K.P.Paul Foundation, Cochin V. CIT, Ernakulam

ITA 624/COCH/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6251 (ITAT-COCHIN)
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2014
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 21-04-2014
• Assessment Year: misc
• Appeal Filed On: 24-09-2013
• Court: TRIBUNAL
• Department Lawyers: K K JOHN
• Assessee Lawyers: A S NARAYANAMOORTHY
• Keywords: Charitable institution; Opportunity of being heard
• Section: 12AA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A. NO. 624/COCH/2013 ASSESSMENT YEAR : NA K.P. PAUL FOUNDATION, KUTTUKKARAN CENTRE, MAMANGALAM, KOCHI-682 025. [PAN: AABTK 3818M] VS. THE COMMISSIONER OF INCOME- TAX, COCHIN. (ASSESSEE -APPELLANT) (REVENUE-RESPONDEN T) ASSESSEE BY SHRI A.S. NARAYANAMOORTHY, REVENUE BY SHRI K.K. JOHN, SR. DR DATE OF HEARING 21/04/2014 DATE OF PRONOUNCEMENT 25/04/2014 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ORDER DATED 29-08-2013 PASSED BY THE LD. CIT-I, KOCHI REJECTING THE APPLIC ATION FILED BY THE ASSESSEE SEEKING REGISTRATION U/S. 12AA OF THE ACT. 2. THE FACTS RELATING TO THE CASE ARE STATED IN BRI EF. THE ASSESSEE IS A TRUST. IT FILED AN APPLICATION IN THE PRESCRIBED FORM BEFO RE THE LD. CIT-I, KOCHI SEEKING REGISTRATION U/S. 12AA OF THE ACT AS A CHARITABLE T RUST. THE ASSESSEE SUBMITTED BEFORE THE LD. CIT THAT THE MAIN OBJECT OF THE TRUS T IS DEVELOPING ENTREPRENEURSHIP BY PROVIDING MICRO FINANCE. IT WA S SUBMITTED THAT THE TRUST I.T.A. NO.624 /COCH/2013 2 GIVES LOANS TO SELECTED PERSONS FOR COW REARING, GO AT REARING, BEE KEEPING ETC. THE LOANS SO GIVEN RANGES FROM RS. 10,000/- TO RS. 50,000/- TO EACH PERSONS, WHICH ALSO CARRIED NOMINAL RATE OF INTEREST OF 5%. IT WAS FURTHER SUBMITTED THAT THE ELIGIBLE CANDIDATES ARE SELECTED FROM POOR PEOP LE AND THEY ARE GIVEN TRAINING AND COUNSELING BY ANOTHER AGENCY NAMED M/S. RAJAGIR I CASP IN VARIOUS TYPES OF ACTIVITIES LIKE COW REARING, GOAT REARING, BEE KEEP ING ETC. ACCORDINGLY, IT WAS SUBMITTED THAT THE ACTIVITY OF GENERATING ENTREPREN EURSHIP AND PROVIDING READY FINANCE AT LOWER RATE OF INTEREST CONSTITUTES RELIE F TO THE POOR. 3. HOWEVER, THE LD. CIT TOOK THE VIEW THAT THE ASSE SSEE IS ENGAGED IN MONEY LENDING BUSINESS AND HENCE ITS ACTIVITIES CAN NOT BE CONSIDERED AS CHARITABLE IN NATURE. THE OBSERVATIONS MADE BY THE LD. CIT ARE EXTRACTED BELOW FOR THE SAKE OF CONVENIENCE. 6. FROM THE FACTS GIVEN ABOVE, IT CAN BE SEEN TH AT THE PETITIONER IS DOING MONEY LENDING BUSINESS CHARGING INTEREST @ 5%. THE ONLY THING THAT CLAIMED TO BE CHARITABLE IN NATURE IS SA ID TO BE LOWER INTEREST RATE OF 5%, COMPARED TO THE COMMERCIAL RAT E. THE CONTENTIONS RAISED BY THE ASSESSEES REPRESENTATIVE DO NOT SEEM TO BE CORRECT AS GRANTING OF LOANS TO THE POOR PEOPLE CHARGING INTEREST, CAN NOT BE CONSIDERED AS A CHARITABLE ACT IVITY. IF IT IS ACCEPTED, A PRIVATE FINANCIER, NORMALLY KNOWN AS B LADE COMPANY IN KERALA CAN ALSO PUT FORTH THE SAME CONTENTION AN D CAN CLAIM EXEMPTION U/S. 12AA ON THE GROUND THAT THEY ARE GIV ING LOANS TO THE NEEDY AND POOR (NORMALLY THE PERSONS WHO APPROA CH THE PRIVATE FINANCIERS WILL BE VERY POOR PEOPLE WHO DO NOT HAVE ANY THING TO MORTGAGE ON WHICH OTHER PUBLIC BANKING COM PANIES STRICTLY INSIST UPON) AT THE RATE PRESCRIBED BY THE GOVERNME NT WITHIN NO TIME AND WITHOUT ANY MORTGAGE OF MOVABLE AND IMMOVA BLE PROPERTIES AND WITHOUT ANY OFFICIAL FORMALITIES WHI CH NORMALLY HAPPENS IN OTHER PUBLIC BANKS. THEY ARE ALSO HELP ING THE POOR FOR BUSINESS ENTREPRENEURSHIP ETC. BY ALLOWING LOANS WI TH IN MINUTES I.T.A. NO.624 /COCH/2013 3 WITH OUT ANY TECHNICAL DELAY. FURTHER, IF THE CONT ENTIONS OF THE PETITIONER IS ACCEPTED, EVERY BUSINESSMAN IS TO BE CONSIDERED AS ELIGIBLE FOR EXEMPTION U/S. 12AA. FOR INSTANCE, A TEXTILE SHOP IN KOCHI CAN CLAIM THAT THEY ARE DOING CHARITY BY HELP ING THE PUBLIC OF THIS LOCALITY BY PROVIDING FAMOUS KANCHIPURAM SAREE S TO THEM AT A REASONABLE PRICE COMPARED TO THE HUGE EXPENSES THE PURCHASER WOULD HAVE INCURRED TO GO AND PURCHASE A GOOD SAREE RIGHT FROM KANCHIPURAM. IT CAN ALSO BE CLAIMED THAT BY PURCHA SING THESE SAREES FROM THE POOR WEAVERS OF KANCHIPURAM, THEY A RE DOING CHARITY TO THEM ALSO. ANY BUSINESSMAN LIKE MERCHAN TS, JEWELERS ETC CAN ALSO CLAIM CHARITY ON SIMILAR GROUNDS. 7. ANOTHER IMPORTANT THING TO BE NOTED THAT ALL OT HER ACTIVITIES IN CONNECTION WITH THE OBJECTIVES OF THE TRUST EXCEPT THE LENDING THE MONEY IS DONE BY ANOTHER AGENCY NAMED RAJAGIRI CASP . EVEN THOUGH, THE PETITIONER HAS CONSIDERED IT AS AN APPR OVAL FOR THE AUTHENTICITY OF THE TRUST, ON DEEPER SCRUTINY IT CA N BE SEEN THAT IT REDUCES THE CHARITABLE NATURE OF THE TRUST AS THE A CTIVITIES OF THE PETITIONER TRUST HAVE BEEN REDUCED TO MERE ADVANCIN G OF MONEY. IT CAN BE CONSIDERED THAT ALL OTHER SO CALLED CHARITAB LE ACTIVITIES HAVE BEEN OUTSOURCED TO ANOTHER AGENCY. 8. CONSIDERING THESE FACTS, IT CAN BE SEEN THAT T HE ACTIVITIES OF THE TRUST IS NOT CHARITABLE IN NATURE BUT CAN BE CONSID ERED ONLY AS DOING MONEY LENDING BUSINESS. ALL OTHER CONNECTED ACTIVI TIES LIKE GIVING COUNSELING ETC. CAN ONLY BE CONSIDERED AS A BUSINES S ACTIVITIES FOR PROPER RECOVERY OF LOAN GRANTED. UNDER THESE CIRCUMSTANCES, AS THE TRUST IS N OT A GENUINE CHARITABLE TRUST, THE PETITIONER IS NOT ELIGIBLE FO R EXEMPTION U/S. 12AA AND THEREFORE THE APPLICATION FILED FOR EXEMPT ION U/S. 12AA IS HEREBY REJECTED. AGGRIEVED BY THE ORDER PASSED BY LD CIT, THE ASSESS EE HAS FILED THIS APPEAL BEFORE US. 4. THE LD COUNSEL APPEARING FOR THE ASSESSEE SU BMITTED THAT THE ASSESSEE TRUST IS FORMED WITH AN OBJECTIVE TO FACILITATE SEL F EMPLOYMENT OF POOR PEOPLE, WHICH WOULD EVENTUALLY REDUCE UNEMPLOYMENT. ACCORD INGLY, THE ASSESSEE TRUST I.T.A. NO.624 /COCH/2013 4 PROVIDES TRAINING TO THE SELECTED CANDIDATES IN THE IR RESPECTIVE AREAS OF INTEREST AND FURTHER PROVIDE SEED CAPITAL IN THE FORM OF MIC RO FINANCE. THE LOAN SO GIVEN RANGES FROM RS.10,000/- TO RS.50,000/- ON WHICH INT EREST IS CHARGED AT A NOMINAL RATE OF 5% P.A. THE ASSESSEE TRUST PROVIDES FINANC E UPTO 85% OF THE PROJECT COST AND THE BALANCE 15% SHOULD BE BROUGHT IN THE B Y THE CANDIDATE. THE LD A.R SUBMITTED THAT THE ASSESSEE TRUST IS A NON-PROFIT O RGANIZATION EXISTING SOLELY FOR CHARITABLE PURPOSES AND THE SAID FEATURE DISTINGUIS HES THE SAME FROM A NORMAL BUSINESS CONCERN, WHEREIN THE PREDOMINANT MOTIVE IS TO MAKE PROFITS. HE FURTHER SUBMITTED THAT THE RATE OF INTEREST OF 5% P.A. CHAR GED ON THE LOANS IS VERY MUCH LESSER THAN THE INTEREST THAT COULD BE EARNED BY PA RKING FUNDS IN FIXED DEPOSITS WITH BANKS. THE LD COUNSEL PLACED RELIANCE ON THE DECISION RENDERED BY VISAKHAPATNAM BENCH OF ITAT IN THE CASE OF SPANDANA (RURAL & URBAN DEVELOPMENT ORGANISATION) VS. ACIT (2010)(40 DTR (V ISAKHA)(TRIB) 153) AND SUBMITTED THAT THE TRIBUNAL HELD THAT THE MICRO FIN ANCE ACTIVITY IS A CHARITABLE ACTIVITY AS IT ALLEVIATES THE POVERTY AND ALSO BENE FITS THE SOCIO-ECONOMICALLY WEAKER SECTIONS OF THE SOCIETY. HE FURTHER SUBMITT ED THAT THE ASSESSEE THEREIN CHARGED INTEREST @ 15% P.A.. HE FURTHER SUBMITTED THAT THE VISAKHAPATNAM BENCH, IN TURN, PLACED RELIANCE ON THE DECISION REN DERED BY THE BANGALORE BENCH OF ITAT IN THE CASE OF ADIT VS. BHARATHA SWAMUKHI S AMSTHE (2009)(28 DTR (BANG)(TRIB) 113), WHEREIN THE ASSESSEE THEREIN HAD CHARGED INTEREST RANGING FROM 9% TO 20% P.A. THE LD COUNSEL SUBMITTED THAT THE DECISION RENDERED BY THE VISAKHAPATNAM BENCH OF TRIBUNAL HAS SINCE BEEN UPHELD BY HONBLE HIGH I.T.A. NO.624 /COCH/2013 5 COURT OF ANDHRA PRADESH, VIDE ITS ORDER DATED 10-07 -2013 IN ITTA NO. 304 OF 2013. THE LD COUNSEL FURTHER SUBMITTED THAT THE IN TEREST RATE OF 5% CHARGED ON THE LOANS GIVEN TO THE CANDIDATES IS ONLY TO INSTIL L A SENSE OF RESPONSIBILITY ON THE CANDIDATES TO WHOM WAS TRAINING WAS GIVEN FOR SELF EMPLOYMENT. THE LD A.R ALSO PLACED RELIANCE ON THE CIRCULAR NO.100 (F.NO. 195/1/72-IT(A-I) DATED 24.1.1973 (88 ITR 66) AND SUBMITTED THAT THE CBDT H AS STATED THAT ADVANCING OF LOANS BY A EDUCATIONAL TRUST TO STUDENTS FOR HIGHER STUDIES WOULD BE TREATED AS APPLICATION OF INCOME FOR CHARITABLE PURPOSES, IF T HE OBJECT OF THE TRUST IS ADVANCEMENT OF EDUCATION AND GRANTING OF SCHOLARSHI P LOANS IS ONLY ONE OF THE ACTIVITIES CARRIED ON FOR THE FULFILLMENT OF THE OB JECTIVES OF THE TRUST. ACCORDINGLY THE LD A.R SUBMITTED THAT THE MAIN OBJECTIVE OF THE PRESENT TRUST IS TO PROMOTE SELF EMPLOYMENT OF POOR PEOPLE AND IN ORDER TO FULF ILL THE SAID OBJECTIVE, THE ASSESSEE HAS BEEN GIVING TRAINING AS WELL AS LOW IN TEREST BEARING LOANS TO THE SELECTED CANDIDATES. 5. ON THE CONTRARY, THE LD D.R PLACED STRONG REL IANCE ON THE ORDER PASSED BY LD CIT. THE LD D.R FURTHER SUBMITTED THAT THE ASSE SSEE IS MERELY DOING FINANCING ACTIVITY AND THE SO CALLED TRAINING WAS G IVEN BY ANOTHER AGENCY AND NOT BY THE ASSESSEE. ACCORDINGLY HE SUBMITTED THAT THE ASSESSEE CANNOT BE CONSIDERED AS A CHARITABLE TRUST AND HENCE THE LD C IT WAS JUSTIFIED IN REJECTING THE APPLICATION FILED BY THE ASSESSEE. I.T.A. NO.624 /COCH/2013 6 6. IN THE REJOINDER, THE LD A.R SUBMITTED THAT T HE TRAINING TO THE SELECTED CANDIDATES IS GIVEN THROUGH ANOTHER AGENCY NAMED M/ S RAJAGIRI CASP ON PAYMENT OF CHARGES AND THE SAID AGENCY IS NO WAY RE LATED TO THE TRUSTEES. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREF ULLY PERUSED THE RECORD. A PERUSAL OF THE ORDER PASSED BY LD CIT WOULD SHOW TH AT THE ADMINISTRATIVE COMMISSIONER HAS TAKEN THE VIEW THAT THE ASSESSEE T RUST HAS BEEN INDULGING IN FINANCING BUSINESS. ACCORDINGLY HE HAS TAKEN THE V IEW THAT THE BUSINESS ACTIVITIES CANNOT BE CONSIDERED AS CHARITABLE ACTIV ITY BY QUOTING EXAMPLES OF TRADING IN SILK SAREES, FINANCE COMPANIES ETC. ACC ORDING TO LD A.R, THE PREDOMINANT OBJECTIVE OF THE ASSESSEE TRUST IS TO P ROMOTE SELF EMPLOYMENT OPPORTUNITY TO POOR PEOPLE, WHICH WOULD EVENTUALLY ERADICATE UNEMPLOYMENT. IN THIS REGARD, WE FEEL IT PERTINENT TO EXTRACT THE FO LLOWING OBSERVATIONS MADE BY HONBLE SUPREME COURT IN THE CASE OF CIT VS. A.P. S TATE ROAD TRANSPORT CORPORATION (1986)(159 ITR 1) AT PAGE 10:- IT IS NOW FIRMLY ESTABLISHED BY THE DECISIONS OF THIS COURT IN SURAT ART SILK CLOTH MANUFACTURERS ASSOCIATIONS CASE (1980)( 121 ITR 1)(SC) AND BAR COUNCIL OF MAHARASHTRAS CASE (1981)(130 ITR 28)(SC ), THAT THE TEST IS WHAT IS THE PREDOMINANT OBJECT OF THE ACTIVITY W HETHER IT IS TO CARRY OUT A CHARITABLE PURPOSE OR TO EARN PROFIT?. IF THE P REDOMINANT OBJECT IS TO CARRY OUT A CHARITABLE PURPOSE AND NOT TO EARN PROF IT, THE PURPOSE WOULD NOT LOSE ITS CHARITABLE CHARACTER MERELY BECAUSE SO ME PROFIT ARISES FROM THE ACTIVITY. I.T.A. NO.624 /COCH/2013 7 8. THE CBDT ALSO IN ITS CIRCULAR NO.100 (REFERR ED SUPRA) HAS STATED AS UNDER:- ..AS REGARDS THE LOANS ADVANCED FOR HIGHER STUDI ES, IF THE ONLY OBJECT OF THE TRUST IS TO GIVE INTEREST BEARING LOANS FOR HIG HER STUDIES, IT WILL AMOUNT TO CARRYING ON OF MONEY LENDING BUSINESS. IF, HOWE VER, THE OBJECT OF THE TRUST IS ADVANCEMENT OF EDUCATION AND GRANTING OF S CHOLARSHIP LOANS AS ONLY ONE OF THE ACTIVITIES CARRIED ON FOR THE FULFI LLMENT OF THE OBJECTIVES OF THE TRUST, GRANTING OF LOANS, EVEN IF INTEREST BEAR ING, WILL AMOUNT TO APPLICATION OF INCOME FOR CHARITABLE PURPOSES. AS AND WHEN THE LOAN IS RETURNED TO THE TRUST, IT WILL BE TREATED AS INCOME OF THAT YEAR. 9. FROM THE FOREGOING DISCUSSIONS, WE NOTICE THA T THE LD CIT SHOULD CONSIDER THE PREDOMINANT OBJECTIVES OF THE TRUST IN ORDER TO DECIDE THE NATURE OF THE TRUST AND ACCORDINGLY THE FINANCING ACTIVITY CANNOT BE CO NSIDERED IN ISOLATION. ACCORDING TO LD A.R, THE MICRO FINANCING ACTIVITY I S CARRIED OUT BY THE TRUST IN ORDER TO ACHIEVE ITS PREDOMINANT OBJECTIVE TO PROMO TE SELF EMPLOYMENT OPPORTUNITY TO POOR PEOPLE, WHICH WOULD EVENTUALLY ERADICATE UNEMPLOYMENT. THE LD A.R ALSO PLACED RELIANCE ON THE DECISION REN DERED BY THE VISAKHAPATNAM BENCH OF TRIBUNAL IN THE CASE OF SPANDANA (RURAL & URBAN DEVELOPMENT ORGANISATION) (SUPRA), WHEREIN THE MICRO FINANCE AC TIVITY WAS CONSIDERED TO BE A CHARITABLE ACTIVITY. IT IS SUBMITTED THAT THE SAID DECISION HAS ALSO BEEN CONFIRMED BY THE HONBLE HIGH COURT OF ANDHRA PRADESH. WE NO TICE THAT THE LD CIT HAS NOT CONSIDERED THE PREDOMINANT OBJECTIVE OF THE ASSESSE E TRUST. 10. ACCORDING TO LD A.R, THE TRAINING WAS GIVEN TO THE SELECTED CANDIDATES THROUGH M/S RAJAGIRI CASP ON PAYMENT OF NOMINAL C HARGES. THE LD A.R FURTHER SUBMITTED THAT THE ABOVE SAID AGENCY IS NOT RELATED TO THE TRUSTEES OF THE I.T.A. NO.624 /COCH/2013 8 ASSESSEE TRUST. HE FURTHER SUBMITTED THAT THE ASSE SSEE TRUST HAS PROVIDED TRAINING TO THE CANDIDATES THROUGH THE AGENCY, SINC E IT DOES NOT HAVE NECESSARY RESOURCES OR FACILITIES WITH IT. THUS, ACCORDING T O LD A.R, THE ACTIVITY OF PROVIDING TRAINING TO THE SELECTED CANDIDATES IS ALSO IN FURT HERANCE OF ITS OBJECTIVES. WE NOTICE THAT THE LD CIT HAS NOT CONSIDERED THIS CONT ENTIONS OF THE ASSESSEE. 11. IN VIEW OF THE FOREGOING DISCUSSIONS, WE ARE OF THE VIEW THAT THE APPLICATION FILED BY THE ASSESSEE SEEKING REGISTRAT ION U/S 12AA REQUIRES FRESH EXAMINATION AT THE END OF LD CIT. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT AND RESTORE THE SAME TO HIS FILE WITH THE DI RECTION TO EXAMINE THE APPLICATION FILED BY THE ASSESSEE AFRESH BY CONSIDE RING VARIOUS DOCUMENTS FILED AND SUBMISSIONS MADE BY THE ASSESSEE AND TAKE APPRO PRIATE DECISION IN ACCORDANCE WITH THE LAW, AFTER AFFORDING NECESSARY OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 12. IN THE RESULT, THE APPEAL FILED BY THE ASS ESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED ACCORDINGLY ON 25-04 -2014. SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 25TH APRIL, 2014 GJ I.T.A. NO.624 /COCH/2013 9 COPY TO: 1. K.P. PAUL FOUNDATION, KUTTUKKARAN CENTRE, MAMANG ALAM, KOCHI-682 025. 2. THE COMMISSIONER OF INCOME-TAX-I, KOCHI. 3. THE COMMISSIONER OF INCOME-TAX, KOCHI. 4. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 5. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN