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TMI Blog2018 (9) TMI 2125X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 Spandana (Rural Urban Development Organisation) [ 2010 (2) TMI 1166 - ITAT VISAKHAPATNAM] , Bharatha Swamukhi Samsthe [ 2008 (12) TMI 310 - ITAT BANGALORE] , Disha India Micro Credit [ 2011 (1) TMI 693 - ITAT NEW DELHI] , Bharat Integrated Social [ 2011 (5) TMI 1143 - ITAT CUTTACK] , Agricultural Produce and Market Committee [ 2007 (3) TMI 213 - BOMBAY HIGH COURT] and Sai Publication Fund [ 2002 (3) TMI 45 - SUPREME COURT] . Therefore, we confirm the findings of the CIT(A). Appeal of the revenue is dismissed. - S/SHRI N.S SAINI, ACCOUNTANT MEMBER AND PAVAN KUMAR GADALE, JUDICIAL MEMBER For the Assessee : Shri S.C.Bhadra, AR For the Revenue : Shri Subhendu Datta, DR ORDER Per N.S.Saini, AM: The appeal filed by the revenue is directed against the order of the CIT(A)-3, Bhubaneswar dated 9.3.2017 for the assessment year 2009-2010. 2. The revenue has raised the following grounds: The CIT(A) erred in allowing exemption u/s. 11 claimed by the assessee, without appreciating the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee went in appeal before the CIT(A). 5. The CIT(A) observed as under: The proviso to section 2(15) which restricts incidental business activities to Rs.25 lakh per year, in Asst. Year 2011-12, gets attracted if the organisation is engaged in business activities or the charitable activities are masked commercial activities. The explanatory Circular No. 11/2008 [F.No.l34/34//2008-TPL on proviso to Section 2(15) has provided the clarification regarding its applicability. It provides that the entities which run commercial activities under the mask of charitable activities are also covered. The relevant extract from the circular is as under : However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of charitable purpose. In the final analysis, however, whether the assessee has for its object the advancement of any other object of general public utility is a question of fact. If such assessee is engaged in any activity in the nature of trade, commerce or business or re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad debt is also high. (iii) The funds are given without any surety or guarantee. The relevant extract from the case are provided as under; 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 sections of the society in which the assessee has to incur a lot of expenditure. Moreover, 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 assessee while granting a loan to the poor woman. 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 types of micro finance activities most of the times the assessee could not recover the loans 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 that charging higher rate of intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credible support to the appellant regarding the charitable character of activities. 7. The CIT(A) further observed that similarly, the Bangalore Bench of the Tribunal in the case of ADIT(E) v. Bharatha Swamukhi Samsthe [2009] 28 DTR 13 (Bangalore - Tribunal) has held that the work of lending money to poor women for income generating activities was charitable in nature as there was nothing on record to show that the interest charged by the assessee was exorbitant. The following extract from the case is crucial to understand the statutory and judicial interpretations in this regard: It is not in dispute that the assessee's work is lending money to the poor women for income generating activities. The loan given to project members are borrowed from bank; 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. It is also not in dispute that the assessee incurs financial costs for ling loans from banks. The assessees also have to make payment towards salaries and other administrative activities of the Trust. There is nothing on rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee was a micro finance company registered under section 25 of the Companies Act, 1956. It had applied for registration under section 12A in Form No. 10A. The assessee's application for registration under section 12A was rejected by the CIT. The CIT had observed that the various clauses of the Memorandum of the company would clearly show that the assessee had a motive of profit also, along with the stated motive of service to the poor and needy people as claimed by the assessee. He further observed that such profit even if to be ploughed back as claimed by the assessee, liable to income-tax under IT Act. It was held that merely because there was a surplus from the activity of micro financing, that by itself, cannot be a ground to say that the assessee did, not exist for charitable purpose particularly when under the Memorandum of Association and Articles of Association, it had been clearly provided that the profit shall not be distributed amongst the members but shall be utilized towards its objects, and in the case of dissolution, any property remaining after meeting out the liability shall be transferred to the association having similar object. Therefore, the rejectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee is conducting the business of earning interest The Judgment of the Hon ble ITAT, Cuttack in these two cases makes it clear that two conditions should be complied with; firstly, the rate should be comparable with the market and secondly, it should not be such that it generates profit at the cost of the beneficiaries. '] The appellant has cited the Supreme Court ruling in CIT v. Thanthi Trust [2001J 247 ITR 785. In this case the Hon'ble Apex Court held that income from incidental business was permissible if the amount was applied for charitable purposes. The appellant has totally misunderstood the ruling and nowhere it suggests that the primary charitable activity can be run for profit on commercial principles. The ruling was specifically confined to sub section (4A) of section 11 which regulates incidental businesses and therefore not relevant.. 10. Further, the CIT(A) has also observed that the appellant has also quoted the High Court of Bombay ruling in the case Commissioner of Income-tax v. Agricultural Produce and Market Committee [2007] TAXMAN 359 (BOM.). In this ruling, it was held that even if there was some profit in activity carried on by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r ancillary activity would also not fall within the definition of business. The above ruling again re-affirms the law that a charitable organization cannot be allowed to run its primary activity on commercial principles with profit intent. The incidental activity may generate income and feed the primary activity but if the primary activity is with profit intent then there will be no primary purpose left for the organization. The primary activity may have profit but cannot have profit intent to benefit out of the beneficiaries. (vii) The Ld. A.R. has placed reliance in the case of Peoples Forum decided by my predecessor in office in ITA No. 0139/2011- 12 for A.Y.2009-10. In the above case, the assessee claims its activities of micro financing as falling within the limb of relief of poor and therefore, eminently eligible for tax exemption u/s.2(15) read with section 11 of the Act. The CIT(Appeals) negated the activity of the assessee as relief to the poor after discussing the issue at length. However, the CIT(Appeals) held that the activity of the assessee falls within the definition of advancement of general public utility and by applying the Annual Percentage Rates (AP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; has not been defined under the statute; but for the inclusive nature of the term as specified under s. 2(15) of the Act, which as existed before the amendment is as follows : 'Sec. 2(15): Charitable purpose includes relief of the poor, education, medical relief and the advancement of any other object of general public utility.' As per Finance Act, 2008, the said 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 Id. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticularly in view of the fact that micro finance business will not constitute any trade or business. According to the Id. AR, to perform charity, income is inevitable and contended that the activities being pursued by the assessee may constitute a trade or business, if it is not applied for the purposes of charity. Contrary to this, the Id. DR submitted that though 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 Id, OR 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 natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any trade, commerce or business............. , As it Stands so, giving a purposive interpretation to the statute, it may have to be read and understood that the second limb of exclusion under cl. (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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is having revolving fund at Rs. 66,33,800/-, which was availed by hypothecation of their debt to various necessary banks. Further, the assessee raised secured loans and unsecured loans @ 11%, totalling to Rs. 16,35,54,090/-. Thus, it means that it has raised loans to advance to the customers by paying interest and the assessee is not having own corpus in a formal capital so as to advance the loan. The assessee is providing loans by association with various commercial banks by raising loans from them. Such kind of micro finance activity cannot be termed as charitable activity rather than it is business activity. In order to become a charitable activity, the institution must have advanced loans at a subsidised rate of interest. The assessee is availing loans from banks and advances the same and admitted that it has advanced the loans to the customers at 13%. It is a commercial rate prevailing in the market. By advancing loans at that rate of interest cannot be considered as an activity carried on by the assessee as charitable and for the benefit of the public. When the assessee carried on micro finance activity in a commercial line, then it is not a charitable activity but an activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the orders of lower authorities and materials available on record. In the instant case, it is not in dispute that the assessee is engaged in the activity of Micro Finance. The Assessing Officer considered the same as non-charitable activity within the meaning of section 2(15) of the Act on the ground that the activities were carried out on commercial lines. 14. On the other hand, ld CIT(A) has held that the said activity of micro financing constituted charitable activity. 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 Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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