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TMI Blog2010 (2) TMI 1166X X X X Extracts X X X X X X X X Extracts X X X X ..... arried on by the appellant are in the nature of a business activity, even then its surplus is exempt under the provisions of section 11 of the Income Tax Act, it having maintained separate books of account in respect of this activity. 4) Appellant submits that the CIT(A) is not justified in holding that it had violated the provisions of section 11 on account of the funds being diverted to M/s. SPANDANA SPOORTHI INNOVATIVE FINANCIAL SERVICES LTD., whereas such funds were not so diverted in any manner whatsoever and have only been utilized in the course of its regular activity. 5) Appellant submits that the CIT(A) is not justified in holding that it had violated the provisions of section 11 in advancing an amount to M/s. SPANDANA MUTUAL BENEFIT TRUST, whereas the said amount has been advanced only in the course of its regular operations towards acquisition of an asset and does not amount to any violation of the provisions of section 11 of the Income Tax Act. 6) Appellant submits that the CIT(A) is not justified in upholding the assessing officer's action in disallowing the amount of Rs. 38,31,698/- made towards provision of loan loss. 2. Though the assessee has raised various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r contended that while granting the registration certificate, the CIT mentioned the name of the assessees as SPANDANA (Rural Development Organisation), Lakshmipuram, Guntur instead of SPANDANA (Rural & Urban Development Organisation). In this letter, he made a reference of application dated 26th November, 1997, whereas the application bears the date of 23.11.1997 which was submitted to the CIT office on 27.11.1997. The Ld. Counsel for the assessee further contended that the revenue has doubted this application on account of variation of dates in the application and the dates mentioned in the registration certificate. But the revenue has not brought out any other application in which the name of the assessee was mentioned as SPANDANA (Rural Development Organisation), in response to which the registration dated 22.1.1998 was granted. The Ld. Counsel for the assessee has also placed a reliance upon the registration certificate granted by the Registrar of Societies, which is appearing at pg. 21 of the compilation of the assessees. During the course of hearing of the appeal, assessee was asked to file some other evidence in order to prove that after filing of this application or grant o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication submitted for grant of registration which is available at pg.22 of the compilation of the assessees and from a careful perusal of this application, we find that it was submitted to CIT, Vijayawada and the name of the assessee was given as SPANDANA (Rural & Urban Development Organisation) and its address was given as D.No.550-39, 1st Lane, Lakshmipuram, Guntur-522008. This application bears the date as 23rd November, 1997. This application was submitted to the CIT on 27.11.1997 as is evident from the delivery book of its Chartered Accountant in which the seal of the office of the Commissioner of Income Tax, Vijayawada is there. This document is available at pg.23 of the compilation. No doubt in the registration certificate the date of application was stated to be 26.11.1997, whereas the date of application appearing at pg.22 is dated 23.11.1997 and it was submitted to CIT office on 27.11.1997. But the revenue has not brought out any other application on record to state that this is a correct application in response to which the registration u/s 12A was granted to the assessees. Revenue authorities have simply drawn an inference on the variation in the dates that this was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had no other option to get the registration certificate rectified except to prefer an appeal before the appellate authority. 8. Keeping in view the totality of the facts and circumstances of the case, we are of the opinion that the error in the name of the assessee appearing in the registration certificate is occurred due to the mistake on account of negligence on the part of the staff of the Commissioner of Income Tax and not the assessees and as such he cannot be held responsible for the mistake. Thus the benefit of exemption cannot be denied to the assessees for this reasons only. We however, direct the revenue to make necessary correction in the name of the registration certificate granted to the assessee and shall treat it to be granted to SPANDANA (Rural & Urban Development Organisation). 9. The next issue relating to the nature of activities undertaken by the assessees. The assessee society was engaged in micro financing activities and was operating in various districts of the Andhra Pradesh. Micro finance is a supply of loans, savings and the basic financial services to the poor. Micro financing loans are small loans granted to the basic sectors, on the basis of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that enables the poor to build assets, increase incomes, and reduce their vulnerability to economic stress. It was further contended that to increase its services over time, an MFI must charge interest high enough to cover the cost of its loans, otherwise, the MFI will loose money. Its activities will shrink instead of growing unless it is continually infused with fresh money from private donors or governments. The assessee is operated as non-grant dependent MFI excellently with low operating cost among peers and transferring the benefit to the borrowers by way of low interest rate among peers. 11. It was further contended before the CIT(A) that in 2002 an internal analysis by ICICI Bank revealed that despite consistent evidence of rival demand from clients, access to MFI was constrained due to the organisation based financing model adopted until then. 12. It was further explained to the CIT(A) that in order to avail the financial help, the assessee has joined hands with the ICICI Bank and other financial institutions so that funds can be arranged for the micro finance to the poorer or the needy people. The CIT(A) examined the issue but was not convinced with the contentions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to suggest that funds were used or misused for personal benefit of the trustees. Thus it was entitled to renewal of recognition u/s 80G(5) of the I.T. Act. 14. The Ld. Counsel for the assessee further contended that before entering into micro finance activity, the assessee has made the necessary amendments in its memorandum and article of association. The amendments were made in general body meeting held on 29th November, 2001, copy of the same is placed at pg. 20 of the compilation of the assessees, according to which one more objective was added to the objects of the society. The Ld. Counsel for the assessees further contended if the assessee is engaged in charitable activities, whatever income is generated during the course of that activity, the same is to be exempted u/s 11 of the Act. The revenue's main objection is only with regard to the advancement of loan to certain institutions which are also engaged in these type of activities though having not obtained the registration u/s 12A of the I.T. Act. But the advance was given to them for a short period on which interest was earned. The said interest was also utilized in micro financing activities. Thus the assessee is enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the member ceased to have any coverage thereafter. The society collects high rate of premium from its members as against very meager relief provided to the poor and the surplus funds are being utilized in micro finance business for earning interest at higher rate. 17. The Ld. D.R. further contended that the society has entered into an agreement under partnership model scrutinisation etc. of portfolios with other banks. It acted as an agent to ICICI bank under partnership model and collected commission with service charges. The ICICI bank is a commercial bank doing micro finance business as one of its business activity. The society instead of doing charitable activity of providing relief to the poor is acting as an agent to private commercial bank and earning commission and hence it is nothing but a business activity which again not incidental to attain its objectives. The Ld. D.R. further contended that the society has advanced funds to SPANDANA Sphoorty Innovative Financial Services Ltd., a company doing micro finance business and SPANDANA Mutual Benefit Society both its sister organisation and members of the society are having interest in such organisation. The SSIFSL Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of its formation. From a careful perusal of record, we find that this object of micro finance was inserted under the headings 'aims & objects' in the memorandum vide resolution of the general body dated 29th November, 2001. Now the question comes whether activities of micro financing to the poor people is a charitable activity or it can only be termed to be commercial activity of the assessee. In this regard, Bangalore Bench of the Tribunal has examined this issue in detail in the light of nature of activities and they have categorically held that micro finance activity is a charitable activity and assessee is entitled for exemption u/s 11 and is also eligible for renewals and recognition of section 80G(5) of the Act. While holding so, the Tribunal has observed that loan was given to project members out of the funds borrowed from the banks. The beneficiaries are poor families. If the women in the assessee's project have to borrow money from the money lenders, they have to pay many times higher interest than what the assessee has charged. The Tribunal further observed that in these type of activities, assessee has to incur financial cost for obtaining loans from banks and for r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) To promote and administer self-financing scheme for improving health, nutrition, sanitation, literacy and housing amongst the poor and disadvantaged sections of the population. (d) To provide support services and encouragement to poverty alleviation programmes. (e) To provide finance for poverty alleviation programmes, social welfare programmes, community development projects, projects for providing housing to the poorer sections of the community. (f) To organize training programmes and to provide educational facilities to the poorer sections of the community. (g) To establish administer, maintain, manage or to finance the establishment and maintenance of vocational training centres and institutions for providing formal and informal education benefit of the poorer and disadvantaged sections of the community. (h) To organize lectures/seminars/demonstrations/exhibitions/symposia etc., to disseminate useful information to the public. (i) To establish, maintain, manage or finance the establishment and maintenance of libraries for the use of the public. (j) To establish, maintain, manage or finance separate funds like emergency fund, calamity fund etc., to help poor fami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and horticulture. The trust in the course of its activities has availed loans from other financial institutions by hypothecating book debts of lending operations. The loans availed by assessee trust carried interest rates ranging from 9 to 12 per cent payable in monthly instalments. In some of the loan agreement the lender has prescribed the maximum rate of interest at 20 per cent flat per annum. Sec. 2(15) of IT Act defines :Charitable purposes" as under: "Charitable purpose includes relief of the poor, education, medical relief and the advancement of any other object of general public utility". Thus, the object of the trust is mainly constitute alleviation of bottom line poor rural and urban women and their families by means of micro credit facilities. The programme is known as "BSS Micro Loan Project" which is presently extending its help to all poor women. The assessee trust has found that the rural and urban poor women have benefited from the trust's funding activities and were about to come out of the depths of their poverty to a great extent to be able to lead a normal life like any other citizen. This goes to show that the relief to the poor has been aimed at by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the poor without adequate security. The trust's motive is not to gain any advantage in this activity but to help the poor in uplifting their economic status in the society. So, it is not justifiable to level the assessee as a profit making body alone. Further, there is nothing on record to justify that the assessee is a charging exhorbitant rate of interest from the poor women mentioned above. There is nothing on record to suggest that these poor women are capable of receiving loan at lesser interest than offered by the assessee. In case, there is availability of funds/loans at lower rate of interest, nobody including the assessee can force these poor women for such alleged higher rate of interest on the loans. There is nothing on record to suggest that the funds of the trust are used or misused for personal benefit of the trustees or their relatives or near and dear ones. The Revenue has brought nothing on record that surplus generated in the above said activities are not ploughed back into the organisation for the benefit of poor. The financial sustainability as a method of achieving our ultimate objectives, should not be termed as 'profit motive'. Because the organisation aim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk for obtaining the loans for its disbursement or advancement to the poor women, the exemption can be denied to the assessees. As held by the Tribunal in the aforesaid case, that this micro finance activity requires an organised sector for procuring a loan from the banks or other financial institutions for its disbursement/advancement of loan to poor or weaker section of the society in which the assessee has to incur a lot of expenditure. More over when a loan was given to the poor women, they do not have any surety or guarantee to stand and most of the times the loan could not be recovered from them and that aspect is also to be taken into account by the assessees while granting a lone to the poor women. Suppose a loan was given to some of the poor women and they would not be in a position to repay the loans what the assessee will do. He cannot enforce the recovery of the loan by other means and ultimately he has to write off the loan. Meaning hereby in these type of micro finance activity most of times the assessee could not recover the loan granted to the poor women as no one stood as the guarantor for them at the time of advancement of the loan. No doubt assessee is charging h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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