ITA No. 625/Mds/2015

SHRI N.R.S.GANESAN AND SHRI CHANDRA POOJARI, JJ.

For The Appellant : Shri A.V.Sreekanth, JCIT
For The Respondent : Shri K. Sheshadri, FCA & Shri Bharadwaj Sheshadri, ACA

ORDER

CHANDRA POOJARI, ACCOUNTANT MEMBER

This appeal by the Revenue is directed against the order of the Commissioner of Income-tax(Appeals) dated 2.12.2014.

2. There is a delay of 13 days in filing this appeal before the Tribunal. The Department has filed a petition praying for condonation of delay. After going through the reason given in the condonation petition, we are satisfied that there is a reasonable cause for the delay of 13 days in filing the appeal and the same is condoned and the appeal is admitted for adjudication.

3. The Revenue has raised the following grounds in this appeal :
“Ground No:2:
2.1 On the facts and circumstances of the case, the Id. CIT

(A) erred on law in not appreciating that the activity of the ‘micro-finance’ comes under the last limb of the charitable purpose mentioned in section 2(15) of the I.T. Act i.e., “advancement of any other object of general public utility”, and wrongly holding that such activity falls under the head” relief of poor”.

2.2 The Id. CIT (A) failed to take note that during the A.Y. 2009-10, the assessee earned interest and service charges of Rs. 1,27,24,442/-, which exceeded the threshold limit of Rs. 10 lakhs, thereby clearly bringing the assessee within the 1st & 2nd provisos to Sec.2(15) of the I.T. Act.

2.3 The Ld. CIT(A) failed to appreciate that after introduction of first proviso to section 2(15) w.e.f. 01.04.2009, irrespective of “nature of use” or “application” of such profits by a trust pursuing an object of “general public utility”, the same would not be held to be a “charitable activity”. This aspect has been correctly appreciated by the Hon’ble ITAT, Panaji Bench in the case of Entertainment Society of Goa v. CIT (2013) 34 taxmann.com 210 (Panaji-Trib.) at para 14 of its order, Amritsar ITAT in the case of Jammu Development Authority Vs CIT (2012)23 taxmann.com 343, against which SLP before Supreme Court stands dismissed vide SLP(C) No 4990/2014 dated 21.07.2014.

Ground No.3:
3.1 The Id. CIT (A) erred on fact in not appreciating that the assessee has collected an amount of Rs. 1,27,24,442/- (interest of Rs. 6,52,711/- and Service charges of Rs. 12,07,173/-) from the borrowers and paid only Rs. 84,56,011/- as interest and bank charges, which shows that the activity of the assessee is purely “business” in nature and is thus hit by proviso’s to Sec.2(15) of the Act. A copy of the Income and Expenditure for the Year ended 31.3.2011 is enclosed as Annexure ‘A’;

3.2 The Id. CIT (A) erred in holding that interest spread of the assessee is very small (2% to 3%) ignoring the fact that it is charging much more under the caption of “service charges”.

Ground No.4:
4.1 The Id. CIT (A) failed to place reliance on the decision of the Jurisdictional ITAT in the case of Socio Economic Development Association v. ITO, Ward 11(4), Madurai [(2011)-TIOL-754-ITAT-Mad] and Bangalore ITAT in the case of Janalakshmi Social Services vs. DIT (Exemptions) [2009] 33 SOT 197 (BANG.) wherein micro-finance activities are held to be “commercial” in nature when high interest rates and service charges are collected, which is also true in the present case.

Ground No.5:
5.1 The Ld CIT(A) erred in relying on CIT-1, Madurai’s decision not to withdraw the registration U/s 12 AA(3) , ignoring the legal position that registration need not be withdrawn in cases where assessees are pursuing objects of general public utility as their gross annual receipts may vary from year to year.

5.2 The Ld CIT (A) erred in ignoring the provisions of Sec. 13(8) of the lncome Tax Act, which empowers the A.O to deny exemption to the assessee in any year when its turnover exceeds the limits prescribed under 2nd proviso to Sec. 2(15) and it is pursuing objects of general public utility.
Ground No.6:

6.1 The Ld CIT(A) erred in holding that a Sec.25 company can have no “profit motive”, whereas under the Income Tax Act, provisos to Sec. 2(15) kick in even without “profit” motive.

6.2 The Ld CITCA) erred in ignoring the legal proposition that provisions of other Acts like Companies Act don’t override the provisions of Income Tax Act, as held in Southern Technology Ltd Vs JCIT (2010) 320 ITR 577 (SC).”

4. The facts of the case are that the assessee is a company registered u/s.25 of the Companies Act. The assessee was granted registration u/s.12A of the Act by the CIT, Madurai in 2003. The assessee filed return of income for the assessment year 2009-10 on 24.9.2009 and was processed u/s.143(1) of the Act. The case was selected for scrutiny and notice u/s.143(2) was issued on 28.9.2009 and the case was heard on a number of occasions.

4.1. The assessee is a micro finance company operating as a financial intermediary between Banks and the SHGs. As per the annual report, main objective of the company is ‘bridging the gap in micro finance to SHGs.’ A perusal of their account books maintained revealed that as against the loans advanced to various SHGs, the assessee has raised overdraft facility and revolving fund assistance by hypothecation of their book debts with various nationalized banks. The AO noted that the assessee availed credit facilities from 12 different banks/financial institutions over the few years at interest rates upto 11%. These were advanced at interest rates with some mark-up, which is not very high. According to the AO, as per the annual report, the net profit from out of the above operations was at 20.44% in the financial year 2009-10.

4.2 The assessment was completed by assessing the income at Rs. 30,33,950/- by denying the exemption u/s.11 & 12 by invoking the provision of proviso to sec.2(15) on the ground that the assessee was doing business of banking (some form of money lending) which fell under 4th limb of proviso to sec.2(15) i.e. any other object of public utility. The assessee has raised a number of objections against AO’s decision to invoke provisions of proviso to sec.2(15) of the Act. The AO rejected the assessee’s contentions and justified his stand. Aggrieved, the assessee went in appeal before the CIT(Appeals).

5. On appeal, the CIT(Appeals) observed that the assessee is a company without profit motive and the micro finance business carried on by the assessee falls under the category of ‘relief to poor’ and hence, it is carrying on charitable activity u/s.2(15) of the Act, so as to grant exemption u/s.11 and 12 of the Act.. Accordingly, he deleted the addition made by the AO. Hence, the Revenue is in appeal before us.

6. The ld. DR submitted that the observation of the CIT(Appeals) that the assessee provides relief to the poor by way of providing such credit facilities at lower rates vis-a vis private money lenders and also without insisting on securities is fallacious. The ld. DR drew our attention to the Table available on page 9 of CIT(Appeals) order, which is reproduced below:

The ld. DR submitted that it is clear from the above table that the lending rate is always higher than the borrowing rate and it is an admitted fact that the assessee borrows from nationalized banks. This would mean that the assessee is lending at a rate higher than the rate of interest charged by the nationalized banks. In such a scenario, can the act of lending by the assessee at a rate higher than the rate charged by the nationalized banks be termed as ‘relief to the poor’? Therefore, the claim that the assessee is providing relief to the poor is not borne out by facts.

6.1 The ld. DR further submitted that the assessee, being a Company registered under Section 25 of the Companies Act, the company is legally debarred from distributing dividend. That does not mean that there is no profit motive. The motive of the assessee to garner profits manifests itself by the amendment the assessee made to its objects incorporating the words ‘with interest’ on 18.03.2003. The ld. DR also pointed out that this fact would also demolish the observation of the CIT(Appeals) made in para 7.4 where he states that the AO has accepted that the interest spread is less which proves that there is no profit motive.

6.2 According to the ld. DR, reference by the assessee to Circular No.110/24 dated 24th January 1973 in support of its claim is misplaced since there is no reference in the said circular to ‘micro financing’.

6.3 The ld. DR further submitted that the concept of res judicata relied upon by the assessee does not apply to income tax proceedings, because each year is a separate proceeding.

6.4 Further, the ld. DR submitted that as per the claim of the assessee that as per the Memorandum of Association, the main object is ‘relief for poor by all conceivable means’. According to the ld. DR, the word, ‘poor’ is a relative term and there cannot be a universal definition. However, as per the Report of the Expert Group to review the methodology for measurement of poverty by the Rangarajan Committee those spending more than Rs. 972 a month in rural areas and Rs. 1,407 a month in urban areas in 2011-12 do not fall under the definition of poverty. The assessee has not established that it caters only to the poor.

6.5. According to the ld. DR, the findings of the Report of SIDBI cannot be taken as the last word on the subject, since SIDBI itself in the said Report admitted as follows:

The sample size within each of subcategory analyzed in the study was not adequate to corroborate the findings. e.g. there are not many ‘Not for Profit Institutions’ (seven Societies, three Trusts and one Section 25) in the study to confirm the findings of the study with respect to the entire population of such Institutions;

6.6. The ld. DR submitted that there is only one Section 25, company in sample taken up by SIDBI and therefore universal applicability of the findings of the Report cannot be made, more so to the case of the assessee since, there was only one Section 25 case in the sample. Therefore, just because the AO did not rebut the findings of the SIDBI that does not mean or indicate that the assessee has no profit motive.

6.7. The ld. DR further contended that the assessee claims that ‘all the main objects specifically restrict the operations of the assessee to be carried out for the poor, which is clearly evident by the repetitive use of the phrases such as ‘ ‘ .... of utility to poor individuals, group of persons belonging to the poorer sections’, ‘ individuals belonging to the poorer sections” fields of benefit and interest to the poor’ etc. in various clauses.’ Accordingly, the ld. DR submitted that mere repetitive use of phrases does not substantiate the assessee’s claim that its activities are for the benefit of the poor.

7. The ld. AR submitted that all the main objects of the assessee specifically restrict the operations to be carried out for the benefit of the poor. This is clearly evident by the repetitive use of phrases such as “ …of utility to poor individuals, group of persons belonging to the poorer sections ... “, individuals belonging to the poorer sections ... “, “ ... fields of benefit and interest to the poor ... “, etc., in various clauses. The assessee is carrying out its activities in accordance with these objects targetted only at the poor. There is no contrary finding by the Revenue or any other authority. The poor are the only beneficiaries of the assessee’s activities. The following points indicate that the activities of the assessee is one of relief to the poor and thus fall within the first limb of section 2(15) of the Act:

1. Assessee s loans are targetted at poor women who are organised in Self- Help Groups (SHGs) - usually of 20 women each.

2. During the relevant previous year, the reach of the assessee has gone up to 13174 SHGs.

3. The financial assistance is aimed at “livelihood security” and is lent for specific purposes such as agriculture, consumption, marriage, education, debt redemption, medical emergencies, income generating activities, house repairs etc., dairy farming, sanitation, etc. The nature of these purposes is, itself, indicative of the financial position of the borrowers.

4. The fundamental basis of the assessee’s activities is that the assessee is able to extend financial assistance to people who are unable to access banks. The assessee does not (and cannot, by virtue of the restrictive nature of its objects) lend to the well-off (non-poor) sections of the population.

5. In any case, the assessee’s relief to the poor extends far beyond just credit. The assessee also conducts and has conducted other activities such as training, capacity building, group promotion, and tsunami relief at no cost to its beneficiaries. For these purposes, the assessee also gives nonreturnable financial grants. An aggregate amount of Rs. 71.83 lakhs has been spent on these activities from FY 2004-05 to FY 2009-10.

6. The quantum of the credit extended also makes it clear that the assessee lends to the poor. The limits are as follows:

? 4,00,0001- per SHG of 20 individuals where the loans are for dwellings; and
? 2,50,0001- per SHG of 20 individuals for other purposes.
7. KDFS does not
• have any profit motive
• distribute any dividend/profit to anyone
• pay remuneration to any of its board members
• involve any private gain and personal benefit to any person.

8. Microfinance is seen as an effective tool to organise the unorganised and build their nested institutions through enabling the poor women. The primacy is on building the capacities of the poor and enabling them to manage the financial services and build strong, sustainable people’s organisations to address their own development and growth - financial and social. This approach builds ownership of members with substantial members’ savings, own funds and involvement. These peoples’ institutions are built on the principles of self help and mutuality with enabling mode to address poverty. It works on demand side, while micro credit commercial entities work on supply side with delivery approach. Microfinance with enabling approach provides space for people to practice democracy at grassroots while micro-credit with delivery approach reinforces dependence perpetually. The emphasis is on developing suitable institutions and financial services controlled by the users.

7.1 The ld. AR further submitted that even government policy considers microfinance to be an effective tool for poverty alleviation. This is evidenced by a statement to this effect made by the Finance Minister in his Budget Speech on the Finance Bill, 2000 on 29 February 2000 reported in [2000] 242 ITR (St.) 5. Therefore, there can be no general principle laid down that microfinance is not for the benefit of the poor. There is a specific burden on the department to establish the validity this proposition in the facts of each case. It has not been so proven in the present case. The Latin maxim “generalia specialibus non derogant” (i.e., the general provision will not derogate from the special provision) must be applied in the interpretation of section 2(15). In section 2(15), the residuary limb, “the advancement of any other object of general public utility” cannot derogate from the first limb, “relief of the poor”. He relied on the judgment of the Supreme Court in CIT v. Shahzada Nand and Sons [1966] 60 ITR 392 (SC), wherein the apex court has affirmed this general principle of law as follows in the context of the tax laws:

“Another rule of construction which is relevant to the present enquiry is expressed in the maxim, generalia specialibus non derogant, which means that when there is a conflict between a general and a special provision, the latter shall prevail. The said principle has been stated in Craies on Statute Law, 5th edition, at page 205, thus;

“The rule is, that whenever there is a particular enactment and a general enactment in the same statute, and the latter, taken in its most comprehensive sense, would overrule the former, the particular enactment must be operative, and the general enactment must be taken to affect only the other parts of the statute to which it may properly apply. “

But this rule of construction is not of universal application. It is subject to the condition that there is nothing in the general provision, expressed or implied, indicating an intention to the contrary ... “

It is clear that there is nothing in the residuary limb of section 2 (15) that would suggest an intention to override the first limb of the said subsection. Thus the said subsection would not fall within the exception postulated by the Supreme Court either.

The ld. AR also submitted that this principle has been applied in the interpretation of sec.2(15) by the ITAT, Chandigarh in Himachal Pradesh Environment Protection and Pollution Control Board v. CIT (9 ITR (Trib) 604). He has also drawn our attention to CBDT Circular 11/19 December 2008 (308 ITR 5 (stats) while explaining the amendment in sec.2(15) of the Act.

7.2 The ld. AR, relied on the following judgments of various Courts to support his argument.
1. ADIT(E) v. Bharatha Swamukti Samsthe [2009] 319 ITR 422, 434 (AT)(Bangalore).
2. Disha India Micro Credit v. CIT, Muzaffarnagar (I.T.A. No. 2. 1374/Del/2010) –
3. M/s. Kurinji Social Welfare Society v. ACIT, Trichy (I.T.A. No. 1594/Mds/2009).

7.3 Regarding ground Nos. 2.2 & 2.3, the ld. AR submitted that the assertion in ground 2.2 that the assessee earned interest and service charges of Rs. 1,27,24,442/- is based on an incorrect interpretation of the facts and the break-up of this sum is given below along with explanations.

The ld. AR submitted that these two grounds deal with the application of the two provisos to section 2(15). In the light of his submissions in relation to ground 2.1 above, according to him, the assessee carries on activities falling under “relief of the poor”, being the first limb of the subsection. The application of the two provisos to section 2(15) is triggered only where the activities fall within the residuary limb, “the advancement of any other object of general public utility”. Accordingly, he submitted that the two provisos have no application to the present case.

7.4 The ld. AR further submitted that the contention of the Revenue is based on the presumption that the microfinance activities are activities “in the nature of trade, commerce or business” as contemplated by the first proviso to section 2(15) and that the receipts therefrom are thus taxable. The ld. AR tried to establish that the activities of the assessee are not in the nature of trade commerce or business by giving following submissions.

7.5 The ld. AR submitted that the fact that the activities of the assessee are not in the nature of business is clear from the fact that the assessee comes within the scope of the Reserve Bank of India’s (RBI) Notification No. DNBS.138/CGM(VSNM)-2000 dated January 13, 2000. The intention of this notification was to relieve entities like the assessee from the stringent procedural requirement (such as capital adequacy and registration with the RBI) applicable to for-profit microfinance NBFCs. The assessee is also supported by grants. Donors do not make grants to commercial entities. The assessee’s aggregate grant receipts in the five financial years ending 31 March 2011 amounted to Rs. 63.55 lakhs. The basic prerequisite of business is profit motive. It has been repeatedly held by various courts including the Supreme Court that the mere incidence of profits does not result in the activity being treated as business and that the intent to earn profits is a sine qua non for an activity to be treated as business. Dominant purpose test is to be applied. The Supreme Court has held that the incidence of profits will not, per se, vitiate the charitable character of organisations and he relied on the following precedents:

• Addl. CIT v. Surat Art Silk Cloth Manufacturers’ Association [1980] 121 ITR 1 (SC);
• Thiagarajar Charities v. Addl, CIT [1997] 225 ITR 1010 (SC);
• CIT v. Andhra Pradesh State Road Transport Association [1986] 159 ITR 1 (SC); and
• American Hotel and Lodging Assn. Education Institute v. CIT [2008] 301 ITR 86 (SC).

7.6 He submitted that various precedents including some of these have been comprehensively analysed to reiterate the aforementioned principles in the Supreme Court’s recent judgement in Queen’s Education Society v. CIT [2015] 372 ITR 699 (SC). This principle (i.e., to determine whether the dominant intention is one to earn profit or not) has come to be known as the dominant purpose test. He also submitted that the reliance placed by the learned AO in his order on the judgements of the Supreme Court in Sole Trustee, Lok Shikshana Trust v. CIT [1975] 101 ITR 234 (SC) and in Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC) is misplaced. In Surat Art’s case, Indian Chamber judgement has been overruled and the observations on restriction of profit in Lokshikshana have been disapproved. In the light of these precedents, in order to establish that the activities of the assessee are not hit by the provisos to section 2(15), it would be sufficient to establish that such activities are not carried out with profit as the motive. Dominant purpose must be charitable.

7.7 The ld. AR contended that the assessee’s micro-lending activities are carried out at an interest rate that is the borrowing rate plus a load of 2% of the amount of the borrowings. Therefore, where the interest rate on borrowings made by the assessee falls, the resultant benefit is passed on to the borrowers. This is demonstrated by the interest rates shown below. These facts have not been disputed by the Revenue thus far. In fact as per Non-Banking Financial Company - Microfinance Institutions (NBFC - MFI) Directions issued by the RBI, the margin cap laid down for micro loans to the poor is as high as 10% (loan portfolio exceeding Rs. 100 crores) and 12% (loan portfolio below Rs. I00 crores) based on the loan portfolio. The load of 2% cannot be done away with as it is a bare necessity to ensure the survival of the organisation. This load is applied towards administrative costs and bad debts. The surplus if any is only ploughed back for application towards its objects. In the light of the license under section 25 of the 1956 Act, the assessee actually has no other legally permissible option. To suggest that the load of 2% indicates an intention to earn profit and that this load would vitiate the charitable character would be to condemn the assessee to financial failure. Financial stability is a prerequisite for the survival of every entity including those carrying on charitable activities. To interpret section 2(15) as prohibiting earning even this income would be to defeat the intention of the exemption provisions. The rates of interest charged by the assessee are considerably lower than the rates of interest charged by other entities carrying out microfinance. This is evidenced by the data brought out in the Small Industries Development Bank of India (SIDBI)’s Report titled “study on interest rates and costs of micro finance institutions, 2011”. The relevant data is extracted below.

Average annual percentage rate tabulated in Annexure 7 to the SIDBI Report varies between 15% and 50.09%. Assessee’s APR is 13% (interest only) and varies between 13.12% and 13.44% (interest + fee) based on the quantum of loan. The average APR (interest + fee) of all the MFls covered is 28.19% as per annexure 7 to SIDBI Report. Further the assessee does not accept deposit or insist on insurance like these MFIs thus making it less burdensome for the poor.

7.8. The ld. AR further submitted that the assessee is licensed under section 25 of the Companies Act, 1956. This licence prohibits the assessee from declaring dividends, issuing bonus shares or distributing the profits in any other manner. Managerial remuneration can also not be paid to members. Further, the terms under which the licence is granted make it incumbent upon the Respondent to utilise (i.e., plough back) its profits only for the purpose of its objects. Profit motive cannot, thus, be attributed to a section 25 of the Companies Act. He drew our attention to the decision of the Tribunal, Chennai Bench in the case of Socio Economic Development Association v. ITO, Ward II(4) Madurai [2011]-TIOL-754-ITAT-Mad, wherein it was observed as under:

“Nevertheless, such activities of giving micro-finance and earning interest can be okayed in the case of Companies registered u/s 25 of the Companies Act, 1956, because in that case, the company intends to apply its profit in promoting charity.”

7.9. The ld. AR submitted that if the assessee’s intention was to earn profit: (i) the assessee would not have given grants; (ii) the assessee’s spread would not have been as low as 2%; (iii) the poor would not have been the only focus; (iv) the monetary limits of loans extended would not have been as low as they are;

(v) other activities such as training, capacity building, promotion of SHGs and tsunami relief would not have been carried out; and

(vi) the assessee would not have chosen to obtain a licence under section 25. He also drew our attention to the judgement of the Delhi High Court in Institute of Chartered Accountants of India v. DGIT( E) [2013] 358 ITR 91 (Delhi), where the Court held that the words “trade, commerce or business” occurring in section 2(15) must be interpreted restrictively while bearing the purposes of that subsection and the exemption provisions in mind. He also placed reliance on the judgment of the High Court of Andhra Pradesh in CIT v. Spandana Rural and Urban Development Organisation (ITA No.304 of 2013). Further, he placed reliance on the following paragraph in the speech of the Finance Minister in the context of the amendment of the first proviso to sec.2(15) of the Act:

“180. “Charitable purpose” includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under “charitable purpose”. Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases. Genuine charitable organisations will not in any way be affected.” Accordingly, the ld. AR submitted that the assessee is a genuine charitable organization and it must not be affected by this amendment.

7.10. The ld. AR submitted that Ground No. 2.3 refers to two precedents both of which do not apply to the assessee for the reasons herein below:

“The essence of the ground taken is that the nature of use or application of profits from an activity in the nature of trade, commerce, or business by a trust pursuing the advancement of any other object of general public utility is irrelevant. The facts of Entertainment Society of Goa v. ClT [2013] 23 ITR(T) 635 (Panaji) are distinguishable on facts of the present case. Further, he invited our attention to the CBDT’s Circular No.11 of 2008, which was not considered in Entertainment Society of Goa(ESG) (supra). The ld. AR also placed reliance on the recent judgment of the High Court of Delhi in India Trade Promotion Organization v. DGIT (371 ITR 333) and he contended that the Panaji Bench did not have the benefit of judgment of the Delhi High Court in the case of Entertainment Society of Goa(supra) as it was passed subsequently. Accordingly, he submitted that the order of the Tribunal in the case of Entertainment Society of Goa(supra) is not relevant to the present case. He also relied on the decision of the Tribunal in Jammu Development Authority v. CIT [2012] 23 taxmann.com 343 (Amritsar) and the Tribunal came to a conclusive finding that there was no charitable activity at all. The assessee in that case was set up to promote and secure the development of local area. There was, in that case, a clear intention to earn profits which finding is conspicuously absent in the present case”.

7.11. The ld. AR submitted that ground No.3, asserts that the interest spread is much more than 2% or 3% as charges are made under the caption “service charges”. This is factually incorrect as it is an admitted position that it is actually interest that is styled as “service charges”. The table of rates showing the relationship between the borrowing rates and the lending rates has not been controverted by the Revenue.

7.12. The ld. AR submitted that the reliance made by the Revenue in Socio Economic Development Association v. ITO, Ward 11(4), Madurai [2011]-TIOL- 754-ITAT-Mad and in Janalakshmi Social Services v. DIT (Exemptions) [2009] 33 SOT 197 (Bang.)- is not relevant to the facts of the present case.

7.13. According to the ld. AR, the assessee is pursuing “the advancement of any other object of general public utility” which presumption is clearly incorrect and which has been addressed above. He submitted that in Entertainment Society of Goa (supra), registration was cancelled under section 12AA(3) invoking proviso to section 2 (15) which was upheld by the ITAT. However in this paragraph the ground states that registration cannot be cancelled under section 12 AA (3) invoking proviso to section 2 (15). The ld. AR submitted that the CIT - 1, Madurai initiated action u/s.12AA(3) invoking the proviso to section 2(15), but dropped the proceedings. Before the CIT-1, the assessee emphasised that it falls under relief of poor with oral and written submissions. He further submitted that ground 5.2 also deals with invoking the second proviso to section 2(15) and, consequently, the provisions of section 13(8). Once again, this proceeds on the basis that the assessee is pursuing “the advancement of any other object of general public utility” which presumption is clearly incorrect and which has been addressed above.

7.14 Regarding invoking of provisos to sec.2(15), he submitted that it has proceeded on the basis that the assessee is pursuing “the advancement of any other object of general public utility” which presumption is clearly incorrect and which has been addressed above. He contended that through ground 6.2, the revenue contends that the provisions of other pieces of legislation such as the Companies Act cannot override the provisions of the Income Tax Act, 1961 and places reliance on the judgement of the Supreme Court in Southern Technology Ltd. v. CIT [2010] 320 ITR 577 (SC). Presumably, the Revenue’s argument is that the character of the assessee (viz. a company licensed under section 25 of the 1956 Act) cannot prejudice the assessment under the Income Tax Act, 1961. He submitted that by virtue of the licence under section 25 of the Companies1956 Act, the assessee is statutorily prohibited from doing certain deeds (such as declaration of dividend issue of bonus shares, payment of remuneration to members etc.). Therefore, assessee cannot be presumed to be an entity with a profit motive. This aspect is actually factual and not legal. It is a factual consequence of the application of law. He further submitted that the Revenue’s contention is also incorrect as, to presume that the assessee is established with a profit motive would be either: To presume non- compliance with section 25 of the Companies Act, 1956; or to fully ignore the application of the Companies Act, 1956. Accordingly, he submitted that both these positions are clearly fallacious and do not deserve consideration. He also invited our attention to the following decisions for the preposition that status under section 25 of the Companies Act, is very relevant in the context of section 2 (15) and its provisos.

1. Socio Economic Development Association (supra)
2. Paragraph 9 of the decision of ITAT, Delhi in Disha Micro Credit

He also relied on the judgement in the case of India Trade Promotion (371 ITR 333, 364), where the Delhi High court has held that in view of the statutory provisions of section 25 of Companies Act, profit making cannot be held to be the object of the entity and he prayed that the order of the CIT(Appeals) is to be confirmed.

8. We have heard both the parties and perused the material on record. Sec. 11 of the Act stipulates that the income from property held for charitable or religious purpose shall not be included in the total income of the previous year of the person in receipt of the income to be given effect in the manner as specified therein. The term ‘charitable purpose’ has not been defined under the statute; but for the inclusive nature of the term as specified under s. 2(15) of the Act, which as existed before the amendment is as follows :

“Sec. 2(15) : “Charitable purpose” includes relief of the poor, education, medical relief and the advancement of any other object of general public utility.”

As per Finance Act, 2008, the said provision was amended adding a ‘proviso’ w.e.f. 1st April, 2009 as follows :

“Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration irrespective of the nature of use or application or retention of the income from such activity.” The AO has taken a stand that by virtue of the amendment as above, the assessee is not entitled to exemption u/s.11 of the Act.

8.1. The ld. 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” added to sec.2(15) of the Act, is not at attracted to the case in hand. He also submitted that the statute, as it stood earlier, had clarified the charitable purpose mentioned in sec.2(15) of the Act, had clarified the charitable purpose mentioned in s. 2(15) by the words “not involving the carrying on of any activity for profit”. By virtue of the existence of these clarifying words, if there was any element of profit it was enough liable to be reckoned as charitable purpose right from the inception of the Act in 1961 till 1st April, 1984, when the words “not involving the carrying on of any activity for profit” were deleted. Thus the contention is that after 1st April, 1984, there is no allergy to profit and if the profit feeds charity, it stands cleared for exemption under s. 11 of the Act.

8.2. To analyse the scope and object of the amendment, we have gone through the “Budget Speech” of the Minister for Finance in the Finance Bill 2008, reported in (298 ITR (St.) 33 at page 65 :

“180. ‘Charitable purpose’ includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under ‘charitable purpose’. Obviously, this was not the intention of Parliament and hence I propose to amend the law to exclude the aforesaid cases. Genuine charitable organizations will not in any way be affected” (Emphasis supplied).

8.3 The learned counsel points out that, the amendment was brought about as a measure of rationalization and simplification, streamlining the definition of charitable purpose and not as a measure of taxation. It is also stated that the concept of charity in India is wider, simultaneously adding that, by virtue of the amendment, the position that existed prior to 1st Feb., 1984 has been brought back and that is all. This however will not tilt the balance in any manner in the case of the assessee so as to take the activities outside the charitable purpose, particularly in view of the fact that micro finance business will not constitute any trade or business. According to the ld. AR, to perform charity, income is inevitable and contended that the activities being pursued by the assessee may constitute a trade or business, if it is not applied for the purposes of charity. Contrary to this, the ld. 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 ld. DR 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, commerce or business” as contemplated under the statute. Further, we note that there is substantial variation in the statutory position as it existed earlier to 1st April, 2009, where the assessee has been given exemption under section 11 of the Act and the position available after amendment to section 2(15) of the Act, brought into effect from 1st April, 2009. Yet another important aspect to be noted in this context is that, after the amendment by incorporating proviso to section 2(15), the 4th limb as to the advancement of “any other object of general public utility” will no longer remain as charitable purpose, if it involves carrying on of :

(a) any activity in the nature of trade, commerce or business,
(b) any activity of rendering any service in relation 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.

8.5. The first limb of exclusion from charitable purpose under cl. (a) will be attracted, if the activity pursued by the institution involves any trade, commerce or business. But the situation contemplated under the second limb [cl. (b)] stands entirely on a different pedestal, with regard to the service in relation to the trade, commerce or business mentioned therein. To put it more clear, when the matter comes to the service in relation to the trade, commerce or business, it has to be examined whether the words “any trade, commerce or business” as they appear in the second limb of cl. (b) are in connection with the service referred to the trade, commerce or business pursued by the institutions to which the service is given by the assessee. If the said words are actually in respect of the trade, commerce or business of the assessee itself, the said clause [second limb of the stipulation under cl. (b)] is rather otiose. Since the activity of the assessee involving any trade, commerce or business, is already excluded from the charitable purpose by virtue of the first limb [cl. (a)] itself, there is no necessity to stipulate further, by way of cl. (b), adding the words “or any activity of rendering any service in relation to any trade, commerce or business ..................”. As it stands so, giving a purposive interpretation to the statute, it may have to be read and understood that the second limb of exclusion under cl. (b) in relation to the service rendered by the assessee, the terms “any trade, commerce or business” refers to the trade, commerce or business pursued by the recipient to whom the service is rendered and in such circumstances, the activities carried on by the assessee cannot be considered as charitable activities.

8.6. The activities carried on by the assessee cannot be considered as activities of medical relief or education or relief of the poor. It is true that the activities carried on by the assessee take care of the poor people also. But those activities cannot be classified under any of the specific activities of relief of the poor; education or medical relief. The correct way to express the nature of the activities carried on by the assessee is to say that the assessee is carrying on ‘advancement of any other object of general public utility’. When that is the case, the assessee is hit by the proviso given under section 2(15). The proviso reads that ‘advancement of 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 any trade, commerce or business for consideration, irrespective of the application of the money. Therefore, the case of the assessee is hit by proviso to section 2(15) and the assessee is not entitled for the benefit of section 11 for that part of income generated in the hands of the assessee from running its micro finance business. Alternatively, one has to look into section 11 (4A). Sub-section (4A) provides that exemption shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the assessee and separate books of account are maintained by such trust or institution in respect of such business. In the present case, there is no dispute on the fact that the assessee is carrying on the business of micro finance. The assessee is maintaining separate accounts for the above business activities. But, the crucial question is whether running of micro finance is a business incidental to the attainment of the objectives of the trust or not. By any stretch of imagination, it is not possible to hold that the business of micro finance is incidental to the above stated objectives of the assessee-trust. “Incidental” means offshoot of the main activities; inherent by-product of principal activities. Activities to compliment and support the main objectives are not in the nature of incidental to the business. They are supporting activities, at the maximum. The genesis of incidental activities must be from the principal activities themselves. There cannot be one source for the principal activities and another source for incidental activities. In the present case, even if activities of the assessee were stated to be relief of poor, it was not possible to conclude that running of business in the form of micro finance is incidental to carrying on of main objective of the assessee-trust and it is the main business of the assessee. Therefore, the assessee is not protected by the provision stated in section 11 (4A), either.”

8.7. In the present case, the assessee is having reserves and surplus at Rs. 50,89,576/-. Contrary to this, the assessee is having revolving fund at Rs. 66,33,800/-, which was availed by hypothecation of their debt to various necessary banks. Further, the assessee raised secured loans and unsecured loans @ 11% totalling to Rs. 16,35,54,090/-. Thus, it means that it has raised loans to advance to the customers by paying interest and the assessee is not having own corpus in a formal capital so as to advance the loan. The assessee is providing loans by association with various commercial banks by raising loans from them. Such kind of micro finance activity cannot be termed as charitable activity rather than it is a business activity. In order to become a charitable activity, the institution must have advance loans at a subsidised rate of interest. The assessee is availing loans from banks and advance 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 the AO and this view of ours is squarely covered by the decision of the Tribunal in the case of Janalakshmi Social Services (supra). The assessee relied on various judgments, which cannot be applied to the facts of the present case, as the assessee is carrying on micro finance business in a commercial manner so as to earn profit and there is no iota of charity carried on by the assessee so as to grant exemption under sec.11 of the Act. Accordingly, we are inclined to uphold the order of the AO and reverse the order of the CIT(Appeals).

9. In the result, the appeal of the Revenue is allowed.