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TMI Blog2023 (9) TMI 256X X X X Extracts X X X X X X X X Extracts X X X X ..... not 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciple 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. - Shri. Chandra Poojari, Accountant Member And Smt. Beena Pillai, Judicial Member For the Assessee : Shri V. Srinivasan, Advocate And Ms. Sunaina Bhatia, CA For the Revenue : Shri D.K. Mishra, CIT DR ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the order dated 07.03.2022 passed by Ld.CIT(A)-2, Panaji for A.Y. 2017-18 on following grounds of appeal: 1. The orders of the authorities be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Self Help Groups [SHG] and thus these activities carried on by the appellant cannot be termed to be business activities incidental to the attainment of the objectives to invoke provisions of Section 11[4A] of the Act under the facts and in the circumstances of the appellant's case. 7. The learned CIT[A] ought not to have rejected the plea of the appellant that the activities of the appellant were examined in course of the earlier assessments framed and hence, a different view ought not to have been taken in violation of the principles of consistency on the ground that the registration u/s 12A of the Act was obtained prior to the insertion of the proviso to section 2[15] of the Act, vide which the benefit of exemption to trusts carrying on activities for the advancement of any other object of general public utility was taken away, without appreciating that the benefit of exemption u/s 11 of the Act was made available to the appellant even after the insertion of the proviso to Section 2[15] of the Act, and thus the stand adopted by the learned A.O. and sustained by the learned CIT[A] goes against the principles of consistency under the facts and in the circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... triotism etc. 7. Offering the opportunity to develop personality and avenues for their intelligent participation in Nation building. 8. To guide them to equip themselves for the struggle for life in changing Society. 9. To open Schools, College and Technical Institutions in District, State and inter State level for providing proper training for rural people regarding cooperative Associates, Co-operative Bank etc. and regarding self-employment, self-unity and help etc. 10. To provide library, T.V., Data etc. to unemployed educated people in rural areas with a view to assist them to take self-employment. 11. To strengthen rural youth clubs by giving proper guidance. In this connection, to work hand in hand with State and Central Government Departments. 12. To provide information about the plans of State and Central Government to the concerned persons of the Public. 13. To create training facilities in rural areas for development of Industry and self-employment. 14. To enable the awakened and affected youth to come together to bring about development and new environments. 15. To provide security to the assets of Association, Cooperative con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. 8. In response, the assessee filed reply dated 07.12.2019, wherein it was submitted that the microfinance and insurance provided by the assessee to SHG s falls within the limb Relief of Poor u/s. 2(15) of the Act and hence, the 1st proviso to section 2(15) of the act was not applicable as the same related only to activities that comes within the limb Any other object of general public utility . Secondly, the assessee also submitted that, the aforesaid activities were carried on even in the earlier years and the same was never regarded as trade, commerce or business and hence, according to the principles of consistency, would apply to the present facts. Finally, it was also contended that, the activity cannot be considered as trade, commerce or business having regard to the dominant purpose test and therefore, it cannot be held as trade, commerce or business. The Ld.AO rejected the contentions of the assessee and has invoked the provisions of section 13(8) r.w.s 2(15) of the act to reject the claim of exemption u/s. 11 of the act. 9. The Ld.AO concluded the assessment by the impugned order passed u/s. 143(3) of the act dated 21.12.2019 determining the total income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, business and commerce or 'involvement' in trade, commerce and business is sufficient to attract the proviso to section 2(15). 4.5 The appellant has contended that none of its activities are carried out with an object or any motive to earn profit or surplus. That the earning of revenue is only incidental to the predominant object of providing help to the poor. However, this submission is quite in contradiction to the fact that the appellant is charging 50 `A higher rate of interest for the loans it provides to the self-help groups. The appellant receives grants and these grants should. in the normal course, have been used for meeting the administrative expenses with the loans to the SHGs being provided at a lower rate approximating the rates at which the appellant itself got it. Charging a 50% higher rate of interest shows that type of services being provided by the appellant are certainly for commercial gains with predominant objective to make profit. 4.6 In the case of Institute of Chartered Accountants of India v. Director General of Income tax (Exemptions) 120121 347 ITR 99, the Honible Delhi High Court discussed the definitions trade, commerce and business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit. To regard an activity as business, there must be a course of dealings continued, or contemplated to be continued, normally with an object of making profit and not for sport or pleasure (Bharat Development P. Ltd. v. CIT [1982] 133 ITR 470 (Delhi)). The third essential characteristic is that a business transaction must be between two persons. Business is not a unilateral act. It is brought about by a transaction between two or more persons. And, lastly, the business activity usually involves a twin activity. There is usually an element of reciprocity involved in a business transaction. 4.8 The Delhi High Court in the case of GS1 India v. DGIT(E) [20131 38 taxmann.com 364 held that legal terms trade, commerce, or business in Section 2(15), means an activity undertaken with a view to make or earn profit. Profit motive is determinative and a critical factor to discern whether an activity is business, trade or commerce. 4.9 The activity of the appellant predominantly is to take loans from banks at a lower rate and thereafter extend it to SHGs at a 50% higher rate. The appellant has an established set up for this activity and propagates this activity through use of Anima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade, commerce or business, it has to be examined whether the words any trade, commerce or business as they appear in clause (b) are in connection with the service referred to the trade, commerce or business pursued by the institutions to which the service is given by the appellant. If the said words are actually in respect of the trade, commerce or business of the assessee itself, clause (b) will be otiose since the activity of the assessee involving any trade, commerce or business, is already excluded from the charitable purpose by virtue of clause (a) itself and hence there was no necessity to stipulate further, by way of clause (b), adding the words or any activity of rendering any service in relation to any trade, commerce or business. . To render a purposive interpretation to the statute, it needs to be read and understood that as per the provisions of clause (b) in relation to the service rendered by the assessee, the terms any trade, commerce or business refers to the trade, commerce or business pursued 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee-trust. Incidental means offshoot of the main activities; inherent by-product of principal activities. Activities to compliment and support the main objectives are not in the nature of incidental to the business. They are supporting activities, at the maximum. The genesis of incidental activities must be from the principal activities themselves. There cannot be one source for the principal activities and another source for incidental activities. In the present case, even if activities of the assessee were stated to be relief of poor, it was not possible to conclude that running of business in the form of micro finance is incidental to carrying on of main objective of the assessee-trust and it is the main business of the assessee. Therefore, the assessee is not protected by the provision stated in section 11 (4A), either. 4.13 The ld.AR, during the course of hearing on 04.03.2022, argued that in earlier years also the Trust was carrying similar activities and the same were held as not commercial even in orders passed under section 143(3) of the Act for A.Y 2016,17, 2013-14, and 2012-13 and therefore the rule of consistency should be followed. He placed reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd there are many judgments holding that the act of providing micro finance and earning interest income thereon is a business activity and not for a charitable purpose. In the case of Sreema Mahila Samity v. Deputy Commissioner of Income-tax, Circle-Nadia (20171 86 taxmann.com 216 (Kolkata - Trib.), it was held that where assessee, charitable institution, carried micro financing business and provided loan to general public and Self-Help Group (SHG) and earned interest income, then this activity would not be a charitable purpose. In the case of Income-tax Officer (Exemptions), Madurai v. Kalanjiam Development Financial Services [20151 64 taxmann.com 255 (Chennai - Trib.), it was held that where Assessee was a micro finance company operating as a financial intermediary between banks and SHGs where its main objective was bridging gap in micro finance to SHGs and for that purpose, it availed credit facilities from different banks/financial institutions over few years on interest and these were advanced to SHGs at interest rates with some mark-up, then assessee was carrying on micro finance business in a commercial line and it was not a charitable activity but an activity to expand fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O case (2017) 84 Taxmatin.Com 283 (SC) refers. 4.17 The argument of the Id. AR that the mere fact that premium collected towards instance is more than the relief given during the specific year cannot make the activity commercial, is well received but the same may not have any material impact on the contours of the case as the case mainly, hinges on the nature of micro financing activity of the appellant. Insurance activity being a corollary of the micro finance activity, whatever holds true for the latter is equally germane for the former. 4.18 This ground of appeal is accordingly dismissed Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before this Tribunal. 11. The Ld.AR submitted that all the issues raised are in respect of disallowance of exemption claimed by the assessee u/s. 11 of the Act. The Ld.AR submitted that the assessee is engaged in the charitable activity of relief to the poor by forming Self Help Groups (SHG) of the rural poor and encouraging them to become financially self-sufficient. He submitted that the modus operandi followed by the assessee is to advance loans to SHGs and encourage them to in turn provide the funds to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kar (supra). 15. The assessee explained before us that in the activity of micro financing, the assessee obtained loan from banks and or financial institutions and advanced the same to self help group and poor persons. Above submissions of the assessee could not be controverted by the department. No material could be brought on record to show that the loan was advanced of any big amount or loan was advanced to any economically affluent persons. Thus, we find merit in the contention of the assessee that the activity was carried out with the object of providing relief to the poor, In the circumstances, we find no error in the order of the CIT(A), which was passed following the decisions of Visakhapatnam Bench of the Tribunal in the case of Spandana (Rural Urban Development Organisation) (supra), Bangalore Bench of the Tribunal n the case of ADIT (E) vs Bharatha Swamukhi Samsthe (supra), Delhi Bench of the Tribunal in the case of Disha India Page 19 I 20 ITA No. 2 65/CT K/ 2017 Asse ssment Year : 20 09- 10 Micro Credit (supra), Cuttack Bench of the Tribunal in the case of Bharat Integrated Social (supra), Hon'ble High Court of Bombay in the case of CIT vs. Agricultural Prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticular section of society, i.e., traders dealing in vegetables and fruits, whereas, in the present case the assessee is providing micro financing assistance to needy, deserving individuals or group of individuals and not to a particular section of society. He also submitted that in case of Janalakshmi Social Services vs. DIT(E) (supra) the assessee was availing loan facility from banks/financial institutions at interest rates ranging from 8.5% to 9% and was extending the finance to the particular section of the society at rates between 18% to 24% per annum in addition to charging of processing and service fee between 1 to 2 percent. 17. Whereas, the assessee in the present facts availed loan from SCDCC bank @ 10% and was charging interest in accordance with RBI guidelines @ 15% on the loans advanced to SHG, without there being any security and processing or service charges on the beneficiaries. 18. The Ld.AR further submitted that in case of Janalakshmi Social Services vs. DIT(E) (supra) the assessee therein was not reaching to individual beneficiaries directly but was having intermediaries such as NGO and SHG s from whom it charged high rate of interest. 19. Whereas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut avenues for marketing of their products including raising of capital and loans for their vocation and activities. They help the rural poor by forming SHG's, attending SHG meetings, regularly conducting Training programs etc. The Trust provides these animators with a monthly honorarium/ remuneration to enable them to meet their expenditure in this regard and carry on the activity of alleviating poverty. The activities of the Self Help Groups are managed coordinated by these animators, who act as a bridge between the trust and self help group members and general public of various places. The activities of the animators aid in bringing awareness to the rural poor in opportunities available to them. The rural poor are mostly artisans, craftsmen and other semi-skilled persons who are engaged in making products and providing services. These people require loans for their activities and they do not have access to banks and other formal financial institutions. They are at the mercy of local money lenders, who charge exorbitant interest. Hence, the animators are tasked to spread awareness not only about the availability of finance through self help groups without security but also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anner, the Trust aids in spreading awareness amongst the rural poor and by educating the SHG members and animators about the various schemes/ benefits available to them, the Trust helps them in making the best use of the opportunities provided. During the year under appeal, the Trust had incurred training expenses of Rs. 79,31,225/-. 6. Uniform: Uniforms are provided to the SHG members as well as Animators free of cost to inculcate a sense of equality and unity among the men women members of Self Help Groups as well as Field workers. The Trust believes in providing fair and equal opportunity to the rural poor and the practice of providing uniforms instills a sense of camaraderie amongst the SHG members and ensures that there is no discrimination. The total amount spent during the year under appeal was Rs. 3,46,187/- 7. SHG formation expenses Formation of Self Help Groups for the socio, economic and holistic development of rural poor is also done by the Trust in cases where the members of the SHG are unable to perform these activities by themselves due to lack of resources. In such cases, the Trust aids them in the formation of SHG's. The SHG formation expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ines issued from time to time and the funds are provided to the needy without putting extra burden of processing or service charges, the activity would certainly fall within the ambit of charitable activity. Based on the above background regarding the activity of Microfinancing, let us analyse the arguments of both sides in light of applicable provisions. 25. Section 11 of the Act, stipulates that income derived from property held under trust either wholly or in part for charitable or religious purposes shall not be included in the total income computed under the Act. Therefore, for an assessees other than religious trusts, the activities must necessarily be for a charitable purpose within the meaning of section 2(15) for availing the exemption under section 11. 26. The Sub section (15) of section 2 lists six limbs, five of which are specific and the last one is the residuary limb, being the advancement of any other object of general public utility . For the sake of convinence the relevant portion of Section 2(15) is reproduced herewith as under: . . 2. In this Act, unless the context otherwise requires, . .. (15) charitable purpose includes re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 28. A plain reading of the above sub-section also shows that, the two old provisos and the new proviso brought in vide Finance Act, 2009 2015, will only apply if the charitable purposes are in the nature of the advancement of any other object of general public utility. These provisos, are not relevant to activities covered by any of the five specific limbs of section 2(15). 29. 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 claimed that this activity of lending money through micro financing is incidental to its main activity of relief of poor and is therefore covered u/s 11(4A) of the I.T. Act, 1961. Though the assessee claims that it's activity is covered u/s. 11(4A) of the Act, as incidental to its mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . ACIT (supra) are as under : 18. ..........Now the issue before us is; whether the micro financing activity is a charitable activity and whether this was an object of the assessee at the 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of self-help and self-reliance amongst the poor sections of the population. (b) To promote and administer schemes for self-employment of the persons belonging to poorer and disadvantaged sections of the population. (c) 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37 in the balance sheet. General fund that has been carried forwarded from the preceding assessment year is approximately Rs. 23.02 crores and the current year balance after adding the excess income over expenditure amounting to Rs. 5.74 crores approximately totals to Rs. 28.76 crores approximately. 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. 35. 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 Hon ble Andhra Pradesh High Court in case of CIT vs. M/s. Spandana (Rur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of an object of general public utility, it is that object and not its accomplishment which must not involve the carrying on of any activity for profit. So long as the dominant purpose of the institution does not involve the carrying on of any activity for profit, it is immaterial how the money for achieving that purpose is found, whether by carrying on an activity for profit or not. The Hon'ble Supreme Court has emphatically clarified that the primary activity cannot be run for profit, once the primary activity is not run with profit motive the organization can have other activities which may generate profit. There is a fundamental difference between running the primary activity for profit and having incidental profit-making activities. 38. To sum up, in our opinion, it is undisputed that the assessee was granted registration under s. 12A w.e.f. 8th July, 2004. The Department also accepted the returns for the last many years allowing exemption under s. 11. It is only for the asst. yr. 2017-18, the Department is taking a different view. It is not in dispute that the assessee's work is lending money to the poor women for income generating activities. The financial assist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the authorities below that the objects of the assessee is not towards advancement of any other object of general public utility. As considered hereinabove, the various activities carried on by assessee by providing finances to the members of self help group reveals that it is working towards the alleviation of economically backward section more importantly the rural women folk who do not have any security to offer for availing loan. These women folk belong to low income households and the finances provided to such groups help them to provide education to their children, improve the household condition etc. In our considered opinion, the activity being charitable in nature towards general public utility cannot be equated with a money lending activity carried out in a corporate world. Therefore the decisions relied by the Ld.DR on this issue is factually different with the present facts of the assessee before us. The assessee therefore has the benefit of the decisions rendered by Hon ble Supreme Court and Hon ble Andhra Pradesh High Court referred to hereinabove. We also draw support from the ratio laid down in decision by Hon ble Supreme Court in case of Vegetable products ..... X X X X Extracts X X X X X X X X Extracts X X X X
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