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2021 (2) TMI 676 - AT - Income TaxExemption u/s 11 - assessee is a charitable Trust and it was granted registration u/s 12A - Denial of exemption as assessee is charging exorbitant interest rates on the loan given to the women - HELD THAT - It is merely a surmise entertained by the AO. The question is whether the rate of interest of 14% charged by the assessee is an exorbitant rate?. The Ld A.R submitted that the assessee is constrained to charge interest at a higher rate than the cost of borrowing so that it can absorb administrative and allied expenses and also possible defaults by the borrowers which is an inherent risk in the financing activities. The Ld A.R submitted that the assessee has charged interest @ 14% which is normal interest charged by commercial banks for lending during the period under consideration. Accordingly the ld A.R has contended that the rate of interest charged by the assessee cannot be considered to be exorbitant. We find merit in the said contentions. As submitted by Ld A.R the rate of interest of 14% is the normal rate charged by the banks for its lending and hence the said rate cannot be considered to be at exorbitant rate as observed by the tax authorities. Assessee is running a women s hostel charging rent of 5, 300/- per month for twin sharing room and 4000/- per month for four sharing room - We notice that the AO does not appear to have confronted the inspector s report with the assessee. No comparable cases to prove the above said submission has also been brought on record. In any case the Ld A.R submitted that the above said rate includes three times meals electricity charges water charges etc. Under these set of facts in the absence of any other comparable case we are of the view that there is merit in the submissions made by Ld A.R on this issue. Assessee is generating surplus year after year - The important point to be noted here is that so long as the assessee has been utilizing its income derived from the property held under the trust for its charitable objectives the provisions of sec.11 do not deny exemption to a charitable trust. Hence mere generation of surplus cannot be a reason to deny exemption u/s 11 of the Act. The AO might have highlighted this aspect to drive the point that the activities of the assessee are carried on commercial lines and hence the proviso to sec.2 (15) would be hit - As decided in AHMEDABAD URBAN DEVELOPMENT AUTHORITY 2017 (5) TMI 1468 - GUJARAT HIGH COURT when the profit making was neither the aim nor object of the trust then the incidental surplus generated while carrying on its activities would not render any activity in the nature of trade commerce or business. Hence this reasoning of the AO would also fail. Assessee has not got approval from DIT (E) for the amendment made to the trust deed - In any case there is no dispute with regard to the fact that the assessee was having registration u/s 12A of the Act during the year under consideration. In that case the proposal of the AO if accepted would apply to the future years only. Hence the exemption u/s 11 should not have been denied by the AO for the year under consideration on this reasoning. We are of the view that none of the reasons given by the AO would enable him to reject the exemption u/s 11 of the Act. Accordingly we are of the view that the Ld CIT(A) was not justified in confirming the assessment order passed by the AO for the year under consideration. Accordingly we set aside the order passed by Ld CIT(A) and direct the AO to grant exemption u/s 11 of the Act to the assessee for the year under consideration. - Decided in favour of assessee.
Issues Involved:
1. Rejection of exemption under Section 11 of the Income-tax Act. 2. Charging of interest rates on microfinance activities. 3. Charging of rent for women's hostel at commercial rates. 4. Generation of surplus by the Trust. 5. Applicability of proviso to Section 2(15) of the Act. 6. Amendment to the Trust deed without approval from DIT (Exemption). Detailed Analysis: 1. Rejection of exemption under Section 11 of the Income-tax Act: The assessee, a charitable trust registered under Section 12A, claimed exemption under Section 11 for the assessment year 2009-10. The Assessing Officer (AO) rejected this exemption, citing that the Trust's activities had shifted primarily to microfinance, which he deemed as commercial in nature. The AO also noted that the Trust had not obtained prior permission from the Director of Income Tax (Exemption) for amendments made to its Trust deed. 2. Charging of interest rates on microfinance activities: The AO observed that the Trust borrowed funds at interest rates ranging from 9.5% to 11.5% and lent them at 14%, with additional charges leading to an effective rate of 17%-18%. The AO considered this rate exorbitant and contrary to charitable objectives. However, the Tribunal found that the interest rate of 14% was comparable to commercial bank rates and was necessary to cover administrative expenses and potential defaults. The Tribunal concluded that the rate was not exorbitant and did not justify denying the exemption. 3. Charging of rent for women's hostel at commercial rates: The AO, based on an inspector's report, claimed that the Trust charged commercial rates for its women's hostel, which contradicted its charitable purpose. The Tribunal noted that the inspector's report was not confronted with the assessee and that the rent included meals, electricity, and water charges. Without comparable cases to substantiate the AO's claim, the Tribunal found merit in the Trust's explanation and dismissed the AO's observation. 4. Generation of surplus by the Trust: The AO argued that the Trust's consistent generation of surplus indicated a commercial rather than charitable intent. The Tribunal, referencing case laws from the Allahabad and Gujarat High Courts, held that as long as the surplus was used for charitable purposes, it did not disqualify the Trust from claiming exemption under Section 11. The Tribunal emphasized that generating surplus alone could not be a reason to deny the exemption. 5. Applicability of proviso to Section 2(15) of the Act: The AO contended that the Trust's microfinance activities fell under trade, commerce, or business, invoking the proviso to Section 2(15). The Tribunal, however, found that the Trust's activities aimed at "relief to poor" did not involve profit motive and thus did not fall under the proviso. The Tribunal concluded that the proviso to Section 2(15) was inapplicable to the Trust's activities. 6. Amendment to the Trust deed without approval from DIT (Exemption): The AO noted that the Trust did not obtain approval from DIT (Exemption) for amendments to its deed. The Tribunal observed that the Trust's registration under Section 12A remained intact and that the AO had granted exemptions in other years. It concluded that non-intimation of the amendment did not justify denying the exemption for the year under consideration. Conclusion: The Tribunal found that none of the AO's reasons justified rejecting the exemption under Section 11. It set aside the order of the CIT(A) and directed the AO to grant the exemption for the assessment year 2009-10. The appeal filed by the assessee was allowed, and the order was pronounced on 16th February 2021.
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