CREDIT GUARANTEE FUND TRUST FOR MICRO AND SMALL ENTERPRISES ,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX EXEMPTION -1(1), MUMBAI

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not in dispute that the assessee trust was granted registration under section 12A of the Act on 18.10.2001, which was withdrawn vide order dated 07.12.2011 by the Director of Income Tax (Exemption) [DIT(E)], Mumbai.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 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.

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 the advancement of general public utility and is charging fee in relation to the services rendered to trade, commercial etc. it is not entitled to the benefit under section 11 of the Act. The AO also relied upon the order passed by the Tribunal in case of Chandigarh Lawn Tennis Association vs. ITO (95 txaman.com 308). At the same time the Ld. CIT(A) has also denied the claim of the assessee trust seeking 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 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.

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 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.

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. 28. 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.” 29. 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.

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 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:

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:

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 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 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.

In the result, the appeal of the assessee is allowed.