Income Tax Appellate Tribunal - Pune
Siddhim Microfinance Foundtion,, Pune vs Assessee on 29 July, 2016
आयकर अपील
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IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, PUNE
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BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No. 658/PN/2014
Siddhim Microfinance Foundation,
The Director, SMF, S No. 37/2,
Bldg. No. B-25, Keshav Complex,
Dhanakwadi, Pune-411043
PAN : AASCS6749M
.......अपीलाथ / Appellant
बनाम / V/s.
Commissioner of Income Tax-1,
Pune
......
यथ / Respondent
Assessee by : Shri Abhay Shashtry
Revenue by : Shri S.B. Prasad
सन
ु वाई क तार ख / Date of Hearing : 30-05-2016
घोषणा क तार ख / Date of Pronouncement : 29-07-2016
आदे श / ORDER
PER VIKAS AWASTHY, JM :
The appeal by the assessee is directed against the order of Commissioner of Income Tax-I, Pune dated 27-01-2014 passed u/s.
12AA(1)(b)(ii) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") rejecting the application of the assessee for grant of registration.
2 ITA No. 658/PN/20142. The brief facts of the case as emanating from records are: The assessee is a company registered u/s. 25 of the Companies Act, 1956 on 14-02-2013. The assessee applied for registration u/s. 12AA of the Act in the prescribed application form on 17-07-2013. The main objects of the assessee as stated in its Memorandum of Association are:
"Relevant clauses from the Memorandum of Association
1. To initiate, support and undertake various developmental and livelihood programs including micro financing activities which leads to development and capacity building of deprived population in order to alleviate poverty in India as permitted by the Government Authorities and other agencies like Reserve bank of India either directly or through groups, federations and organizations for improving socio-economical status of economically and socially poor marginalized weak and neglected sections of the society.
2. To help and give or to guarantee micro-financial assistance to needy, deserving individuals or groups of individuals such as unemployed youth, poor men and women and slum dwellers and to organizations working for such persons with a view to make them self driven and self maintained and to undertake follow up and consulting activities for micro/small income generating activities.
3. The income and property of the company when so ever derived shall be solely and exclusively applied for the promotion and achievement of the objects set forth in this Memorandum.
No part of the income or property shall be paid or transferred, directly or indirectly by way of dividends, bonus or otherwise by way of profit, to persons who at any time are or have been members of the company or except with the previous approval of the Central Government, no remuneration or other benefit in money or money's 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 interest on money lent, or reasonable and proper rent on premises let to the company.
4. Except with the previous approval of the Central Government, no members shall be appointed to any office under the company which is remunerated by salary, fees, or in any other manner not excepted by 3 ITA No. 658/PN/2014 sub-clause (3).
5. If upon winding up or dissolution of Company, there remains, after the satisfaction of all the debts and liabilities, an property whatsoever, the same shall not be distributed amongst the members of the Company but shall be given or transferred to such other Company or institutions or organizations having objects similar to objects of the company, to be determined by the members of the company, at or before the time of dissolution or in default thereof, by the High Court of Judicature that has or may acquire jurisdiction in the matter"
The Commissioner of Income Tax rejected the application of the assessee vide impugned order primarily on two grounds :
i. Micro financing activities included in the objects of the assessee are not charitable but commercial in nature.
ii. The genuineness of the activities could not be verified.
Against the order of Commissioner of Income Tax, the assessee is in appeal before the Tribunal.
3. Shri Abhay Shashtry appearing on behalf of the assessee has furnished written submissions which are as under :
"It is not in dispute that the present assessee is a company registered u/s. of the Companies Act, 1956. Under sub-sec. (1) of sec. 25 of the Companies Act, 1956, it has been provided that, "where it is proved to the satisfaction of the Central Government that an association is about to be formed as a limited company for promoting commerce, art, science, religion, charity or any other useful object, and intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members, the Central Government may, by license, direct that the association may be registered as a company with limited liability without the addition to its name of the word "Limited" or the words "Private Limited".
This observation of the CIT is purely based on his assumption inasmuch as in the main object, it has been clearly stated and specified that the assessee shall promote micro finance services, as permitted from time to time by the Reserve Bank of India, exclusively to a large number of poor persons to help 4 ITA No. 658/PN/2014 them and their families to rise out of poverty not with the motive of profit. In the main object under Item No.(1), it has been clearly stated that the assessee shall pursue its objects not with the motive of profit. Section 25 of the Companies Act, 1956, also provides that the company shall apply its profit, if any or other income in promoting its objects and it is prohibited from making any payment of dividend to its members. Therefore, the question of pursuing the objects of the company with a profit motive does not arise. Thus, it can be said that the company has no motive of profit in pursuing its objects as provided in the Memorandum of Association.
In Para X of the Memorandum of Association regarding consequence upon winding up or dissolution of the company, it is clearly provided therein that if upon winding up or dissolution of the company, there remains, after the satisfaction of all its debts and liabilities, any property whatsoever, the same shall not be distributed amongst the members of the company but shall be given or transferred to such other company or institution registered under sec. 25 of the Act having objects similar to the objects of assessee company, to be determined by the members of the company at or before the time of dissolution or in default thereof, by the High Court of Judicature that has or may acquire jurisdiction in the matter.
We rely on Disha India Micro Credit Vs. Commissioner of Income-tax I.T. A. No.1374/Del/2010 wherein the facts are similar. Enclosed as Annexure 6. (pg no. 19).
However, the learned CIT, placed reliance upon the decision of ITAT, Bangalore Bench 'B' in the case of Janalakshmi Social Services Vs. Director of Income-tax (Exemption), being dated August 22, 2008 reported in (2009) 33 SOT 197 (Bang.), to contend that micro financing if done on commercial lines is not a charitable activity.
However, the present case is not a case, where the assessee has been providing loan to individual beneficiaries not directly but through some mediator. It is also not a case where the assessee has been charging exorbitant rate of interest along with processing and service charges. In the present case, the assessee shall provide micro-financial services as per the guidelines given by the Reserve Bank of India. The Reserve Bank of India has given guidelines about the nature of micro credits and the interest rates applicable thereto. Therefore, the facts of the present case are on quite different footing than that in the case of Janalakshmi Social Services (supra).
5 ITA No. 658/PN/2014As regards to the Second ground of rejection that the genuineness of the activities cannot be verified we draw your kind attention to the decision pronounced by the Hon'ble ITAT Pune in the case of M/s Advik Foundation vs CIT-V, Pune (ITA No. 1617 & 1618/PN/2011) wherein the Hon. Bench has held that that the genuineness of the activities is not a precondition to confer registration u/s. 12AA. Enclosed as Annexure 7. (pg no. 38).
In view of above it is earnestly prayed that the Trust may be granted registration u/s 12AA of the ITA, 1961."
3.1 The ld. AR of the assessee while supplementing his written submissions contended that the assessee is not financing any particular class of society and no financing will be done through NGO or Self Help Group (SHG). The ld. AR contended that the assessee intends to finance individuals without there being any intermediary.
The ld. AR further contended that micro financing activity which the assessee intends to carry out is subject to Reserve Bank of India (RBI) approval and guidelines. The assessee cannot charge interest on micro financing activity in an arbitrary and unjustified manner. The RBI has laid down the guidelines in this regard and has restricted the pricing of the loan/interest under micro financing activity. The ld. AR placed on record a copy of FAQs issued by the RBI with respect to Non Banking Financial Company - Micro Finance Institutions. The ld. AR further to support his submissions placed reliance on the decision of Bangalore Bench of the Tribunal in the case of Assistant Commissioner of Income Tax (Exemptions) Vs. Bharatha Swamukhi Samsthe reported as 28 DTR 113 and the decision of Visakhapatnam Bench of the Tribunal in the case of SPANDANA (Rural & Urban Development Organisation) Vs. ACIT in ITA No. 364/Vizag/2009 for assessment year 2005-06 decided on 17-02-2010 : [40 DTR 153 (Visakha-Trib.)].
6 ITA No. 658/PN/20144. On the other hand Shri S.B. Prasad representing the Department vehemently supported the order of Commissioner of Income Tax in rejecting the application of assessee for grant of registration u/s. 12AA of the Act. The ld. DR submitted that till now the assessee has not carried out any activity from where it can be ascertained that the micro financing activity carried out by the assessee is charitable in nature.
The ld. DR submitted that the Chennai Bench of the Tribunal in the case of Income Tax Officer (Exemptions) Vs. Kalanjiam Development Financial Services reported as 156 ITD 213 (Chennai-Trib.) has held that the micro financing activity is commercial activity and upheld the action of Assessing Officer in denying the exemption u/s. 11 and 12 of the Act, to the assessee therein. The ld. DR submitted that Commissioner of Income Tax has rightly applied the decision of Bangalore Bench of the Tribunal in the case of Janalakshmi Social Services Vs. Director of Income Tax (Exemptions) reported as 33 SOT 197 (Bang.) in rejecting the application of the assessee.
5. The ld. AR rebutting the submissions made by ld. DR contended, that before start of the activities by the assessee the Revenue cannot assume that the assessee would be charging exorbitant interest under micro financing activity. The ld. AR further submitted that the facts in the case of Janalakshmi Social Services Vs. Director of Income Tax (Exemptions) (supra) are distinguishable and therefore, the ratio laid down in the said case would not apply in the case of assessee. In the case of Janalakshmi Social Services Vs. Director of Income Tax (Exemptions) (supra) the assessee was providing finance to a particular section of society, i.e., traders dealing in vegetables and fruits, whereas, in the present case the assessee shall be providing micro financing assistance to needy, deserving individuals or group of individuals such 7 ITA No. 658/PN/2014 as unemployed youth, slum dwellers etc. and not to a particular section of society. In the case of Janalakshmi Social Services Vs. Director of Income Tax (Exemptions) (supra) the assessee was availing loan facility from banks/financial institutions at interest rates ranging from 8.5% to 9% and was extending the finance to the particular section of the society at rates ranging between 18% to 24% per annum in addition to charging of processing and service fee between 1 to 2 percent.
Whereas, the assessee would be charging interest in accordance with RBI guidelines and no processing or service charges would be levied on the beneficiaries. The ld. AR further submitted that in the said case the assessee was not reaching to individual beneficiaries directly but was having intermediaries such as NGO and SHGs from whom it charged high rate of interest. Whereas, the in the present case the assessee would be providing loan to individual beneficiaries without there being any intermediary. The ld. AR contended that rejecting application of the assessee for grant of registration u/s. 12AA on the presumption that the assessee would be carrying out micro financing activities on commercial basis is pre-judging the activities before there being actually carried out.
6. We have heard the submissions made by the representatives of rival sides and the impugned order passed by the Commissioner of Income Tax. We have also considered the decisions on which both the sides have placed reliance in support of their respective contentions.
The application of the assessee for grant of registration u/s. 12AA has been rejected by the Commissioner of Income Tax on the ground that micro financing activity mentioned in the object clause of the Memorandum of Association is commercial in nature. The another reason for rejecting the application of the assessee is that genuineness 8 ITA No. 658/PN/2014 of the activity carried out by the assessee could not verified. The primary issue before us which has emerged from the submissions made by the representatives of rival sides is, whether the micro financing is a commercial or charitable in nature? This question can be answered only after appreciating the facts and circumstances of the each case.
There is a broad line of distinction between the micro financing activities being carried out on commercial basis and for charitable purpose. If the micro financing facility is extended by charging exorbitant rate of interest and for a particular group of society which may be affluent and is using micro financing mode to fund their working capital, undoubtedly, the micro financing activity would be commercial in nature. On the contrary if the micro financing assistance is provided to the weaker section of society to meet their vocational needs and for their upliftment, by charging rate of interest in accordance with the RBI guidelines issued from time to time and the funds are provided to the needy without putting extra burden of processing or service charges, the activity would certainly fall within the ambit of charitable activity.
7. The Visakhapatnam Bench of the Tribunal in the case of SPANDANA (Rural & Urban Development Organisation) Vs. ACIT (supra) has dealt with this issue. The Vizag Bench while addressing this issue has placed reliance on the decision rendered by Bangalore Bench of the Tribunal in the case of Assistant Commissioner of Income Tax (Exemptions) Vs. Bharatha Swamukhi Samsthe (supra). The relevant extract of the findings in the case of SPANDANA (Rural & Urban Development Organisation) Vs. ACIT (supra) are as under :
"18. ..........Now the issue before us is; whether the micro financing activity is a charitable activity and whether this was an object of the 9 ITA No. 658/PN/2014 assessee at the time of its formation. From a careful perusal of record, we find that this object of micro finance was inserted under the headings 'aims & objects' in the memorandum vide resolution of the general body dated 29th November, 2001. Now the question comes whether activities of micro financing to the poor people is a charitable activity or it can only be termed to be commercial activity of the assessee. In this regard, Bangalore Bench of the Tribunal has examined this issue in detail in the light of nature of activities and they have categorically held that micro finance activity is a charitable activity and assessee is entitled for exemption u/s 11 and is also eligible for renewals and recognition of section 80G(5) of the Act. While holding so, the Tribunal has observed that loan was given to project members out of the funds borrowed from the banks. 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. The Tribunal further observed that in these type of activities, assessee has to incur financial cost for obtaining loans from banks and for regularizing the rest of the activities and to meet the expenses in that activities and other administrative activities of the trust the assessee has to charge the higher rate of interest from the poor members. The Tribunal further observed that object of the assessee was for alleviation of poverty by extending micro credits to poor rural women and it was not charging exorbitant interest and they are being nothing to suggest that the funds are ever used or misused for the personal benefits of the trustees. The relevant observation of the Tribunal are extracted hereunder for the sake of reference:
"After going through the rival submissions and material on record, we find that the assessee trust was registered as a public charitable trust in September, 1997 for specific purpose of poverty alleviation and general for other related charitable activities under the name and style of M/s. Bharatha Swamukhi Samsthe (BSS). The poverty alleviation of poor women and through them, of their families as well was the object of the trust. For the sake of convenience, objects are extracted from the trust deed of the assessee:
"(i) The main objective of the trust is to alleviate poverty in a sustainable and sustained manner, if even larger numbers of poor people, particularly poor women.
(ii) The trust aims to facilitate entrepreneurial activities by provision of micro credit to poor rural women. It will also work to encourage savings habit amongst such poor people. It will work to help create financial resources to serve the poor women and their families to tide over the many emergencies they face regularly, such as ill health etc. The trust 10 ITA No. 658/PN/2014 will work to facilitate over all social development of poor women, their families and their communities to the degree possible, with minimal possible additional financial input. The input will work to help establish institutions to do all of the above in a sustained and sustainable manner for the long run.
(iii) The trust may also engage in education, research, health promotion and any other objects of general public utility.
(iv) The other aims and objects of the trust shall be:
(a) To promote the principles of self-help and self-reliance amongst the poor sections of the population.
(b) To promote and administer schemes for self-employment of the persons belonging to poorer and disadvantaged sections of the population.
(c) To promote and administer self-financing scheme for improving health, nutrition, sanitation, literacy and housing amongst the poor and disadvantaged sections of the population.
(d) To provide support services and encouragement to poverty alleviation programmes.
(e) To provide finance for poverty alleviation programmes, social welfare programmes, community development projects, projects for providing housing to the poorer sections of the community.
(f) To organize training programmes and to provide educational facilities to the poorer sections of the community.
(g) To establish administer, maintain, manage or to finance the establishment and maintenance of vocational training centres and institutions for providing formal and informal education benefit of the poorer and disadvantaged sections of the community.
(h) To organize lectures /seminars /demonstrations /exhibitions / symposia etc., to disseminate useful information to the public.
(i) To establish, maintain, manage or finance the establishment and maintenance of libraries for the use of the public.
(j) To establish, maintain, manage or finance separate funds like emergency fund, calamity fund etc., to help poor families at the time of distress.11 ITA No. 658/PN/2014
(k) To publish or to finance the publication of books, pamphlets, tracts, magazines, etc., for dissemination of useful knowledge amongst the public.
(l) To undertake and carryout research in social sciences or statistical research.
(m) To undertake and carry out programmes of conservation of natural resources or of afforestation.
(n) To conduct, perform or carry on any of the above activities or any activity in pursuance of the above object either jointly or in collaboration with any other trust or institution.
(o) To design, formulate, execute or carry out any scheme for the furtherance or attainment of any of the above objects.
(p) To do all such acts, deeds and things as are necessary or incidental to the furtherance or attainment of the above objects."
We find that the main focus of the objects stated to be alleviation of poverty by extending micro credits to poor rural women. In addition, several other objects which are charitable in nature such as providing training and support programmes for poverty alleviation, education are also listed as its other aims and objects.
The assessee has extended loan facility for the last four years under various groups:
Financial year Amount of loans advanced
2002-03 1,30,16,000
2003-04 4,54,80,000
2004-05 9,49,23,000
2005-06(upto September, 2005) 9,41,34,000
The loans were extended to the following categories of activities:
(1) Agriculture;
(2) Horticulture (3) Animal Husbandry;
(4) Petty services;
(5) Petty manufacturing;
(6) Petty trading;
(7) Life quality improvement loans;
(8) Consumption loans.
The assessee has also stated to have conducted several internal survey to study the impact of its programme on the borrowers which showed economic status or well being of the borrower. As per its reports for the financial year 2002-03, the 12 ITA No. 658/PN/2014 trust is stated to have only one programme namely `BSS Microloan and Savings Project' which aims at sustained and sustainable poverty alleviation of bottom line poor rural women and their families using micro credit. All BSS loans are to be repaid in fifty equal instalments. The loans extended are stated to be for income generating activity, quality of life improvement activities, income generating activities fall under the four categories namely; animal husbandry, petty trading, petty manufacturing, agriculture and horticulture. The trust in the course of its activities has availed loans from other financial institutions by hypothecating book debts of lending operations. The loans availed by assessee trust carried interest rates ranging from 9 to 12 per cent payable in monthly instalments. In some of the loan agreement the lender has prescribed the maximum rate of interest at 20 per cent flat per annum.
Sec. 2(15) of IT Act defines :Charitable purposes" as under: "Charitable purpose includes relief of the poor, education, medical relief and the advancement of any other object of general public utility".
Thus, the object of the trust is mainly constitute alleviation of bottom line poor rural and urban women and their families by means of micro credit facilities. The programme is known as "BSS Micro Loan Project" which is presently extending its help to all poor women. The assessee trust has found that the rural and urban poor women have benefited from the trust's funding activities and were about to come out of the depths of their poverty to a great extent to be able to lead a normal life like any other citizen. This goes to show that the relief to the poor has been aimed at by the trust's micro loan and this is clearly a charitable purpose confirming to the provisions of s. 2(15) of the I.T. Act, 1961 both as relief to poor as well as an object of general public utility.
The micro credit is now recognized as one of the most powerful, effective and one of the most sustainable tools to achieve the goal of poverty alleviation. This fact is now widely recognized not only in India, but throughout the developing world as well as in many developed countries. The assessee is undisputedly engaged in such a poverty alleviation programme and this point has also been considered by the IT authorities in earlier years. While granting recognition under s. 80G in 1997-98 and also during the renewal of recognition of previous year, which was granted by the Jt. CIT, after carefully examining all the relevant facts. The assessee is running similar activities since its inception. So, there is nothing on record to justify the disqualification of trust for recognition under s. 80G of the IT Act. With regards to objection that loans are obtained on a very low 13 ITA No. 658/PN/2014 interest ranging from 9.5 per cent per annum by hypothecating the book debts and movable assets and lending at a substantially higher rate of interest to the beneficiaries is concerned, we find that the loans given by the financial institutions and banks are at the rates normally charged to any other micro credit organisation and there is nothing on 'record to suggest that special benefit has accrued to the assessee trust from the loans. In fact, the benefit has accrued to the women who are served with financial inputs for their vocations under an organized and orderly micro credit programme. The micro credit programme has received place of priority even by the Government of India and other bodies concerned with the financial well being of rural women.
The amount borrowed from banks and financial institutions in the range of 9.5 per cent per annum is not high considering market rate and normally lent by the financial institutions to micro credit organisations. The borrowed amounts are advanced to the beneficiaries covering the above, employment, training and administrative expenses. The ultimate beneficiaries of the scheme of the micro loans are the poor women and especially women who have no access to the credit facilities from banks and other financial institutions as nobody can stand as surety for the poor without adequate security. The trust's motive is not to gain any advantage in this activity but to help the poor in uplifting their economic status in the society. So, it is not justifiable to level the assessee as a profit making body alone. Further, there is nothing on record to justify that the assessee is a charging exhorbitant rate of interest from the poor women mentioned above. There is nothing on record to suggest that these poor women are capable of receiving loan at lesser interest than offered by the assessee. In case, there is availability of funds/loans at lower rate of interest, nobody including the assessee can force these poor women for such alleged higher rate of interest on the loans. There is nothing on record to suggest that the funds of the trust are used or misused for personal benefit of the trustees or their relatives or near and dear ones. The Revenue has brought nothing on record that surplus generated in the above said activities are not ploughed back into the organisation for the benefit of poor. The financial sustainability as a method of achieving our ultimate objectives, should not be termed as 'profit motive'. Because the organisation aims and work to alleviate poverty of poor women. It is not out of contest to mention here that Dr. Ramesh BellamKonda, trustee and project director, is a medical doctor by background and was in medical practice abroad till March, 1997. He has left his practice in foreign to serve his motherland and is engaged in work of Prof. Muhammed 14 ITA No. 658/PN/2014 Yunus and Grameen Bank of Bangladesh involving himself mainly by observing the day-to-day activities of the trust. In view of the above, it is not justified to hold that the assessee trust is financially exploiting the poor women, but in fact the trust is rendering great service to the society by the above said poverty alleviation programme. Under the facts and circumstances, we hold that the assessee should be granted renewal of recognition under s. 80G of the I.T. Act. The AO directed accordingly."
19. In the aforesaid case assessee was mainly engaged in micro financing activities and the money was lent to its project members at a rate of interest higher than that of the rate of interest the loan was borrowed. In that case also assessee has borrowed the funds either from the bank or other financial institutions and was lent to the project members. The Tribunal has taken a view that this micro finance activity was undertaken to alleviate the poverty and for the benefit of socioeconomically weaker sections of the society and for doing this activity a proper organized sector is required in which lot of expenses are to be incurred. To meet that expenses, assessee is bound to charge higher rate of interest from the project members. Otherwise, assessee could not undertake the micro finance 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 alleviate the poverty and also for the benefit of the socio-economically 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 assessees u/s 12A assessee is eligible for exemption u/s 11 of the Act. Now next issue is that by joining hands with other financial institutions or the bank for obtaining the loans for its disbursement or advancement to the poor women, the exemption can be denied to the assessees. As held by the Tribunal in the aforesaid case, that this micro finance activity requires an organised sector for procuring a loan from the banks or other financial institutions for its disbursement/advancement of loan to poor or weaker section of the society in which the assessee has to incur a lot of expenditure. More over when a loan was given to the poor women, they do not have any surety or guarantee to stand and most of the times the loan could not be recovered from them and that aspect is also to be taken into account by the assessees while granting a lone to the poor women. Suppose a loan was given to some of the poor women and they would not be in a position to repay the loans what the assessee will do. He 15 ITA No. 658/PN/2014 cannot enforce the recovery of the loan by other means and ultimately he has to write off the loan. Meaning hereby in these type of micro finance activity most of times the assessee could not recover the loan granted to the poor women as no one stood as the guarantor for them at the time of advancement of the loan. No doubt assessee is charging higher rate of interest from the poor women or the downtrodden or socio-economically weaker sections of the society. The reason behind is that most of time the assessee could not recover the loan from these poor and weaker sections of the society, beside incurring heavy expenditure in maintaining the organized sector. These poor and weaker section happily agreed with the assessee for loan at higher rate, because they could not get the loan from the financial institutions as they require a surety who can stand for them and also to complete various formalities.
20. So far as the advancement of certain funds by the assessee to other organisations who were also engaged in similar type of activities are concerned, we are of the view that by advancing a fund on interest to other organisations, assessee has accomplished its object of micro finance to the socio-economically weaker sections of the society and also to alleviate poverty beside collecting the interest on the advanced loan. Moreover, this fund was advanced for a shorter period and the assessee has also earned an interest thereon which was utilized in micro financing activity to the poor people. We therefore of the view that by joining hands with the banks or financial institutions for procuring funds/loans for its advancement to poor or needy people exemption u/s 11 cannot be denied.
21. While rejecting the claim of the assessee, the revenue has not taken into account these factors that by doing this activity, assessee is helping the needy people or the socio-economically weaker section of the society as no one is going to finance them to meet their requirements. By doing this, the assessee is atleast helping the poor and weaker section of the society in meeting their urgent needs. We therefore of the view that for these reasons the exemption u/s 11 cannot be refused to the assessees. We accordingly, set aside the order of the CIT(A) and direct the A.O. to allow the exemption u/s 11 of the I.T. Act."
[Emphasized by us] 16 ITA No. 658/PN/2014
8. A perusal of the above order would show that the Tribunal has held micro financing activity charitable in nature in the facts of the case for following reasons :
i. The loan was advanced to the weaker section of society to meet their urgent needs.
ii. Even if the assessee has charged slightly higher rate of interest, it is not held to be non-charitable because the cost of recovery is very high and the chances of bad debts are also considerable.
iii. The funds under micro financing activity are given without any surety or guarantee.
9. The Bangalore Bench of the Tribunal in the case of Assistant Commissioner of Income Tax (Exemptions) Vs. Bharatha Swamukhi Samsthe (supra) held micro financing activity to be charitable in nature in the facts and circumstances of that particular case. It was observed that the assessee was borrowing money from the banks and providing loans to poor women for their poverty alleviation. There was nothing on record to show that the interest charged by the assessee was exorbitant.
10. In the case of Janalakshmi Social Services Vs. Director of Income Tax (Exemptions) (supra) micro financing activity was held to be not charitable in the facts and circumstances of that particular case. In the said case the application of the assessee for grant of registration u/s. 12AA was rejected as the Director of Income Tax (Exemptions) during the course of examination of activities of the society had noticed that assessee was providing finance to a particular section of society, i.e. traders dealing in vegetables and fruits and making purchases from Safal. The assessee was availing loan facility from banks/financial 17 ITA No. 658/PN/2014 institutions at interest rates ranging from 8.5% to 9% and was extended to so called poor people in urban areas at rates between 18% to 24% per annum in addition to burden of processing and service charges between 1 to 2 percent. Further, assessee was not directly reaching to individual beneficiaries. The assessee roped in NGOs and SHGs from whom it charged high interest rate. The facts and circumstances in that particular case clearly indicated that the assessee was engaged in micro financing activity on commercial basis and there was no element of charity.
10.1 A perusal of the order of Tribunal in the aforesaid case would show that the Tribunal has not rejected the concept of charity associated with micro financing activity. The Tribunal in para 20 of the order has observed : "Micro finance can be a business as well as a charitable activity. In order to become a charitable activity, the institution must have subsidized funds. The promoters if they are ready to take the establishment cost then micro finance can become a charitable activity. But it is done on commercial lines, then it is not a charitable activity but an activity to expand the finance business by contracting a new section of the society".
Thus after perusing the order of Tribunal in the case of Janalakshmi Social Services Vs. Director of Income Tax (Exemptions) (supra), we are of the view that the facts of the present case are entirely at variance from the facts in that case. In the present case the assessee is in the stage of infancy. The assessee has yet to start its activities. Without examining the activities being carried out by the assessee it would be pre-mature to hold that the micro financing 18 ITA No. 658/PN/2014 activity to be carried out by the assessee would be commercial in nature.
11. Similarly, in the case of Income Tax Officer (Exemptions) Vs. Kalanjiam Development Financial Services (supra) the Tribunal held that the assessee was not entitled to claim exemption u/s. 11 as the assessee was carrying on micro finance business in a commercial manner and there was no element of charity in the activities being carried out by the assessee. Therefore, the ratio laid down in the case will not apply in the facts and circumstances of the present case.
12. At the time of considering the application for grant of registration u/s. 12A, the Commissioner of Income Tax has to confine his observations with regard to objects of trust which the assessee would be carrying out in times to come. The Hon'ble Karnataka High Court in the case of Director of Income Tax (Exemptions) Vs. Meenakshi Amma Endowment Trust reported as 50 DTR 243 (Kar.) has held that the Commissioner of Income Tax/Director is not required to examine the question whether the trust has actually commenced and has in fact carried on charitable activities at the stage of considering application for grant of registration u/s. 12A of the Act. Similar view has been taken by the Hon'ble Gujarat High Court in the case of Commissioner of Income Tax Vs. Kutchi Dasa Oswal Moto Pariwar Ambama Trust in Tax Appeal NO. 918/2011 decided on 10-12-2012. The various Benches of the Tribunal have also been consistently taking similar view. The Co-ordinate Bench of the Tribunal in the case of M/s. Advik Foundation Vs. Commissioner of Income Tax in ITA Nos. 1617 & 1618/PN/2011 (supra) has held that merely because the assessee trust has not carried out any activity till the time of application, 19 ITA No. 658/PN/2014 Commissioner of Income Tax is not justified in denying registration u/s. 12AA of the Act to the assessee trust since none of the objects have been found to be non-charitable.
13. In view of the facts and circumstances of the present case and various decisions discussed above, we remit this file back to Commissioner of Income Tax for reconsidering the application of assessee in the light of our above observations. Accordingly, the appeal of the assessee is allowed for statistical purpose.
14. In the result, the appeal of the assessee is allowed for statistical purpose.
Order pronounced on Friday, the 29th day of July, 2016.
Sd/- Sd/-
(आर. के. पांडा / R.K. Panda) (!वकास अव"थी / Vikas Awasthy)
लेखा सद"य / ACCOUNTANT MEMBER $या%यक सद"य / JUDICIAL MEMBER
पुणे / Pune; &दनांक / Dated : 29th July, 2016
RK
आदे श क) *%त,ल#प अ-े#षत / Copy of the Order forwarded to :
1. अपीलाथ / The Appellant.
2. यथ / The Respondent.
3. आयकर आय' ु त / The CIT-I, Pune
4. !वभागीय %त%न*ध, आयकर अपील य अ*धकरण, "बी" ब-च, पण ु े / DR, ITAT, "B" Bench, Pune.
5. गाड/ फ़ाइल / Guard File.
//स या!पत %त // True Copy// आदे शानुसार / BY ORDER, %नजी स*चव / Private Secretary, आयकर अपील य अ*धकरण, पुणे / ITAT, Pune