the assessee falls under the first limb of section 2(15) of the Act.
2. Whether the assessee is eligible for exemption u/s 11 & 12 of the Act.
3. Whether the assessment order is unsigned and thus invalid.
4. Whether the interest u/s 234A, 234B, and 234C of the Act is correctly levied.

Summary:

Issue 1: Microfinancing Activity under Section 2(15)
The primary issue was whether the microfinancing activities conducted by the assessee fall under the first limb of section 2(15) of the Act or the category of "advancement of any other object of general public utility." The Tribunal noted that the assessee, a trust registered u/s 12A, provided microfinance to individuals through Self-Help Groups (SHGs) at interest rates significantly higher than those at which it borrowed from banks. This activity generated substantial profits, indicating a commercial nature rather than a charitable one. The Tribunal held that the microfinancing activity was conducted on commercial lines with a profit motive, thus falling under the proviso to section 2(15) and not qualifying as a charitable purpose.

Issue 2: Eligibility for Exemption u/s 11 & 12
The Tribunal examined whether the assessee's activities were eligible for exemption u/s 11 & 12 of the Act. The assessee argued that the surplus generated from microfinancing was used for charitable purposes. However, the Tribunal found that the predominant object of the assessee was profit-making rather than charitable activities. The assessee's microfinancing activities were deemed commercial, and thus, the exemption u/s 11 & 12 was denied. The Tribunal emphasized that the mere generation of surplus does not entitle an entity to claim exemption if the activities are carried out with a profit motive.

Issue 3: Validity of Unsigned Assessment Order
The assessee raised additional grounds claiming that the assessment order and the notice of demand were unsigned, thus invalid. However, these grounds were not pressed during the hearing and were dismissed by the Tribunal.

Issue 4: Interest u/s 234A, 234B, and 234C
The assessee contested the levy of interest u/s 234A, 234B, and 234C, arguing that the rate, period, and quantum were not discernible. The Tribunal upheld the levy of interest, stating that the assessee failed to demonstrate any error in the calculation or application of the interest provisions.

Conclusion:
The Tribunal dismissed the appeals, holding that the assessee's microfinancing activities were commercial in nature and not eligible for exemption u/s 11 & 12 of the Act. The assessment order was upheld, and the levy of interest u/s 234A, 234B, and 234C was confirmed.

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