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TMI Blog2024 (5) TMI 1010X X X X Extracts X X X X X X X X Extracts X X X X ..... it is important to ensure that there is no dominant profit motive involved and it is not used as a mask for commercial activities and benefitting at the hands of the beneficiaries. If an organisation which has no source of generating surplus from its activity other than the beneficiary then existence of consistent and substantial surplus does raise a question regarding the commercial nature of the activity. If this question is not successfully defended and justified by the assessee then the invocation of the proviso to section 2(15) by the AO cannot be questioned. In the present case, assessee is only carrying the microfinancing activity by charging exorbitant rate of interest like any other commercial banks which is not expected from this assessee, which is registered u/s 12AA of the Act so as to claim exemption u/s 11 of the Act. The activity of the assessee is nothing but commercial activity carried on with the intention of making maximum profit. If we consider the plea of the assessee, then the exemption u/s 11 of the Act could also be claimed by the Co-operative Societies, Regional Rural Banks and Commercial banks also as the activity of these banks are similar to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he authorities below were not justified in holding that the activity of providing financial assistance to poor people would fall within the limb advancement of any other object of general public utility and does not come within the ambit of 'relief of the poor' on the facts and circumstances of the case. 6. The learned CIT(A) erred in denying claim of deduction u/s 11 12, though admitting that the micro finance Activity is Charitable activity in the advancement of GPU and erroneously concluded that the appellant was hit by the Proviso to section 2(15), when the said proviso is only applicable to the incidental revenues generated and not the primary activity, on the facts and circumstances of the case. 7. The authorities below have erred in not allowing the exemption claimed under section 11 of the Act on the grounds that the appellant has made surplus from its activity without appreciating the fact that such surplus is again utilised for providing financial assistance to the poor on the facts and circumstances of the case. 8. The authorities below were not justified in holding that the appellant is providing financial assistance to select group of people and not to public a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of Income Tax, Karnataka II, Bangalore in No. TRUST/18/A-1/S-742/98-99/CIT-II dated 18.12.1998. the assessee has also been granted 80G vide order in F.No. DIT(E) BLR/80G/200/AAECS0038H/ITO(E)- 3/Vol.2010-11, dt: 16/08/2010. The said certificate u/s 12A and 80G have been both renewed on 24/09/2021. ii. The Assessee Trust was formed with the objectives as reproduced in the order of assessment and the assessee has been carrying out activities to fulfil the objectives. The assessee has over the years consciously and in fulfilment of its objectives, lent monies to the downtrodden, who have no option of availing loans and has provided the means to install themselves as earning members of the community. iii. The assessee has advanced monies to individuals and others in order to develop a belief of entrepreneurship and to inculcate a feeling of participation in the society, by earning and performing small activities. The assessee has advanced monies to imbibe a sense of responsibility in the individuals, in order to make them responsible citizens in earning income and being self-reliant. iv. The individuals who receive the microfinance are people who are ineligible to apply for loans w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir daily lives would not be eligible to avail a loan and at concessional rates of interest compared to the prevailing rate of interest from private financial institutions / NBFC. xi. Without prejudice to the above, the ld. A.R. stated that the assessee does not receive any funds as donations, grants, etc and has to operate solely on the borrowings to fund the demand, which is on a higher scale and thus the necessity to avail loans and the markup on the loans availed are necessary to cover the cost of overheads, travelling, conducting camps, recovery drives, litigation, etc. xii. The assessee has by being prudent in its lending and effective control of the disbursements, ensured that there was a surplus in the years, which cannot be construed to be a profit motive and the activities of the assessee was being conducted for earning profit. xiii. The ld. A.R. submitted that the learned AO ought not to have been merely swayed by the financials of the assessee to hold that the assessee was earning profits consistently, rather ought to have appreciated that the assessee was under taking a large responsibility of upliftment of the downtrodden, which has not been appreciated in the right pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towns etc. for income-generation; and thus to help them and their family to rise out of poverty not with the motive of profit, can be considered to be charitable purpose within the meaning of sec. 2(15) of the Act. 15 16 17. On perusal of the aforesaid meaning of relief of the poor, it is clear that it encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy people. It would include within its ambit, purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under sec. 11(4A) or the seventh proviso to sec. 10(23C) of the Act. xxiii. The ld. A.R. placed further reliance on the decision of the Hon ble Cuttack Tribunal in the case of Bharat Integrated Social Welfare Agency in ITA No.115/CTK/2011 dated 27.05.2011, wherein it was held; 5. The amounts received from the financial institutions and the amounts distributed as loan to carry out i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not dis-entitle it from claiming exemption under section 11 of the Act, when the surplus are used for the object of the trust. viii. The ld. A.R. placed reliance on the parity of reasoning of the decision of the Hon ble Apex court in the case of ACIT v. Surat Art Silk Cloth Manufacturer Association reported in [1978] 121 ITR 1, wherein the constitutional bench held; 17 The test which has, therefore, now to be applied is whether the predominant object of two activities involved in carrying out the object of general public utility is to subserve this charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al economy, without which it would be difficult for the individuals to join the main stream of the economy. iv. The learned Assessing Officer has merely relied upon the figures as appearing in the financials, has arrived at the conclusion that the assessee was not carrying on charitable activity, without appreciating the nature of the work carried on, by the assessee. v. He submitted that the nature of charitable activity cannot be construed by a mere glance at the financial data, but the AO ought to have appreciated the purpose and the intent behind the activities being undertaken by the assessee. vi. The AO ought to have appreciated that the assessee s activity was to be appreciated by considering the surrounding circumstances under which it operates, the individuals to whom benefit is accruing, the extent of the revival in the economy it is aiding in, to arrive at the conclusion that the assessee was not doing charitable activity. vii. In view of the above, the ld. A.R. submitted that the AO has taken a narrow view of the activities of the assessee by relying upon the financial data alone to arrive at the erroneous conclusion that the assessee was not charitable in nature. viii. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year; xiv. The ld. A.R. submitted that it borrows money from banks and financial institutions and advances to the needy people. The learned assessing officer has also concurred at para 5.9 of page 6 in the impugned order of assessment that the assessee does not have its own corpus. The relevant portion is extracted hereunder; 5.9 Further, the assessee has raised secured loans and unsecured loans at the rate of from banks. Thus, it means it has raised loans to advance to customer by paying interest and the assessee is not having own corpus in a formal capital so as to advance the loan. Borrowed funds of the assessee have been utilised to lend loans to the public and the rate of interest charged is with a view to generate profit. xv. The ld. A.R. submitted that the learned assessing officer has held that the assessee is engaged in business activity and denied the exemption under section 11 of the Act purely based on the surmise that the assessee is charging exorbitant interest on loan advanced to poor people. xvi. The ld. A.R. submitted that the micro-financing act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 2.1 The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute charitable purpose even if it incidentally involves the carrying on of commercial activities. 2.2. Relief of the poor encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that (i) the business should be incidental to the attainment of the objectives of the entity, and (ii) separate books of account should be maintained in respect of such business. Similarly, en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is bound to charge higher rate of interest from the project members. Otherwise, assessee could not undertake the microfinance activities at the same rate of interest. The similar is the position in the instant case. Since the Tribunal has taken a view in a particular set of facts and held that micro finance activity is a charitable activity as it alleviates the poverty and also for the benefit of the socioeconomically weaker sections of the society, we find no reason to take a contrary view in this appeal with regard to the nature of activity undertaken by the assessee. We therefore hold that the micro finance activity in the instant case is a charitable activity. Since the registration has already been granted to the assessee under s. 12A assessee is eligible for exemption under s. 11 of the Act. 4.3. Regarding Interest under section 234 of the Act- Grounds of appeal No.(8) the ld. A.R. for the assessee submitted that: i. The ld. A.R. submitted that the rate, period and quantum on which interest under section 234of the Act has been levied is not discernible. The levy is not in accordance with law and further the Assessee was not given the basis and method of calculation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As a result of professional management, assessee has earned profit of 28.76% in assessment year 2016-17 and 24.94% in the assessment year 2018-19 and also reserves surplus of Rs. 34,01,24,035/- in the assessment year 2016-17 and Rs. 45,91,43,949/- in the assessment year 2018-19. Thus, the assessee has not lend any money to its borrowers at subsidized rate. On the other hand, it charged exorbitant rate to its borrowers and there has been no relief to the poor. 6.1 Now the contention of the assessee before us is that the assessee is a Charitable Institution carried business of microfinance in terms of section 2(15) of the Act and exemption to be granted. The charitable purpose is defined u/s 2(15) of the Act, where it states that exemption can be granted to the institutions which are involved in charitable purposes namely relief to poor, education, medical relief and advancement of any object of general public utility. But, however, an amendment came into force by Finance Act, 2008, wherein proviso was added to section 2(15) of the Act, which states that the advancement of any other object of general public utility shall not be charitable purpose if it involves carrying of any activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and abroad (b) To Provide consultancy and the required infrastructural and training facilities to the group members. (c) To receive money on deposit at interest and provide financial and other support to the members of SHGs. 2. .. (a) To organise survey and investigation for assessing the scope and expansion of existing rural industries and establishment of new industries for the benefit of group members. (b) To formulate plans for providing required credit to the group members. (c) To raise necessary funds for carrying out the objectives of the financial service by borrowing, donations, grants, gifts or otherwise from India and abroad. (d) To provide finance for economic activities relating to production, trade and business undertaken by the group members. (e) To arrange for direct financing of the group members by the Commercial Banks and other financing agencies and provide necessary guarantee to them. 3. To undertake and assist rural development and relief for poor by all conceivable means and especially in the areas relating to relief in times Of natural and other calamities, improvement of basic amenities like water supply, electricity, roads, transport, drainage and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvest the monies of the Company not immediately required for its purposes in or upon such investments/securities and in the modes specified under the provisions of Section 13(1)(d) read with Section 11(5) of the Income Tax Act. 1961 as amended from time to time. 10. To undertake and execute any trusts or any agency which may seem directly ir indirectly conducive to any of the objects of the Company. 11. To subscribe to any local or other charities and to grant donations for any public purposes and to provide a superannuation fund for the servants of the Company or otherwise to assist any such servants, their widows and children. 12. To establish and support and to aid in the establishment and support Of any other Company formed for all or any of the Objects of this Company. 13. To amalgamate with any Companies, Institutions, societies or associations having objects similar to those Of this Company. 14. To purchase or otherwise acquire and undertake all to any part of the property, assets, liabilities ad engagements at any one or more of the Companies, institutions, societies or associations with which the Company is authorised to amalgamate. 15. To transfer all or any part of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company, would make it a Trade union. II. The objects of the Company extend to the whole of India III. 1. The income and property of the Company, whensoever derived, shall be applied solely for the promotion of its objects as set forth in this Memorandum. 2. No portion of the income or property aforesaid shall be paid or transferred directly or indirectly, by way of dividend, bonus or otherwise by way of profit, to persons who at any time are or have been members of the Company or to any one or more of them or to any person claiming through any one or many of them. 3. Except with previous approval Of the Central Government, no remuneration or other benefit in money or monies worth shall be given by the Company to any of its members, whether officers or servants of the Company or not, except payment of out of pocket expenses, reasonable and proper rent on premises let out to the Company. 4. Except with previous approval of the Central Government, no member shall be appointed to any office under the Company, which is remunerated by salary, fees or in any other manner not excepted by sub-clause (3). 5. Nothing in this clause shall prevent the payment by the Company in good faith if re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above object clause along with income and expenditure account of the assessee for these assessment years, assessee has carried on object clauses 1 2 only and it has not carried out any charitable activities stated in clause 3 4 of the Articles of Association. Therefore, we are not in agreement with the argument of the ld. A.R. that the lower authorities have ignored the approval to the assessee u/s 12AA of the Act in denying claim of the exemption. The ld. A.R. has stated that in earlier year exemption u/s 11 of the Act has been granted and hence, rule of consistency to be followed. In our opinion, prior to adding proviso to section 2(15) of the Act, the entities which got registration u/s 12AA of the Act, engaged in commercial activity claimed exemption on the ground that such activities were for advancement of object of general public utility in terms of 4th limb of definition to section 2(15) of the Act. We find that the said benefit was taken away by adding proviso to section 2(15) of the Act, wherein it explains that the advancement of any other object of general public utility shall not be charitable purpose. In the present case, lower authorities have categorically brough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity to relief of the poor, education, medical relief. The correct way to express the nature of 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 u/s 2(15) of the Act. The proviso reads that advancement of any other object of general public utility shall not be a charitable purpose, if it is 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 money. Therefore, in the case of assessee, it is hit by proviso to section 2(15) of the Act and assessee is not entitled for the benefit of section 11 of the Act for that part of income generated in the hands of assessee from running into microfinance business. Alternatively, one has to look into section 11(4A) of the Act. It provides that exemption shall not apply in relation to any income of a Trust or an Institution, being profit gains of business, unless the business is incidental to the attainment of the object of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence of interest over deposits and disbursement in cases of banks and non- banking financial companies is less than 12%. As such the micro finance activity conducted by the assessee is strictly commercial in nature and with profit motive. The assessee had even collecting overdue interest from their defaulter which clearly shows that the trust was not even considerate with the poor loanees and was purely acting just as any money lender. From the above the activity of the assessee is business in nature and there is no element of charity involved in the activities of the assessee and it is purely commercial. 6.8 Further the Ld. AR made an argument that the assessee was already granted approval under section 12AA of the Act after considering the object clause of the assessee-Trust. As such granting of exemption u/s. 11 is automatic and it cannot be disturbed. As discussed earlier, granting of exemption u/s 11 of the Act is not automatic and it could be examined at each stage of assessment in each assessment year. Trust was not even considerate with the poor borrowers and the assessee-Trust is nothing but doing money lending business as like a private banker and there is no element of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk; 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 record to suggest that the assets and income of the trust were available for the personal benefit of the trustee and the board members, are only used for micro credit to poor women for their poverty alleviation and for the benefit of the socio-economically weaker sections of the society. The AO has not substantiated its findings that the work of the trust is not charitable and the interest charged by the assessee is exorbitant. The AO placed nothing on record to show that the assessee is charging exorbitant interest. The AO may justify the exorbitant rate of Interest charged, in case the poor ladies in question have option to avail credit at lower Interest from other sources. In case, the credits are available at lower interest to the poor women in question the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icro Credit also does not help the assessee as it is about treating micro finance a charitable activity at the time of 12A registration, which in any case is not disputed. At the assessment stage only the application and charitable nature is seen. (C) The ld. A.R. further referred to the decision of the Cuttack Bench of the Tribunal in the case of Bharat Integrated Social v. CIT, Sambalpur [ITA NO.115/CTK/2011], wherein, it was held that the micro finance activity are per se charitable in nature and earning of interest was incidental in nature. The interest earned was also within permissible market rates, therefore, could not be treated as business of earning interest. The relevant extract is as under: CIT has interpolated the activities of the charitable nature carried on by the assessee trust with that of the income resulting in interest earning against which he has not been able to establish whether he was trying to hold the activities as noncharitable on the basis of surplus identifiable as interest only. Obviously the assessee is said to have borrowed the amounts from banks and gives to the ultimate borrower by becoming a co- borrower, stands guarantee, surety concerned they h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is to provide micro finance assistance to the weaker section of the society at concessional rate of interest and without any security. The activity of the assessee has to be analyzed in light of the objects of the assessee that the formation of the assessee company with charitable objects and not with profit motive. The expression charitable purpose as per provisions of Section 2(15) of the Act includes any other objects and general public utility and therefore, if the objects of the assessee are in advancement of any object to benefit to public or a section of public then it is distinguished from benefit to an individual or group of individual and would be regarded as charitable purpose. We find that the primary and predominant object of the assessee are to promote the welfare of the economically weaker and destitute persons of the society by way of providing finance at concessional rate of interest and without asking for any security. Thus prima facie the object of the assessee are charitable in nature in terms of Section 2(15) of the Act . As seen from the above order of the Tribunal, primary and predominant object of the assessee was to promote the welfare of the ec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crofinance activity is itself a charitable activity cannot be accepted as the activity of the assessee carried on by it with a predominant and principal object of making profit and no charitable activity has been carried out and it also cannot be said that it was carried on towards advancement of any other object of general public utility. Hence, ratio of above Hon ble Supreme Court judgement cannot be applied. (F) The Apex Court in the case of Queens Educational Society cited (supra) wherein held that predominant object test to be applied. In the present case, if we apply the ratio of above judgement, it could be seen that the assessee has carried on the microfinance activity solely with the motive of making profit and charged exorbitant rate of interest and the ld. AO has clearly brought on record that assessee has been earning profit @ 28.76% in the assessment year 2016-17 and 24.94% in the assessment year 2018-19 and accumulated huge reserves without carrying on any charitable activities. The activities of the assessee are just like any other commercial banks for which exemption u/s 11 of the Act cannot be granted. (G) In the case of M/s Janodaya Trust v. ACIT(E) in ITA No.763/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of sec.11 do not deny exemption to a charitable trust. Hence, mere generation of surplus cannot be a reason to deny exemption u/s 11 of the Act. The AO might have highlighted this aspect to drive the point that the activities of the assessee are carried on commercial lines and hence the proviso to sec.2 (15) would be hit. Before us, the Ld A.R placed her reliance on the decision rendered by Hon'ble Allahabad High Court in the case of Lucknow Development Authority (supra) and Ahmedabad Urban Development Authority (supra). In both the cases, it was held that when the profit making was neither the aim nor object of the trust, then the incidental surplus generated while carrying on its activities would not render any activity in the nature of trade, commerce or business. Hence, this reasoning of the AO would also fail. 18. The next reasoning given by the AO is that the micro finance activities carried on by the trust would be hit by the proviso to sec. 2(15) of the Act. The decision rendered by Hon'ble Allahabad High Court in the case of Lucknow Development Authority (supra) and Ahmedabad Urban Development Authority (supra), which is referred above, also addresses this poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alleviates the poverty and also for the benefit of the socioeconomically weaker sections of the society, we find no reason to take a contrary view in this appeal with regard to the nature of activity undertaken by the assessee. We therefore hold that the micro finance activity in the instant case is a charitable activity. Since the registration has already been granted to the assessee under s. 12A assessee is eligible for exemption under s. 11 of the Act. (I) In the case of Spandana (Rural Urban Development Organisation) v ACIT [2010] 40 DTR 153 (Visakha-Trib.) which held that micro finance activity is a charitable activity as it alleviates poverty and also benefits socio-economically weaker sections of the society. The Hon'ble Tribunal held that the Micro finance activity was charitable in nature because of the following reasons: (i) The loan is advanced to weaker sections of the society to meet their urgent needs. (ii) Even if reasonable or slightly higher interest is charged, it cannot be held uncharitable because the cost of recovery is very high and the possibility of bad debt is also high. (iii) The funds are given without any surety or guarantee. The relevant extract fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conomically weaker sections of the society as no one is going to finance them to meet their requirements. By doing this, the assessee is at least helping the poor and weaker sections of the society in meeting their urgent needs. It is evident that the society was facing non-recovery of loan and therefore the Hon'ble ITAT in its wisdom rightly held that only high rate of interest was not enough to deny the charitable nature. The ratio of the case clearly exemplifies the absence of profit motive, as the assessee was not making any real surplus or profit due to high cost and NPAs. Therefore, the rate of interest in itself could not have been the determining factor to pass a judgement on the charitable character of the institution. The case in fact casts a greater responsibility on the AO to study the Income and expenditure to ensure that the assessee is not benefiting at the cost of the beneficiaries. In the present case in hand, the assessee is making huge profits on a consistent basis. Therefore, the facts and circumstances of this case do not provide any credible support to the assessee regarding the charitable character of activities. In the above case, the ld. AO has not subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... moneylenders, they would have to pay many times higher interest along with security than what the assessee has charged. It is also not in dispute that the assessee incurs financial costs for obtaining loans from banks. The assessee also have to make payment towards salaries and other administrative activities of the trust. There is nothing on record to suggest that the assets and income of the trust were available for the personal benefit of the trustee and the board members. These are only used towards advancing credit to poor women for their poverty alleviation and for the benefit of the socio-economically weaker sections of the society. The Ld.AO has not substantiated his findings, that the work of the trust is not charitable and the interest charged by the assessee does not commensurate with the cost incurred by it. The Ld.AO placed nothing on record to show that the assessee is charging exorbitant interest. The action of the Ld.AO might have justified, in case the poor ladies of SHG have option to avail credit at lower interest from other sources. In present case, the credits are available at interest rate without any security. There was no compulsion over parties to avail fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitution is the advancement 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. In assessee's case, micro finance is the primary activity under which profits are generated continuously and throughout the years. 6.15 Further, in our opinion, the dominant activity should not be in the nature of business: The Hon'ble Supreme Court decision in the case of Commissioner of Sales Tax v. Sai Publication Fund (2002) 258 ITR 70 (SC) held that: Thus, if the dominant activity of the assessee was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 activity to expand the finance business by contracting weaker section of the public and it does not involve any charitable activity. Therefore, looking into the activities carried on by the assessee, we fully agree with the findings of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and argued that the AO has no power to deny the exemption as registration u/s 12AA is in force. Tribunal find that the registration u/s. 12AA is granted subject to fulfillment of certain conditions contemplated in section 2(15) of the Act. Therefore, we are not in agreement with the arguments of the Id.AR that the AO has ignored the registration of the assessee granted u/s. 12AA of the Act in denying the claim of exemption. The Id.AR also argued that rule of consistency should be followed by placing his reliance on the decision of the Hon'ble SC in the case of Radha Swamty Satsang supra, which held that the AO should not interfere with the fundamental aspect permitting through the difference assessment years. In Tribunal opinion that prior to adding proviso to section 2(15), the entities which got registration u/s. 12AA engaged in commercial activity claimed exemption on the ground that such activities were for advancement of objects of general public utility in terms of 4th limb of definition to section 2(15) of the Act. Tribunal find that the said benefit was taken away by adding proviso to section 2(15) of the Act, wherein it explains that the advancement of any other objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of Assessee trust, which was not continuing during relevant period and in case of discontinued business, claim of Assessee u/s.36(l)(vii) could not be allowed. (Para 11) Conclusion: Assessee carrying on micro finance business in commercial manner so as to earn profit and there is no iota of charity carried on by Assessee so as to grant exemption u/s.11. 6.22 The ld. A.R. has also submitted that benefit of judgments which are in favour of the assessee to be given in view of the judgement of Hon ble Supreme Court in the case of Vegetable Products reported in 88 ITR 192 (SC). As we noted earlier, the assessee is not at all carried on any charitable activities and carried the microfinance activities with the sole motive of earning profit. There is no question of following the ratio laid down by judgements, which are in favour of the assessee as the facts are not similar to the assessee s case. In our opinion, when the facts considered by the Courts are similar to assessee s case the ratio of that judgements could be applied to the assessee. However, in the present case, it is not the case. 6.23 It has been observed that the proviso to section 2(15) which restricts incidental busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arding the commercial nature of the activity. If this question is not successfully defended and justified by the assessee then the invocation of the proviso to section 2(15) by the AO cannot be questioned. In the present case, assessee is only carrying the microfinancing activity by charging exorbitant rate of interest like any other commercial banks which is not expected from this assessee, which is registered u/s 12AA of the Act so as to claim exemption u/s 11 of the Act. The activity of the assessee is nothing but commercial activity carried on with the intention of making maximum profit. If we consider the plea of the assessee, then the exemption u/s 11 of the Act could also be claimed by the Co-operative Societies, Regional Rural Banks and Commercial banks also as the activity of these banks are similar to the assessee s case. 6.26 We have also taken into account of the Report of the Sub- committee of the Central Board of Directors of Reserve Bank of India issued during the year January, 2011 produced before us by the Ld. A.R, which is reproduced herein below:- 2. The Micro finance sector 2.1. Microfinance is an economic development tool whose objective is to assist the poor t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting for the balance 8% of the outstanding loan portfolio. Primary Agricultural Co-operative Societies numbering 95,663, covering every village in the country, with a combined membership of over 13 crores and loans outstanding of over Rs. 64, 044 crores as on 31.03.09 have a much longer history and are under a different regulatory framework. Thrift and credit co-operatives are scattered across the country and there is no centralized information available about them. 6.27 If we examine the activities of the present assessee in the light of above report of Sub-committee of the Central Board of Directors of Reserve Bank of India, the assessee is only doing the microfinancing activities by charging exorbitant interest, which does not commensurate with the prevailing rate. It is also noted that the activity is not also in lieu of any benefit to low-income group who are very vulnerable and are not in a position to cope up with such financial burdens. In order to consider the activity to be charitable in nature, the services rendered must commensurate with the benefit that may arise to such low-income group. The facts of the case relied by the ld. A.R. is quite opposite to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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