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TMI Blog2017 (1) TMI 1833X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld CIT (A) were reversed by any higher authority on an appeal filed there against. Also further find that in view of the decisions of Bharatha Swamukhi Samsthe [ 2008 (12) TMI 310 - ITAT BANGALORE ] and Spandana (Rural Urban Development Organisation) [ 2010 (2) TMI 1166 - ITAT VISAKHAPATNAM ] the activity under consideration falls under the expression relief to poor as envisaged under section 2(15) of the Act. Therefore, 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. No good reason to interfere with the conclusion of the ld CIT (A). Hence, this ground of the revenue is dismissed. Disallowance of provision of loan loss as the same has neither been expended nor any amount loan has become bad during the previous year - Revenue has brought no material on record to show that the provision of bad debt was not bonafide. Therefore, as relying on National Association of Software and Services Companies [ 2012 (5) TMI 204 - DELHI HIGH COURT ] find no good and justifiable reason to interfere with the order of the CIT (A), which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation to any trade, commerce or business for a cess or a fee or any other consideration irrespective of the nature of use or application, or retention, of the income from such activity. (iii)The AO stated that even if the Appellant claimed that it had acted for the benefit of the poor or the downtrodden or people below the poverty line, the borrowing and lending of money for some extra consideration could not be treated as charitable activity u/s 2(15) of the Act. Further, the claim of the Appellant that the surplus money had been utilized for charitable purpose could not be held as a ground to treat its activities as charitable in nature keeping in view the specific intentions of Section 2(15). (iv)The judicial ratios cited by the Appellant in the case of in the cases of Spandana (Rural Urban Development Organization) vs. ACIT and ADIT (E) vs. Bharatha Swamukhi Samasth (supra) was not applicable in the instant case as that referred case did not specifically deal with the applicability or otherwise of the amended provisions of Section 2(15) of the Act. (v)In view of the business activity as discussed above , the AO held that the Appellant society was not eligible for tax exemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial activities . From appreciation of the aforesaid provision, it is clear that the objects covered under 1st three limbs will be treated as charitable. b. That the appellant was carrying on the micro financing activities which were held by the Ld. Assessing Officer as non charitable and further he held that micro financing activities were covered under the fourth limb of the provisions of the Act. In this respect the appellant submits before your honour that, micro financing activities are in the nature of relief of poor and are covered under the first limb of the provisions of section 2(15) of the Act. As per the para no. 2.2 of CBDT circular No. 11 of 2008 dated 19,12.2008 states that, '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, sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 who charges average interest of 120% per year. The organization charges only a margin of 10.5% p. a. for this activity which is also covered all expenses and less than the Reserve bank of India recommended interest rate. So, this activity of supporting finance of giving loan to the poor and weaker people is a purely development activity and not a business activity of the orgnisation at any means. The additional surplus created out of this activity is activity is again redeployed for the development for the same set of people. So, this activity is squarely covered as per the Para No. 2.2 of the above referred circular and it is charitable in nature. D. Further, the Hon ble ITAT Delhi Bench while deciding the issue in the case of Disha India Micro Credit Vs. CIT, Muzaffarnagar, vide ITA No. 1374/Del/2010, it was held that, micro financing activities to the weaker sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir p alleviation, by borrowing from bank by the assessee is charitable in nature. The appellants case; squarely covered by this case law and therefore we pray your honour to treat the micro financing. activities of the appellant as charitable and allow the relief of Rs. 28,99,119. d. Further the Hon'ble ITAT, Visakhapatnam Bench, in the case of Spandana Vs. ACIT, (2010) 40 DTR (Visakha)(Trib) 153 held that, assessee borrowing money and providing loans to the socio economically weaker sections (micro financing activity) can be said to be carrying on charitable activity and is eligible for exemption u/s 11. e. Further it is submitted that, the appellant is carrying on the micro financing activities since so many years and the revenue is accepting the returned income of the appellant and also treating the micro financing activities as charitable. There is no change of facts in the present year. Therefore by following the rule of consistency in the present year also the micro financing activities should be treated as charitable activities. On the above ground it is submitted before your honour that the micro financing activities are squarely covered under the definition of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded both a) relief of the poor; and b) the advancement of any other object of general public utility . [*NB: From 01.04.2009, the definition of charitable purpose added 2 new limbs (Numbers 4 and 5) being a) the preservation of environment (including watersheds, forests and wildlife); and b) preservation of monuments or places, or objects of artistic or historic interest. How these are 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnings of the private operator that were not available to the Government or the community at large. Going by this yardstick, it does not appear that the Appellant's impugned activities fall within the definitional ambit of relief to the poor since the Appellant has been earning systematic surpluses over the years. e) To attend to and address any alternative argument by the Appellant 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mirers as having enormous potential as a tool for poverty alleviation. i) Many critics however argue that microcredit and microfinance strategies have: a) not had a positive impact on gender relationships; b) does not alleviate poverty; c) have led many borrowers into a debt trap; and d) constitutes a privatization of welfare . [NB: The AO, through his comments and opinions in the 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 cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intents front, microcredit organizations were initially created as alternatives to the loan-sharks known to take advantage of clients. Indeed, many micro-lenders began as non-profit organizations and operated with government funds or private subsidies. However, as is the case when dealing with large sums of money, the human mind is programmed towards satisfaction maximization, comfort and profiteering; it is often difficult to keep greed and rentseeking 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 claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtionist. p) From a legal standpoint, the definition of charitable purpose u/s 2(15) of the Act is inclusive. The Hon'ble Courts through their decisions have held that the expression 'charitable purpose' is sufficiently wide in scope to include a variety of activities. For instance, promotion of sports and games is a charitable purpose [as per the CBDT's Circular 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Mad.)] r) A contextual analysis of the legal categorization of the activities in the instant case into charitable and non-charitable will yield the following results: (i) There Appellant's activities appear to have an idea of benefiting others (the rural poor and the indigent) but whether the same overrides the converse idea of benefitting oneself (the Appellant itself) 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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... understanding about the facts and circumstances of each case considered. t) From all the above, it cannot be stated that the Appellant's micro-finance activities fall under by the disallowance provisions of the first proviso to Section 2(15) of the Act and the CBDT's Circular No. 11 of 2008 dated 19.11.2008. Since the answers to the two questions respectively stated 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 publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data may not be specific to the F.Y. 2009-10 under reference but can still be considered to be broadly indicative. w) The average APR on all of the 483 loan packages considered is computed as 31.53% while the standard deviation is 0.55175% which provides for a reliably narrow range. The data for the Appellant is extracted from the table in the Appendix and presented below: MFI Product Purpose Loan Amount (min) Loan Amount (max) Quoted Min Rate Quoted Max Rate Num Clients % Sample Urban Loan Amount Sample Term APR India Details Int + Fees +Deposit) 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being continued 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of engagement 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( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has emerged in 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,930/- from these activities during the year under appeal. The Assessing Officer not allowed deduction u/s. 11 of the Act on the ground that the activity was carried out in commercial lines. 9. On appeal, ld CIT (A) held that the surplus generated is eligible for deduction u/s. 11 of the Act. In holding so, ld CIT (A) followed the orders of his predecessors passed in the case of the assessee itself for the earlier assessment years 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e chances of recovery were significantly low and close to remote in many cases. Therefore the provision for loan loss was allowable as per the prudent norms of the banks/financial institutions. c) On the above issue, the Appellant's submissions are accepted. The provision is made as it is incidental to its charitable activities, and not doing so would have choked and/or cut off the life-line flow of loan funds to the Appellant from the banks and financial institutions. Besides, since the incomes generated and earned by the Appellant are held in this order to be tax-exempt u/s 11 of the Act, any tax that may result out of the disallowance of the impugned amount would be notional in nature and not collectible by Revenue. The AO is directed to permit the Appellant to carry out its accounting in accordance with the norms fixed by the RBI and made operational on account of the transactions required to be had by the Appellant with the banks/financial institutions, which would mean that the impugned amount of Rs. 4,37,714 is directed to be retained as an expense deduction in the appellant s Income and Expenditure statement. The Ground of Appeal number No. 4 preferred by the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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