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Facts
The assessee, Credit Guarantee Fund Trust for Micro and Small Enterprises, received Rs. 715 crores as corpus contribution from the Government of India. The Assessing Officer rejected its claim for exemption under section 11 by invoking the proviso to section 2(15) of the Income-tax Act, 1961, and also disallowed a provision for guarantee claims amounting to Rs. 791,02,44,944/-. The Ld. CIT(A) upheld the AO's order, leading to the present appeal before the ITAT.
Held
The tribunal, following its previous order in the assessee's own case, held that the assessee's activities for credit guarantee to small and micro enterprises constituted advancement of general public utility, not trade or commerce, thus the proviso to section 2(15) was not applicable, and exemption under section 11 was allowable. It also held that the provision for guarantee claims was a legitimate deduction and an allowable expense, directing the AO to delete the addition. Other grounds of appeal were either not pressed or deemed consequential.
Key Issues
1. Eligibility of the assessee trust for exemption under section 11, considering the proviso to section 2(15) of the Income-tax Act, 1961. 2. Allowability of deduction for 'provision for guarantee claims'.
Sections Cited
250, 143(3), 144B, 2(15), 11, 11(1)(a), 12, 234A, 234B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA & SHRI ANIKESH BANERJEE
Instant appeal of the assessee was filed against the order of theNational Faceless Appeal Centre, Delhi [for brevity, ‘Ld.CIT(A)’] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’), for Assessment Year 2019-20, date of order04.09.2024.The impugned order was emanated from the order of the Credit Guarantee Fund Trust for Micro and Small Enterprises National Faceless Assessment Centre, Delhi (in short, ‘the A.O.’) passed under section 143(3)r.w.s. 144Bof the Act date of order27/09/2021.
The assessee has taken the following grounds of appeal:-
“The following concise grounds of appeal are independent and are without prejudice to each other. (1) Ld. CIT(A) has erred in passing the said order without giving opportunity of being heard. (2) Ld. CIT(A) has erred in upholding the denial of claim of exemption u/s 11 of the Act by invoking proviso to section 2(15) of the Act. (3) Ld. CIT(A) has erred in rejecting the claim of deduction of Rs. 12,52,48,555/- u/s 11(1)(a) of the Act being 15% of income derived from property held under trust by relying upon assessing officer's findings in preceding assessment years of appellant trust. (4) Ld. CIT(A) has erred in confirming the disallowance of deduction of provision for guarantee claims of Rs. 791,02,44,944/-. (5) Ld. CIT(A) has erred in not allowing the set off of brought forward deficit of previous years against the income determined in the order. 6) Ld. CIT(A) has erred in confirming interest of Rs. 2,44,76,642/- u/s 234A of the Act. 7)Ld. CIT(A) has erred in confirming interest of Rs. 73,42,99,260/- u/s 234B of the Act. The appellant trust craves leave to add, alter, amend, modify and/or delete any or all the above grounds of appeal, on or before the date of hearing.”
3. The brief facts of the case are that the assessee, “Credit Guarantee Fund Trust for Micro and Small Enterprises” is an irrevocable trust settled on 27/07/2000 by the President of India acting through Ministry of SSI & ARI, Government of India (in short GOI) and Small Industries Development Bank of Credit Guarantee Fund Trust for Micro and Small Enterprises India (in short SIDBI). During the impugned assessment year, assessee trust received Rs.715 crores as contribution to corpus from Government of India. The ld. AO, by rejecting the submission of the assessee that “in accordance with the provisions of Section 11of the Act, any voluntary contribution made with specific intention that they shall from a part of corpus of the Trust are not be included while computing total income of the Trust”. By invoking provision of section 2(15) of the Act, rejected the exemption claimed under section 11 of the Act and added the same to the total income of the assessee trust.It is stated that as per the sanction letters, it would be observed that the contribution has been made with the specific direction that it shall be from part of the corpus of the trust. The trust is registered under section 12A of the Act on dated 18/10/2001. But the activity of the trust was treated on contrary of section 2(15) of the Act and accordingly claim U/s 11 is rejected by the ld. AO.
In second issue, the Ld.AO rejected on account of the “provision for guarantee claims”, amount to Rs.791,02,44,944/-. The assessee has claimed provision for guarantee claim amount to Rs. 1607,58,00,000/-. After considering the payment of guarantee claims amount to Rs.816,55,55,066/- the balance amount which works out to Rs.791,02,44,944/- was added back with the total income of the assessee. The aggrieved assessee filed an appeal before the ld. CIT(A). The Ld.CIT(A) upheld the impugned assessment order. Being aggrieved on the appeal order, the assessee filed the appeal before us.
The Ld.AR vehemently argued and proceeded his argument related to groundno.2, the disallowance the claim of deduction under section 11 of the Act. The Ld.AR further argued that the assessee is arranging the guarantee to the Credit Guarantee Fund Trust for Micro and Small Enterprises credit for loans and advances in first generation entrepreneur. The guarantee and / or counter guarantee the loans and advances be the such sum as may be decided by the Board of Trustee on the direction issued by the Government of India from time to time, sanctioned and disbursed by the lending institution without any collateral security and / or third party guarantee to the new or existing micro and small enterprises or such other enterprises, as may be decided by the settlers from time to time and to levy guarantee fee / service fee / other charges on lending institution, as may be decided by the trust, from time to time. He further placed that the Ld.AO has followed the earlier assessment orders of the assessee. The issue is only related to the activity of the assessee is duly covered section 2(15) of the Act and is it eligible for exemption U/s 11 of the Act. The ld. AR stated that the issue is squarely covered in favour of the assessee by the order of the co-ordinate bench of ITAT, Mumbai Bench-C in assessee’s own case in date of pronouncement 24/11/2023. The relevant paragraph no.20 is reproduced as below:-
“20. 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 Credit Guarantee Fund Trust for Micro and Small Enterprises 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.”
The ld. DR vehemently argued and fully relied on the order of the revenue authorities. The Ld. DR was unable to provide any contrary judgment or bring forth any material to contradict the submissions of the Ld. AR.
We heard the rival submissions and considered the documents available in the record. We find that the assessee is ameliorating the credit guarantee to the small venture and supporting for development of business/ livelihood. Considering the activities,we note that it is not contravening the provisions of section 2(15) of the Act and liable for exemption under section 11 of the Act. The trust is fully governed by Government of India for development of the first- generation entrepreneurs in small-scale industries. We respectfully follow the order of the co-ordinate bench of ITAT, Mumbai Bench-C in (supra).We set aside the impugned appeal order in this issue. In our considered view, the ground taken by the assessee is allowed.
Accordingly, ground no-2 of the assessee is allowed.
In ground no-4 the issue is related to rejection of ‘provisionof guaranteeclaims’and the addition was made by the Ld.AO by following the earlier assessment orders. The ld. AO had treated this provision as ‘Provision of Expenses” which not allowable as per the statue. It is further stated by the ld. AR that the issue was agitated in earlier years in assessee’s own case and the issue is also squarely covered by the order of the ITAT, Mumbai Bench “C” in assessee’s own case in date of pronouncement 24/11/2023. The relevant paragraph Nos.28 & 29 are reproduced as below: - Credit Guarantee Fund Trust for Micro and Small Enterprises “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 employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, was mutated 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.”
For demonstrating the fact related to year-wise provision and claim made, the ld. AR submitted a chart which is reproduced as below: -
Amount (Rs.in crores)
Particulars Assessment Years 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 Opening 1,718.62 1,734.62 1,798.45 2,145.49 2,936.52 3,84738 5,217.12 Balance Add: Provision 1,020.73 1,126.11 1,314.84 1,607.58 1,912.23 2,073.04 2,321.90 made during the year Less:Claims 1,004.74 1,062.27 967.80 816.56 1,001.37 703.30 1,227.39 paid during the year Closing Balance 1,734.62 1,798.45 2,145.49 2,936.52 3,847.38 5,217.12 6,311.63 (A) Total 62,318 67m762 70,310 74,330 99,492 1,09,955 1,24,618 guarantees issued and outstanding as on year end (B)
% of Closing 2.78 2.65 2.65 3.95 3.87 4.74 5.06 Provision to outstanding guarantee as on year end (C= A/B)
The ld. DR argued and fully relied on the impugned orders of the revenue authorities and was unable to provide any evidence or bring forth any material to contradict the submissions of the Ld. AR.
We heard the rival submission and considered the documents available in the record. We find that the ld. AO had treated the ‘provision of guarantee claims’ as ‘provision for expenses’. We note that the nature of settlement of claim and the payment made by assessee is only to support the small and medium businesses. The entire activities for the purpose of providing effective credit guarantee for SSI loans extended by eligible scheduled commercial bank and rural bank to the eligible borrowers without collateral security. As per the scheme, a Credit Guarantee Fund Trust for Micro and Small Enterprises lending institution has to enter into an agreement with the assessee for covering by way of guarantee. Against the outstanding guarantee the assessee creates a provision for guarantee claims as required to be maintained under the conservatism principle required to be adhered under mercantile system of accounts.We find that the deduction claimed by the assessee under ‘provision of guarantee claims’ is allowable expenses. We respectfully follow the order of coordinate bench ITAT-Mumbai in assessee’s own case in ITA No.2684/Mum/2022(supra). We set aside the impugned appeal order in this issue. The ld. AO is directed to delete the addition amount of Rs.791,02,44,944/-.
Accordingly, the appeal of the assessee ground no4 is allowed.
Accordingly, ground no. 1 is not pressed; ground nos. 3,5, 6 & 7 are consequential in nature and are not required to adjudicate.