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TMI Blog2018 (6) TMI 1310X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of charity involved in the activities of the assessee and it is purely commercial. In view of this, the action of the lower authorities in denying exemption u/s. 11 of the Act is confirmed. Disallowance u/s. 36(1)(vii) - Held that:- Going into the merit of the issue raised by the assessee, in our opinion under section 36(1)(vii) of the Act, only debts which were written off as irrecoverable in the books of accounts of the assessee in the previous year relating the assessment year is to be claimed as deduction as bad debts while computing the income of the assessee. There is no question of granting any relief towards provision for bad and doubtful debts while computing the business income of the assessee. No merit in the above ground raised by the assessee in both the years. This ground of appeals of the assessee is dismissed. Disallowance towards donations and gifts - Held that:- Since the donations/gifts are not expended wholly and exclusively for the purpose of business of the assessee and it is in the nature of charities, it cannot be allowed while computing the income of the assessee. Accordingly, the disallowance made by the Assessing Officer and confirmed by the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in these appeals is with regard to the treatment of the income from microfinance activity as not eligible for exemption u/s. 11 of the I.T. Act. 4. The facts of the case are that the assessee is a charitable Trust registered u/s. 12A of the I.T. Act. It is engaged in the microfinance activity especially for poor rural women. The assessee claimed income exemption u/s. 11 of the Act considering that the micro finance activity is a charitable activity in terms of sec. 2(15) of the I.T. Act. The Assessing Officer noted that the assessee is charging interest at the rate of 29% per annum while it is getting funds at the interest rate of 12% per annum. According to the Assessing Officer, it is business activity without any element of charity. The Assessing Officer relied on the decision of the ITAT, Bangalore Bench in the case of Janalakshmi Social Services vs. DIT(Exemptions)I wherein it was held that microfinance activity can be both charitable and business in nature. Accordingly, the Assessing Officer denied exemption u/s. 11 of the Act. 5. Against this, the assessee went in appeal before the CIT(A). The CIT(A) confirmed the order of the Assessing Officer on this issue. 6. Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able if that is so activity undertaken to achieve the object do not have any relevance as the same is only a device to mobilize resources for achieving charitable objects. It was submitted that in this case the Assessing Officer failed to look in to the objective of activity but erroneously considered the activity as object of the trust. 6.2 The Ld. AR relied on the decision of Supreme Court in the case of Thiagarajar Charities vs ACIT where the Hon'ble Supreme Court held that the business - corpus - property held under trust - produces or results in income, like any other property. That is all. The business is only a means of achieving the object of the Trust; it is a medium through which the objects are accomplished. The Ld. AR relied on the parallel decision in favour by the Supreme Court in case of ACIT Vs Thanthi Trust where the Hon'ble Supreme Court invoked section 13(l)(bb). Even a business that is held by such a trust as a part of its corpus is carried on by the trust. The Ld. AR relied on the decision of the ITAT, Visakhapatnam Bench in the case of Spandana (Rural Urban Development Organisation) vs. ACIT which states that microfinance activity is a char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said Act which is as under: 7. Interest and charges allowed to money lenders No money lender shall charge interest on any loan at a rate exceeding 2% above the maximum rate of interest charged by commercial banks on loans granted by them. 7.2 The Ld. DR submitted that for the previous year relevant to the assessment year 2007-08 the rate of interest as per section 7 of the Kerala Money Lenders Ace cannot exceed more than 18%. However, in the present case, the Ld. DR submitted that the assessee was charging 29% interest which was far above the rate prescribed by law, i.e., The Kerala Money Lenders Act. Thus, the Ld. DR submitted that the assessee is in the business of lending at 29% per annum to the poor, which is not as envisaged in the assessee Trust s objects. By collecting interest at such a higher rate, the Ld. DR submitted that the assessee had deviated from its objective of doing charity, especially in view of the fact that the difference of interest over deposits and disbursement in cases of banks and nonbanking financial companies is less than 10%. As such, according to the Ld. DR, the micro finance activity conducted by the assessee is strictly commercial in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid provision was amended adding a 'proviso' w.e.f. 1st April, 2009 as follows: Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration irrespective of the nature of use or application or retention of the income from such activity. The AO has taken a stand that by virtue of the amendment as above, the assessee is not entitled to exemption u/s.11 of the Act. 8.1 The ld. AR submitted that, the idea and understanding of the AO with regard to the scope of amendment to sec.2(15) is thoroughly wrong and misconceived. There is no trade or business in the activities pursued by the assessee in running of micro finance business and will not take it outside the purview of charity and hence, that the proviso added to sec.2(15) of the Act, is not at attracted to the case in hand. He also submitted that the statute, as it stood earlier, had clarified the charitable purpose mentioned in sec.2(15) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough the object of the assessee is to carry on charitable activities, but it does not carry those charitable activities, and it was only carrying on micro finance business in a commercial manner, which cannot be construed as charitable activity. In other words, it was contended by the ld. DR that the assessee carried on activities in a business oriented manner, it will definitely come within the fourth limb of the amended sec.2(15) of the Act, where the prohibition of activity in the nature of trade, commerce or business for any activity of rendering service or any other consideration, irrespective of the nature of the use or application or retention of the income of such activity is specified and hence, not entitled to any exemption. 8.4 To analyse the activities carried on by the assessee, we have to go through the nature of activities pursued by the assessee and perusal of that activities carried on by the assessee, cannot be oust the involvement of trade, commerce or business or any service in connection with trade, commerce or business as contemplated under the statute. Further, we note that there is substantial variation in the statutory position as it existed earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the recipient to whom the service is rendered and in such circumstances, the activities carried on by the assessee cannot be considered as charitable activities. 8.6 The activities carried on by the assessee cannot be considered as activities of medical relief or education or relief of the poor. It is true that the activities carried on by the assessee take care of the poor people also. But those activities cannot be classified under any of the specific activities of relief of the poor; education or medical relief. The correct way to express the nature of the activities carried on by the assessee is to say that the assessee is carrying on 'advancement of any other object of general public utility'. When that is the case, the assessee is hit by the proviso given under section 2(15). The proviso reads 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, or any activity of rendering any service in relation to any trade, commerce or business for consideration, irrespective of the application of the money. Therefore, the case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e poor. If that is the real object, they would have provided loans at interest rate below bank rates or by taking a nominal margin on the money they borrowed from banks. But it is seen that they charged interest rate of 29% per annum which is 14% above the rate at which they have borrowed from the banks. In Kerala there is a specific law which is called as The Kerala Money Lenders Act, 1958 (Act 35 of 1958) to provide for the regulation and control of the business of money lenders in the State of Kerala. In this Act the maximum amount of interest which can be charged on lending money is prescribed. The rate is prescribed in section 7 of the said act which is as under: 7. Interest and charges allowed to money lenders No money lender shall charge interest on any loan at a rate exceeding 2% above the maximum rate of interest charged by commercial banks on loans granted by them. 8.8 For the previous year relevant to the assessment year 2007-08 the rate of interest as per section 7 of the Kerala Money Lenders Act cannot exceed more than 18%. However, in the present case the assessee was charging 29% interest which is far above the rate prescribed by the law i.e. The Ker ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt order, the Ld. AR submitted that the assessee has borrowed funds for advancing loans to the public at interest of 12% per annum from the Banks. Later, the assessee lent that amount to the public at average rate of 29%. It means that even there is a gap of 17% between borrowing and lending the amount to the public. The assessee claimed it as a charitable activity by placing reliance on the report of the sub-committee of the Central Board of Directors of Reserve Bank of India to study issues and concerns in the MFI sector(Malegam Committee Report). For the purpose of determining appropriate margin cap, the Committee examined the financials for the year ended 31st march 2010 of large MFIs and small MFIs as under: a) for the larger MFIs the effective interest rate calculated on the mean of the outstanding loan portfolio as at 31st March, 2009 and 31st march, 2010 ranged between 31.02% and 50.53% with an average of 36.79% for the smaller MFIs the average was 28.73%. 8.9.2 According to the Ld. AR, it was recommended by the sub-committing to charge interest from the public at 24% per annum since there was administrative expenditure incurred by the micro finance institutions. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pleaded before us that the income of the assessee is to be computed as per formally accepted commercial principles and on prudent basis. According to him, the income of the assessee is to be computed after making the above provisions for bad and doubtful debts to ascertain the correct income of the assessee. 12. The Ld. DR submitted that the provision for bad and doubtful debts can be allowed only if it was written off in the books of accounts of the assessee. 13. We have heard the rival submissions and perused the material on record. The Ld. AR placed reliance on the judgment of Kolkata Bench of the Tribunal in the case of Sreema Mahila Samity vs. DCIT in ITA No. 2826/Kol/2013 dated 13/10/2017, it was held that as under: 25. We find that the assessee has shown other receipts of ₹ 70,49,240/- which includes provision for bad and doubtful debt of last year (Schedule 11 14) of ₹ 53,60,345/-. The assessee in its written submission stated that cost of recovery is very high and the possibility of bad debt is also high as the loans were advanced without any surety or guarantee. We find from the record that the assessee has shown a provision of bad and doubtful deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Mr. Job M. Joy. The assessee claimed payment of ₹ 2,47,500 to Mr. Jayson Joy and ₹ 1,80,000/- made to Mr. Job M. Joy. This ground was dismissed by the Assessing Officer on the reason that these are trustees of the assessee and have no professional qualification for claiming such honorarium/salary from the Trust and also there was no mention of payment of salary or honorarium to the trustees in the Trust Deed. Only the expenditure incurred by them is to be reimbursed. Since the above amounts were paid to these persons unauthorisedly, this was disallowed by the lower authorities. 15. Against this, the assessee is in appeal before us. The Ld. AR submitted that the disallowances of remuneration paid to Mr. Jayson Joy and Mr. Job M Joy is not at all justified due to the fact that they both are Post graduates and are devoting their whole time in activities of the Trust. The Ld. AR submitted that they supervise and oversee the whole activities of the Trust and also travel extensively for the needs of Trust. Therefore, according to the Ld. AR, as a return, the remuneration is a reasonable pay back for their efforts and their sacrifice for the society and the amount so paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are unaware of the methods of recording in a proper manner thus it was difficult to get the computerised bills and vouchers from them. Hence, according to the Ld. AR, the expenditures incurred by the trust in the rural areas may not be fully supported by vouchers and bills. 22. The Ld. DR relied on the orders of the lower authorities. 23. We have heard the rival submissions and perused the record. The expenditure was disallowed on the basis of self made vouchers to the extent of ₹ 5 lakhs. In a normal trade practice, it is not possible to prove 100% bills and receipts from the recipients and there is every chance of making payments by way self made vouchers. However, there is every chance of inflating the expenditure by way of self made vouchers. Hence, we direct the Assessing Officer to disallow only 20% of ₹ 5 lakhs, i.e. ₹ 1 lakh towards self made vouchers. Hence, this ground of appeal of the assessee is partly allowed. 24. The next ground is with regard to disallowance of ₹ 1,30,000/- u/s. 40A(3) of the Act being 20% of ₹ 6,50,000/- paid as cash for land purchase. 25. The facts of the case are that the Trust had paid the following amou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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