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2023 (9) TMI 256 - AT - Income TaxExemption u/s. 11 - nature of microfinance activity carried on by the appellant - relief to poor - business activists or not? - commercial gins with predominant objective to make profit - the appellant is charging 50% higher rate of interest for the loans provided to SHG when compared to the borrowing cost - AR contended that registration u/s. 12AA granted to the assessee has not been rejected for the year under consideration HELD THAT - We note that Microfinance is lending carried out with small borrowers. The targets of microfinance are low-income individuals/families who require small quantities of short term finance for purposes such as agriculture, marriage, debt redemption, medical emergencies, etc. These loans are extended without collateral security Microfinancing penetrates into the rural sectors to serve the poor. We also note that the strict lending criteria, terms, and conditions that banks insist, cannot always be met by borrowers belonging to the weaker economic sector. And therefore microfinancing activity is considered to be a practical and workable source of funds. We note that there is a broad line of distinction between the micro financing activities being carried out on commercial basis and for charitable purpose. If the micro financing facility is extended by charging exorbitant rate of interest and for a particular group of society which may be affluent and is using micro financing mode to fund their working capital, undoubtedly, the micro financing activity would be commercial in nature. In the present facts of the case, it seen that the assessee procures loans from SCDCC Bank and lend it to needy members of the SHG s. These loans are being procured on interest by the assessee and, the assessee was charging interest on these amounts lent to the beneficiaries. The assessee trust has been borrowing money from SCDCC Bank on interest and thereafter lends the same to various SHG s by charging interest on the amounts lent. These SHG S further utilises the money advanced by the assessee for its members or to any others who are in need of such funds. Hence, in our view, this activity of the assessee clearly gets covered under Advancement of General Public Utility and not under relief of poor as defined in Sec.2(15) of the Act. We find that the main focus of the objects of the assessee before us is alleviation of poverty by extending micro credits to poor rural women. The brief description regarding the services rendered to SHG s by the assessee has been reproduced. In addition, several other objects which are of Public charitable in nature such as providing training and support programmes for poverty alleviation, education are also listed as its other aims and objects. The For all these activities of the assessee small SHG s are formed who are provided with finance assistance by the assessee to carry out the objects of the trust. The assessee has been accumulating the income year by year by providing financial assistance to the beneficiaries of the self help group. Further from the balance sheet it is noted that assessee has obtained loans and advances from SDCC bank amounting to Rs. 15.51 crores approximately and the loans advanced to SHG is Rs. 38.60 crores approximately. This itself reveals that the entire money is sourced from corpus fund, general fund and loans and advances received by assessee during the year. Coming to the objection of the Ld.DR that assessee has been charging interest at 15% as against 10% at which assessee itself pays interest, it is noted that the assessee does not demand any security towards the loans advanced by it to the SHG members considering the social and economic conditions of the SHG members. The ratio expressed in case PANDANA RURAL AND URBAN DEVELOPMENT ORGANISATION 2013 (7) TMI 1216 - ANDHRA PRADESH HIGH COURT objection of the Ld.DR that the main purpose of the public charitable activity undertaken by assessee has to be looked into as a dominant purpose test and that collection of money for micro financing in the form of interest on the loans advanced to the self help group members will not defeat the real object in order to deprive of the exemption. The assessee is running various activities like Animator activities, Donations, Health Insurance premiums, Santhwana, Training, Uniform, SHG Formation, Sahayadhana, Insurance Premium Scholarship for students in rural area to make the poor ladies aware of the scheme and to encourage their participation as the principle objects of the trust. All these things need some expenditure. The facts and circumstances show that the assessee is carrying out its charitable activities and the surplus funds are used for charitable purposes. Therefore the argument advanced by the Ld. DR that micro financing activity is merely a money lending activity without any charitable object cannot be accepted. There is nothing on record brought by the Ld. DR or the authorities below that the objects of the assessee is not towards advancement of any other object of general public utility. Lower authorities are not justified in holding that the assessee is not engaged in charitable activities and denying exemption under section 11 - Decided in favour of assessee.
Issues Involved:
1. Whether the microfinance activity carried on by the assessee is in the nature of "relief of poor" or "advancement of any other object of general public utility". 2. Whether the provisions of section 13(8) read with the first proviso to section 2(15) of the Income Tax Act are applicable. 3. Whether the assessee is entitled to exemption under section 11 of the Act. 4. Whether the rule of consistency should be applied in the assessee's case. Summary: Issue 1: Nature of Microfinance Activity The Tribunal examined whether the microfinance activity carried on by the assessee could be classified as "relief of poor" or "advancement of any other object of general public utility". The assessee, a charitable trust registered under section 12AA, argued that its activities of providing loans to Self Help Groups (SHGs) without any security and at a nominal interest rate were aimed at empowering rural poor. The Tribunal noted that microfinance targets low-income individuals who require small quantities of short-term finance and that the activity is considered charitable if it is aimed at the upliftment of the weaker sections of society by charging interest rates in accordance with RBI guidelines without exorbitant rates or additional fees. The Tribunal concluded that the assessee's activities were charitable in nature and fell within the ambit of "relief of poor". Issue 2: Applicability of Section 13(8) read with Proviso to Section 2(15) The Tribunal analyzed the applicability of section 13(8) read with the first proviso to section 2(15) which states that "advancement of any other object of general public utility" shall not be a charitable purpose if it involves carrying on any activity in the nature of trade, commerce, or business. The Tribunal concluded that the assessee's activities did not fall under "advancement of any other object of general public utility" but were primarily aimed at "relief of poor". Therefore, the proviso to section 2(15) was not applicable. Issue 3: Entitlement to Exemption under Section 11 The Tribunal held that since the assessee's activities were charitable in nature, the provisions of section 11(4A) were satisfied. The activities were incidental to the attainment of the objectives of the trust and separate books of account were maintained. The assessee was thus entitled to exemption under section 11 of the Act. Issue 4: Rule of Consistency The Tribunal emphasized the principle of consistency, noting that the assessee's activities had been accepted as charitable in nature in previous assessment years, and there was no change in the facts or circumstances. The Tribunal cited the decision of the Hon'ble Supreme Court in Radhasoami Satsang v. CIT, which held that the AO should not deviate from the established position unless there is a significant change in facts. Conclusion: The Tribunal allowed the appeal filed by the assessee, holding that the microfinance activities carried on by the assessee were charitable in nature, aimed at the relief of the poor, and thus entitled to exemption under section 11 of the Act. The Tribunal also upheld the principle of consistency in favor of the assessee.
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