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TMI Blog2008 (8) TMI 606X X X X Extracts X X X X X X X X Extracts X X X X ..... haritable or religious purpose and not the nature of the activity by which the income was derived by the Trust. Hence, we are satisfied that for the purpose of registration u/s 12AA of the Income-tax Act, DIT(E) was to satisfy himself about the genuineness of the activities. In the instant case, the assessee company has not obtained any assistance or grant. It has raised loans on commercial lines. The DIT(E) during the course of examination of activities of the society has noticed that the assessee company is providing advance at the rate of 24 per cent. It is providing finance to a particular section of the society, i.e., traders dealing in vegetables and fruits and making purchases from Safal. It is true that the potential that micro finance holds in a country like India is immense. Various banks are associating themselves with such micro finance activities. ABN Amro Bank has also offered micro finance in India. Micro finance can be a business as well as a charitable activity. In order to become a charitable activity, the institution must have subsidized funds. The promoters if they are ready to take the establishment cost then micro finance can become a charitable activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany made an application on 17-8-2006 for registration under section 12AA of the Income-tax Act. Before processing of the application for registration, the learned DIT(E) required the assessee to file certain details and also gave the assessee an opportunity to explain as to why the application for registration under section 12AA of the Act be not rejected. 4. The assessee-company is registered under section 25 of the Companies Act, 1956 on 26th June, 2006. The objects for which the company is established are mentioned in clause III of the Memorandum of Association. The main objects to be pursued by the company on its incorporation are : 1.To undertake micro financing activities as permitted by the Reserve Bank of India and to provide all kinds of credit facilities on interest or otherwise to Self Help Groups and others with the sole object of promoting the development and economic well being of the urban and rural poor and to provide education loans and undertake any other charitable objects for aiding alleviation of poverty amongst the urban poor and to render such services as providing savings, credit and other financial services to the poorer of the society in general a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 2 per cent on the amount sanctioned subject to a maximum of Rs. 3,000. ( c )Loan documentation charges of Rs. 60, to execute Financial Assistance agreement. ( d )Card charges of Rs. 150 which could be paid up front or in three equal instalments of Rs. 50 each payable in the first three months at the billing cycle followed for interest due. ( e )Other terms are as per the financial assistance agreement. 6. The learned DIT(E) also reproduced some of the terms of the Facility Agreement entered into between the assessee-company and the traders. Such terms have been mentioned as under : (1)The Trader has been carrying on the business of trading in fruits and vegetables and has been procuring his stock from Safal outlets; (2)Safal outlets means and include the various outlets established by Safal, to facilitate trading in fruits and vegetables by small time traders; (3)On all utilization of the micro credit limit by the Trader, the Trader shall promptly and without fail repay Janalakshmi the principle amount with interest at the rate of 1.5 per cent every month on or before the 10th of the subsequent month for which the repayment is due from the Trader to Janalakshmi. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objectives of section 25 of the Companies Act is to grant license to such companies who are involved in charitable and other activities of public utility. Companies registrated under section 25 cannot distribute profits if any. The profits if any, earned is to be plough back for achieving the objects for which the company has been established. It was submitted that relief of the poor need not necessarily mean that in order to be charitable, the relief should be in the form of free doles or alms to the poor. It may take the economically sounder form of wage for work or labour done by the beneficiaries. For this proposition, reliance was placed on the decision of the Privy Council in the case of All India Spinners Association v. CIT [1944] 12 ITR 482. Hence, an attempt is made to mitigate the poverty and lift the economic level of the poor strata of the society by giving financial help and that is equivalent to relief to the poor and will be covered in the definition of charitable activity as defined in section 2(15) of the Income-tax Act. 9. It was submitted that micro financing cannot be equated with the traditional financing options normally carried out by banks, financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that it is making an attempt to mitigate poverty and lift the economic level of the poorer strata of society by giving financial help through micro credit financing. It is giving relief to the poor. However, such fact is not supported by the ground reality. The assessee-company seeks to do the business on micro financing and the benefit to the people is only incidental. It was further observed by the learned DIT(E) that the assessee has taken over the urban unit of the activities carried on by another entity Sanghamithra Rural Financial Services and the latter has retained the activities being carried out in the rural areas. People in urban centers have easy access to credit facilities through the vast network of banks and NBFCs. Though reaching finance in the hands of the needy even in urban areas can be a charitable activity, the procedure and manner in which the same is done would show whether the activity is indeed charitable. The assessee-company is availing loan facility from banks/financial institutions at the interest rates ranged from 8.5 per cent to 9 per cent and such loan facility is extended to the so called poor in urban areas at rates ranging between 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1(4A), which permits exemption to cases where a charitable trust also engages in other incidental activities which may be of commercial nature, provided that ( i ) separate books of account are maintained for such incidental activity, and ( ii ) the surplus or profit arising from such activity is ploughed back to carry on the charitable activities undertaken for the attainment of the objects. But a reading of the provision contained in section 11(4A) clearly shows that in requiring the maintenance of separate books of account for commercial activities that are incidental , the Legislature intended to permit granting of exemption even in cases where two sets of activities were being conducted, one charitable, and the other commercial, subject to the above conditions. But, surely there would be no scope for allowing registration, or allowing exemption where there is only commercial activity undertaken by the entity itself, in the manner mentioned above. If that were so, the requirement for maintenance of separate books of account would become redundant. Further, the concept of ploughing back into charity cannot be stretched so much as to apply to cases where only one activity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings before us, the learned AR has filed a paper book containing 48 pages. The learned AR drew our attention to the meaning of micro finance as mentioned in the website of micro finance Gateway. According to it, micro finance means providing very poor families with very small loans to help them engage in productive activities or grow their tiny businesses. Micro finance has come to include a broader range of services (credit, savings, insurance etc.) as it has been realized that the poor and the very poor, who lack access to traditional formal financial institutions require a variety of financial products. The typical micro finance clients are low-income persons that do not have access to formal financial institutions. Micro finance clients are typically self-employed, often household based entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income generating activities such as food processing and petty trade. In urban areas, micro finance activities are more diverse and include shopkeepers, service providers, artisans, street vendors etc. Micro finance clients are poor and vulnerable, non-poor who have a relatively stable sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e object of the institution falls within the definition of charitable purpose and the institution is genuinely carrying on such objects, the Commissioner is obliged to register the institution. The jurisdictional High Court in the case of Sanjeevamma Hanumanthe Gowda Charitable Trust v. Director of Income-tax (Exemptions) [2006] 285 ITR 327 2 (Kar.) had an occasion to consider the procedure for granting of registration. The jurisdictional High Court held that for the purpose of registration under section 12AA of the Income-tax Act, the authorities have to satisfy themselves about the genuineness of the activities of the Trust or Institution and how the income derived from the trust or applied to charitable or religious purpose and not the nature of the activity by which the income was derived by the Trust. Hence, we are satisfied that for the purpose of registration under section 12AA of the Income-tax Act, DIT(E) was to satisfy himself about the genuineness of the activities. 17. Section 2(15) defines the charitable purpose. The words not involving the carrying on any activity for profit in the definition of charitable purpose was omitted by the Finance Act, 1983 with eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finance institution in order to help the poor has to receive the start-up capital from international agencies either by way of grant assistance or soft loans. Some of such institutions may set up NBFCs under the Companies Act. The Task Force suggested that for meeting requirements of start-up capital by the micro finance institutions, a flexible approach is needed. NABARD and SDBI are engaged in supporting the same at national level. It was observed by the Task Force that these institutions are not able to provide such assistance from out of their own resources due to two reasons viz., lack of adequate funds for provision of start-up capital vis- -vis the demand for such funds. The Task Force gave the following view in respect of taxation : "4.8-1 The SHG concept is based on the principle of mutual help and co-operation. Thus, the borrowers group in the form of SHGs federations also work on the principle of mutuality. The Task Force has observed that in a comparable situation, section 10(23D) of the Income-tax Act exempts the income of registered mutual funds from Income-tax. Similarly, section 10(23F) exempts the income by way of dividends or long-term capital gains of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves with such micro finance activities. ABN Amro Bank has also offered micro finance in India. Micro finance can be a business as well as a charitable activity. In order to become a charitable activity, the institution must have subsidized funds. The promoters if they are ready to take the establishment cost then micro finance can become a charitable activity. But if it is done on commercial lines, then it is not a charitable activity but an activity to expand the finance business by contracting a new section of the society. The learned DIT(E) has found that the assessee company is undertaking only the business of micro finance and has not done any activity to show that it has been done as a charitable act. Even in spite of repetition we would like to reproduce the three main objects of the Company : 1.To undertake micro financing activities as permitted by the Reserve Bank of India and to provide all kinds of credit facilities on interest or otherwise to Self Help Groups and others with the sole object of promoting the development and economic well being of the urban and rural poor and to provide education loans and undertake any other charitable objects for aiding alleviation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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