CREDIT GUARANTEE FUND TRUST FOR MICRO AND SMALL ENTERPRISES ,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX EXEMPTION -1(1), MUMBAI
Income Tax Appellate Tribunal, MUMBAI “C” BENCH : MUMBAI
Before: SHRI VIKRAM SINGH YADAV & SHRI RAHUL CHAUDHARY
PER VIKRAM SINGH YADAV, A.M :
This is an appeal filed by the assessee against the order of the Learned
Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre
(NFAC), Delhi [„Ld.CIT(A)‟], pertaining to Assessment Year (AY) 2018-19, wherein the assessee has taken the following grounds of appeal:
“(1) On the facts and circumstances of the case and in law, the Learned
Commissioner of Income Tax (Appeals) [Ld. CIT(A)], NFAC has erred in confirming the order of levying penalty u/s 270A of the Act of Rs. 293,63,60,258/- on 2
disallowances made in the assessment order passed u/s 143(3) r.w.s 144B of the Act without appreciating the fact that the Hon'ble ITAT, Mumbai has fully deleted the said disallowances and reasons assigned by him for doing so are wrong and contrary to the facts and circumstances of the case, provisions of the Act and Income Tax Rules, 1962 ("the Rules") made thereunder.
The appellant prays that the penalty u/s 270A of the Act of Rs. 293,63,60,258/- be deleted.
The appellant craves leave to add, amend, alter, modify and/or delete all or any of the above grounds of appeal, on or before the date of hearing.”
Briefly stated, the facts of the case are that the assessee trust registered u/s 12A filed its return of income for the year under consideration claiming exemption under section 11 of the Act. The return of income was selected for scrutiny and necessary information/documentation was called for. The submissions so filed by the assessee trust were considered but not found acceptable and by following the earlier assessment order for AY. 2016-17 & 2017-18, the AO proceeded to hold that the assessee‟s case is covered by proviso to section 2(15) of the Act and thereby rejected the claim of exemption under section 11 of the Act and whole of income amounting to Rs 66,18,37,439/- before accumulation u/s 11 was brought to tax. The AO also made a disallowance of the deduction of provision for guarantee claims of Rs.3,47,04,32,777/- and assessed income was determined at Rs 4,13,22,70,216/- vide order dated 14-04-2021 passed under section 143(3) read with section 144(3A) read with section 143(3B) of the Act. The penalty proceedings u/s 270A read with 274 were separately initiated stating that the assessee has unreported the income in consequence of misreporting of income.
The assessee carried the matter in appeal before the Ld.CIT(A) and thereafter before the Co-ordinate Benches of the Tribunal and the Co-ordinate Bench of the Tribunal vide its order dt. 24-11-2023 has 3 allowed the claim of the benefit to the assessee-trust u/s. 11 and 12 of the Act and the relevant findings read as under:
“Ground No.2
9. In the backdrop of the aforesaid facts the assessee trust has claimed benefits available under section 11 & 12 of the Act. However, the AO by invoking the proviso to section 2(15) of the Act and by relying upon the assessment order for A.Y. 2016-17 & 2017-18 denied the claim of exemption under section 11 on the ground that levying/collecting fees for guarantee from MLIs shows profit motive.
Assessment order has been upheld by the Commissioner of Appeals vide impugned order which is under challenge before the Tribunal.
Before proceeding further, we would like to extract the bare provisions of proviso to section 2(15) of the Act for ready perusal.
“proviso to section 2(15) of the Act amended w.e.f. 01.04.2016
“Charitable purpose" includes relief of the poor education, yoga, medical relief, preservation of environment (including watersheds forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility: 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, unless-
(i) such activity is undertaken bielertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;”
Undisputedly to ameliorate the difficulties being faced by the small scale industries in getting credit from primary lending institutions, namely banks, state finance corporation, state industrial development corporation and regional rural banks for want of collateral security and/or third party guarantee, the Government of India has introduced a credit guarantee fund for small industry. It is also not in dispute that the initial fund as well as further contribution to the trust are made by the Government of India and SIDBI. It is also not in dispute that the assessee trust was granted registration under section 12A of the Act on 18.10.2001, which was withdrawn vide order dated 07.12.2011 by the Director of Income Tax (Exemption) [DIT(E)], Mumbai. It is also not in dispute that order of withdrawal of registration under section 12A of the Act passed by DIT(E), Mumbai has been set aside by the 4 Tribunal and Tribunal’s order has been upheld by the Hon’ble Bombay High Court vide order dated 02.08.2017. It is also not in dispute that the assessee trust provides guarantee to the lending institutions who give loan to the MSME without collateral security and/or third party guarantee, for which it (assessee trust) charges guarantee fee and service charges to the lending institutions. It is also not in dispute that the issue as to the applicability of proviso to section 2(15) of the Act has already been decided by the Tribunal in favour of the assessee in A.Y. 2010- 11, 2011-12 & 2014-15. It is also not in dispute that there is no change of activities being undertaken by the assessee trust during the year under consideration vis-à- vis earlier years. It is also not in dispute that in A.Y. 2016-17 & 2017-18 the AO has invoked the proviso to section 2(15) of the Act by denying the benefit of section 11 of the Act, which orders are pending before the Ld. CIT(A) for adjudication.
In the backdrop of the aforesaid undisputed facts the sole question arises for determination by the Tribunal qua ground No.2 is as to whether:
“The AO and the Ld. CIT(A) have erred in denying the claim of exemption of the assessee trust under section 11 of the Act by invoking the proviso to section 2(15) of the Act?”
The AO as well as the Ld. CIT(A) have proceeded to deny the benefit of section 11 to the assessee trust on the premise that since the assessee trust is engaged in benefit under section 11 of the Act on the ground that “since the assessee trust is charging guarantee fee, which amount is substantial, the assessee trust is not carrying out any charitable activity. The Ld. CIT(A) denied the relief claimed by the assessee trust under section 11 on two fold basis;
(1) that the assessee trust having charged substantial guarantee fee is not into any charitable activities and (2) that he has invoked proviso to section 2(15) of the Act also.
The Ld. A.R. for the assessee challenging the denial of benefit of section 11 & 12 of the Act by invoking the proviso to section 2(15) of the Act contended inter-alia that proviso to section 2(15) of the Act cannot be invoked in case of the assessee it being a charitable trust granted registration under section 12A of the Act and identical issue has already been decided in favour of the assessee in assessee’s own case for A.Y. 2010-11, 2011-12 & 2014- 15; that there is no change of activities undertaken by the assessee during the year under consideration vis-a-vis earlier years; that assessee’s trust has no profit motive whatsoever so as to hit by proviso to section 2(15) of the Act, rendering of services to trade, commerce or business; that services rendered by the assessee trust are purely institutional or subservient to the main objects of the trust which are “charitable purposes”; that objects of the trust are to be considered for the benefit of underprivileged class of 5 people and also falls within the meaning of relief to poor referred to in section 2(15) of the Act and the Central Board of Direct Taxation (CBDT) has issued circular vide circular No.11/2008 dated 19.12.2008 clarified that newly inserted proviso to section 2(15) of the Act will not apply in respect of 1st three limbs of section 2(25) of the Act i.e. relief of the poor, education or medical relief; that the Ld. CIT(A) has erred in not following the order passed by the Tribunal in assessee’s own case for A.Y. 2010-11, 2011-12 & 2014-15 wherein it is held that proviso to section 2(15) of the Act cannot be invoked in case of the assessee.
The Ld. A.R. for the assessee challenging the impugned order contended that the assessee is into the charitable activities in as much as it is engaged in advancement of objects of general public utility and it is not hit by proviso to section 2(15) of the Act.
However, on the other hand, the Ld. D.R. for the Revenue in order to repel the arguments addressed by the Ld. A.R. for the assessee relied upon the order passed by the Ld. CIT(A) by contending that since the assessee trust is promoting the activities of the banking institution by supporting their commercial activities who are lending loans to the MSME and drew our attention towards page 13 of the paper book which shows that the business of the assessee trust is thriving day by day and as such it is hit by proviso to section 2(15) of the Act. It is further contended by the Ld. D.R. for the Revenue that the assessee trust is silent that “whether there is any mark up to the cost being charged as guarantee fee by the assessee trust or they are charging on cost to cost basis”.
When we examine the contentions raised by the Ld. A.Rs for the parties to the appeal it has become clear on record that on the basis of objects of the activities of the assessee trust is a charitable trust as this issue has been decided by the Tribunal vide order dated 28.05.2014, which has been confirmed by the Hon’ble Bombay High Court vide order dated 02.08.2017 available on record at page 77 of the paper book. So the findings returned by the Ld. CIT(A) in the impugned order that “the assessee trust is not carrying out any charitable activity” are not sustainable. Moreover, the Ld. CIT(A) has not given any reason for this finding rather intermingled this finding with the issue if the claim of the assessee for exemption under section 11 is hit by proviso to section 2(15) of the Act. Now the sole question arises for determination in this case is as to whether:
“The claim of the assessee under section 11 & 12 of the Act is hit by proviso to section 2(15) of the Act?”
We are of the considered view that the answer to this question is in negative for the reasons given here under:
(i) that in A.Y. 2010-11, 2011-12 & 2014-15 the AO did invoke the proviso to section 2(15) of the Act, which order was upheld by the Ld. CIT(A). However, the Tribunal vide its orders overturned the findings returned by the AO/Ld. CIT(A) by holding that the assessee is a charitable trust and since it does not have any profit motive, the proviso to section 2(15) of the Act cannot be invoked.
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(ii) that it is undisputed fact that there is no change in the facts of the year under consideration vis-à-vis A.Y. 2010-11, 2011-12 & 2014-15, order of which has already been attained finality. The AO in A.Y. 2016-17 & 2017-18 has taken a diverse view that the assessee is pursuing the activity of advancement of general public utility and is in activity of trade, commerce or business of charging fee for services, the assessment order passed by the AO for A.Y. 2016-17 & 2017-18 is pending adjudication before the Ld. CIT(A).
(iii) that in order to determine the issue raised in this case as to whether the assessee trust having pursued the activity of advancement of general public utility is into activity of trade, commerce or business of charging fee for services, we are to examine profile and activities carried out by the assessee trust.
(iv) that so far as profile of the assessee trust is concerned, the same has been constituted by the Hon’ble President of India and as per trust deed its settler viz.
Government of India and SIDBI noticed that the small scale industries in India are facing difficulties in getting credit facilities from primary lending institutions, banks, state finance corporation, state industrial development corporation, regional rural development banks etc. for want of collateral security and/or third party guarantee. It is a matter of common knowledge that small scale industries are facing real time difficulties in getting loan without arranging collateral security and/or third party guarantee. For inclusive growth of India unless small scale industry is not promoted overall growth of the country cannot be expected. So in order to provide easy credit facilities to the small scale industries who are unable to arrange collateral securities and 3rd party guarantee, the assessee trust has come to their rescue by providing third party guarantee by charging guarantee fees. With this profile we do not find any element of profit motive because the entire grant for providing third party guarantee to the small scale industries is being borne by the Government of India.
(v) that when we examine the receipt and expenditure of assessee trust for the preceding as well as succeeding years, which has been brought on record by the assessee trust in tabulated form, it is proved that the assessee trust is running into losses for carrying out the activities of providing guarantee to the small scale industries, which is tabulated for ready perusal as under:
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(vi) that when we take the figure of receipt by the assessee trust from collecting the guarantee fee and its expenditure for the year under consideration i.e. 2018-19, it is apparently clear that the assessee trust has received amount of Rs.830.79 crores whereas incurred the expenses in providing guarantees to the recipient of loan for setting up small scale industry is Rs.1322.76 crores and faced with the deficit of Rs.491.98 crores.
(vii) that right from A.Y. 2014-15 till 2022-23 the assessee trust is constantly running deficit from the activities of providing guarantee. These facts go to prove that there is no profit motive or trading activity in running this trust. Had there been any such profit motive the activities would have been discontinued long back because of consistent loss.
(viii) that when we further examine the contribution made by the Government of India and SIDBI towards corpus of the assessee trust, available at page 13 of the paper book, annual report of the assessee it is proved that the assessee trust received Rs.3699.90 crores towards corpus contributed by the Government of India and Rs.500 crores contributed by SIDBI, which shows that the Government of India and SIDBI have contributed crores of Rupees to run the charitable activities of the assessee trust. Othewise had there been any motive of the assessee trust to earn profit or to be into trading activities crores of Rupees would not have been pumped into the corpus of the assessee trust. This fact shows that the assessee trust is 8
being run purely for the purpose of general public utility without having any element of activity of trading, commerce or business by charging fee for services.
(ix) that Hon’ble Gujarat High Court in case of CIT (Exemptions) vs. Gujarat
Industrial Development Corporation (2023) 452 ITR 27 (Guj.) wherein the assessee being a state industrial development corporation constituted for the purpose of securing and assisting rapid and orderly establishment and organization of industrial areas and industrial estates in the state and for the purpose of establishing the commercial centers in connection with establishment and organization of such industries, was denied the benefit of section 11 by the AO by invoking the provisions contained under section 2(15) of the Act. However, the Tribunal had allowed the benefit of section 11 & 12 of the Act to the assessee corporation which was upheld by the Hon’ble High Court by relying upon the decision rendered by Hon’ble Supreme Court of India in case of CIT (Assst.)
(Exemptions) vs. Ahmedabad Urban Development Authority (2022) 449 ITR 1 (SC) by holding as under:
“EXEMPTION - CHARITABLE PURPOSE-STATE INDUSTRIAL DEVELOPMENT
CORPORATION-ACTIVITIES CARRIED OUT BY ASSESSEE NOT IN NATURE OF TRADE, COMMERCE OR BUSINESS, FOR CESS OR FEE OR ANY OTHER
CONSIDERATION-PROVISO TO SECTION 2(15) NOT ATTRACTED- TRIBUNAL
JUSTIFIED IN GRANTING BENEFITS UNDER SECTIONS 11 AND 12-INCOME-TAX
ACT, 1961, ss. 2(15), prov., 11, 12.”
(x) that the answer to the reasoning given by the AO as well as the Ld. CIT(A) while denying the benefit of section 11 & 12 to the assessee trust is given by the Hon'ble
Apex Court in the case of Ahmedabad Urban Development Authority (Supra) while replying the question of law framed therein, which are extracted as under for ready perusal:
“A. General test under Section 2(15)
A.1. It is clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration ("cess, or fee, or any other consideration");
A.2. However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that (i) the activities of trade, commerce or business are connected ("actual carrying out..."
inserted w.e.f. 01.04.2016) to the achievement of its objects of GPU; and (ii) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, as amended over the years (Rs. 10 lakhs w.e.f.
01.04.2009; then Rs. 25 lakhs w.e.f. 01.04.2012; and now 20% of total receipts of the previous year, w.e.f. 01.04.2016);
A.3. Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above
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cost, cannot be considered to be "trade, commerce, or business" or any services in relation thereto. It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of "cess, or fee, or any other consideration" towards "trade, commerce or business".
In this regard, the Court has clarified through illustrations what kind of services or goods provided on cost or nominal basis would normally be excluded from the mischief of trade, commerce, or business, in the body of the judgment.
A.4. Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidental. The requirement in Section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15), has not been breached.
Similarly, the insertion of Section 13(8), seventeenth proviso to Section 10(23C) and third proviso to Section 143(3) (all w.r.e.f. 01.04.2009), reaffirm this interpretation and bring uniformity across the statutory provisions.”
(xi) that when we apply the aforesaid test laid down by the Hon’ble Apex Court in case of Ahmedabad Urban Development Authority (supra) for invoking the proviso to section 2(15) of the Act, we are of the considered view that the guarantee fee being charged by the assessee trust is not enough to run the activities of the assessee trust, rather the assessee trust is running into losses and government in order to run the charitable activities pumped crores of Rupees in the same.
(xii) that the assessee trust is not even meeting with the cost from the guarantee fees being charged from the stake holders and as such it does not fall within the mischief of proviso to section 2(15) of the Act.
(xiii) that there is not an iota of element of trade, commerce and business or service in the activities being carried out by the assessee company in providing guarantee fees for the small scale industries who are unable to arrange for collateral security and/or third party guarantee and as such not hit by section 2(15) of the Act.
(xiv) that the assessee trust being a statutory body being run by Government of India has the only object of general public utility without having any element of trade, commerce or business in providing services to the small scale industries.
(xv) that the contention raised by the Ld. D.R. for the revenue trust that assessee is catering to commercial activities of the banks is not sustainable because banking institutions are running their business as per the rules and regulations formulated by the Reserve Bank of India and they are not giving any preferential treatment to the small scale industries rather insisting upon providing credit guarantee by the assessee trust in case of providing credit to the small scale industries, so element of commercial activities is not there
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(xvii) that the nature of the activities being carried out by the assessee trust being charitable and for advancement of general public utility are further proved from the legislative changes carried out by the Parliament by inserting section 10(46B) by the Finance Act, 2023 w.e.f. 01.04.2024, which are though not applicable for the year under consideration but it certainly makes the intention of the legislature clear that the credit guarantee fund trust for micro and small scale enterprises, the assessee in this case has been exempted from any income tax. The relevant provisions contained under section 10(46B) are extracted for ready perusal as under:
"S. 10(468) any income accruing or arising to-
(i) …….
(ii) ………
(iii) Credit Guarantee Fund Trust for Micro and Small Enterprises, being a trust created by the Government of India and the Small Industries Development Bank of India established under sub- section (1) of section 3 of the Small Industries
Development Bank of India Act, 1989 (39 of 1989)."
(xvi) that the assessee trust being a statutory authority constituted by the President of India with the funds being provided by the Government of India and SIDBI is purely involved in the advancement of the object of general public utility and as such to be considered as charity in the general public utility category.
(xviii) that the order relied upon by the AO rendered by the Tribunal in case of Chandigarh Lawn Tennis Association (supra) is not applicable to the facts and circumstances of the case because in that case the assessee was not an organization of the state or any statutory or regulatory authority. Tribunal has categorically held that in that case the assessee had a profit motive, which is entirely missing in this case
(xix) that going by the objects and purposes for which the assessee trust was established, it is proved on record that its sole purpose was to ameliorate the difficulties being faced by the small scale industries who are unable to arrange for collateral security and/or third party guarantee to take the credit facilities from the banking and financial institutions to run their business. Apart from the activities being carried out by the assessee trust of general public utility, these are necessary for the economic growth of the country as well as for inclusive growth of India at large.
In other words the assessee trust is proved to be an enabler in the financial eco system to accelerate the inclusive growth by providing guarantee to the small and micro entrepreneurs who are otherwise unable to arrange for collateral security and/or third party guarantee.
In view of what has been discussed above and as a sequel to the findings returned in the preceding paras, we are of the considered view that assessee trust having been established by the Government of India with the object and purpose of ameliorating the difficulties of the small scale industries and micro enterprises in 11 availing credit facilities from financial as well as banking institutions without having collateral security and/or third party guarantee which is being provided by the assessee trust with cost to cost or with a small mark up is pursuing the activity of advancement of general public utility without having an iota of activity of trade, commerce or business. So in other words mere charging of guarantee fees for services by the assessee trust ipso facto is not sufficient to invoke the proviso to section 2(15) of the Act, that too without establishing that the object and purpose of the assessee is profit motive. Had it been so the assessee trust would not have been running into deficit of about Rs.400 crores every year. So in these circumstances the impugned findings returned by the Ld. CIT(A) that “since the assessee is charging guarantee fee on substantial scale, it is not carrying out any charitable activities, hence not entitled for benefit of section 11 & 12 of the Act”, are not sustainable, hence set aside. Ground No. 2 is determined in favour of the assessee.
Ground No.3
21. During the year under consideration the assessee trust has claimed provision for guarantee claims to the tune of Rs.13,14,84,00,000/-. During the year under consideration the payment of Rs.9,67,29,67,223/- were made towards guarantee claim. Declining the contentions raised by the assessee trust that the liability has accrued during this year and is ascertained through actuarial valuation and accordingly provision is made, the AO proceeded to disallow the same on the ground that since the assessee is a registered trust under section 12A of the Act the application is to be allowed on actuarial basis and no provision is allowable and that the assessee has itself recognized guarantee fee income on payment basis as such provision for guarantee claim cannot be allowed. The Ld. CIT(A) has confirmed the disallowance on the disallowance of deduction claimed by the assessee trust.
It is a fact on record that the assessee trust is into providing guarantee to the financial and banking institution on behalf of the small entrepreneurs who are taking loans, for which the assessee trust receives guarantee commission from the lending institution and thereby undertakes the responsibility of making good any loss to them in case of the default of the borrower.
The Ld. A.R. for the assessee challenging the impugned provision for guarantee claims of Rs.3,47,04,32,777/- contended that the AO has proceeded on the wrong premise that the assessee is following “cash system of accounting” whereas the assessee is following “mercantile system of accounting” having been intimated to the AO vide letter dated 31.03.2021 which has been accepted by the Income Tax Department year after year and drew our attention towards schedule 9, i.e. note to account available at page 31 of the annual report.
We have perused the schedule 9, particulary note 1(b) which says that the assessee trust is following “mercantile system of accounting”. We have also perused the assessment order passed by the AO for A.Y. 2013-14 wherein in the head note of the assessment order under the head method of accounting (mercantile is recorded) so it is proved that the assessee is following mercantile system of accounting qua its receipts as well as payments.
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25. The Ld. A.R. for the assessee drew our attention towards explanation added to section 11 of the Act w.e.f. 01.04.2022 which reads as under:
"Explanation.- For the purpose of this section, any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it (irrespective of the previous year in which the liability to pay such sum was incurred by the trust or institution according to the method of accounting regularly employed by it)."
When we peruse the explanation to section 11 it has come on record that w.e.f. 01.04.2022 any some payable by the trust shall be considered as application of the previous year in which the payment is made irrespective of the year of incurring of expenditure. The AO proceeded on the wrong premise that the amount spent on the object of the trust is considered as application of the income in the case of trust “by holding that the assessee is following cash system of accounting” whereas assessee trust is proved to be following the mercantile system of accounting. So in these circumstances the amount not paid by the assessee trust cannot be treated as application of the trust.
So far as observation made by the Ld. CIT(A) that there is no provision in the Income Tax Act which allows deduction for the provision for guarantee claim, the Ld. A.R. for the assessee contended that the Ld. CIT(A) has arrived at wrong conclusion. Because under the mercantile system of accounting provisions have to be made in respect of all possible liabilities which is incurred but yet to be quantified and/or paid. When the accounting standard mandates creating of provision, so in the absence of such provisions financial result would give distorted picture of financial affair of the assessee trust.
Hon’ble Supreme Court of India in case of Rotrock Control India Pvt. Ltd. vs. CIT 314 ITR 62 held provision on account of warranty in respect of product sold by the assessee as legitimate deduction. Hon’ble Supreme Court of India in case of Parth Movers 245 ITR 428 (SC) has also decided the issue at hand by returning following findings:
“Held, reversing the decision of the High Court, that the provision made by the assessee company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the emplo yees of the company, inclusive of the officers and the staff, subject to the ceil ing on accumulation as applicable on the relevant date, was mutitled to deduction out of the gross receipts of the accounting year during which the provision is made for the liability. The liability was not a contingent liability.”
When the provision for guarantee claim made by the assessee is otherwise proved to be legitimate deduction, the correct income of the assessee cannot be calculated and as such claim of the assessee for deduction of provision for guarantee claim is an allowable deduction. So the AO is directed to allow the amount of Rs.347.04 crores. Ground No.3 raised by the assessee is hereby allowed.
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Ground Nos.4 & 5
30. The Ld. Lower Revenue Authorities have rejected the claim of the assessee trust for accumulation under section 11(2) of the Act on account of denial of claim under section 11 of the Act. Since the assessee is found to be entitled for benefit of claim under section 11 of the Act as per findings returned under ground No.2 in the preceding paras, this ground has become consequential. The AO is directed to process the claim of accumulation under section 11(2) of the Act accordingly these ground Nos.4 & 5 being consequently in nature. So ground no. 4 & 5 are decided in favour of the assessee for statistical purpose.
Ground No.6
31. The Ld. Lower Revenue Authorities have also denied the claim of “set off” of brought forward deficit of the previous years against the current year income, due to the denial of benefit of section 11 & 12 to the assessee. Since the assessee is found to be entitled for benefit of section 11 & 12 as per findings returned under the head ground No.2 in the preceding paras the AO is directed to process the claim of “set off” of the assessee trust accordingly, this ground being consequential in nature. So ground No.6 is also determined in favour of the assessee.”
The penalty proceedings were also initiated by the AO separately u/s. 270A r.w.s. 274 as the assessee has under-reported the income in consequence of misreporting thereof and thereafter, the order u/s. 270A of the Act dt. 28-04-2023 was passed wherein the AO has held that he found it‟s a fit case for levy of penalty u/s. 270A of the Act as the assessee has under-reported its income in consequence of misreporting of income by way of misrepresentation of facts and making a false claim for expenditure not substituted by evidence and penalty u/s. 270A(9)(a) and 270A(9)(c) of the Act was levied @200% of the income under-reported, amounting to Rs. 2,93,63,60,258/-.
The assessee again carried the matter in appeal before the Ld.CIT(A), wherein the assessee referred to the aforesaid decision of the Co-ordinate Bench of the Tribunal in the quantum proceedings and submitted that for the impugned assessment year wherein the matter has been decided in favour of the assessee and the assessee-trust has been held eligible for the claim of deduction u/s. 11 and 12 of the Act, there is no basis for levy of 14 penalty u/s 270A of the Act. The Ld.CIT(A) has taken note of the Co- ordinate Bench decision in assessee‟s case, however, has sustained the levy of penalty u/s 270A and the relevant findings which are under challenge before us read as under:
“IV. SUMMARISING the discussion following the Tribunal's decision in assessee's own case, the claim of exemption u/s 11 cannot be denied. But regarding the expenditure claim on account of provision towards warranty fee, is held to be allowable as per ITAT decision in assessee's own case. To that extend the levy of penalty for misreporting leading to under reporting of income is weakened. The order under appeal is the Penalty u/s 270A which is consequential to the addition made by the assessing officer on quantum. The penalty order is kept in abeyance since the matter is sub judice. Till it attains finality the matter is kept alive. Moreover it has to be deliberated after taking into account the amendment applicable from 1/4/2024. It was further noticed that the Income from Guarantee as well as the other income on account of interest was shown on receipt basis whereas the guarantee claims was claimed on the strength of provisions made. As the provisions for expenses are not allowable under the Income-tax Act, the assessee's claim of provisions amounting to Rs. 3,47,04,32,777/- (Rs 13,14,84,00,000 Rs 9,67,79,67,223) was disallowed by the AO out of the application of fund claimed during the year under consideration. The applicability of the amendment from 1/4/2024
needs a closer look. Earlier assessee drew our attention towards explanation added to section 11 of the Act w.e.f. 01.04.2022 which reads as under:
"Explanation. For the purpose of this section, any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it (irrespective of the previous year in which the liability to pay such sum was incurred by the trust or institution according to the method of accounting regularly employed by it)."
1 When we peruse the explanation to section 11 it has come on record that w.e.f. 01.04.2022 any some payable by the trust shall be considered as application of the previous year in which the payment is made irrespective of the year of incurring of expenditure. Only the actual payment made can be allowed as expenditure even if mercantile system is followed. In effect only the actual warranty paid can be allowed as expenditure towards application of income. Considering this the penalty levied u/s 270A is also kept alive. Moreover the introduction of section 10(46B) wherein there is discussion about Credit Guarantee Fund is also pertinent. The CG funds are to be created by the government. This aspect also needs a closed look. Assessee has under- reported its income in consequence of misreporting of income by way of misrepresentation of facts and making a false claim for expenditure not substantiated by evidence. It is not a false claim of expenditure. The assessing officer was satisfied that the Assessee is liable to the imposition of penalty u/s 15 270A(9)(a) and 270A(9)(c) of the Income Tax Act and penalty u/s 270A(9)(a) and 270A(9)(c) @ 200% of the tax on the income under reported. The penalty levied at Rs 2936360258 is upheld.”
During the course of hearing, the Ld.AR submitted that in the quantum proceedings, the matter has already been decided in favour of the assessee, therefore, where the very basis for levy of penalty doesn‟t survive, there is no basis for levy of penalty by the AO u/s. 270A of the Act and in support, reliance was placed on the following decisions:
(A) Hon'ble Supreme Court in the case of PCIT vs. Ajmer Vidyut Vitran
Nigam Limited (2023) 150 taxmann.com 230;
(B) Hon'ble Rajasthan High Court in the case of PCIT vs. Ajmer Vidyut
Vitran Nigam Limited (2023) 150 taxmann.com 229;
(C) Hon'ble Bombay High Court in the case of DIT(IT)-II vs. Gartner
Ireland Limited (2011) (7) TMI 522;
(D) Hon'ble Rajasthan High Court in the case of CIT vs. Shishpal (2003)
126 Taxman 5;
(E) Hon'ble Gujarat High Court in the case of CIT vs. Babul Harivadan
Parikh (2013) 37 taxmann.com 52;
(F) ITAT, Mumbai in the case of ITO vs Jas Trading Private Limited [ITA
311 & 313/MUM/2024];
(G) ITAT, Mumbai in the case of DCIT vs Knight Riders Sports Private
Limited [ITA 1536/Mum/2023 & 1538/Mum/2023]
Further, our reference was drawn to the decision of the Ld.CIT(A) and it was submitted that as evident from the impugned decision, the Ld.CIT(A) has gone through the decision of the Co-ordinate Bench of the Tribunal in assessee‟s own case in the quantum proceedings and has held that though the claim of exemption u/s. 11 of the Act cannot be denied to the assessee and levy of penalty is weakened, at the same time, he has held that the 16 penalty order has to be kept in abeyance since the matter is sub-judice and further, he has referred to the amendment applicable from 1st April, 2024. It was submitted that even though the Revenue is in appeal in the earlier years, in the quantum proceedings, however, as far as the levy of penalty is concerned, the Ld.CIT(A) has to either confirm or delete the levy of penalty basis appreciation of facts in the present case, however, there is no basis for the Ld.CIT(A) to keep the penalty order in abeyance for the reason that the quantum proceedings are sub-judice before the Hon‟ble High Court. It was further submitted that he has referred to certain amendment in law with effect from 1st April, 2024 and how the same are relevant for the impugned assessment year, no finding has been recorded by the Ld.CIT(A) except stating that said amendments need a closer look. It was further submitted that at one place, the Ld.CIT(A) is stating that by virtue of the order of the Tribunal in the quantum proceedings, matter relating to levy of penalty is weakened and at the same time, he has confirmed the levy of penalty which shows complete non-application of mind on part of the ld CIT(A). It was accordingly submitted that given the fact that in the quantum proceedings, the matter has since been decided in favour of the assessee, there is no basis for sustenance of levy of penalty and the same be directed to be deleted.
Per contra, the Ld.DR is heard, who has relied on the order passed by the AO as well as that of the Ld.CIT(A).
We have heard the rival contentions and perused the material available on record. In the quantum proceedings, as we have noted supra, the Co-ordinate Bench has recorded a clear finding that the assessee trust is pursuing the activity of general public utility, that mere charging of guarantee fees for services is not sufficient to invoke proviso to 17 section 2(15) and that the assessee trust is eligible for deduction u/s 11 and 12 of the Act and claim of accumulation u/s 11(2) has been directed to be allowed. Further, the Coordinate Bench has held that where the assessee is following mercantile system of accounting, the provision for guarantee claim has to be allowed to it. In light of the same, we agree with the contention advanced by the Ld.AR where the assessee has been held eligible for claim of deduction u/s 11 and 12 and the whole of the additions have been directed to be deleted by the Coordinate Bench in the quantum proceedings, the very foundation for levy of penalty u/s.270A no more survive and in such circumstances, there is no basis for sustenance of levy of penalty u/s.270A of the Act. The AO has worked out penalty @ 200% of tax payable on the under-reported income and where there is no under-reported income and no tax payable on such under-reported income in light of the decision of the Co-ordinate Bench, the very foundation and the computational machinery for levy of penalty fails. The various authorities quoted by the Ld.AR which lays down the similar proposition support the case of the assessee.
The Ld.CIT(A) is acknowledging the fact that by virtue of decision of the Co-ordinate Bench in the quantum proceedings, the case of the Revenue for levy of penalty gets weakened and in the same breadth, he has gone ahead and confirmed the levy of penalty. The mere fact that the Revenue has not accepted the order of the Co-ordinate Bench in the quantum proceedings and the matter is sub-judice before the Hon‟ble High Court cannot be a basis to sustain the levy of penalty where the very basis for levy of penalty doesn‟t survive. Further, the law as on the date of occurrence of default has to be seen for levy of penalty and not subsequent amendment which is stated to be made applicable prospectively. Thus, the findings of the Ld.CIT(A) are set-aside.
18
11. In light of the aforesaid discussion and in the entirety of facts and circumstances of the case, the levy of penalty u/s. 270A is hereby directed to be deleted.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 15-09-2025 [RAHUL CHAUDHARY] [VIKRAM SINGH YADAV]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai,
Dated: 15-09-2025
TNMM
Copy to :
1)
The Appellant
2)
The Respondent
3)
The CIT concerned
4)
The D.R, ITAT, Mumbai
5)
Guard file
By Order
Dy./Asst.