M/S. INNOVATIVE MICRFINANCE FOR POVERTY ALLEVIATION & COMMUNITY TRANSFORMATION,CHENNAI vs. CIT, EXEMPTIONS,, CHENNAI

We have heard rival contentions and gone through facts and circumstances of the case. We noted that in the case law cited by ld.counsel for the assessee, it is a case of assessee holding self-help group comprising of rural poor people to avail the benefit of insurance and micro-finance. From the above reproduction, from the case law of Navodaya Grama Vikas Charitable Trust, supra, in that assessee, the assessee is running a various activities like Animator activities, Donations, Health Insurance premiums, Santhwana, Training, Uniform, SHG Formation, Sahayadhana, Insurance Premium & Scholarship for students in rural area to make the poor ladies aware of the scheme and to encourage their participation as Page - 2 - of 26 the principle objects of the trust. All these things need some expenditure. The facts and circumstances show that the assessee is carrying out its charitable activities and the surplus funds are used for charitable purposes. Finally, the Tribunal held that even the Revenue could not brought on record that the object of the assessee is not towards advancement of any other object of general public utility and hence, the Tribunal held that the assessee is engaged in charitable activities and allowed exemption u/s.11 of the Act. 7.1 We noted that the there is a categorical finding by the AO and CIT(A) that the assessee is providing loans by associating with various commercial banks and by raising loans from them. The assessee is obtaining loan from various commercial banks at the rate of 12% to 14% and advancing loan to its customer or the so called power beneficiaries at 25.13% which is exorbitant rate. The AO noted that the rate charged by assessee from its poor customers or board beneficiaries, allegedly at 25.13% cannot be compared with m market rate and once it cannot be compared with market rate which is almost 12 to 14% or 15%, assessee’s activity cannot be called charitable or for the benefit of poor. We noted that exactly identical issue was considered by Co-ordinate Bench of ITAT, Bangalore in the case of Sanghamitra Rural Financial Services, supra, wherein considering various case laws exactly on identical facts denied exemption u/s.11 of the Act by observing in para 6.7 to 6.28 as under:- 6.7 In the present case, from the details given in the assessment order, it is seen that the assessee was charging interest @ 18% to 20% per annum from its clients. The assessee admitted that they were taking loan from commercial banks at an interest rate below 11.75% per annum for disbursing these loans. Therefore, the difference between these rates was 6% to 8% 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. This shows that the assessee is in the business of lending at 18% to 20% 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 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 nonbanking financial companies is less than 12%. As such the micro finance activity conducted by the assessee is strictly commercial in nature and with profit motive. The assessee had even collecting overdue 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. 6.8 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. As discussed earlier, granting of exemption u/s 11 of the Act is not automatic and it could be examined at each stage of assessment in each assessment year. Trust was not even considerate with the poor borrowers and the Page - 3 - of 26 assessee- Trust is nothing but doing money lending business as like a private banker and there is no element of charity in its activities. 6.9 Further, 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 11.75% per annum from the Banks. Later, the assessee lent that amount to the public at average rate of 18% to 20%. It means that even there is a gap of 6 to 8% between borrowing and lending the amount to the public. 6.10 According to the Ld. AR, it was recommended by the various committees 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 18% to 20% 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. 6.11 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 dated 17/02/2019 which is related to grant of approval u/s. 12AA of the Act. In this order, the Tribunal considered the micro finance activities as charitable activities as the assessee was charging interest at 15% per annum. In the order of the ITAT, Delhi Benches in the case of Disha India Micro Credit vs. CIT in 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. 11 of the Act while passing assessment order u/s. 143(3) of the Act. 6.12 The assessee relied on the following judgements which we will consider one by one. (A) The Bangalore Bench of the Tribunal in the case of ADIT(E) v. Bharatha Swamukhi Samsthe [2009] 28 DTR 13 (Bangalore - Tribunal) has held that the work of lending money to poor women for income generating activities was charitable in nature as there was nothing on record to show that the interest charged by the assessee was exorbitant, which is missing in present case. The following extract from the case is crucial to understand the statutory and judicial interpretations in this regard: "It is not in dispute that the assessee's work is lending money to the poor women for income generating activities. The loan given to project members are borrowed from bank; the beneficiaries are poor families. If the women in the assessee's project have to borrow money from the money lenders they have to pay many times higher interest than what the assessee has charged. It is also not in dispute that the assessee incurs financial costs for ling loans from banks. The assessees also have to make payment towards salaries and other administrative activities of the Trust. There is nothing on record to suggest that the assets and income of the trust were available for the personal benefit of the trustee and the board members, are only used for micro credit to poor women for their poverty alleviation and for the benefit of the socio-economically weaker sections of the society. The AO has not substantiated its findings that the work of the trust is not charitable and the Page - 4 - of 26 interest charged by the assessee is exorbitant. The AO placed nothing on record to show that the assessee is charging exorbitant interest. The AO may justify the exorbitant rate of Interest charged, in case the poor ladies in question have option to avail credit at lower Interest from other sources. In case, the credits are available at lower interest to the poor women in question then they were free to avail the same. There was no compulsion over parties to avail credit at higher rate of Interest. In case they have option to avail loan at lower rate of interest. The assessee can carry out its activities on or after charging marginal higher rate of interest to run its activities. The assessee is running seminar in rural area to make the poor ladies aware of the scheme and to encourage their participation. All these things need some expenditure. Initially, the assessee was in loss and it is only in the year under consideration some surplus is with the assessee trust. The facts and circumstances show that the assessee is carrying out its charitable activities and the surplus funds are used for charitable purposes. So, the CIT (A) was justified in holding that the assessee is engaged in charitable activities and qualify for exemption under section 11." (B) Further, the ld. A.R. relied on the decision of the Delhi Bench of the Tribunal in the case of Disha India Micro Credit v. CIT 120111 Tax Pub (DT) 873 (Del- Trib)/38(II) ITCL 301, where the assessee was a micro finance company registered under section 25 of the Companies Act, 1956. It had applied for registration under section 12A in Form No. 10A. The assessee's application for registration under section 12A was rejected by the CIT. The CIT had observed that the various clauses of the Memorandum of the company would clearly show that the assessee had a motive of profit also, along with the stated motive of service to the poor and needy people as claimed by the assessee. He further observed that such profit even if to be ploughed back as claimed by the assessee, liable to income-tax under IT Act. It was held that merely because there was a surplus from the activity of micro financing, that by itself, cannot be a ground to say that the assessee did, not exist for charitable purpose particularly when under the Memorandum of Association and Articles of Association, it had been clearly provided that the profit shall not be distributed amongst the members but shall be utilized towards its objects, and in the case of dissolution, any property remaining after meeting out the liability shall be transferred to the association having similar object. Therefore, the rejection of the registration of trust on this score was also found by the Hon'ble Tribunal as unjustified. This case Disha India Micro Credit also does not help the assessee as it is about treating micro finance a charitable activity at the time of 12A registration, which in any case is not disputed. At the assessment stage only the application and charitable nature is seen. (C) The ld. A.R. further referred to the decision of the Cuttack Bench of the Tribunal in the case of Bharat Integrated Social v. CIT, Sambalpur [ITA NO.115/CTK/2011], wherein, it was held that the micro finance activity are per se charitable in nature and earning of interest was incidental in nature. The interest earned was also within permissible market rates, therefore, could not be treated as business of earning interest. The relevant extract is as under: "CIT has interpolated the activities of the charitable nature carried on by the assessee trust with that of the income resulting in interest earning against which Page - 5 - of 26 he has not been able to establish whether he was trying to hold the activities as noncharitable on the basis of surplus identifiable as interest only. Obviously the assessee is said to have borrowed the amounts from banks and gives to the ultimate borrower by becoming a coborrower, stands guarantee, surety concerned they have not given money for charitable purpose which the assessee has identified itself of carrying out the charitable activities. Earning of interest becomes Incidental for governing and controlling all the funds as utilized cannot be Isolated to derive a trading or commercial activity therein. We find merit in the contention of the learned Counsel for the assessee that having received various grants for the charitable purposes from the Government and semi Government concerns, the interest received is not beyond the permissible market rates in order to render surplus to the assessee to hold a view that the assessee is conducting the business of earning Interest." It was again noted that the Hon'ble ITAT, Cuttack Bench, Cuttack again has been consistent with the various other rulings, in both the above cases the facts and circumstances did not reflect surpluses made from MFI activity to justify profit intent. The observation, "the interest received is not beyond the permissible market rates in order to render surplus to the assessee to hold a view that the assessee is conducting the business of earning interest" The Judgment of the Hon"ble ITAT, Cuttack in these two cases makes it clear that two conditions should be complied with; firstly, the rate should be comparable with the market and secondly, it should not be such that it generates profit at the cost of the beneficiaries. "'] The appellant has cited the Supreme Court ruling in CIT v. Thanthi Trust [2001] 247 ITR 785. In this case the Hon'ble Apex Court held that income from incidental business was permissible if the amount was applied for charitable purposes. The appellant has totally misunderstood the ruling and nowhere it suggests that the primary charitable activity can be run for profit on commercial principles. The ruling was specifically confined to sub section (4A) of section 11 which regulates incidental businesses and therefore not relevant.” (D) In the case of Sakhi-Saheli Micro finance Forum reported in [2019] 108 taxmann.com 435 (Jaipur-Trib.), wherein it was held; “5….Further, the ld. CIT(E) has arrived to the conclusion that the activities of the assessee are not charitable in nature by considering the nature of objects and activities being providing finance to weaker and destitute persons of the society and primarily to the economically weaker women. Therefore, the primary object of the assessee is to provide micro finance assistance to the weaker section of the society at concessional rate of interest and without any security. The activity of the assessee has to be analyzed in light of the objects of the assessee that the formation of the assessee company with charitable objects and not with profit motive. The expression charitable purpose as per provisions of Section 2(15) of the Act includes any other objects and general public utility and therefore, if the objects of the assessee are in advancement of any object to benefit to public or a section of public then it is distinguished from benefit to an individual or group of individual and would be regarded as charitable purpose. We find that the primary and predominant object of the assessee are to promote the welfare of the economically weaker and destitute persons of the society by way of providing finance at concessional rate of interest and without asking for any security. Thus prima facie the object of the assessee are charitable in nature in terms of Section 2(15) of the Act.” Page - 6 - of 26 As seen from the above order of the Tribunal, primary and predominant object of the assessee was to promote the welfare of the economically weaker and destitute persons of the society by way of providing finance at concessional rate of interest and without asking for any security and object was charitable in nature and there was no finding that assessee has charged exorbitant rate of interest and the resource has been used to help the weaker sex, poor socially and weaker sections of society and the activities of those assessee companies are in consonance with the objects. However, in the present case, the activity carried on by the assessee is of microfinance activity with the predominant intention of making profit and no activity other than microfinance activity was conducted by the assessee in the nature of charity. Therefore, the facts of that case is not similar to the facts of the present case before us. (E) Hon’ble Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association cited (supra) has held that main test to find out whether an institution is run for charitable purpose is to find out what is the dominant or primary purpose of the assessee. It was observed by Hon’ble Supreme Court that it is necessary to analyse whether the purpose was to promote commerce and trade in Art Silk etc. or the advancement of the object of the general public utility. It was also held if the primary or dominant purpose of an institution is charitable, another object which by it may not be charitable but which is merely ancillary or incidental to the dominant purpose would not prevent the institution from being a charitable institution. It was further held that if the purpose of an institution is the advancement of an object of general public utility, it is that object and not its accomplishment which must not involve the carrying on of any activity for profit. So long as the dominant purpose of the institution does not involve the carrying on of any activity for profit, it is immaterial how the money for achieving that purpose is found, whether by carrying on an activity for profit or not. The Hon'ble Supreme Court has emphatically clarified that the primary activity cannot be run for profit, once the primary activity is not run with profit motive the organization can have other activities which may generate profit. There is a fundamental difference between running the primary activity for profit and having incidental profit-making activities. Hence, the argument of ld. A.R. is that microfinance activity is itself a charitable activity cannot be accepted as the activity of the assessee carried on by it with a predominant and principal object of making profit and no charitable activity has been carried out and it also cannot be said that it was carried on towards advancement of any other object of general public utility. Hence, ratio of above Hon’ble Supreme Court judgement cannot be applied. (F) The Apex Court in the case of Queens Educational Society cited (supra) wherein held that predominant object test to be applied. In the present case, if we apply the ratio of above judgement, it could be seen that the assessee has carried on the microfinance activity solely with the motive of making profit and charged exorbitant rate of interest and the ld. AO has clearly brought on record that assessee has been earning profit @ 28.76% in the assessment year 2016-17 and 24.94% in the assessment year 2018-19 and accumulated huge reserves without carrying on any charitable activities. The activities of the assessee are just like any other commercial banks for which exemption u/s 11 of the Act cannot be granted. (G) In the case of M/s Janodaya Trust v. ACIT(E) in dated 16.02.2021, wherein the ITAT, Bangalore ‘B’ Bench held as under; “16. Now we shall examine various reasons given by the AO for rejecting the claim of exemption u/s 11 of the Act. The first reason given is that the assessee is charging Page - 7 - of 26 exorbitant interest rates on the loan given to the women. The AO has observed that the assessee has availed loans from banks, financial institutions etc at interest rate ranging from 9.5% to 11.50% and it has charged interest on the loans given by it @ 14%. The AO has also observed that the assessee has charged Rs.200/- - Rs.300/- over and above the interest rate of 14%. Accordingly he has held that the effective rate of interest would work out to 17% to 18%. As contended by Ld A.R, the AO has not given the basis for observing that the effective rate of interest would work out to 17% to 18%. Hence, we are of the view that it is merely a surmise entertained by the AO. The question is whether the rate of interest of 14% charged by the assessee is an exorbitant rate?. The Ld A.R submitted that the assessee is constrained to charge interest at a higher rate than the cost of borrowing, so that it can absorb administrative and allied expenses and also possible defaults by the borrowers, which is an inherent risk in the financing activities. The Ld A.R submitted that the assessee has charged interest @ 14%, which is normal interest charged by commercial banks for lending during the period under consideration. Accordingly the ld A.R has contended that the rate of interest charged by the assessee cannot be considered to be exorbitant. We find merit in the said contentions. As submitted by Ld A.R, the rate of interest of 14% is the normal rate charged by the banks for its lending and hence the said rate cannot be considered to be at exorbitant rate, as observed by the tax authorities. Hence the case laws relied upon by the tax authorities, viz., Kalanjiam development financial services (supra) and Janalakshmi Social Services (supra) are distinguishable on facts.

The next reason given by the AO is that the assessee is generating surplus year after year. Further, its income from financing activities has been increasing year after year. The important point to be noted here is that, so long as the assessee has been utilizing its income derived from the property held under the trust for its charitable objectives, the provisions of sec.11 do not deny exemption to a charitable trust. Hence, mere generation of surplus cannot be a reason to deny exemption u/s 11 of the Act. The AO might have highlighted this aspect to drive the point that the activities of the assessee are carried on commercial lines and hence the proviso to sec.2 (15) would be hit. Before us, the Ld A.R placed her reliance on the decision rendered by Hon'ble Allahabad High Court in the case of Lucknow Development Authority (supra) and Ahmedabad Urban Development Authority (supra). In both the cases, it was held that when the profit making was neither the aim nor object of the trust, then the incidental surplus generated while carrying on its activities would not render any activity in the nature of trade, commerce or business. Hence, this reasoning of the AO would also fail.

The next reasoning given by the AO is that the micro finance activities carried on by the trust would be hit by the proviso to sec. 2(15) of the Act. The decision rendered by Hon'ble Allahabad High Court in the case of Lucknow Development Authority (supra) and Ahmedabad Urban Development Authority (supra), which is referred above, also addresses this point. In the absence of profit motive, the activities cannot be considered as involving trade, commerce or business. The Ld A.R further submitted that the activities carried on by the assessee would fall under the category of “relief to poor” and hence the proviso to sec,2(15) would not be applicable. In view of the above, this reasoning would also fail.” As seen from the above judgement, ld. AO has not given basis for observing that the rate of interest would work out to 17 to 18% and it was only surmise. It was also noted by Page - 8 - of 26 the Tribunal that assessee has been utilizing income derived from property held under the trust for its charitable activities, as such exemption u/s 11 of the Act cannot be denied. It was also noted by the Tribunal that profit motive was absent and the activities of that assessee cannot be considered as involving trade, commerce or business. But in the case of present assessee, the ld. AO clearly brought on assessee is charging interest at 18 to 20% after borrowing the same @ 10 to 11.75% and made huge profit from year to year, after analyzing the facts of the assessee’s case and his finding is not surmice or conjecture. (H) The ld. A.R. placed further reliance on the decision of the Visakhapatnam Tribunal in the case of SPANDANA (Rural and Urban Development Organisation) in dated 17.2.2010, wherein it was held; “19. In the aforesaid case assessee was mainly engaged in micro financing activities and the money was lent to its project members at a rate of interest higher than that of the rate of interest the loan was borrowed. In that case also assessee has borrowed the funds either from the bank or other financial institutions and was lent to the project members. The Tribunal has taken a view that this micro finance activity was undertaken to alleviate the poverty and for the benefit of socio- economically weaker sections of the society and for doing this activity a proper organized sector is required in which lots of expenses are to be incurred. To meet that expenses, assessee is bound to charge higher rate of interest from the project members. Otherwise, assessee could not undertake the microfinance activities at the same rate of interest. The similar is the position in the instant case. Since the Tribunal has taken a view in a particular set of facts and held that micro finance activity is a charitable activity as it alleviates the poverty and also for the benefit of the socioeconomically weaker sections of the society, we find no reason to take a contrary view in this appeal with regard to the nature of activity undertaken by the assessee. We therefore hold that the micro finance activity in the instant case is a charitable activity. Since the registration has already been granted to the assessee under s. 12A assessee is eligible for exemption under s. 11 of the Act.” (I) In the case of Spandana (Rural & Urban Development Organisation) v ACIT [2010] 40 DTR 153 (Visakha-Trib.) which held that micro finance activity is a charitable activity as it alleviates poverty and also benefits socio-economically weaker sections of the society. The Hon'ble Tribunal held that the Micro finance 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. The relevant extract from the case are provided as under; "Micro finance activity requires an organised sector for procuring a loan from the banks or other financial institutions for its disbursement/advancement of loan to poor or weaker sections of the society in which the assessee has to incur a lot of expenditure. Moreover, when a loan was given to the poor women, they do not have any surety or guarantee to stand and most of the times the loan could not be recovered from them and that aspect Is also to be taken into account by the assessee while granting a loan to the poor woman. Suppose a loan was given to some of the poor women and they would not be in a position to repay the loans what the assessee will do. He cannot enforce the recovery of the loan by other means and ultimately Page - 9 - of 26 he has to write off the loan. Meaning hereby, in these types of micro finance activities most of the times the assessee could not recover the loans granted to the poor women as no one stood as the guarantor for them at the time of advancement of the loan. No doubt assessee is that charging higher rate of interest from the poor women or the downtrodden or socio-economically weaker section of the society. The reason behind is that most of the time the assessee could not recover the loan from these poor and weaker sections of the society, besides incurring heavy expenditure In maintaining the organised sector. These poor and weaker sections happily agreed with the assessee for loan at higher rate, because they could not get advancement of certain funds by the assessee to other organisations who were also engaged in similar type of activities are concerned, by advancing a fund on interest to other organisations, assessee has accomplished its of microfinance to the socio-economically weaker sections of the society and to alleviate poverty beside collecting the interest on the advancement loan. Moreover, this fund was advanced for a shorter period and the assessee has also earned an interest thereon which was utilised in micro financing activity to the poor people. By joining hands with the banks or financial institutions for procuring funds/loans for its advancement to poor or needy people exemption under section 11 cannot be denied. While rejecting the claim of the assessee, the Revenue has not taken into account these factors that by doing this activity, assessee is helping the needy people or the socio-economically weaker sections of the society as no one is going to finance them to meet their requirements. By doing this, the assessee is at least helping the poor and weaker sections of the society in meeting their urgent needs." It is evident that the society was facing non-recovery of loan and therefore the Hon'ble ITAT in its wisdom rightly held that only high rate of interest was not enough to deny the charitable nature. The ratio of the case clearly exemplifies the absence of profit motive, as the assessee was not making any real surplus or profit due to high cost and NPAs. Therefore, the rate of interest in itself could not have been the determining factor to pass a judgement on the charitable character of the institution. The case in fact casts a greater responsibility on the AO to study the Income and expenditure to ensure that the assessee is not benefiting at the cost of the beneficiaries. In the present case in hand, the assessee is making huge profits on a consistent basis. Therefore, the facts and circumstances of this case do not provide any credible support to the assessee regarding the charitable character of activities. In the above case, the ld. AO has not substantiated his findings that the work of the trust is not charitable and the interest charged by the assessee is exorbitant. The ld. AO placed nothing on record to show that the assessee is charging exorbitant interest. Further, the assessee was also running a seminar in rural area to make the poor ladies aware of the scheme and to encourage their participation. It was noted that in the above case the assessee was sustaining losses in all the previous years and therefore the, Hon'ble ITAT rightly upheld the charitable character of the assessee as there was no reason to believe that the assessee was benefiting at the cost of the beneficiaries and there was profit intent. Again, the fact and circumstances of this case do not provide any credible support to the claim of the assessee regarding the charitable character of activities due toits high profit margin maintained consistently for several years.

It is only for the asst. yr. 2017-18, the Department is taking a different view. It is not in dispute that the assessee's work is lending money to the poor women for income generating activities. The financial assistance given to Self Help Group (SHG) members are borrowed from bank to certain extent. The beneficiaries are poor families. If the SHG members have to borrow money from the moneylenders, they would have to pay many times higher interest along with security than what the assessee has charged. It is also not in dispute that the assessee incurs financial costs for obtaining loans from banks. The assessee also have to make payment towards salaries and other administrative activities of the trust. There is nothing on record to suggest that the assets and income of the trust were available for the personal benefit of the trustee and the board members. These are only used towards advancing credit to poor women for their poverty alleviation and for the benefit of the socio-economically weaker sections of the society. The Ld.AO has not substantiated his findings, that the work of the trust is not charitable and the interest charged by the assessee does not commensurate with the cost incurred by it. The Ld.AO placed nothing on record to show that the assessee is charging exorbitant interest. The action of the Ld.AO might have justified, in case the poor ladies of SHG have option to avail credit at lower interest from other sources. In present case, the credits are available at interest rate without any security. There was no compulsion over parties to avail financing at the rate of interest offered by the assessee. The assessee can carry out its activity only after charging marginal higher rate of interest to run its activities. This perse cannot be the basis to come to the conclusion that the assessee is in money lending acitivty. The assessee is running various activities like Animator activities, Donations, Health Insurance premiums, Santhwana, Training, Uniform, SHG Formation, Sahayadhana, Insurance Premium & Scholarship for students in rural area to make the poor ladies aware of the scheme and to encourage their participation as the principle objects of the trust. All these things need some expenditure. The facts and circumstances show that the assessee is carrying out its charitable activities and the surplus funds are used for charitable purposes.” 6.13 However, in the present case, surplus funds are not at all used for charitable purpose and used for carrying out further microfinance activities as such ratio of that order cannot be applied.

In the result, the appeal of the revenue is allowed.” 6.18 Further, same view was taken by Cochin Bench of Tribunal in the case of Shalom Charitable Ministries of India Vs. ACIT in & 80/coch/2017 & SP Nos.17 & 18/Coch/2017 dated 25.4.2018. 6.19 Further, in the case of Sreema Mahila Samity Vs. DCIT reported 167 ITD 420, wherein held as under: “Amendment came into force by the Finance Act 2008, wherein proviso was added to section 2(15) states that the advancement of any other object of general public utility shall not be charitable purpose if it involves carrying on “Amendment came into force by the Finance Act 2008, Page - 16 - of 26 wherein proviso was added to section 2(15) states that the advancement of any other object of general public utility shall not be charitable purpose if it involves carrying on & 745/Bang/2023 Sanghamitra Rural Financial Services, Bangalore Page 48 of 54 any activity in the nature, trade, commerce or bus/ness or any activity of rendering in services in relation to trade, commerce or business. Therefore, the exemption is not available in view of adding of proviso to section 15 particularly the 4th limbs definition of the charitable purpose. We find that the assessee did not lend loans to beneficiaries directly as it was advanced to various self-help groups. The said loans also raised on commercial lines and the profit was being generated by levying higher rate of interest and CIT-A by distinguishing the case laws held that the said microfinancing as conducted by the assessee was on commercial lines and confirmed the order of the AO denying the exemption in view of adding proviso to section 2(15) of the Act. The CIT-A also discussed and distinguished the decisions in the case of Disha India Micro Credit of Delhi Tribunal with that of Janalakshmi Social Services and held that the facts of Janalakshmi Social Services are clearly, applicable to the case of hand and held that the assessee undertaken only business of micro financing and had not done any activity to show that it had been done as charitable act. (Para 22) Before Tribunal the Id.AR placed his reliance on the decisions of various High Courts and Supreme Court and argued that the AO has no power to deny the exemption as registration u/s 12AA is in force. Tribunal find that the registration u/s. 12AA is granted subject to fulfillment of certain conditions contemplated in section 2(15) of the Act. Therefore, we are not in agreement with the arguments of the Id.AR that the AO has ignored the registration of the assessee granted u/s. 12AA of the Act in denying the claim of exemption. The Id.AR also argued that rule of consistency should be followed by placing his reliance on the decision of the Hon'ble SC in the case of Radha Swamty Satsang supra, which held that the AO should not interfere with the fundamental aspect permitting through the difference assessment years. In Tribunal opinion that prior to adding proviso to section 2(15), the entities which got registration u/s. 12AA engaged in commercial activity claimed exemption on the ground that such activities were for advancement of objects of general public utility in terms of 4th limb of definition to section 2(15) of the Act. Tribunal find that the said benefit was taken away by adding proviso to section 2(15) of the Act, wherein it explains that the advancement of any other object, general public utility shall not be charitable purpose. In Tribunal opinion that the AO and the CIT-A opined that the assessee conducted its activities on commercial line in the nature of trade, -commerce or business. Therefore, they rightly denied the exemption by following statutory provisions. Tribunal do not find any infirmity in the impugned order of the CIT-A. Tribunal find that the ratio laid down by the decisions as relied upon by the Id.AR are not applicable to the facts of this case. Tribunal uphold the same. This issue of the assessee is dismissed. (Para 23) Conclusion: Where assessee conducted its activities on commercial line in nature of trade, commerce or business, therefore, addition made on account of income from micro finance justified.” 6.20 Further, in the case of Janalakshmi Social Service Vs. DIT (Exemptions) reported in 27 CCH 618 (2008) (Bang.), wherein held that “where assessee being a company registered u/s 25 of the Companies Act, was engaged in providing

Yet another manner of looking at the definition together with Sections 10(23) and 11 is that for achieving a general public utility object, if the charity involves itself in activities, that entail charging amounts only at cost or marginal mark up over cost, and also derive some profit, the prohibition against carrying on business or service relating to business is not attracted - if the quantum of such profits do not exceed 20% of its overall receipts. …………… …………… Page - 21 - of 26 …………...

In view of the foregoing discussion and analysis, the following conclusions are recorded regarding the interpretation of the changed definition of “charitable purpose” (w.e.f. 01.04.2009), as well as the later amendments, and other related provisions of the IT Act. 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 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. B. Authorities, corporations, or bodies established by statute B.1. The amounts or any money whatsoever charged by a statutory corporation, board or any other body set up by the state government or central governments, for achieving what are essentially ‘public functions/services’ (such as housing, industrial development, supply of water, sewage management, supply of food grain, development and town planning, etc.) may resemble trade, commercial, or business activities. However, since their objects are essential for advancement of public purposes/functions (and are accordingly restrained by way of statutory provisions), such receipts are prima facie to be excluded from the mischief of Page - 22 - of 26 business or commercial receipts. This is in line with the larger bench judgments of this court in Ramtanu Cooperative Housing Society and NDMC (supra). B.2. However, at the same time, in every case, the assessing authorities would have to apply their minds and scrutinize the records, to determine if, and to what extent, the consideration or amounts charged are significantly higher than the cost and a nominal mark-up. If such is the case, then the receipts would indicate that the activities are in fact in the nature of “trade, commerce or business” and as a result, would have to comply with the quantified limit (as amended from time to time) in the proviso to Section 2(15) of the IT Act. B.3. In clause (b) of Section 10(46) of the IT Act, “commercial” has the same meaning as “trade, commerce, business” in Section 2(15) of the IT Act. Therefore, sums charged by such notified body, authority, Board, Trust or Commission (by whatever name called) will require similar consideration – i.e., whether it is at cost with a nominal mark-up or significantly higher, to determine if it falls within the mischief of “commercial activity”. However, in the case of such notified bodies, there is no quantified limit in Section 10(46). Therefore, the Central Government would have to decide on a case-by-case basis whether and to what extent, exemption can be awarded to bodies that are notified under Section 10(46). B.4. For the period 01.04.2003 to 01.04.2011, a statutory corporation could claim the benefit of Section 2(15) having regard to the judgment of this Court in the Gujarat Maritime Board case (supra). Likewise, the denial of benefit under Section 10(46) after 01.04.2011 does not preclude a statutory corporation, board, or whatever such body may be called, from claiming that it is set up for a charitable purpose and seeking exemption under Section 10(23C) or other provisions of the Act. C. Statutory regulators C.1. The income and receipts of statutory regulatory bodies which are for instance, tasked with exclusive duties of prescribing curriculum, disciplining professionals and prescribing standards of professional conduct, are prima facie not business or commercial receipts. However, this is subject to the caveat that if the assessing authorities discern that certain kinds of activities carried out by such regulatory body involved charging of fees that are significantly higher than the cost incurred (with a nominal mark-up) or providing other facilities or services such as admission forms, coaching classes, registration processing fees, etc., at markedly higher prices, those would constitute commercial or business receipts. In that event, the overall quantitative limit prescribed in the proviso to Section 2(15) (as amended from time to time) has to be complied with, if the regulatory body is to be considered as one with ‘charitable purpose’ eligible for exemption under the IT Act. C.2. Like statutory authorities which regulate professions, statutory bodies which certify products (such as seeds) based on standards for qualification, etc. will also be treated similarly. D. Trade promotion bodies Bodies involved in trade promotion (such as AEPC), or set up with the objects of purely advocating for, coordinating and assisting trading Page - 23 - of 26 organisations, can be said to be involved in advancement of objects of general public utility. However, if such organisations provide additional services such as courses meant to skill personnel, providing private rental spaces in fairs or trade shows, consulting services, etc. then income or receipts from such activities, would be business or commercial in nature. In that event, the claim for tax exemption would have to be again subjected to the rigors of the proviso to Section 2(15) of the IT Act. E. Non-statutory bodies E.1. In the present batch of cases, non-statutory bodies performing public functions, such as ERNET and NIXI are engaged in important public purposes. The materials on record show that fees or consideration charged by them for the purposes provided are nominal. In the circumstances, it is held that the said two assessees are driven by charitable purposes. However, the claims of such nonstatutory organisations performing public functions, will have to be ascertained on a yearly basis, and the tax authorities must discern from the records, whether the fees charged are nominally above the cost, or have been increased to much higher levels. E.2. It is held that though GS1 India is in fact, involved in advancement of general public utility, its services are for the benefit of trade and business, from which they receive significantly high receipts. In the circumstances, its claim for exemption cannot succeed having regard to amended Section 2(15). However, the Court does not rule out any future claim made and being independently assessed, if GS1 is able to satisfy that what it provides to its customers is charged on cost basis with at the most, a nominal mark-up. F. Sports associations So far as the state cricket associations are concerned (Saurashtra, Gujarat, Rajasthan, Baroda, and Rajkot), this Court is of the opinion that the matter requires further scrutiny, in light of the discussion in paragraphs 228-238 of the judgment. Accordingly, a direction is issued that the AO shall adjudicate the matter afresh after issuing notice to the concerned assessees and examining the relevant material indicated in the previous paragraphs of this judgment. Furthermore, if any consequential order needs to be issued, the same shall be done and resulting actions, including assessment orders shall be passed in accordance with the law under relevant provisions of the IT Act. G. Private Trusts So far as the appeal by assessee-Tribune Trust is concerned, it has been held that despite advancing general public utility, the Trust cannot benefit from exemption offered to entities covered by Section 2(15) as the records reveal that income received from advertisements, constituted business or commercial receipts. Consequently, the limit prescribed in the proviso to Section 2(15) has to be adhered to for the Trust’s claim of being as a charity eligible for exemption, to succeed. Therefore, despite differing reasoning, this court has held that the impugned judgment of the High Court does not call for interference. Page - 24 - of 26 H. Application of interpretation H. At the cost of repetition, it may be noted that the conclusions arrived at by way of this judgment, neither precludes any of the assessees (whether statutory, or non-statutory) advancing objects of general public utility, from claiming exemption, nor the taxing authorities from denying exemption, in the future, if the receipts of the relevant year exceed the quantitative limit. The assessing authorities must on a yearly basis, scrutinize the record to discern whether the nature of the assessee’s activities amount to “trade, commerce or business” based on its receipts and income (i.e., whether the amounts charged are on costbasis, or significantly higher). If it is found that they are in the nature of “trade, commerce or business”, then it must be examined whether the quantified limit (as amended from time to time) in proviso to Section 2(15), has been breached, thus disentitling them to exemption. 7.3 We have also examined the report of the sub-committee of the Central Board of Directors, Reserve Bank of India issued in January, 2011 and the extract of the same are reproduced in para 6.26 of the order of the Co-ordinate Bench in the case of Sanghamitra Rural Financial Services, supra. The sub-committee of the Central Board of Directors of Reserve Bank of India in its categorical report, when compared with the activities of the assessee, we reached to a conclusion that the assessee is only doing micro finance activities by charging exorbitant interest which does not commensurate with the prevailing rate. It is also noted that the activities is not in lieu of any benefit to low income group or poor people who are vulnerable and not in a position to cope up with financial burdens. In our considered view, the activity of the assessee tobe in charitable in nature, the services rendered must commensurate with the benefit that may arise to such poor people. Hence, we find that this issue is fully covered on facts as well as on principle by the decision of Bangalore Bench in the case of Sanghamitra Rural Financial Services, supra, we confirm the order of AO and that of the CIT(A) and dismiss this appeal of assessee….”