Income Tax Appellate Tribunal - Cochin
M/S.Shalom Charitable Ministries Of ... vs The Acit, Palakkad on 25 April, 2018
1
IN THE INCOME TAX APPELLATE TRIBUNAL
COCHIN BENCH, COCHIN
BEFORE S/SHRI CHANDRA POOJARI, AM & GEORGE GEORGE K., JM
I.T.A. Nos. 79 & 80/Coch/2017 & S.P. Nos. 17 & 18/Coch/2017
Assessment Years : 2007-08 & 2009-10
M/s. Shalom Charitable Ministries Vs. The Assistant Commissioner of
of India , Shalmo Nagar, Income-tax, Circle-1, Palakkad.
Gopalapuram Road,
Chittur,
Palakkad-678 101.
[PAN :AADTS 6647Q]
(Assessee-Appellant) (Revenue-Respondent)
Assessee by Shri Sivadas Chettoor, CA
Revenue by Shri A. Dhanaraj, Sr. DR
Date of hearing 04/04/2018
Date of pronouncement 25th/04/2018
ORDER
Per CHANDRA POOJARI, ACCOUNTANT MEMBER:
These appeals filed by the assessee are directed against the different orders of the Commissioner of Income Tax(Appeals), Thrissur and pertain to the assessment years 2007-08 and 2009-10. The assessee has also filed Stay Petitions in S.P. Nos. 17&18/Coch/2017 for these assessment years seeking stay of recovery of outstanding demand as under:
AY Demand
2007-08 Rs.44,70,299/-
2009-10 Rs.22,15,850/-
I.T.A. Nos.79&80/C/2017 &
S.P. Nos. 17&18/C/2017
2. Since the issues involved in these appeals are common, they were heard together and are being disposed of by this consolidated order.
3. The first common ground in these appeals is with regard to the treatment of the income from microfinance activity as not eligible for exemption u/s. 11 of the I.T. Act.
4. The facts of the case are that the assessee is a charitable Trust registered u/s. 12A of the I.T. Act. It is engaged in the microfinance activity especially for poor rural women. The assessee claimed income exemption u/s. 11 of the Act considering that the micro finance activity is a charitable activity in terms of sec. 2(15) of the I.T. Act. The Assessing Officer noted that the assessee is charging interest at the rate of 29% per annum while it is getting funds at the interest rate of 12% per annum. According to the Assessing Officer, it is business activity without any element of charity. The Assessing Officer relied on the decision of the ITAT, Bangalore Bench in the case of Janalakshmi Social Services vs. DIT(Exemptions)I wherein it was held that microfinance activity can be both charitable and business in nature. Accordingly, the Assessing Officer denied exemption u/s. 11 of the Act.
5. Against this, the assessee went in appeal before the CIT(A). The CIT(A) confirmed the order of the Assessing Officer on this issue. 2
I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017
6. Aggrieved, the assessee is in appeal before us. The Ld. AR submitted that the finding of the AO that there is no element of charity in the microfinance activity is untenable in law and unwarranted in fact also because Sec. 2(15) of IT Act defines: Charitable purposes" as under:
"Charitable purpose "to include the following:-
(i) Relief of the poor
(ii) Education (Hi) Medical relief, and
(iv) The advancement of any other object of general public utility.
6.1 The Ld. AR submitted that with effect from 01.04.2009 (i.e., from assessment year 2009-10 onwards), however, the "advancement of any other object of general public utility" shall not qualify as a "charitable purpose" if the same involves the carrying on of any activity in the nature of trade, commerce or business, or rendering of any service in relation to any trade, commerce or business, for a consideration. According to the Ld. AR this new restriction applies irrespective of the nature of use or application of the income arising from such activity. It was submitted that this amendment shall not apply to the assessee as the Object is only relating to "relief of the poor". The Ld. AR submitted that the object of the activity is to give relief of the poor. The Ld. AR submitted that the objective of the trust is poverty alleviation and empowerment of the rural poor with particular emphasis on the rural women. According to the Ld. AR the 3 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 trust had found that the rural and urban poor women had 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 which goes to show that the relief to the poor was 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. It was submitted that 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 and this fact is now widely recognized not only in India, but throughout the developing world as well as in many developed countries. The Ld. AR submitted that the object of the activity is to give relief to the poor, it cannot be disputed that the objective is charitable if that is so activity undertaken to achieve the object do not have any relevance as the same is only a device to mobilize resources for achieving charitable objects. It was submitted that in this case the Assessing Officer failed to look in to the objective of activity but erroneously considered the activity as object of the trust. 6.2 The Ld. AR relied on the decision of Supreme Court in the case of Thiagarajar Charities vs ACIT where the Hon'ble Supreme Court held that "the business - corpus - property held under trust - produces or results in income, like any other property. That is all. The business is only a "means of achieving the "object" of the Trust; it is a medium through which the "objects" are 4 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 accomplished. The Ld. AR relied on the parallel decision in favour by the Supreme Court in case of ACIT Vs Thanthi Trust where the Hon'ble Supreme Court invoked section 13(l)(bb). Even a business that is held by such a trust as a part of its corpus is carried on by the trust." The Ld. AR relied on the decision of the ITAT, Visakhapatnam Bench in the case of Spandana (Rural & Urban Development Organisation) vs. ACIT which states that microfinance activity is a charitable activity as it alleviates poverty and also benefits socio-economically weaker sections of the society. The Tribunal held that the Microfinance activity was charitable in nature because of the following reasons :-
i) The loan is advanced to weaker sections of the society to meet their urgent needs.
ii) Even if reasonable or slightly higher interest is charged, it cannot be held uncharitable because the cost of recovery is very high and the possibility of bad debt is also high.
iii) The funds are given without any surety or guarantee.
6.3 The Ld. AR relied on the decision of the Delhi Bench of Income Tax Appellate Tribunal in the case of Disha India Micro Credit Vs. CIT wherein the Tribunal elaborately dealt with the activity relating to micro finance and came to the conclusion that the micro finance activity is charitable in nature. The Ld. AR submitted that the Tribunal did not follow another decision of the Bangalore Bench reported in (2009) 33 SOT 197 (Bang) in the case of Janalakshmi Social Services Vs. Director of Income Tax (Exemption) which decision was relied on by the ITO.
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I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017
7. On the other hand the Ld. DR submitted that the assessee was charging interest at the rate of 29% per annum from its clients. According to the Ld. DR the assessee themselves admitted that they were taking loan from commercial banks at an interest rate below 15% per annum for disbursing these loans and therefore, the difference between these rates was 14% which was very substantial. The Ld DR submitted that as per the Trust Deed, the main object of the assessee trust is shown as providing finance to the poor. If that is the real object, according to the Ld. DR they would have provided loans at interest rate below bank rates or by taking a nominal margin on the money they borrowed from banks. But according to the Ld. DR they charged interest at the rate of 29% per annum which was 14% above the rate at which they have borrowed from the banks.
7.1 Further, the Ld. DR submitted that in Kerala there is a specific law which is called as "The Kerala Money Lenders Act, 1958 (Act 35 of 1958)" to provide for the regulation and control of the business of money lenders in the State of Kerala. In this Act, according to the Ld. DR the maximum amount of interest which can be charged on lending money is prescribed and this rate is prescribed in section 7 of the said Act which is as under:
"7. Interest and charges allowed to money lenders - No money lender shall charge interest on any loan at a rate exceeding 2% above the maximum rate of interest charged by commercial banks on loans granted by them."6
I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 7.2 The Ld. DR submitted that for the previous year relevant to the assessment year 2007-08 the rate of interest as per section 7 of the Kerala Money Lenders Ace cannot exceed more than 18%. However, in the present case, the Ld. DR submitted that the assessee was charging 29% interest which was far above the rate prescribed by law, i.e., The Kerala Money Lenders Act. Thus, the Ld. DR submitted that the assessee is in the business of lending at 29% per annum to the poor, which is not as envisaged in the assessee Trust's objects. By collecting interest at such a higher rate, the Ld. DR submitted that the assessee had deviated from its objective of doing charity, especially in view of the fact that the difference of interest over deposits and disbursement in cases of banks and non- banking financial companies is less than 10%. As such, according to the Ld. DR, the micro finance activity conducted by the assessee is strictly commercial in nature and with profit motive. The Ld. DR submitted that the assessee had even collected penal interest amounting to Rs.40,274/- from their defaulter which clearly showed that the trust was not even considerate with the poor loanees and was purely acting just as any money lender. Thus the Ld. DR submitted that the activity of assessee was business in nature and there is no element of charity involved in the activities of the assessee and it is purely commercial. 7.3 The Ld. DR submitted that the assessee was availing loan from commercial banks below the prime lending rate and the loan so taken were given to various members of the self help group of women as micro finance. The Ld. DR 7 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 submitted that the assessee is charging exorbitant interest of 29% per annum with reference to their cost of fund. The Ld. DR submitted that since the assessee was charging and collecting very high interest and it cannot be stated to be an activity of charitable in nature. As such, it was submitted that the microfinance activity conducted by the assessee was strictly commercial in nature and with profit motive. Further, it was submitted that as per original trust deed clause 27, the trustees cannot change the primary objectives of the trust. Hence, according to the Ld. DR the modification made on 22/09/2006 in the objects of the trust deed is not legally valid and therefore, the trust activity of microfinancing is not acceptable under Income Tax Act and will not qualify for exemption u/s. 11 of the Act. From the above, thus it was submitted that the activity of the assessee is business in nature and there is no element of charity.
8. We have heard the rival submissions 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.' 8 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 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 9 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 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 10 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 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), 11 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 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 12 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 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 13 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 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 abovestated 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.
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I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 8.7 In the present case, from the details given in the assessment order, it is seen that the assessee was charging interest @ 29% per annum from its clients. The assessee admitted that they were taking loan from commercial banks at an interest rate below 15% per annum for disbursing these loans. Therefore, the difference between these rates was 14% which is very substantial. As per the Trust Deed, the main object of the assessee is shown as providing finance to the poor. If that is the real object, they would have provided loans at interest rate below bank rates or by taking a nominal margin on the money they borrowed from banks. But it is seen that they charged interest rate of 29% per annum which is 14% above the rate at which they have borrowed from the banks. In Kerala there is a specific law which is called as "The Kerala Money Lenders Act, 1958 (Act 35 of 1958)" to provide for the regulation and control of the business of money lenders in the State of Kerala. In this Act the maximum amount of interest which can be charged on lending money is prescribed. The rate is prescribed in section 7 of the said act which is as under:
"7. Interest and charges allowed to money lenders - No money lender shall charge interest on any loan at a rate exceeding 2% above the maximum rate of interest charged by commercial banks on loans granted by them."
8.8 For the previous year relevant to the assessment year 2007-08 the rate of interest as per section 7 of the Kerala Money Lenders Act cannot exceed more 15 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 than 18%. However, in the present case the assessee was charging 29% interest which is far above the rate prescribed by the law i.e. The Kerala Money Lenders Act. This shows that the assessee is in the business of lending at 29% per annum to the poor, which is not as envisaged in the assessee-Trusts's objects. By collecting interest at such a higher rate the assessee has deviated from its objective of doing charity, especially in view of the fact that the difference of interest over deposits and disbursement in cases of banks and non banking financial companies is less than 10%. As such the micro finance activity conducted by the assessee is strictly commercial in nature and with profit motive. The assessee had even collected penal interest from their defaulter which clearly shows that the trust was not even considerate with the poor loanees and was purely acting just as any money lender. From the above the activity of the assessee is business in nature and there is no element of charity involved in the activities of the assessee and it is purely commercial. In view of this, the action of the lower authorities in denying exemption u/s. 11 of the Act is confirmed. 8.9 The Ld. AR submitted that the Income Tax Officer does not have the power to sit in judgment over the decision of his superior that is the Commissioner of Income-tax who found the objects of the Trust as charitable in nature. It was submitted that the Income Tax Officer did not give notice to deny the exemption u/s. 11 of the Act. According to the Ld. AR the status of the assessee was fixed as 'Trust' whereas there is no such status under the Income 16 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 Tax Act. Further the Ld. AR made an argument that the assessee was already granted approval under section 12AA of the Act after considering the object clause of the assessee-Trust. As such granting of exemption u/s. 11 is automatic and it cannot be disturbed. However, we find that the assessee was availing loans from commercial banks below the prime lending rate and charging interest at the rate of 29% per annum to its members. In addition, the assessee was also charging penal interest from the defaulters which shows that the assessee- Trust was not even considerate with the poor borrowers and the assessee-Trust is nothing but doing lending business and there is no element of charity in its activities. As such we do not find any infirmity in the order of the lower authorities and the same is confirmed on this issue.
8.9.1 In the present case, contrary to the findings in the assessment order, the Ld. AR submitted that the assessee has borrowed funds for advancing loans to the public at interest of 12% per annum from the Banks. Later, the assessee lent that amount to the public at average rate of 29%. It means that even there is a gap of 17% between borrowing and lending the amount to the public. The assessee claimed it as a charitable activity by placing reliance on the report of the sub-committee of the Central Board of Directors of Reserve Bank of India to study issues and concerns in the MFI sector(Malegam Committee Report). For the purpose of determining appropriate margin cap, the Committee examined 17 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 the financials for the year ended 31st march 2010 of large MFIs and small MFIs as under:
a) for the larger MFIs the effective interest rate calculated on the mean of the outstanding loan portfolio as at 31st March, 2009 and 31st march, 2010 ranged between 31.02% and 50.53% with an average of 36.79% for the smaller MFIs the average was 28.73%.
8.9.2 According to the Ld. AR, it was recommended by the sub-committing to charge interest from the public at 24% per annum since there was administrative expenditure incurred by the micro finance institutions. Even going by the Malegam Committee Report of the RBI, the interest charged by the assessee is 29% which is very high. Hence, the activity carried on by the assessee cannot be considered as charitable so as to grant exemption u/s. 11 of the Act. 8.9.3 The Ld. AR relied on various judgments of Tribunals and Supreme Court. The Ld AR relied on the decision of the ITAT, Visakhapatnam in the case of Spandana (Rural & Urban Development Organisation) vs. ACIT in ITA No. 364/Vizag/2009 dated 17/02/2019 which is related to grant of approval u/s. 12AA of the Act. The Tribunal considered the micro finance activities as charitable activities as the assessee was charging interest at 15% per annum. In the judgment of the ITAT, Delhi Benches in the case of Disha India Micro Credit vs. CIT in ITA No. 1374/Del/2010 dated 28/01/2011, the issue was related to approval u/s. 12AA of the Act and not with regard to granting of exemption u/s. 18
I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 11 of the Act while passing assessment order u/s. 143(3) of the Act. The Ld. AR also relied on the decision of the ITAT, Bangalore Bench in the case of Janalakshmi Social Services vs. DIT(Exemptions), 33 SOT 197 which is decided against the assessee. In the judgments of the Supreme court in the cases of Thiagarajar Charities vs. ACIT (225 ITR 1010) and ACIT vs. Thanthi Trust (239 ITR 502), the cases are not relating to micro finance activities. Similar is the position with the decision of the ITAT, Chennai Bench in the case of ACIT vs. Jeppiar Educational Trust in ITA Nos. 1333, 1334, 1591 to 1595/Mds/2010 dated 15/06/2011 and decision of the ITAT, Kolkata Bench in the case of Sreema Mahila Samity vs. DCIT dated 13/10/2017. In view of this, we do not find any infirmity in the order of the CIT(A) and confirm the same. Thus the above ground of appeals taken by the assessee is rejected for both the assessment years.
9. The next common ground in these two appeals is with regard to disallowance of Rs. 13,91,107 and Rs.2,43,503/- for the assessment years 2007-08 and 2009- 10 respectively.
10. The facts of the case are that the assessee had debited the above amounts in these assessment years as provision for bad and doubtful debts in its income and expenditure account. This amount was disallowed u/s. 36(1)(vii) of the I.T. Act and the same was confirmed by the CIT(A).
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I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017
11. Against this, the assessee is in appeal before us. The Ld. AR pleaded before us that the income of the assessee is to be computed as per formally accepted commercial principles and on prudent basis. According to him, the income of the assessee is to be computed after making the above provisions for bad and doubtful debts to ascertain the correct income of the assessee.
12. The Ld. DR submitted that the provision for bad and doubtful debts can be allowed only if it was written off in the books of accounts of the assessee.
13. We have heard the rival submissions and perused the material on record. The Ld. AR placed reliance on the judgment of Kolkata Bench of the Tribunal in the case of Sreema Mahila Samity vs. DCIT in ITA No. 2826/Kol/2013 dated 13/10/2017, it was held that as under:
25."We find that the assessee has shown other receipts of Rs.70,49,240/- which includes provision for bad and doubtful debt of last year (Schedule 11 & 14) of Rs.53,60,345/-. The assessee in its written submission stated that cost of recovery is very high and the possibility of bad debt is also high as the loans were advanced without any surety or guarantee. We find from the record that the assessee has shown a provision of bad and doubtful debt in the last year for a sum of Rs.53,61,345/-, which is more than the amount in the year under consideration and the Assessing Officer has already deducted the same while computing the income of the assessee for the year under consideration. The assessee, therefore, cannot be said to have any grievance of the assessee on this issue."20
I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 13.1 In the case before the Calcutta Bench, there was disallowance of bad and doubtful debts at Rs.38,27,197/- in the year under appeal. However, the Assessing Officer had considered the earlier provisions of bad and doubtful debts at Rs.53,61,345/- which is more than the amount in the year under consideration while computing the income of the assessee in the assessment year under consideration. Hence, the Tribunal was of the opinion that the assessee cannot have any grievance. This judgment of the Kolkata Bench (supra) is of no assistance to the assessee. Going into the merit of the issue raised by the assessee, in our opinion under section 36(1)(vii) of the Act, only debts which were written off as irrecoverable in the books of accounts of the assessee in the previous year relating the assessment year is to be claimed as deduction as bad debts while computing the income of the assessee. There is no question of granting any relief towards provision for bad and doubtful debts while computing the business income of the assessee. Accordingly, we do not find any merit in the above ground raised by the assessee in both the years. This ground of appeals of the assessee is dismissed.
13.2 The next ground in the assessment year 2009-10 is with regard to disallowance of Rs.3,12,639/- towards donations and gifts. The lower authorities disallowed the above amount which was claimed by the assessee as donations and gifts.
21
I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 13.3 We have heard the rival submissions and perused the record. Since the donations/gifts are not expended wholly and exclusively for the purpose of business of the assessee and it is in the nature of charities, it cannot be allowed while computing the income of the assessee. Accordingly, the disallowance made by the Assessing Officer and confirmed by the CIT(A) is justified. Hence, this ground of appeal of the assessee for the assessment year 2009-10 is dismissed.
14. The next ground for the assessment year 2007-08 is with regard to disallowance of remuneration paid to Mr. Jayson Joy and Mr. Job M. Joy. The assessee claimed payment of Rs.2,47,500 to Mr. Jayson Joy and Rs.1,80,000/- made to Mr. Job M. Joy. This ground was dismissed by the Assessing Officer on the reason that these are trustees of the assessee and have no professional qualification for claiming such honorarium/salary from the Trust and also there was no mention of payment of salary or honorarium to the trustees in the Trust Deed. Only the expenditure incurred by them is to be reimbursed. Since the above amounts were paid to these persons unauthorisedly, this was disallowed by the lower authorities.
15. Against this, the assessee is in appeal before us. The Ld. AR submitted that the disallowances of remuneration paid to Mr. Jayson Joy and Mr. Job M Joy is not at all justified due to the fact that they both are Post graduates and are 22 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 devoting their whole time in activities of the Trust. The Ld. AR submitted that they supervise and oversee the whole activities of the Trust and also travel extensively for the needs of Trust. Therefore, according to the Ld. AR, as a return, the remuneration is a reasonable pay back for their efforts and their sacrifice for the society and the amount so paid (Rs.2,47,500 for Mr. Jayson Joy and Rs.1,80,000 for Mr. Job M Joy) is nominal when compared to gross total income (Rs.1,68,78,778/-). The Ld. AR relied on the decision of the ITAT, Ahmedabad Bench in the case of PNR Society for Relief & Rehabilitation of Disabled Trust vs. DDIT(Exemption).
16. The Ld. DR relied on the orders of the lower authorities.
17. We have heard the rival submissions and perused the material on record. There is no authorization in the Trust Deed to pay remuneration to Mr. Jayson Joy and Mr. Job M Joy. These unauthorized remunerations paid by the Trust to the employees have not been sanctioned in the Trust Deed. Hence, we find no infirmity in the order of the CIT(A) and confirm the same.
18. The next ground for the assessment year 2007-08 is with regard to the disallowance of Rs. 5 lakhs on self made vouchers.
19. The facts of the case are that the assessee could not produce vouchers for various expenses incurred by it before the Assessing Officer. The assessee 23 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 stated that most of the vouchers were self-vouchers and they had actually incurred the expenses as shown in the accounts and that all the expenses are genuine. It was stated by the assessee as under:
"The disallowance of Rs.5,00,000/- on the ground that some of the expenses are supported by self vouchers is unsustainable and unreasonable since the expenses claimed are very reasonable considering the volume of transactions undertaken by the trust. It is requested that a liberal and lenient view may be taken of the whole matter especially considering the fact that the activities of the appellant trust are mainly carried on in rural areas."
20. On appeal, the CIT(A) found that the assessee had not produced bills/vouchers at the time of assessment proceedings before the Assessing Officer or even at the time of appellate proceedings. Therefore the CIT(A) confirmed the addition of Rs.5 lakhs made by the Assessing Officer.
21. Against this, the assessee is in appeal before us. The Ld. AR submitted that the disallowance of Rs. 5,00,000/- on self made vouchers cannot be justified on the fact that a large volume of transactions are being undertaken by the assessee Trust. Also, it was submitted that as their transactions are concentrated in the rural areas, exact accounting systems may not be active in that area as many of the local people are unaware of the methods of recording in a proper manner thus it was difficult to get the computerised bills and vouchers from them. Hence, according to the Ld. AR, the expenditures incurred by the trust in the rural areas may not be fully supported by vouchers and bills. 24
I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017
22. The Ld. DR relied on the orders of the lower authorities.
23. We have heard the rival submissions and perused the record. The expenditure was disallowed on the basis of self made vouchers to the extent of Rs. 5 lakhs. In a normal trade practice, it is not possible to prove 100% bills and receipts from the recipients and there is every chance of making payments by way self made vouchers. However, there is every chance of inflating the expenditure by way of self made vouchers. Hence, we direct the Assessing Officer to disallow only 20% of Rs. 5 lakhs, i.e. Rs. 1 lakh towards self made vouchers. Hence, this ground of appeal of the assessee is partly allowed.
24. The next ground is with regard to disallowance of Rs.1,30,000/- u/s. 40A(3) of the Act being 20% of Rs.6,50,000/- paid as cash for land purchase.
25. The facts of the case are that the Trust had paid the following amounts in cash. Hence the Assessing Officer disallowed 20% of the sum of Rs.1,30,000/- u/s. 40A(3) of the I.T. Act and added to the income returned. Cash paid to Sri Kabeer for land purchased:
28.11.2006 Rs.3,00,000 21.12.2006 Rs.1,50,000 Rs.4,50,000 25 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 Cash paid to Sri Shoukath Ali for purchase of land:
12.9.2006 Rs.2,00,000 To0tal Rs.6,50,000 20% thereof Rs.1,30,000/-.
26. On appeal, the CIT(A) confirmed the action of the Assessing Officer in including the profits from land development in the assessee's income as "income from business". As this was treated as a business activity, the CIT(A) held that the provisions of section 40A(3) of the Act will be applicable for the cash payment made by the assessee for purchase of land for development. Hence, he confirmed the addition of Rs.1,30,000/- i.e., 20% of Rs.6,50,000/- paid in cash for purchases of land.
27. Against this the assessee is in appeal before us. The Ld. AR submitted that disallowance of Rs.1,30,000/- being 20% of Rs. 6,50,000/- paid on land purchase is unjustified and this amounts to disallowance of section 40(a)(3) of Income Tax Act, 1961. The Ld. AR submitted that the same Section 40(a) (3) does not attract transaction of purchase of land. According to the Ld. AR only if the Trust claims this purchase as expenditure the section of disallowance u/s. 40(a)(3) arises and hence does not attract. The Ld. AR relied on the decision of ITAT, Chennai Bench in the case of Jeppiaar Educational Trust vs. ACIT. The Tribunal held that " a charitable trust is claiming exemption from taxation and not exactly on the basis of the concept of "expenditure". On the other hand, it is 26 I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017 claiming exemption from the levy of taxation on the concept of "application of funds for charitable purposes". Therefore the difference between the application of funds for charitable purposes and claim of deduction by way of expenses has to be borne in mind while applying the provisions of sec. 40A(3) to the case of a charitable trust. The assessee-trust is not claiming the cash payments made by it as deductible expenditure in its computation of taxable income."
28. On the other hand, the Ld. DR relied on the orders of the lower authorities.
29. We have heard the rival submissions and perused the material on record. The payment is made towards purchase of land. The capital expenditure is not charged to P&L account as expenditure. Being so, section 40A(3) have no application to the assessee's case. Hence, this ground of the assessee is allowed.
30. The assessee has also filed Stay Petitions in S.P. Nos.17 & 18 /Coch/2017. Since the appeals have been disposed of, the Stay Petitions have become infructuous. Hence, the Stay Petitions are dismissed as infructuous. 27
I.T.A. Nos.79&80/C/2017 & S.P. Nos. 17&18/C/2017
31. In the result, the appeal filed by the assessee in ITA No. 79/Coch/2017 is partly allowed and the appeal filed by the assessee in ITA No. 80/Coch/2017 is dismissed. The Stay Petitions filed by the assessee are dismissed.
Order pronounced in the open Court on this 25th April, 2018.
sd/- sd/-
(GEORGE GEORGE K.) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Place:
Dated: 25th April, 2018
GJ
Copy to:
1. M/s. Shalom Charitable Ministries of India , Shalom Nagar, Gopalapuram Road, Chittur, Palakkad-678 101.
2. The Assistant Commissioner of Income Tax, Circle-1, Palakkad.
3. The Commissioner of Income-tax(Appeals), Kochi
4. The Pr. Commissioner of Income-tax, Kochi
5. D.R., I.T.A.T., Cochin Bench, Cochin.
6. Guard File.
By Order (ASSISTANT REGISTRAR) I.T.A.T., Cochin 28