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2023 (11) TMI 1107 - AT - Income TaxExemption u/s 11 - charging of guarantee fees for services by the assessee trust - charitable activity u/s 2(15) - as per revenue assessee trust is engaged in the advancement of general public utility and is charging fee in relation to the services rendered to trade, commercial etc. - CIT(A) has also denied the claim of the assessee trust seeking benefit u/s 11 on the ground that since the assessee trust is charging guarantee fee, which amount is substantial, the assessee trust is not carrying out any charitable activity - HELD THAT - 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 in availing credit facilities from financial as well as banking institutions without having collateral security and/or third party guarantee which is being provided by the assessee trust with cost to cost or with a small mark up is pursuing the activity of advancement of general public utility without having an iota of activity of trade, commerce or business. Mere charging of guarantee fees for services by the assessee trust ipso facto is not sufficient to invoke the proviso to section 2(15) of the Act, that too without establishing that the object and purpose of the assessee is profit motive. Had it been so the assessee trust would not have been running into deficit of about Rs. 400 crores every year. So in these circumstances the impugned findings returned by the Ld. CIT(A) that since the assessee is charging guarantee fee on substantial scale, it is not carrying out any charitable activities, hence not entitled for benefit of section 11 12 of the Act , are not sustainable, hence set aside. Ground No. 2 is determined in favour of the assessee. Provision for guarantee claims - assessee is following mercantile system of accounting qua its receipts as well as payments - As per AO since the assessee is a registered trust under section 12A of the Act the application is to be allowed on actuarial basis and no provision is allowable and that the assessee has itself recognized guarantee fee income on payment basis as such provision for guarantee claim cannot be allowed - CIT(A) has confirmed the disallowance on the disallowance of deduction claimed by the assessee trust - HELD THAT - When we peruse the explanation to section 11 it has come on record that w.e.f. 01.04.2022 any some payable by the trust shall be considered as application of the previous year in which the payment is made irrespective of the year of incurring of expenditure. The AO proceeded on the wrong premise that the amount spent on the object of the trust is considered as application of the income in the case of trust by holding that the assessee is following cash system of accounting whereas assessee trust is proved to be following the mercantile system of accounting. So in these circumstances the amount not paid by the assessee trust cannot be treated as application of the trust. Hon ble Supreme Court of India in case of Rotrock Control India Pvt. Ltd. 2009 (5) TMI 16 - SUPREME COURT held provision on account of warranty in respect of product sold by the assessee as legitimate deduction. When the provision for guarantee claim made by the assessee is otherwise proved to be legitimate deduction, the correct income of the assessee cannot be calculated and as such claim of the assessee for deduction of provision for guarantee claim is an allowable deduction. So the AO is directed to allow the amount. Denial of claim of set off of brought forward deficit of the previous years against the current year income, due to the denial of benefit of section 11 12 - Since the assessee is found to be entitled for benefit of section 11 12 as per findings returned under the head ground No.2 in the preceding paras the AO is directed to process the claim of set off of the assessee trust accordingly, this ground being consequential in nature.
Issues Involved:
1. Denial of opportunity of being heard. 2. Denial of exemption under section 11 by invoking proviso to section 2(15). 3. Disallowance of provision for guarantee claims. 4. Disallowance of accumulated income under section 11(2). 5. Disallowance of deduction under section 11(1)(a). 6. Denial of set-off of brought forward deficit. 7. Initiation of penalty proceedings under section 270A. Summary: Ground No.1: Denial of Opportunity of Being Heard The appellant did not press this ground during the argument, hence it was dismissed as not pressed. Ground No.2: Denial of Exemption under Section 11 by Invoking Proviso to Section 2(15) The Tribunal examined whether the AO and CIT(A) erred in denying the exemption under section 11 by invoking the proviso to section 2(15). The Tribunal noted that the assessee trust, established by the Government of India and SIDBI, provides credit guarantees to MSMEs without collateral security and has been recognized as a charitable trust under section 12A. The Tribunal found that the trust's activities have not changed compared to previous years when the exemption was granted, and it operates without a profit motive. The Tribunal concluded that the trust's activities do not fall under the proviso to section 2(15), which excludes entities engaged in trade, commerce, or business. The Tribunal emphasized that the trust is running deficits and relies on government contributions, indicating no profit motive. Consequently, the Tribunal set aside the CIT(A)'s findings and ruled in favor of the assessee. Ground No.3: Disallowance of Provision for Guarantee Claims The assessee claimed a provision for guarantee claims based on actuarial valuation. The AO disallowed this, arguing that the provision is not allowable under the Act. The Tribunal found that the assessee follows the mercantile system of accounting, which mandates creating provisions for liabilities. The Tribunal cited Supreme Court rulings that legitimate provisions should be allowed as deductions. Therefore, the Tribunal directed the AO to allow the provision for guarantee claims amounting to Rs. 347.04 crores. Ground Nos.4 & 5: Disallowance of Accumulated Income under Section 11(2) and Deduction under Section 11(1)(a) The lower authorities rejected the assessee's claim for accumulation under section 11(2) and deduction under section 11(1)(a) due to the denial of exemption under section 11. Since the Tribunal ruled that the assessee is entitled to the exemption under section 11, it directed the AO to process these claims accordingly. These grounds were decided in favor of the assessee for statistical purposes. Ground No.6: Denial of Set-off of Brought Forward Deficit The lower authorities denied the set-off of the brought forward deficit against the current year's income due to the denial of exemption under section 11. The Tribunal, having found the assessee entitled to the exemption, directed the AO to process the set-off claim accordingly. This ground was also determined in favor of the assessee. Ground No.7: Initiation of Penalty Proceedings under Section 270A The Tribunal did not specifically address this ground in the summary provided. Conclusion: The Tribunal allowed the appeal filed by the assessee, setting aside the findings of the lower authorities and directing the AO to process the claims for exemption, provision for guarantee claims, accumulated income, and set-off of brought forward deficit as per the Tribunal's findings. The order was pronounced in the open court on 24.11.2023.
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