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TMI Blog2016 (11) TMI 1759X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of the object of society to poor does not make the activity non-charitable within the meaning of section 2(15) of the Act. No good reason to interfere with the conclusion of the ld. CIT(A). Hence, this ground of the revenue is dismissed. Addition made on account of violation of provisions of section 40(a)(ia) by not deducting tax at source on advertisement expenses when the assessee is not eligible for exemption u/s. 11 of the Act in view of the violation of the proviso to section 2(15) of the Act - HELD THAT:- As decided in MAHATMA GANDHI SEVA MANDIR [ 2012 (5) TMI 396 - ITAT MUMBAI] section 40(a) will only go to enhance the business profit of an assessee whose income is assessable under section 28 and not otherwise. Hence, provisions of section 40(a) are not applicable in case of charitable trust or institution where income and expenditure is computed in terms of section 11 - Decided against revenue. - Shri N.S Saini, Accountant Member For the Assessee : Shri S.K. Agarwal, AR. For the Revenue : Shri D.K. Pradhan, DR. ORDER This is an appeal filed by the revenue and cross objection filed by the assessee against the order of CIT(A)-3, Bhubaneswar, dated 2nd November, 2015, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out activity of micro finance in the year under reference. The Assessing Officer then extracted the net surplus for the assessment years 2009-2010 and 2011-2012 of the assessee society generated from micro finance activities and stated that these revealed the true nature of functioning of the society imputing that loans were obtained at lower rate of interest from the banks and provided to rural SHGs at higher rate of interest and that such process of banking business guised as NBFO activities resulted in substantial commercial surplus over the years. Therefore, the Assessing Officer assessed Rs. 24,36,117/- as business income of the assessee. 4. Being aggrieved, the assessee filed appeal before the ld. CIT(A). 5. The arguments of the assessee before the ld. CIT (A) was as under: The argument of the appellant is that micro financing activities are falling under the 1st limb of the definition of charitable purpose within the meaning of section 2(15) of the Act and in support of this argument the appellant referred to the Para No. 2.1 and 2.2 of the circular no. 11 dated 19.12.2008 issued by the CBDT. The Para No 2.1 2.2 are as follows; 2.1 The newly inserted proviso to section 2( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re given to the weaker sections of the society to meet their urgent needs. This is very high risk activity as it does not have collateral, this is only meant to strength the financial and social status of the poor women of the state. Most of the time, these poor and women from the weaker sections of the society failed to repay these loans which ultimately lead to the write-up of the loan. Means, the loans granted to these poor women do not have a guarantee of return for which the organization made provisions to cover these costs. The organization charges minimum interest which is accepted by the poor and weaker section happily as they would have not got a collateral free loan otherwise. This activity is purely a development activity for the purpose of alleviating poverty by supporting them through advancement of loan, training capacity building and market support and setting of their own enterprise. The organization is helping the needy people of the socio-economic weaker section of the society as they are not financially included and no one is going to finance them to meet their requirement otherwise. The alternative available to this weaker section of the society is money lender ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t being non-commercial in intent, purpose and content (as mandated amended first proviso to the said section) and also since they fall within the definition of advancement of general public utility. 6. After considering the submissions of the assessee, ld. CIT (A) held as under: Submission made by the Ld. A.R. was considered carefully.. The allegation leading to the alleged action is that the appellant engaged in money lending activities for purpose of earning profit. Similar addition was made to the total income in the A.Y.2009-10 A.Y. 2010-11. The CIT(A)-II, Bhubaneswar allowed the appeal of the appellant after analyzing provisions of sec. 2(15), amended provisions introduced to the section vide Finance Act, 2008, Circular No. 11 of 2008 dt. 19.12.2008 etc., facts of the appellant's case, comparing the statistical data of other NGOs operating in similar activities and average APR. The relevant portion of the order in ITA No. 0139/2011-12 for immediately preceding year relevant to the A.Y. 2010-11 is reproduced hereunder:- 5. I have considered the content and substance of the Assessment Order and the Grounds of Appeal preferred by the Appellant, following which I arrive at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not relevant in the context of the instant case. This would also mean that advancement of any other object of general public utility would represent the residual 6th limb of the definition of charitable activity as per Section 2(15) of the Act]. c) In order to further clarify the above, the Circular No. 11 of 2008 dated 19.12.2008 [CBDT Circular No. 11/2008, F.No. 134/34/2008-TPL dated 19.12.2008] was issued by the CBDT wherein the implications of the amendment were given. 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. Any commercial activities in connection with these three activities will come under 'charitable activities '. This means that even if tax exempt entity such as a charitable trust or a registered society were to carry out incidental commercial activities while carrying out activities falling within these first 3 limbs as above, tax exemption u/s. 11 or u/s. 10(23C) of the Act could still be available and applicable. In corollary, this newly inserted proviso to Section 2(15) will apply only to those entities whose purpose would be that state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant that the loans/grants/ payments.' advances made by it fell under the ambit of relief or assistance per se. the definitions of these terms from Google s online content-aggregator dictionary is provided as follows: Relief is defined as financial or practical assistance given to those in special need or difficulty while Assistance is defined as the provision of money, resources, or information to help someone . The Appellant was provided financial and practical assistance to specified target groups mostly in rural areas and also provided money and resources to such groups, albeit at a cost being interest. Consequently, the Appellant's activities can be considered to fall under the category-ambit of relief or assistance per se, but certainly not under that of relief to the poor . f) The phrase relief to .he poor in general parlance encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or the needy and will include within its ambit activities such as relief to: a) the destitute, the orphans or the handicapped; b) disadvantaged women or children c) small and marginal farmers d) indigent artisans or e) senior citizens in need of hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order about, inter alia, the commercial nature of the lending practices carried out and interest differentials earned by the Appellant, was by implication pointing to the alleged private nature and profit earning motive in the apparent welfare intent of the appellant s activities. j) There are two dimensions to this inquiry: a) whether micro-finance has indeed helped the case for poverty alleviation and the cause of relief to the poor (we call this the evidence along results of charitable purpose); and b) whether there has been -and continues to be - colourable, unscrupulous and dishonourable intent on the part of the purveyors of micro-finance in their averred statements that they were working in the area not for profit but with altruistic intent (we call this the evidence along intents of charitable purpose) k) Let us first examine the evidence along results first. The first scientific (statistically randomized) evaluation of microcredit, conducted by Esther Duflo and others, showed mixed results: there was no effect on household expenditure, gender equity, education or health, but the number of new businesses increased by one third compared to a control group. In a re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mfort and profiteering; it is often difficult to keep greed and rent-seeking drives for away. By the 1980 s the financial systems approach influenced by neo-liberalism had become the dominant ideology among microcredit organizations. For instance, Unit Desa (BRI-UD) within the Bank Rakyat Indonesia, commercialized micro-credit by offering 'kupedes' microloans based on market interest rates. Ironically, many microcredit organizations now function as independent banks. This has led to their charging higher interest rates on loans and placing more emphasis on savings programs. [NB: Unit Desa of Indonesia charged in excess of 20 per cent on small business loans]. The application of neoliberal economics to microcredit has generated much debate among scholars and development practitioners, with some claiming that microcredit bank directors, such as Muhammad Yunus [the pioneer of micro-finance and the Nobel Laureate from Bangladesh], apply the practices of loan sharks for their personal enrichment. There was also a Wall-street style scandal involving the Mexican microcredit organization Compartamos. n) However, there is something that can be referred to as ethical micro-lending th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar No. 395 dated 24.09.1984], as is promotion of trade and commerce, even when the beneficiaries are confined only to a particular line of trade or commodity [the decisions of the Hon'ble Supreme Court in the cases of Bharat Diamond Bern '. 3 126 Taxman 365 (SC Sural Art Silk Cloth Manufactures 1980] 121 ITR I (SC) q) At the same time, the mere fact that remote and indirect benefits are derived b_ members of the public will not be sufficient to make the purpose a charitable purpose under the Act. some of the judicial precedent decisions of the Hon'ble Courts which help clarify the meaning of the expression charitable purpose for the purposes of Income-tax are cited below (emphases in bold italics provided by me): (i) The word 'Charity' connotes altruism in thought and action. It involves an idea of' benefiting others rather than oneself [Andhra Chamber of Commerce [1965] 55 ITR 722 (SC)] (ii) A commercial concern is not an object of relief of the poor on the ground that it provides employment. The object should provide relief directly and not indirectly [Yograj Charity Trust [1976] 103 ITR 777(SC)] iii) For a trust to be accepted as a charitable trust for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is unclear; (ii) The loans/payments are made directly to the target population (viz., the rural poor and the indigent) but whether the latter have actually benefited and whether the intention of the Appellant was to only let the latter benefit is unclear; iii)) Clause v) of the object-clauses of the Appellant - which is the final clause -reads thus to promote and manage Self Help Groups of poor women/men through their Solidarity Groups and raise loans for further lending to them from various organization like Rashtriya Mahila Kosh SIDIB with a view to providing collateral free credit for suitable livelihood option for them . These objectives can be called semi-specific, neither too generic nor desirably specific. Also, in realizing these objectives, the Appellant has raised loans for further lending to poor women/men, but importantly, not_ from the organizations as referenced above with a view towards providing collateral free credit. Most of the Appellant's borrowing and lending transactions are loaded with an interest component. Therefore, to categorize the Appellant's micro-finance activities under the definitional head relief to the poor - as has been elaborated above - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Clauses 7(g)(i) and 7(g) ((H) above are not in the affirmative, the attendant questions stated at Clause 7(g) (Hi) as to whether its micro-finance business activity was incidental to the attainment of the objects of the Appellant; and whether separate books of accounts have been maintained in respect of such business activity are not relevant. u) However, to hold that the micro-finance activities are per se not charitable in nature, we would need to prove that these: a) do not drive the advancement of any other object of general public utility; and b) there is no commercial intent, content or substance in its these activities. Although the Appellant has in its submissions stoutly denied that its activities fell within the wide and generic definitional ambit of advancement of any other object of general public utility , and foreclosed its options by selecting to place itself within the more selective definitional ambit of relief to the poor (which is clearly not applicable, as proved above, and is rejected) with the objective of wriggling out of the tricky question of business-commercial purpose and profit intent, it is apparent that we need to consider these seriously if a full ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct Purpose Loan Amount (min) Loan Amount (max) Quoted Min Rate Quoted Max Rate Num Clients % Urban Amount Sample Loan Sample Term APR India Int + Fees + Deposit) APR India Int + Fees + Deposit) PEOPLE'S FORUM SHG Finance Business. Emergency 8.000 15.000 12.0% 12.0% 46,865 10% 8000 16 months 29.4% Details PEOPLE'S FORUM SHG Finance Business, Emergency 8.000 15.000 12.0% 12.0% 46,865 10% 1000 16 months 29.5% Details PEOPLE'S Business, SHG Fin Business Emerg. 8.000 15.000 12.0% 12.0% 46,865 10% 12000 16 months 29.1% Details It is readily seen that the urban component of the Appellant's loan recipient base of Self Help Groups (SHGs) is low at 10% while the quoted interest rate is uniformly 12%, with the APR computed at 29.4% which is lower than the national average of 31.53%. Separately, the averages of the quoted minimum and maximum rates of interest of all the micro-finance players are computed at 17.57% and 17.78% per annum respect h too are significantly higher than the average rate of 12%. per annum quoted by the Appellant. Further in-depth analyses can be conducted on the date to allow and adjust for differences along the other driver parameters such as the target ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the Budget Speech dated 28.02.2015 of the Hon'ble Union Finance Minister) to the accounts of members of the targeted weaker sections which supports the principle above. Charitable activity is known, stated and held under the statute to be inclusive in definitional meaning and substance; likewise, the residual limb-clause u/s. 2(15) of the Act being advancement of any other object of general public utility too has a wide and genetic ambit. The activities of micro-finance and advancing microcredits, which for part of the object-clauses of the Appellant society, would therefore fall within the definition of advancement of general public utility. aa) In the distinctive limbs situate within the definition of charitable activity u/s. 2(15) of the Act, while the dominant category-limbs 1 to 5 represent a much narrower group of charitable entities with distinctive nature of work, the residual category number 6 (viz., advancement of objects of general public utility) is more like an accumulation of various charitable activities with no clear distinction between main and ancillary objectives. However, to fall within the ambit of the residual category, the entity should not have any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement in charitable purpose defined under Section 2 15 For the application of Section 2(15) to charitable entity engaged in any other object of general public utility , various Hon'ble Courts have earlier held profit motive' and 'an element of reciprocity in business transactions' as important elements that needed to be factored into while understanding the scope of economic activity undertaken by such entity. The Hon'ble Delhi High Court, keeping in view the aforesaid determinants, explained that while a business activity has an important pervading element of self-interest, charity or charitable activity is the anti-thesis to activities undertaken with a profiteering motive. To determine whether a residual-category charitable entity is engaged in any business activity, the issue of self-enrichment and self-gain should be carefully looked into. A small contribution by way of fee should not emulate the transaction or the given activity to be commercial in nature. dd) In its above decision, the Hon'ble Delhi High Court laid down the 'charitable activity test' to determine whether the legal terms trade, commerce, or business in Section 2(15) means act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n consequence can be considered as incidental (to the charitable purpose and activities being carried out) in nature. ff) It is also to be noted that in the cases of organizations like Spandana, Disha India Micro Credit, etc. (supra) that professedly carry out micro-finance activities, the Department has granted them the necessary certification under the Act of being charitable in their intents and purposes, and when these were questioned in assessment, such charitable intent and purpose have been upheld by various authorities including various benches of the ITAT. The Commissioner of Income-tax [CITJ, Sambalpur has in a few cases under his jurisdiction granted registration u/s. 12AA to organizations that professedly carry out micro-finance activities. The case of Janlaxmi Social Services vs. DIT (Exemptions), Bangalore cited by the AO is distinguishable on facts in that the Appellant in that case had extended the financial assistances to the traders not to the SHGs or poorer women, as it professed to do. It is therefore important that the Government and the tax authorities speak in one voice on the issue and take a principled stand based on economic principles, the contextual fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 2009-10 and 2010-2011. 10. Before me, ld. D.R. could not point out that the orders passed in the earlier years by the ld. CIT (A) were reversed by any higher authority on an appeal filed there against. I further find that in view of the decisions of the Tribunal in the case of Assistant Director of Income Tax (Exemptions) vs Bharatha Swamukhi Samsthe, (2009) 28 DTR 0113 (Bang) and Spandana (Rural Urban Development Organisation) vs Assistant Commissioner of Income Tax (2010) 48 DTR 0153 (Vis. Trib), the activity under consideration falls under the expression relief to poor as envisaged under section 2(15) of the Act. Therefore, in my considered view simply because an activity undertaken in commercial line in pursuance to furtherance of the object of society to poor does not make the activity non-charitable within the meaning of section 2(15) of the Act. In the circumstances, I do not find any good reason to interfere with the conclusion of the ld. CIT(A). Hence, this ground of the revenue is dismissed. 11. In Ground No. 4 of the appeal, the grievance of the revenue is that the ld. CIT (A) erred in deleting the addition made on account of violation of provisions of section 40(a)(i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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