2024 (12) TMI 1477 - AT - Income Tax

Exemption u/s 11 - arranging the guarantee to the credit for loans and advances - HELD THAT - We find that the assessee is ameliorating the credit guarantee to the small venture and supporting for development of business/ livelihood. Considering the activities, we note that it is not contravening the provisions of section 2(15) of the Act and liable for exemption under section 11 of the Act. The trust is fully governed by Government of India for development of the first-generation entrepreneurs in small-scale industries. We respectfully follow the order of 2023 (11) TMI 1107 - ITAT MUMBAI . We set aside the impugned appeal order in this issue. In our considered view, the ground taken by the assessee is allowed. Rejection of provision of guarantee claims - AO had treated this provision as Provision of Expenses which not allowable as per the statue - We note that the nature of settlement of claim and the payment made by assessee is only to support the small and medium businesses. The entire activities for the purpose of providing effective credit guarantee for SSI loans extended by eligible scheduled commercial bank and rural bank to the eligible borrowers without collateral security. As per the scheme, a lending institution has to enter into an agreement with the assessee for covering by way of guarantee. Against the outstanding guarantee the assessee creates a provision for guarantee claims as required to be maintained under the conservatism principle required to be adhered under mercantile system of accounts. We find that the deduction claimed by the assessee under provision of guarantee claims is allowable expenses.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses the following core issues:

(1) Whether the order was passed without providing an opportunity to be heard, violating principles of natural justice.

(2) Whether the denial of the exemption claim under Section 11 of the Income Tax Act, 1961, by invoking the proviso to Section 2(15), was justified.

(3) Whether the rejection of the claim for deduction under Section 11(1)(a) for 15% of income derived from property held under trust was valid.

(4) Whether the disallowance of the deduction for the provision of guarantee claims was appropriate.

(5) Whether the non-allowance of the set-off of brought forward deficits from previous years against the current year's income was correct.

(6) Whether the confirmation of interest under Sections 234A and 234B was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Opportunity of Being Heard

- Relevant Legal Framework and Precedents: The principle of natural justice mandates that parties should be given a fair opportunity to present their case.

- Court's Interpretation and Reasoning: The court did not find this issue pressed by the appellant.

- Conclusion: The issue was not adjudicated as it was not pressed by the appellant.

Issue 2: Denial of Exemption under Section 11

- Relevant Legal Framework and Precedents: Section 11 provides for exemptions to income derived from property held under trust for charitable purposes. The proviso to Section 2(15) limits this exemption if the activity involves trade, commerce, or business.

- Court's Interpretation and Reasoning: The court referenced a previous ITAT decision, which held that the trust's activities were for public utility and not profit-driven, thus not contravening Section 2(15).

- Key Evidence and Findings: The trust was established by the Government of India to support small-scale industries without profit motives.

- Application of Law to Facts: The court found the trust's activities aligned with charitable purposes, allowing the exemption under Section 11.

- Conclusion: The court set aside the denial of exemption, allowing the appeal on this ground.

Issue 3: Deduction under Section 11(1)(a)

- Relevant Legal Framework and Precedents: Section 11(1)(a) allows a 15% deduction of income derived from property held under trust.

- Court's Interpretation and Reasoning: The court did not specifically address this issue as it was consequential to the primary issue of exemption under Section 11.

- Conclusion: The issue was not separately adjudicated.

Issue 4: Provision for Guarantee Claims

- Relevant Legal Framework and Precedents: The legitimacy of provisions for future liabilities as deductions, supported by precedents like Rotrock Control India Pvt. Ltd. and Parth Movers.

- Court's Interpretation and Reasoning: The court found the provision for guarantee claims to be a legitimate deduction, referencing prior ITAT decisions.

- Key Evidence and Findings: The trust's activities supported small and medium enterprises, and the provision was necessary under accounting principles.

- Application of Law to Facts: The court directed the deletion of the addition made by the AO, recognizing the provision as an allowable expense.

- Conclusion: The court allowed the appeal on this ground, directing the deletion of the disallowed amount.

Issue 5: Set-off of Brought Forward Deficits

- Relevant Legal Framework and Precedents: The ability to set off deficits against current income is typically allowed under tax law.

- Court's Interpretation and Reasoning: The court did not specifically address this issue as it was consequential to the primary issues.

- Conclusion: The issue was not separately adjudicated.

Issue 6: Interest under Sections 234A and 234B

- Relevant Legal Framework and Precedents: Sections 234A and 234B pertain to interest for defaults in furnishing returns and payment of advance tax, respectively.

- Court's Interpretation and Reasoning: The court did not specifically address these issues as they were consequential to the primary issues.

- Conclusion: The issue was not separately adjudicated.

3. SIGNIFICANT HOLDINGS

- Preserve Verbatim Quotes of Crucial Legal Reasoning: "The assessee trust having been established by the Government of India with the object and purpose of ameliorating the difficulties of the small scale industries and micro enterprises... is pursuing the activity of advancement of general public utility without having an iota of activity of trade, commerce or business."

- Core Principles Established: The judgment reaffirms that activities aimed at public utility without profit motives qualify for exemptions under Section 11, even if fees are charged, as long as they do not constitute trade or commerce.

- Final Determinations on Each Issue: The appeal was allowed in favor of the assessee for the exemption under Section 11 and the deduction for the provision of guarantee claims. Other issues were not separately adjudicated as they were consequential.