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TMI Blog2023 (11) TMI 1107X X X X Extracts X X X X X X X X Extracts X X X X ..... e the said order needs to be quashed. 2. On the facts and in the circumstances of the case and in law, CIT(A) erred in invoking the proviso to section 2(15) of the Income Tax Act and thereby rejecting the claim of exemption u/s 11 of the Act by relying on the findings given in assessment orders for AYS 2016-17 and 2017-18 without appreciating the facts that: (i) the objects of the Trust are covered within the meaning of charitable purpose and the Trust was granted registration u/s. 12A of the Act. The Hon'ble ITAT has held in the appellant's own case for AY 2010-11, AY 2011-12 and AY 2014-15 that the proviso to section 2(15) of the Act cannot be invoked in appellant's case and that it is eligible for the benefits of sections 11 and 12 of the Act. (ii) There is no change in the activity undertaken by the appellant trust during FY 2017-18 as compared to the previous years in respect of which cancelation of registration was restored. Thus, there is no reason for invoking the provisions of section 2(15) of the Act as said facts are already decided by the appellate authorities and accepted by the Income Tax Department in preceding year. (iii) the appellant Trust has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b. Provision for guarantee claims is made as per the recognised and accepted accounting principles/ standards under mercantile system; c. As regards to recognition of revenue from guarantee fees, the same is in accordance with the Accounting Standard 9-Revenue Recognition, as per which the revenue is recognised only when it is reasonably certain that the ultimate collection will be made; d. The appellant has ensured that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities in accordance with AS 29 Provisions, Contingent Liabilities and Contingent Assets. e. The present value of a future liability, properly ascertained and discounted i.e. accounted for on actuarial basis, is allowable u/s 37(1) of the Act; f. The provisions made in the books of accounts amounts to application of income u/s 11 of the Act g. Provision is only 4.24% of the Guarantees issued and outstanding, which is fair and reasonable. which is wrong and contrary to the facts of the case, the provisions of the Income Tax Act, 1961, and Rules made thereunder. (iii) Without prejudice to the above, on the facts and in the circumstances of the case and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrary to the facts of the case, the provisions of the Income Tax Act, 1961 and Rules made thereunder. (ii) CIT(A) also erred in disallowing the sum of Rs. 9,92,75,616/- being 15% of the income derived by the trust under section 11(1)(a) without appreciating the facts that: a) the Hon'ble ITAT has already held in the appellant's own case for AY 2010-11, AY 2011-12 and AY 2014-15 that the proviso to section 2(15) of the Act cannot be invoked in appellant's case and that it is eligible for the benefits of sections 11 and 12 of the Act. b) as per CBDT - Circular No. 11/2008, dated 19-12-2008, the newly inserted proviso to section 2(15) of the Act will not apply in respect of the first three limbs of section 2(15) of the Act i.e. relief of the poor, education or medical relief and as the purpose of the appellant trust is relief of the poor, proviso to Section 2(15) will not apply in appellant's case. (iii) Without prejudice to the above grounds of appeal, on the facts and in the circumstances of the case and in law, the ld. Assessing Officer ought to have given a deduction of 15% on assessed total income of Rs. 4,13,22,70,216/- as determined by the ld. AO in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of the deduction of provision for guarantee claims of Rs. 3,47,04,32,777/- made on the basis of collateral valuation and restricting the same to the actual payment on the ground that the provision of expenses are not allowable under the Act assessee's claim for deduction of provisions of guarantee to the tune of Rs. 9,67,79,67,223/- [Rs.3,47,04,32,777/- (-)(minus) Rs. 13,14,84,00,000/-] out of the aggregation of funds claimed during the year under consideration. The AO also disallowed deduction of Rs. 9,92,75,616/- being 15% of the income derived by the assessee trust under section 11(1)(a) of the Act. The AO accordingly framed the assessment under section 143(3) read with section 144B of the Act. 3. The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has partly allowed the same. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the assessee has come up before the Tribunal by way of filing the present appeal. 4. We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objectives hereinabove provided." 7. Pursuant to the enactment of the Micro, Small & Medium Enterprises Development Act, 2006, the Ministry of SSI & ARI has been named as Ministry of Micro, Small & Medium Enterprises vide notification dated May 09, 2007 and as such the activities are also changed in the concept of Micro, Small & Medium Enterprises. Therefore, in order to carry out the activities of the trust SSI are substituted by the words "Micro & Small Enterprises (MSE)" and the "SSI loans" are substituted by the word "MSE Loans". Ground No.1 8. During the course of argument ground No.1 was not pressed hence, the same is dismissed as not pressed. Ground No.2 9. In the backdrop of the aforesaid facts the assessee trust has claimed benefits available under section 11 & 12 of the Act. However, the AO by invoking the proviso to section 2(15) of the Act and by relying upon the assessment order for A.Y. 2016-17 & 2017-18 denied the claim of exemption under section 11 on the ground that levying/collecting fees for guarantee from MLIs shows profit motive. Assessment order has been upheld by the Commissioner of Appeals vide impugned order which is under challenge before the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee trust provides guarantee to the lending institutions who give loan to the MSME without collateral security and/or third party guarantee, for which it (assessee trust) charges guarantee fee and service charges to the lending institutions. It is also not in dispute that the issue as to the applicability of proviso to section 2(15) of the Act has already been decided by the Tribunal in favour of the assessee in A.Y. 2010-11, 2011-12 & 2014-15. It is also not in dispute that there is no change of activities being undertaken by the assessee trust during the year under consideration vis-à-vis earlier years. It is also not in dispute that in A.Y. 2016-17 & 2017-18 the AO has invoked the proviso to section 2(15) of the Act by denying the benefit of section 11 of the Act, which orders are pending before the Ld. CIT(A) for adjudication. 12. In the backdrop of the aforesaid undisputed facts the sole question arises for determination by the Tribunal qua ground No.2 is as to whether: "The AO and the Ld. CIT(A) have erred in denying the claim of exemption of the assessee trust under section 11 of the Act by invoking the proviso to section 2(15) of the Act?" 13. The AO as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, education or medical relief; that the Ld. CIT(A) has erred in not following the order passed by the Tribunal in assessee's own case for A.Y. 2010-11, 2011-12 & 2014-15 wherein it is held that proviso to section 2(15) of the Act cannot be invoked in case of the assessee. 15. The Ld. A.R. for the assessee challenging the impugned order contended that the assessee is into the charitable activities in as much as it is engaged in advancement of objects of general public utility and it is not hit by proviso to section 2(15) of the Act. 16. However, on the other hand, the Ld. D.R. for the Revenue in order to repel the arguments addressed by the Ld. A.R. for the assessee relied upon the order passed by the Ld. CIT(A) by contending that since the assessee trust is promoting the activities of the banking institution by supporting their commercial activities who are lending loans to the MSME and drew our attention towards page 13 of the paper book which shows that the business of the assessee trust is thriving day by day and as such it is hit by proviso to section 2(15) of the Act. It is further contended by the Ld. D.R. for the Revenue that the assessee trust is silent that "whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r services, we are to examine profile and activities carried out by the assessee trust. (iv) that so far as profile of the assessee trust is concerned, the same has been constituted by the Hon'ble President of India and as per trust deed its settler viz. Government of India and SIDBI noticed that the small scale industries in India are facing difficulties in getting credit facilities from primary lending institutions, banks, state finance corporation, state industrial development corporation, regional rural development banks etc. for want of collateral security and/or third party guarantee. It is a matter of common knowledge that small scale industries are facing real time difficulties in getting loan without arranging collateral security and/or third party guarantee. For inclusive growth of India unless small scale industry is not promoted overall growth of the country cannot be expected. So in order to provide easy credit facilities to the small scale industries who are unable to arrange collateral securities and 3rd party guarantee, the assessee trust has come to their rescue by providing third party guarantee by charging guarantee fees. With this profile we do not find any el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itable activities of the assessee trust. Othewise had there been any motive of the assessee trust to earn profit or to be into trading activities crores of Rupees would not have been pumped into the corpus of the assessee trust. This fact shows that the assessee trust is being run purely for the purpose of general public utility without having any element of activity of trading, commerce or business by charging fee for services. (ix) that Hon'ble Gujarat High Court in case of CIT (Exemptions) vs. Gujarat Industrial Development Corporation (2023) 452 ITR 27 (Guj.) wherein the assessee being a state industrial development corporation constituted for the purpose of securing and assisting rapid and orderly establishment and organization of industrial areas and industrial estates in the state and for the purpose of establishing the commercial centers in connection with establishment and organization of such industries, was denied the benefit of section 11 by the AO by invoking the provisions contained under section 2(15) of the Act. However, the Tribunal had allowed the benefit of section 11 & 12 of the Act to the assessee corporation which was upheld by the Hon'ble High Court by rely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court has clarified through illustrations what kind of services or goods provided on cost or nominal basis would normally be excluded from the mischief of trade, commerce, or business, in the body of the judgment. A.4. Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidental. The requirement in Section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15), has not been breached. Similarly, the insertion of Section 13(8), seventeenth proviso to Section 10(23C) and third proviso to Section 143(3) (all w.r.e.f. 01.04.2009), reaffirm this interpretation and bring uniformity across the statutory provisions." (xi) that when we apply the aforesaid test laid down by the Hon'ble Apex Court in case of Ahmedabad Urban Development Authority (supra) for invoking the proviso to section 2(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit Guarantee Fund Trust for Micro and Small Enterprises, being a trust created by the Government of India and the Small Industries Development Bank of India established under sub- section (1) of section 3 of the Small Industries Development Bank of India Act, 1989 (39 of 1989)." (xvi) that the assessee trust being a statutory authority constituted by the President of India with the funds being provided by the Government of India and SIDBI is purely involved in the advancement of the object of general public utility and as such to be considered as charity in the general public utility category. (xviii) that the order relied upon by the AO rendered by the Tribunal in case of Chandigarh Lawn Tennis Association (supra) is not applicable to the facts and circumstances of the case because in that case the assessee was not an organization of the state or any statutory or regulatory authority. Tribunal has categorically held that in that case the assessee had a profit motive, which is entirely missing in this case (xix) that going by the objects and purposes for which the assessee trust was established, it is proved on record that its sole purpose was to ameliorate the difficulties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee trust that the liability has accrued during this year and is ascertained through actuarial valuation and accordingly provision is made, the AO proceeded to disallow the same on the ground that since the assessee is a registered trust under section 12A of the Act the application is to be allowed on actuarial basis and no provision is allowable and that the assessee has itself recognized guarantee fee income on payment basis as such provision for guarantee claim cannot be allowed. The Ld. CIT(A) has confirmed the disallowance on the disallowance of deduction claimed by the assessee trust. 22. It is a fact on record that the assessee trust is into providing guarantee to the financial and banking institution on behalf of the small entrepreneurs who are taking loans, for which the assessee trust receives guarantee commission from the lending institution and thereby undertakes the responsibility of making good any loss to them in case of the default of the borrower. 23. The Ld. A.R. for the assessee challenging the impugned provision for guarantee claims of Rs. 3,47,04,32,777/- contended that the AO has proceeded on the wrong premise that the assessee is following "c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and/or paid. When the accounting standard mandates creating of provision, so in the absence of such provisions financial result would give distorted picture of financial affair of the assessee trust. 28. Hon'ble Supreme Court of India in case of Rotrock Control India Pvt. Ltd. vs. CIT 314 ITR 62 held provision on account of warranty in respect of product sold by the assessee as legitimate deduction. Hon'ble Supreme Court of India in case of Parth Movers 245 ITR 428 (SC) has also decided the issue at hand by returning following findings: "Held, reversing the decision of the High Court, that the provision made by the assessee company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, was mutitled to deduction out of the gross receipts of the accounting year during which the provision is made for the liability. The liability was not a contingent liability." 29. When the provision for guarantee claim made by the assessee is otherwise proved to be legitimate deduction, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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