ACIT(Exemptions), Bhubaneswar V. M/s. People's Forum, Bhubaneswar

ITA 81/CTK/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7543 (ITAT-CUTTACK)
• Duration Of Justice: 8 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 10-11-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 09-03-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: D K PRADHAN
• Assessee Lawyers: S K AGARWAL
• Keywords: Business income; Charitable institution
• Section: 40A(3); 12A; 12AA; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CUTTACK SMC BENCH, CUTTACK BEFORE SHRI N.S SAINI, ACCOUNTANT MEMBER ITA NO.81/CTK/2016 ASSESSMENT YEAR : 2011 - 2012 ACIT (EXEMPTIONS), AAYAKAR BHAVAN, BHUBANESWAR. VS. M/S. PEOPLES FORUM, PLOT NO.HIG 44, DHARMA VIHAR, KHANDAGIRI, BHUBANESWAR PAN/GIR NO. AAATP 2214 R (APPELLANT ) .. ( RESPONDENT ) C.O.NO.02/CTK/2016 (RISING OUT OF ITA NO.81/CTK/2016) ASSESSMENT YEAR :2011 - 2012 M/S. PEOPLES FORUM, PLOT NO.HIG 44, DHARMA VIHAR, KHANDAGIRI, BHUBANESWAR VS. ACIT (EXEMPTIONS), AAYAKAR BHAVAN, BHUBANESWAR PAN/GIR NO. AAATP 2214 R (APPELLANT ) .. ( RESPONDENT ) ASSESSEE BY : SHRI S.K.AGARWAL, AR REVENUE BY : SHRI D.K.PRADHAN, DR DATE OF HEARING : 10 /11 / 2016 DATE OF PRONOUNCEMENT : 30 /11 / 2016 2 O R D E R THIS IS AN APPEAL FILED BY THE REVENUE AND CROSS OBJECTION FILED BY THE ASSESSEE AG AINST THE ORDER OF CIT(A) - 3, BHUBANESWAR , DATED 2 ND NOVEMBER, 2015 , FOR THE ASSESSMENT YEAR 2011 - 2012 . 2. THE GRIEVANCE OF THE REVENUE IN GROUND NOS.2 & 3 IS T HAT THE LD CIT(A) ERRED IN ALLOWING EXEMPTION UNDER SECTION 11 OF THE ACT IN VIEW OF AMENDED PROVISIONS OF SECTION 2(15) OF THE ACT. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A SOCIETY REGISTERED UNDER SOCIETIES REGISTRATION ACT, 1860 ON 27.12.1990. THE ASSESSEE SOCIETY IS ALSO REGISTERED U/S.12A OF THE I.T.ACT, 1961 W.E.F. 1.4.1995. THE ASSESSEE FILED THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2011 - 12 ON 11.11.2011 SHOWING TOTAL INCOME AT NIL. THE ASSESSING OFFICER VERIFIED THE OBJEC TS OF THE SOCIETY AND AUDITED ACCOUNTS FILED ALAONGWITH RETURN OF INCOME AND FOUND THAT THE ASSESSEE SOCIETY WAS UNDERTAKING MICRO FINANCE ACTIVITIES UNDER THE BANNER 'MISSIO - ANNAPURNA', BESIDES RUNNING A CENTRE FOR MENTALLY ILL AND DESTITUTE WOMAN IN THE NAME & STYLE ' MIS SION ASHRA'. F OR THE PURPOSE OF CARRYING MICRO F INANCE ACTIVITIES, THE ASSESSEE SOCIETY AVAILED LOANS FROM VARIOUS NATIONALIZED BANKS AS WELL AS OTHER FINANCIAL INSTITUTIONS SUCH AS ALLAHABAD BANK, ORIENTAL BANK OF COMMERCE, BANK OF INDIA, SBI, PUNJAB NATIONAL BANK, HDFC BANK LTD., DEVELOPMENT CREDIT BANK LTD. , FRIENDS OF WWB INDIA, SIDBI A ND RASTRIYA MAHILA KOSH. F ROM TH E LOAN SANCTION LETTERS 3 THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE SOCIETY HAS UNDERTAKEN ALL RESPONSIBILIT IES OF AVAILING LOANS @10% TO 13% BY OFFERING COLLATERAL SECURITIES OF ITS OWN, THAT THE LOANS WERE ADVANCED TO S ELF H ELP G ROUP S (SHGS) AT A .HIGHER RATE OF INTEREST @24% TO 26% PER ANNUM. THEREFORE, THE ASSESSING OFFICER OPINED THAT SUCH FINANCIAL TRAN SACTION OF THE SOCIETY WOULD CLEARLY INDICATE THAT THE SOCIETY WAS PRIMARILY CARRYING ON SOME ACTIVITIES OF FINANCING TO GROUPS BY CHARGING HIGHER RATE OF INTEREST AND ALSO, PROCESSING FEES , SECURITY, INSURANCE FEES AND MEMBERSHIP FEES FROM THE BENEFICIAR IES AND SUCH A CTIVITIES RESULTED IN COMMERCIAL SURPLUS OVER THE YEARS. THE A SSESSING OFFICER VERIFIED THE OF OTHER EXPENSES OF ACTIVITIE S CARRIED OUT BY THE ASSESSEE SOCIETY OTHER THAN ACTIVITIES OF MICRO FINANCING AND FOUND THAT THE CORRESPONDING RECEIPTS AND EXPENSES ON OTHER ACTIVITIES CONSTITUTE A VERY SMALL PORTION OF TOTAL RECEIPTS AND EXPENSES INCURRED DURING THE F INANCIAL Y EAR .2010 - 11 RELEVANT TO THE A SSESSMENT Y EAR 2011 - 12 AND THAT THE MAGNITUDE OF WORKS DONE BY THE ASSESSEE SOCIETY ESTABLISHES THAT THE SOCIETY PRIMARILY CARRIED OUT ACTIVITY OF MICRO FINANCE IN THE YEAR UNDER REFERENCE. THE ASSESSING O FFICER THEN EXTRACTED THE NET SURPLUS FOR THE ASSESSMENT YEARS 2009 - 2010 AND 2011 - 2012 OF THE ASSESSEE SOCIETY GENERATED FROM MICR O FINANCE ACTIVITIES AND STATED THAT THESE REVEALED THE TRUE NATURE OF FUNCTIONING OF THE SOCIETY IMPUTING THAT LOANS WERE OBTAINED AT LOWER RATE OF INTEREST FROM THE BANKS AND PROVIDED TO RURAL SHGS AT HIGHER RATE OF INTEREST AND THAT SUCH PROCESS 4 OF BANKING BUSINESS GUISED AS NBFO ACTIVITIES RESU LTED IN SUBSTANTIAL COMMERCIAL SURPLUS OVER THE YEARS. T HEREFORE, THE ASSESSING OFFICER ASSESSED RS.24,36,117/ - AS BUSINESS INCOME OF THE ASSESSEE. 4. BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE THE LD CIT(A). 5. THE ARGUMENTS OF THE ASSESSEE BEFORE THE LD CIT(A) WAS AS UNDER: TH E ARGUMENT OF THE APPELLANT IS THAT MICRO FINANCING ACTIVITIES ARE FALLING UNDER THE 1 ST LIMB OF THE DEFINITION OF CHARITABLE PURPOSE WITHIN THE MEANING OF SECTION 2(15) OF THE ACT AND IN SUPPORT OF THIS ARGUMENT THE APPELLANT REFERRED TO THE PARA NO. 2.1 AND 2.2 OF THE CIRCULAR NO. 11 DATED 19.12.2008 ISSUED BY THE CBDT. THE PARA NO 2.1 & 2. 2 ARE AS FOLLOWS; 2.1 THE NEWLY INSERTED PROVISO TO SECTION 2(15) WILL NOT APPLY IN RESPECT OF THE FIRST THREE LIMBS OF SECTION 2(15), I.E. RELIEF OF THE POOR, EDUCATION OR MEDICAL RELIEF. CONSEQUENTLY, WHERE THE PURPOSE OF A TRUST OR INSTITUTION IS RELIEF OF THE POOR, EDUCATION OR MEDICAL RELIEF, IT WILL CONSTITUTE CHARITABLE PURPOSE EVEN IF IT INCIDENTALLY INVOLVES THE CARRYING ON OF COMMERCIAL ACTIVITIES'. 2.2 'RELIEF OF THE POOR' ENCOMPASSES A WIDE RANGE OF OBJECTS FOR THE WELFA RE OF THE ECONOM ICALLY AND SOCIALLY DISADVANTAGED OR NEEDY. IT WILL, THEREFORE, INCLUDE WITHIN ITS AMBIT PURPOSES SUCH AS RELIEF TO DESTITUTE, ORPHANS OR THE HANDICAPPED, DISADVANTAGED WOMEN OR CHILDREN, SMALL AND MARGINAL FARMERS, INDIGENT ARTISANS OR SENIOR CITIZENS IN NEED OF AID. ENTITIES WHO HAVE THESE OBJECTS WILL CONTINUE TO BE ELIGIBLE FOR EXEMPTION EVEN IF THEY INCIDENTALLY CARRY ON A COMMERCIAL ACTIVITY, SUBJECT, HOWEVER, TO THE CONDITIONS STIPULATED UNDER SECTION 11(4A) OR THE SEVENTH PROVISO TO SECTION 10(23C) WHICH ARE THAT: (I) THE BUSINESS SHOULD BE INCIDENTAL TO THE ATTAINMENT OF THE OBJECTIVES OF THE ENTITY, AND (II) SEPARATE BOOKS OF ACCOUNT SHOULD BE MAINTAINED IN RESPECT OF SUCH BUSINESS. SIMILARLY, ENTITIES WHOSE OBJECT IS 'EDUCATION' OR 'MEDICAL REL IEF WOULD ALSO CONTINUE TO BE ELIGIBLE FOR EXEMPTION AS CHARITABLE INSTITUTIONS EVEN IF THEY INCIDENTALLY CARRY ON A COMMERCIAL ACTIVITY SUBJECT TO THE CONDITIONS MENTIONED ABOVE. 5 FURTHER THE APPELLANT'S ARGUMENT IS THAT SINCE IT WORKS FOR THE WELFARE OF THE ECONOMICALLY AND SOCIALLY DISADVANTAGED OR NEEDY WOMEN AND STARTED THE MICRO FINANCE PROGRAM BY PROMOTING AND NURTURING SELF HELP GROUPS IN DIFFERENT VILLAGES AND STARTED THE LIVELIHOOD PROMOTION PROGRAM THROUGH EXTENDING FINANCIA L PRODUCTS THROUGH A SPECIAL DRIVE NAMED AS 'MISSION ANNAPURNA'. FURTHER, IT PROVIDES ADEQUATE TRAINING, CAPACITY BUILDING, BUSINESS SUPPORT, MARKET LINKAGES AND FINANCIAL SUPPORT IN THE FORM OF LOAN & GRANT. THIS ACTIVITY IS A SELF SUSTAINED PROGRAM AND LOANS ARE MOBILIZED FROM BANKS AND ARE FURTHER LEND TO THE POOR AND VULNERABLE WOMEN AT AN INTEREST RATE WHICH COVER THE COST OF THE ORGANIZATION LIKE SALARY, ADMINISTRATIVE EXPENSES AND COST OF PROCURING THE LOAN FROM THE BANK. THESE LOANS ARE EXTENDED TO THEM WITHOUT COLLATERAL OR MORTGAGE, FOR PURSUANCE OF THEIR ECONOMIC ACTIVITY AS THEY DO NOT HAVE ANY PROPERTY OR VALUABLE ARTICLE TO BE BANKABLE BY THE BANKS. THE LOANS WERE GIVEN TO THE WEAKER SECTIONS OF THE SOCIETY TO MEET TH EI R URGENT NEEDS. THIS IS VERY HIGH RISK ACTIVITY AS IT DOES NOT HAVE COLLATERAL, THIS IS ONLY MEANT TO STRENGTH THE FINANCIAL AND SOCIAL STATUS OF THE POOR WOMEN OF THE STATE. MOST OF THE TIME, THESE POOR AND WOMEN FROM THE WEAKER SECTIONS OF THE SOCIET Y FAILED TO REPAY THESE LOANS WHICH ULTIMATELY LEAD TO THE WRITE - UP OF THE LOAN. MEANS, THE LOANS GRANTED TO THESE POOR WOMEN DO NOT HAVE A GUARANTEE OF RETURN FOR WHICH THE O RGANIZATION MADE PROVISIONS TO COVER THESE COSTS. THE ORGANIZATION CHARGES MINIMU M INTEREST WHICH IS ACCEPTED BY THE POO R AND WEAKER SECTION HAPPILY AS THEY WOULD HAVE NOT GOT A COLLATERAL FREE LOAN OTHERWISE. THIS ACTIVITY IS PURELY A DEVELOPMENT ACTIVITY FOR THE PURPOSE OF ALLEVIATING POVERTY BY SUPPORTING THEM THROUGH ADVANCEMENT OF LOAN, TRAINING CAPACITY BUILDING AND MARKET SUPPORT AND SETTING OF THEIR OWN ENTERPRISE. THE ORGANIZATION IS HELPING THE NEEDY PEOPLE OF THE SOCIO - ECONOMIC WEAKER SECTION OF THE SOCIETY AS THEY ARE NOT FINANCIALLY INCLUDED AND NO ONE IS GOING TO F INANCE THEM TO MEET THEIR REQUIREMENT OTHERWISE. THE ALTERNATIVE AVAILABLE TO THIS WEAKER SECTION OF THE SOCIETY IS MONEY LENDER WHO CHARGES AVERAGE INTEREST OF 120% PER YEAR. THE ORGANIZATION CHARGES ONLY A MARGIN OF 10.5% P. A. FOR THIS ACTIVITY WHICH IS ALSO COVERED ALL EXPENSES AND LESS THAN THE RESERVE BANK OF INDIA RECOMMENDED INTEREST RATE. SO, THIS ACTIVITY OF SUPPORTING FINANCE OF GIVING LOAN TO THE POOR AND WEAKER PEOPLE IS A PURELY DEVELOPMENT ACTIVITY AND NOT A BUSINESS ACTIVITY OF THE O RGNISATION AT ANY MEANS. THE ADDITIONAL SURPLUS CREATED OUT OF THIS ACTIVITY IS ACTIVITY IS AGAIN REDEPLOYED FOR THE DEVELOPMENT FOR THE SAME SET OF PEOPLE. SO, THIS ACTIVITY IS SQUARELY COVERED AS PER THE PARA NO. 2.2 OF THE ABOVE REFERRED CIRCULAR AND IT IS CHARITABLE IN NATURE. IN SUPPORT OF THIS ARGUMENT FURTHER, THE APPELLANT REFERRED TO THE JUDGMENTS OF DIFFERENT ITATS NAMELY DISHA INDIA MICRO CREDIT VS. CIT, MUZAFFARNAGAR, VIDE ITA NO. 1374/DEL/2010 AND GRAM UTTHAN VS. CIT, VIDE ITA NO. 396/CTK/201 0. BASING ON THE ABOVE SUBMISSION THE APPELLANT CLAIMS TO BE FALLING UNDER THE FIRST LIMB OF DEFINITION OF CHARITABLE PURPOSE. THEREAFTER, THE APPELLANT, IN GROUND NO. 3 CLAIMS THAT IT HAD EXTENDED TH< FINANCE TO DIFFERENT SHGS BASING ON THE RBI GUIDELINES AND OF THE SANCTIONING BANKS/FIS. IN SUPPORT OF THE ARGUMENT IT HAS SUBMITTED THE COPIES OF TH< 6 SANCTION LETTER OF BANKS/FIS. FURTHER, IT CLAIMED THAT IT SANCTIONED AND DISBURSE THE LOAN AS PER THE NO RMS OF THE SANCTION LETTER AND IT DOES NOT ENJOYS THE LIBERT Y TO EXTEND THE FINANCE AS PER ITS SWEET WILL OR AT OWN DESIRE. THE APPELLANT CITE OTHER TWO CASES OF ITAT IN SUPPORT OF JUSTIFICATION OF MICRO FINANCING ACTIVITY C HARITABLE ACTIVITIES NAMEL Y ADIT (EXEMPTIONS) VS. BHARATHA SWAMUK' SA MSTHE, (2009) 28 DTR (BANG.)(TRIB) 113 AND SPANDANA VS. ACIT, (2010) 4 (VISAKHA)(TRIB) 153. FURTHER THE LD.A.R. SUBMITTED THAT IN APPELLANT'S OWN CASE FOR IMMEDIATE TWO PRECEDING ASSESSMENT YEAR I.E. AY 2009 - 10 &. 2010 - 11 UNDER SIMILAR FINDING THE AO DISALLOWED THE BENEFITS OF SECTION 11 AND TAXED THE SURP LUS GENERATED OUT OF THE MICRO FINANCING ACTIVITIES. IN APPEAL, CIT(APPEALS) - BHUBANESWAR WHILE ANALYZING THE FACTS OF THE APPELLANT AND COMPARING STATISTICAL DATA OF OTHER NGO OPERATING IN THE SIMILAR ACTIVITIES HELD IN NO.0139/2011 - 12 & ITA NO.0095/2012 - 13 DT.27.02.2015 THAT THE ACTIVITIES MIRCRO FINANCE AND MICRO CREDIT BEING CARRIED OUT BY THE A PPELLANT ARE IN TRUE NATURE AND DEFINITION OF CHARITABLE ACTIVITY AS DEFINED U/S.2(15) OF THE IT. ACT BEING NON - COMMERCIAL IN INTENT, PU RPOSE AND CONTENT (AS MANDATED AMENDED FIRST PROVISO TO THE SAID SECTION) AN D ALSO SINCE THEY FALL WITHIN THE DEFINITION OF ADVANCEMENT OF GENERAL PUBLIC UTILITY. 6. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, LD CIT(A) HELD AS UNDER: SUBMISSION MADE BY THE LD. A.R. WAS CONSIDERED CAREFULLY. . THE ALLEGATION LE AD ING TO THE ALLEGED ACTION IS THAT THE APPELLANT ENGAGED IN MONEY LENDING ACTIVITIES FOR PURPOSE OF EARNING PROFIT. SIMILAR ADDITION WAS MADE TO THE TOTAL INCOME IN THE A.Y.2009 - 10 & A.Y. 2010 - 11. THE CIT(A) - II, BHUBANESWAR ALLOWED THE APPEAL OF THE APP ELLANT AFTER ANALYZING PROVISIONS OF SEC.2 (15), AMENDED PROVISIONS INTRODUCED TO THE SECTION VIDE FINANCE ACT, 2008,CIRCULAR NO.11 OF 2008 DT.19.12.2008 ETC., FACTS OF THE APPELLANT'S CASE, COMPARING THE STATISTICAL DATA OF OTHER NGOS OPERATING IN SIMILAR ACTIVITIES AND AVERAGE APR. THE RELEVANT PORTION OF THE ORDER IN ITA NO.0139/2011 - 12 FOR IMMEDIATELY PRECEDING YEAR RELEVANT TO THE A.Y.2010 - 11 IS REPRODUCED HEREUNDER: - '5. / HAVE CONSIDERED THE CONTENT AND SUBSTANCE OF THE ASSESSMENT ORDER AND THE GROUN DS OF APPEAL PREFERRED BY THE APPELLANT, FOLLOWING WHICH I ARRIVE AT THE FOLLOWING FINDINGS/DECISIONS. THE PRINCIPAL DISPUTE BETWEEN THE AO AND THE APPELLANT IN THIS CASE IS WHETHER ACTIVITIES OF THE NATURE OF MICRO - FINANCE AND MICRO - CREDIT ARE CHARITABLE IN NATURE AND SUBSTANCE, AND WHETHER THESE CAN BE CONSIDERED AS BEING CARRIED OUT FOR 'CHARITABLE PROPOSE' AS DEFINED U/S 2(15) OF THE ACT. A) IT IS THE ARGUMENT OF THE APPELLANT THAT THE PROVISO TO THE SAID SECTION INTRODUCED VIDE T HE FINANCE ACT, 2008 W.E.F SOUGHT TO KEEP OUT FROM THE AMBIT OF TAX EXEMPTION ALL ACTIVITIES TOWARDS COLOURABLE OBJECTIVES UNDER THE (RESIDUAL) HEAD 'ADVANCEMENT OF GENERAL PUBLIC UTILITY' (WHICH BEING EXTREMELY GENERIC IN SCOPE WAS PRONE TO MISUSE)AND NOT ACTIVITIES TOWARDS OBJECTIVES THAT FELL UNDER THE CATEGORY - HEAD (SIC) 'RELIEF OF THE IMPLICATION OF THE APPELLANT WAS THAT THE MICRO - FINANCE AND MICRO - CREDIT ACTIVITIES CARRIED OUT BY IT FELL UNDER THE LATTER CATEGORY AND WERE THEREFORE EMINENTLY ELIGIBLE FOR TAX EX EMPTION U/S 2(15) R.W.S 11 OF THE ACT. 7 B) TO PRESENT AND UNDERSTAND THIS ARGUMENT FROM A CORRECT PERSPECTIVE, IT IS BEST TO GO TO THE PARAGRAPH 180 OF THE FINANCE ACT, 2008 THAT SPECIFIES THE FOLLOWING REASON FOR INTRODUCING THE FIRST PROVISO (EMPHASES IN BOLD ITALICS SUPPLIED BY ME): ''CHARITABLE PURPOSES' INCLUDES RELIEF OF THE POOR, EDUCATION, MEDICAL RELIEF AND ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY. THESE ACTIVITIES ARE TAX EXEMPT AS THEY SHOULD BE. HOWEVER SOME ENTITIES CARRYING ON REGULAR TRAD E, COMER OR BUSINESS OR PROVIDING SERVICES IN RELATION TO ANY TRADE, COMMERCE OR BUSINESS AND EARNING INCOMES HAVE SOUGHT TO CLAIM THEIR PURPOSES WOULD ALSO FALL UNDER 'CHARITABLE PURPOSES'. OBVIOUSLY, THIS WAS NOT THE INTENTION OF PARLIAMENT AND HENCE I P ROPOSE TO AMEND THE LAW TO EXCLUDE THE AFORESAID CASES. HOWEVER GENUINE CHARITABLE ORGANIZATIONS WILL NOT IN ANY WAY AFFECTED.' IN THE ABOVE, THE HON 'BLE UNION FINANCE MINISTER EMPHASIZED THE POSITION STIPULATED U/S 2(15) THAT THE LEGAL TERM 'CHARITABLE P URPOSE ' INCLUDED 4* SEPARATE LIMBS THAT INCLUDED BOTH A) RELIEF OF THE POOR ; AND B) THE ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY . [*NB: FROM 01.04.2009, THE DEFINITION OF 'CHARITABLE PURPOSE' ADDED 2 NEW LIMBS (NUMBERS 4 AND 5) BEING A) THE PRESERVATION OF ENVIRONMENT (INCLUDING WATERSHEDS, FORESTS AND WILDLIFE); AND B) PRESERVATION OF MONUMENTS OR PLACES, OR OBJECTS OF ARTISTIC OR HISTORIC INTEREST. HOW THESE ARE NOT RELEVANT IN THE CONTEXT OF THE INSTANT CASE. THIS WOULD ALSO MEAN THAT 'ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY' WOULD REPRESENT THE RESIDUAL 6 TH LIMB OF THE DEFINITION OF 'CHARITABLE ACTIVITY AS PER SECTION 2(15) OF THE ACT]. C) IN ORDER TO FURTHER CLARIFY THE ABOVE, THE CIRCULAR NO. 11 OF 2008 DATED 19.12 .2008 [CBDT CIRCULAR NO. 11/2008, F.NO. 134/34/2008 - TPL DATED 19.12.2008] WAS ISSUED BY THE CBDT WHEREIN THE IMPLICATIONS OF THE AMENDMENT WERE GIVEN. 'THE NEWLY INSERTED PROVISO TO SECTION 2(15) WILL NOT APPLY IN RESPECT OF THE FIRST THREE LIMBS OF SECTIO N 2(15) I.E. RELIEF OF THE POOR, EDUCATION, OR MEDICAL RELIEF. ANY COMMERCIAL ACTIVITIES IN CONNECTION WITH THESE THREE ACTIVITIES WILL COME UNDER 'CHARITABLE ACTIVITIES ''. THIS MEANS THAT EVEN IF TAX EXEMPT ENTITY SUCH AS A CHARITABLE TRUST OR A REGISTER ED SOCIETY WERE TO CARRY OUT INCIDENTAL COMMERCIAL ACTIVITIES WHILE CARRYING OUT ACTIVITIES FALLING WITHIN THESE FIRST 3 LIMBS AS ABOVE, TAX EXEMPTION U/S 11 OR U/S 10(23C) OF THE ACT COULD STILL BE AVAILABLE AND APPLICABLE. IN COROLLARY, THIS NEWLY INSERT ED PROVISO TO SECTION 2(15) WILL APPLY ONLY TO THOSE ENTITIES WHOSE PURPOSE WOULD BE THAT STATED IN THE SIXTH AND LAST LIMB OF SECTION 2(15) BEING 'ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY'. SUCH ENTITIES WILL NOT BE ELIGIBLE FOR EXEMPTION U/S 11 OR 10(23C) OF THE ACT IF THEY CARRY OUT COMMERCIAL ACTIVITIES. D) WE THEREFORE NEED TO KNOW WHAT WE UNDERSTAND BY THE PHRASE 'RELIEF OF THE POOR'. THE OXFORD DICTIONARY DEFINES THIS TO MEAN 'FINANCIAL ASSISTANCE GIVEN TO THE POOR FRO M STATE OR LOCAL COMMUNITY FUNDS'. THE MERRIAM - WEBSTER DICTIONARY DEFINES IT TO MEAN 'RELIEF OR ASSISTANCE USUALLY ADMINISTERED BY LOCAL OFFICIALS WITH FUNDS FROM THE LOCAL TREASURY FOR THE AID OF THE NEEDY IN A COMMUNITY'. IN EITHER DEFINITION, THE COMMO N FACTORS ARE THAT THE ASSISTANCE OR RELIEF PROVIDED IS COST - FREE, SUCH AS IN GRANTS, AND THE FACT THAT THE GOVERNMENT OR THE COMMUNITY IS RESPONSIBLE FOR THE SAME. GOING BY THE SAME, THE ACTIONS AND ACTIVITIES OF A PRIVATE OPERATOR OF WHATEVER NATURE PROV IDING FUNDS TO THE TARGETED 'POOR' OR THE 'NEEDY' AT A COST BEING INTEREST MAY NOT CONSTITUTE 'RELIEF TO THE POOR'. THIS IS DESPITE THE FACT THAT THE GOVERNMENT OR THE COMMUNITY HAS EXEMPTED SUCH OPERATOR FROM TAXATION, THEREBY CLOAKING IT WITH AN IMPLIED SANCTION THAT THESE REPRESENTED FUNDS OF THE COMMUNITY HELD UNDER TRUST, ALBEIT A PRIVATE TRUST. IF SUCH PRIVATE OPERATOR NEEDED TO CLAIM THAT ITS ACTIVITIES CONSTITUTED 'RELIEF TO 8 THE POOR', THEN THE LOANS/GR ANTS/PAYMENTS/ADVANCES MADE TO THE TARGET DEMOGRAPHIC SEGMENT(S) NEED TO BE AT RATES THAT ADD - ON TO THE COST OF OBTAINING THE FUNDS ONLY SUCH PREMIUMS AS TO COVER ITS NECESSARY OPERATING EXPENSES. THIS WOULD MEAN THAT THE LOANS/GR ANTS/PAYMENTS/ADVANCES WOULD BE MADE EFFECTIVELY AT THE INTERNAL COSTS OF OBTAINING, MAINTAINING AND DISBURSING SUCH LOANS/GRANTS/PAYMENTS/ADVANCES TO THE BENEFICIARIES. THE GENERATION OF ANY SURPLUS OVER AND ABOVE SUCH COSTS (INTEREST AMOUNTS PAID PLUS TH E PREMIUM TOWARDS OPERATING COSTS) WOULD CONSTITUTE A COMMERCIAL AND/OR BUSINESS SURPLUS IN THE HANDS OF THE PRIVATE OPERATOR, AS SUCH FUNDS REPRESENTED THE EARNINGS OF THE PRIVATE OPERATOR THAT WERE NOT AVAILABLE TO THE GOVERNMENT OR THE COMMUNITY AT LARG E. GOING BY THIS YARDSTICK, IT DOES NOT APPEAR THAT THE APPELLANT'S IMPUGNED ACTIVITIES FALL WITHIN THE DEFINITIONAL AMBIT OF 'RELIEF TO THE POOR' SINCE THE APPELLANT HAS BEEN EARNING SYSTEMATIC SURPLUSES OVER THE YEARS. E) TO ATTEND TO AND ADDRESS ANY ALTERNATIVE ARGUMENT BY THE APPELLANT THAT THE LOANS/GRANTS/ PAYMENTS.' ADVANCES MADE BY IT FELL UNDER THE AMBIT OF 'RELIEF OR 'ASSISTANCE' PER SE. THE DEFINITIONS OF THESE TERMS FROM GO O GLES ONLINE CONTENT - AGGREGATOR DICTI ONARY IS PROVIDED AS FOLLOWS: RELIEF IS DEFINED AS FINANCIAL OR PRACTICAL ASSISTANCE GIVEN TO THOSE IN SPECIAL NEED OR DIFFICULTY WHILE ASSISTANCE IS DEFINED AS THE PROVISION OF MONEY, RESOURCES, OR INFORMATION TO HELP SOMEONE. THE APPELLANT WAS P ROVIDED FINANCIAL AND PRACTICAL ASSISTANCE TO SPECIFIED TARGET GROUPS MOSTLY IN RURAL AREAS AND ALSO PROVIDED MONEY AND RESOURCES TO SUCH GROUPS, ALBEIT AT A COST BEING INTEREST. CONSEQUENTLY, THE APPELLANT'S ACTIVITIES CAN BE CONSIDERED TO FALL UNDER THE CATEGORY - AMBIT OF 'RELIEF' OR 'ASSISTANCE' PER SE, BUT CERTAINLY NOT UNDER THAT OF 'RELIEF TO THE POOR'. F) THE PHRASE 'RELIEF TO .HE POOR' IN GENERAL PARLANCE ENCOMPASSES A WIDE RANGE OF OBJECTS FOR THE WELFARE OF THE ECONOMICALLY AND SOCIALLY DISADVANTAGED OR THE NEEDY AND WILL INCLUDE WITHIN ITS AMBIT ACTIVITIES SUCH AS RELIEF TO: A) THE DESTITUTE, THE ORPHANS OR THE HANDICAPPED; B) DISADVANTAGED WOMEN OR CHILDREN C) SMALL AND MARGINAL FARMERS D) INDIGENT ARTISANS OR E) SENIOR CITIZENS IN NEED OF HELP. ENTITIES WHO WORK TOWARDS THESE OBJECTS WILL CONTINUE TO BE ELIGIBLE FOR TAX EXEMPTION EVEN IF THEY INCIDENTALLY CARRY ON A COMMERCIAL ACTIVITY SUBJECT TO THE CONDITIONS STIPULATED U/S 10(23C) OR 11(4A) WHICH STATE THAT: (I) THE BUSINESS SHOULD BE INCIDENTAL TO THE ATTAINMENT OF THE OBJECTS OF THE ENTITY; (II) (II) SEPARATE BOOKS OF ACCOUNTS SHOULD BE MAINTAINED IN RESPECT OF SUCH BUSINESS. G) SINCE THE CBDT'S CIRCULAR REFERRED ABOVE IS BINDING ON ALL OFFICERS AND PROCEEDINGS OF THE DEPARTMENT, WHAT WE REALLY NEED TO DETERMINE AND DECIDE IN THE CONTEXT OF THE INSTANT CASE OF THE APPELLANT ARE : (I) WHETHER THE MICRO - FINANCE AND MICRO - CREDIT ACTIVITIES CAN BE CONSIDERED TO BE ACTIVITIES THAT TARGET THE OBJECTIVE 'RELIEF OF THE POOR' II) WHETHER THE MICRO - FINANCE AND MICRO - CREDIT ACTIVITIES AS CARRIED OUT BY THE APPELLANT CAN BE CONSIDERED AND HELD TO BE ACTIVITIES THAT TARGET THE OBJECTIVE 'RELIEF OF THE POOR' (II) IF THE ANSWERS TO THE TWO QUESTIONS ABOVE ARE BOTH IN THE AFFIRMATIVE, AND IF ANY PART OF THE ACTIVITIES OF THE APPELLANT CAN BE CONSIDERED TO BE BUSINESS IN NATURE, WHETHER SUCH BUSINESS ACTIVITY WAS INCIDENTAL TO THE ATTAINMENT OF THE OBJECTS OF 9 THE APPE LLANT; AND B: WHETHER SEPARATE BOOKS OF ACCOUNTS HAVE BEEN MAINTAINED IN RESPECT OF SUCH BUSINESS ACTIVITY. H) MICROCREDIT IN MODERN FINANCE AND COMMERCE IS DEFINED AS THE EXTENSION OF VERY SMALL LOANS (MICROLOANS) TO POOR BORROWERS WHO TYPICALLY LACK COL LATERALS (TO OFFER IN EXCHANGE SUPPORT), STEADY EMPLOYMENT AND A VERIFIABLE CREDIT HISTORY. THE MICROCREDIT STRATEGY HAS BEEN DESIGNED (IN THEORY AT LEAST) NOT ONLY TO: A) SUPPORT ENTREPRENEUR SHIP AND B) ALLEVIATE POVERTY, BUT ALSO IN MANY CASES TO: C) EM POWER WOMEN AND D) UPLIFT ENTIRE COMMUNITIES BY EXTENSION. MICROCREDIT IS PART OF MICRO FINANCE, WHICH (IN THEORY AT LEAST) PROVIDES A WIDER RANGE OF FINANCIAL SERVICES, ESPECIALLY SAVINGS ACCOUNTS, TO THE POOR. MICROCREDIT IS WIDELY USED IN DEVELOPING COU NTRIES AND IS PRESENTED BY ITS PROMOTERS, SYMPATHIZERS AND ADMIRERS AS HAVING 'ENORMOUS POTENTIAL AS A TOOL FOR POVERTY ALLEVIATION.' I) MANY CRITICS HOWEVER ARGUE THAT MICROCREDIT AND MICROFINANCE STRATEGIES HAVE: A) NOT HAD A POSITIVE IMPACT ON GENDER R ELATIONSHIPS; B) DOES NOT ALLEVIATE POVERTY; C) HAVE LED MANY BORROWERS INTO A DEBT TRAP; AND D) CONSTITUTES A 'PRIVATIZATION OF WELFARE'. [NB: THE AO, THROUGH HIS COMMENTS AND OPINIONS IN THE ASSESSMENT ORDER ABOUT, INTER ALIA, THE COMMERCIAL NATURE OF TH E LENDING PRACTICES CARRIED OUT AND INTEREST DIFFERENTIALS EARNED BY THE APPELLANT, WAS BY IMPLICATION POINTING TO THE ALLEGED 'PRIVATE' NATURE A ND PROFIT EARNING MOTIVE' IN THE APPARENT 'WELFARE' INTENT OF THE APPELLANTS ACTIVITIES. J) THERE ARE TWO DIMENSIONS TO THIS INQUIRY: A) WHETHER MICRO - FINANCE HAS INDEED HELPED THE CASE FOR POVERTY ALLEVIATION AND THE CAUSE OF RELIEF TO THE POOR (WE CALL THIS THE EVIDENCE ALONG RESULTS OF CHARITABLE PURPOSE); AND B) WHETHER THERE HAS BEEN - AN D CONTINUES TO BE - COLOURABLE, UNSCRUPULOUS AND DISHONOURABLE INTENT ON THE PART OF THE PURVEYORS OF MICRO - FINANCE IN THEIR AVERRED STATEMENTS THAT THEY WERE WORKING IN THE AREA NOT FOR PROFIT BUT WITH ALTRUISTIC INTENT (WE CALL THIS THE EVIDENCE ALONG IN TENTS OF CHARITABLE PURPOSE) K) LET US FIRST EXAMINE THE EVIDENCE ALONG RESULTS FIRST. THE FIRST SCIENTIFIC (STATISTICALLY RANDOMIZED) EVALUATION OF MICROCREDIT, CONDUCTED BY ESTHER DUFLO AND OTHERS, SHOWED MIXED RESULTS: THERE WAS NO EFFECT ON HOUSEHOLD EXPENDITURE, GENDER EQUITY, EDUCATION OR HEALTH, BUT THE NUMBER OF NEW BUSINESSES INCREASED BY ONE THIRD COMPARED TO A CONTROL GROUP. IN A RESEARCH PAPER TITLED 'THE MIRACLE OF MICROFINANCE? EVIDENCE FROM A RANDOMIZED EVALUATION' [AUTHORS: ABHIJIT BANERJEE , ESTHER DUFLO, RACHEL GLENNERSTER AND CYNTHIA KINNAN), THE FIELD STUDY FOR WHICH WAS FUNDED BY THE ICICI BANK AND SPANDANA (A TRUST WORKING IN THE AREA OF MICROFINANCE), AND THE RESULTS AND FINDINGS OF WHICH HAVE BEEN PUBLISHED IN AMERICAN ECONOMIC JOURNA L: APPLIED ECONOMICS [2015] 7(1): 22 - 53, THE AUTHORS HAVE DETERMINED AS UNDER: (I) BUSINESS ACTIVITY: ACCESS TO CREDIT INCREASED SMALL BUSINESS INVESTMENT, BUT ONLY INCREASED THE PROFITS OF THE MOST PROFITABLE PRE - EXISTING BUSINESSES. AFTER 1.5 YEARS, TRE ATMENT HOUSEHOLDS WERE NO MORE LIKELY TO OWN A BUSINESS OR START NEW BUSINESSES, BUT THEY DID INVEST MORE IN EXISTING BUSINESSES. TO THE EXTENT THAT MICROCREDIT HELPED BUSINESSES, IT MAY HAVE HELPED THE MOST PROFITABLE BUSINESSES THE MOST. (II) HOUSEHOLD FINANCES: THOUGH MICROCREDIT ACCESS INCREASED INVESTMENT, IT DID NOT LEAD TO A SIGNIFICANT INCREASE IN INCOME. THERE WERE NO SIGNIFICANT DIFFERENCES IN TOTAL HOUSEHOLD EXPENDITURES (A PROXY FOR MATERIAL WELL - BEING) BETWEEN TREATMENT AND COMPARISON GROUPS A FTER 1.5 OR THREE YEARS. 10 (III) EDUCATION AND FEMALE EMPOWERMENT: RESEARCHERS FOUND LITTLE EVIDENCE TO SUGGEST THAT MICROCREDIT EMPOWERED WOMEN OR IMPROVED INVESTMENT IN CHILDREN'S EDUCATION IN THIS CONTEXT. WOMEN IN TREATMENT AREAS WERE MORE LIKELY TO MANAGE MORE SELF - EMPLOYMENT ACTIVITIES THAN THOSE IN COMPARISON AREAS, BUT THEY WERE NO MORE LIKELY TO MAKE DECISIONS ABOUT HOUSEHOLD SPENDING, INVESTMENT, SAVINGS, OR EDUCATION. L ) IT DOES APPEAR FROM THE ABOVE THAT THERE IS VERY LITTLE EMPIRICAL EVIDENCE ALONG RESULTS THAT MICRO - FINANCE ACTIVITIES HAVE CHANGED THE CONDITIONS OF THE POOR. IN AN INTERVIEW TO THE BBC, DR. DEAN KARLAN, PROFESSOR OF ECONOMICS, YALE UNIVERSITY, USA HELD THAT THAT WHILST MICROCREDIT GENERATES BENEFITS IT WAS NOT THE PANACEA THAT IT HAS BEEN PURPORTED TO BE. HE ADVOCATED GIVING THE POOR ACCESS TO SAVINGS ACCOUNTS. M) ALONG THE EVIDENCE ALONG INTENTS FRONT, MICROCREDIT ORGANIZATIONS WERE INITIALLY CREATED AS ALTERNATIVES TO THE 'LOAN - SHARKS' KNOWN TO TAKE ADVANTAGE OF CLIENTS. INDE ED, MANY MICRO - LENDERS BEGAN AS NON - PROFIT ORGANIZATIONS AND OPERATED WITH GOVERNMENT FUNDS OR PRIVATE SUBSIDIES. HOWEVER, AS IS THE CASE WHEN DEALING WITH LARGE SUMS OF MONEY, THE HUMAN MIND IS PROGRAMMED TOWARDS SATISFACTION MAXIMIZATION, COMFORT AND PROFITEERING ; IT IS OFTEN DIFFICULT TO KEEP GREED AND RENT - SEEKING DRIVES FOR AWAY. BY THE 1980S THE FINANCIAL SYSTEMS APPROACH INFLUENCED BY NEO - LIBERALISM HAD BECOME THE DOMINANT IDEOLOGY AMONG MICROCREDIT ORGANIZATIONS. FOR INSTANCE, UNIT DESA ( BRI - UD) WITHIN THE BANK RAKYAT INDONESIA, COMMERCIALIZED MICRO - CREDIT BY OFFERING 'KUPEDES' MICROLOANS BASED ON MARKET INTEREST RATES. IRONICALLY, MANY MICROCREDIT ORGANIZATIONS NOW FUNCTION AS INDEPENDENT BANKS. THIS HAS LED TO THEIR CHARGING HIGHER INTEREST RATES ON LOANS AND PLACING MORE EMPHASIS ON SAVINGS PROGRAMS. [NB: UNIT DESA OF INDONESIA CHARGED IN EXCESS OF 20 PER CENT ON SMALL BUSINESS LOANS]. THE APPLICATION OF NEOLIBERAL ECONOMICS TO MICROCREDIT HAS G ENERATED MUCH DEBATE AMONG SCHOLARS AND DEVELOPMENT PRACTITIONERS, WITH SOME CLAIMING THAT MICROCREDIT BANK DIRECTORS, SUCH AS MUHAMMAD YUNUS [THE PIONEER OF MICRO - FINANCE AND THE NOBEL LAUREATE FROM BANGLADESH], APPLY THE PRACTICES OF LOAN SHARKS FOR THEI R PERSONAL ENRICHMENT. THERE WAS ALSO A WALL - STREET STYLE SCANDAL INVOLVING THE MEXICAN MICROCREDIT ORGANIZATION COMPARTAMOS. N) HOWEVER, THERE IS SOMETHING THAT CAN BE REFERRED TO AS 'ETHICAL MICRO - LENDING' THAT CAN GO HAND - IN - HAND WITH THE MOTIVE OF INV ESTOR PROFITS. ACCORDING TO MOHAMMED YUNUS (REFERRED SUPRA) 'MICROCREDIT SHOULD BE SEEN AS AN OPPORTUNITY TO HELP PEOPLE GET OUT OF POVERTY IN A BUSINESS WAY, BUT NOT AS AN OPPORTUNITY TO MAKE MONEY OUT OF POOR PEOPLE.' THE DEBATE OVER PRESERVING THE FIELD 'S SAINTLY AURA CENTRES ON HOW MUCH INTEREST AND PROFITS ARE ACCEPTABLE AND WHAT CONSTITUTES EXPLOITATION. O) IN THE INSTANT CASE, IT HAS BEEN DETERMINED BY THE AO FROM THE RECORDS AND THE SUBMISSION OF THE APPELLANT THAT THE INTEREST DIFFERENTIALS E ARNED BY THE APPELLANT THROUGH ITS MICRO - FINANCE ACTIVITIES RANGED AROUND 13% TO 14% [24%> TO 26% PER ANNUM EARNED ON LOANS ADVANCED TO SHGS LESS 10 TO 13% PER ANNUM PAID FOR LOANS SUPPORTED BY ITS OWN COLLATERAL SECURITIES]. THE APPELLANT HAS STATED IN ITS S UBMISSIONS THAT IT HAD OBTAINED LOANS FROM DIFFERENT FINANCIAL INSTITUTIONS AND LENT TO SELF HELP GROUPS (SHGS)JLGS AT A HIGHER RATE OF 10.5% THAN THE RATE AT WHICH THE BORROWED WHICH WAS 'LESS THAN THE RESERVE BANK OF INDIA RECOMMENDED INTEREST RATE'. WHEN TAKEN TOGETHER, THESE MEAN AN EFFECTIVE INTEREST DIFFERENTIAL EARNED BETWEEN 10.5% TO 14% PER ANNUM. 11 WHETHER THESE EARNINGS ARE EXTORTIONIST IN NATURE IS TO BE DECIDED IN LINE WITH WHAT THE MARKET YARDSTICKS STATE ABOUT THE INTEREST EA RNINGS BASED ON THE LENDING RATES OF SIMILAR SUMS OF MONEY BY COMMERCIAL ORGANIZATIONS OF A SIMILAR NATURE, OPERATING ON SCALES AND VOLUMES OF SIMILAR ORDERS. ACCORDING TO MOHAMMED YUNUS (SUPRA), INTEREST RATES SHOULD BE 10 TO 15% ABOVE THE COST OF RAISING THE MONEY, WITH ANYTHING BEYOND THAT DEEMED TO CONSTITUTE A 'RED ZONE' OF LOAN SHARKING. HIS STATEMENT IN CONTEXT WAS 'WE NEED TO DRAW A LINE BETWEEN GENUINE AND ABUSE'. [SOURCE: 2010 NEW YORK TIMES NEWS SERVICE AS EXTRACTED FROM HTTP://SOUTHASIA.ONEWORLD.NET/PEOPLESPEAK/MICROCREDIT - HAS - OUTGROWN - ITS - CHARITABLE - ROOTS#. VP GESFMUCUW] . ON THIS (FACTUAL) SCORE, IT WOULD APPEAR THAT THE APPELLANT'S LENDING RATES AND INTEREST EARN INGS ARE NOT EXORBITANT OR EXTORTIONIST. P) FROM A LEGAL STANDPOINT, THE DEFINITION OF 'CHARITABLE PURPOSE ' U/S 2(15) OF THE ACT IS INCLUSIVE. THE HON'BLE COURTS THROUGH THEIR DECISIONS HAVE HELD THAT THE EXPRESSION 'CHARITABLE PURPOSE' IS SUFFICIENTLY W IDE IN SCOPE TO INCLUDE A VARIETY OF ACTIVITIES. FOR INSTANCE, PROMOTION OF SPORTS AND GAMES IS A CHARITABLE PURPOSE [AS PER THE CBDT'S CIRCULAR NO.395 DATED 24.09.1984], AS IS PROMOTION OF TRADE AND COMMERCE, EVEN WHEN THE BENEFICIARIES ARE CONFINED ONLY TO A PARTICULAR LINE OF TRADE OR COMMODITY [THE DECISIONS OF THE HON 'BLE SUPREME COURT IN THE CASES OF BHARAT DIAMOND BERN '. 3 126 TAXMAN 365 (SC SURAL ART SILK CLOTH MANUFACTURES 1980] 121 IT R I (SC) Q) AT THE SAME TIME, THE MERE FACT THAT REMOTE AND INDIRECT BENEFITS ARE DERIVED B_ MEMBERS OF THE PUBLIC WILL NOT BE SUFFICIENT TO MAKE THE PURPOSE A 'CHARITAB LE PURPOSE ' UNDER THE ACT. SOME OF THE JUDICIAL PRECEDENT DECISIONS OF THE HON 'BLE COURTS WHICH HELP CLARIFY THE MEANING OF THE EXPRESSION 'CHARITABLE PURPOSE 'FOR THE PURPOSES OF INCOME - TAX ARE CITED BELOW (EMPHASES IN BOLD ITALICS PROVIDED BY ME): ` (I) THE WORD 'CHARITY' CONNOTES ALTRUISM IN THOUGHT AND ACTION. IT INVOLVES AN I DEA OF ' B ENEFITING OTHERS RATHER THAN ONESELF [ANDHRA CHAMBER OF COMMERCE [1965] 55 ITR 722 (SC)] (II) A COMMERCIAL CONCERN IS NOT AN OBJECT OF RELIEF OF THE POOR ON THE GROUND THAT I T PROVIDES EMPLOYMENT. THE OBJECT SHOULD PROVIDE RELIEF DIRECTLY AND NOT INDI RECTLY [YOGRAJ CHARITY TRUST [1976] 103 ITR 777(SC)] III) FOR A TRUST TO BE A CCEPTED AS A CHARITABLE TRUS T FOR THE PURPOSES OF EXEMPTION, IT IS NECESSARY THAT THE O BJECTS SHOULD BE SPECIFIC] SO AS TO CONFIRM TO THE REQUIREMENT OF INCOME TAX LAW IN THIS REGARD. WHERE THEY ARE T OO WIDE, THE TRUST MAY NOT QUALIFY FO R EXEMPTION [GANGABAI CHARITIES [1992] 197 ITR 416 (SC); ASSEMBLY ROOMS [2000] 241 ITR 76 (MAD)] IV) THE \ ONUS \ TO PROVE THAT OBJECTS ARE OF CHARITABLE NATURE IS ON THE ASSESSEE [INDIAN CH AMBER OF COMMERCE V. CIT [1975] 101 ITR 796 (SC)]. V) THE ESTABLISHMENT OF AN INDUSTRIAL OR COMMERCIAL CONCERN O RDINARILY ENVISAGES A PROFIT MAKING ACTIVITY AND CANNOT BE SAID TO BE A CHARITA BLE PURPOSE ON THE GROUND THAT IT WILL PROVIDE EMPLOYMENT TO SOM E POOR PERSONS [DHARMAPOSHANAM CO. [1978] 114 ITR 463 (SC); JAIPUR CHARITABLE TRUST [1971] 81 ITR 1 (DEL); YOGIRAJ CHARITY TRUST [1976] 103 ITR 777 (SC)]. (VI) TO SERVE A CHARITABLE PURPOS E, IT IS N OT NECESSARY THAT THE OBJECT SHOULD BE TO BENEFIT THE WHOLE OF MANKIND] OR ALL PERSONS IN A PARTICULAR COUNTRY OR STATE. IT IS SUFFICIENT IF THE INTENTION 12 TO BENEFIT A SECTION OF THE PUBLIC A S DISTINGUISHED FROM A SPECIFIED INDIVIDUAL, IS PRESENT. HOW EVER, TH E SECTION OF THE COMMUNITY SOUGHT TO BE BENEFITED MUST BE SUFFICIENTLY DEFINED AND IDENTIFIABLE BY SOME COMMON QUALITY OF A PUBLIC OR IMPERSONAL NATURE \ [AHMEDABAD RANA CASTE ASSOCIATION [1971] 82 ITR 704 (SC)]. (VII) AN INSTITUTION SET UP WITH TH E O BJECT OF PROMOTING TRADE OR COMMERCE] IS A CHARITABL E INSTITUTION AS IT PROMOTES COMMON GOOD THROUGH ENHANCEMENT OF BUSINESS . [ FEDERATION OF INDIAN CHAMBERS OF COMMERCE & INDUSTRY [1981] 130 ITR 186(SC); BAR COUNCIL OF MAHARASHTRA [1981] 130 ITR 28 (SC)]. (VIII) HOWEVER, AN INSTITUTION WHICH M ERELY REGULATES OR ENHANCES THE BUSINESS OF ITS MEMBERS IS NOT A CHARITABLE INSTITUTION. THUS, WHERE THE PROPRIETORS OF HOTELS FORMED AN ASSOCIATION FOR OBTAINING ARTICLES ON PERMIT FOR SUPPLYING THEM TO MEMBERS AND PROTECTING THEIR BUSINESS INTEREST, THE ASSOCIATION WAS HELD NOT TO BE A CHARITABLE ONE FOR THE PURPOSE OF THE ACT. [MADRAS HOTELS ASSOCIATION [1978] 111 ITR 241 (MAD.)] R) A CONTEXTUAL ANALYSIS OF THE LEGAL CATEGORIZATION OF THE ACTIVITIES IN THE INSTANT CASE INTO 'CHARITABLE ' AND 'NON - CHARIT ABLE ' WILL YIELD THE FOLLOWING RESULTS: (I) THERE APPELLANT'S ACTIVITIES APPEAR TO HAVE AN IDEA OF BENEFITING OTHERS (THE RURAL POOR AND THE INDIGENT) BUT WHETHER THE SAME OVERRIDES THE CONVERSE IDEA OF BENEFITTING ONESELF (THE APPELLANT ITSELF) IS UNCLEAR; (II) THE LOANS/PAYMENTS ARE MADE DIRECTLY TO THE TARGET POPULATION (VIZ., THE RURAL POOR AND THE INDIGENT) BUT WHETHER THE LATTER HAVE ACTUALLY BENEFITED AND WHETHER THE INTENTION OF THE APPELLANT WAS TO ONLY LET THE LATTER BENEFIT IS UNCLEAR; I II) ) CLAUSE V) OF THE OBJECT - CLAUSES OF THE APPELLANT - WHICH IS THE FINAL CLAUSE - READS THUS 'TO PROMOTE AND MANAGE SELF HELP GROUPS OF POOR WOMEN/MEN THROUGH THEIR SOLIDARITY GROUPS AND RAISE LOANS FOR FURTHER LENDING TO THEM FROM VARIOUS ORGANIZATION LI KE RASHTRIYA MAHILA KOSH SIDIB WITH A VIEW TO PROVIDING COLLATERAL FREE CREDIT FOR SUITABLE LIVELIHOOD OPTION FOR THEM'. THESE OBJECTIVES CAN BE CALLED SEMI - SPECIFIC, NEITHER TOO GENERIC NOR DESIRABLY SPECIFIC. ALSO, IN REALIZING THESE OBJECTIVES, THE APPE LLANT HAS RAISED LOANS FOR FURTHER LENDING TO POOR WOMEN/MEN, BUT IMPORTANTLY, NOT_ FROM THE ORGANIZATIONS AS REFERENCED ABOVE WITH A VIEW TOWARDS PROVIDING COLLATERAL FREE CREDIT. MOST OF THE APPELLANT'S BORROWING AND LENDING TRANSACTIONS ARE LOADED WITH AN INTEREST COMPONENT. THEREFORE, TO CATEGORIZE THE APPELLANT'S MICRO - FINANCE ACTIVITIES UNDER THE DEFINITIONAL HEAD 'RELIEF TO THE POOR' - AS HAS BEEN ELABORATED ABOVE - WOULD BE LESS THAN HONEST. THERE IS ALSO NO OTHER OBJECT - CLAUSE IN THE APPELLANT'S LI ST OF OBJECTS THAT DEALS WITH MICRO - FINANCE OR MONEY LENDING. IV) THE APPELLANT HAS NOT DISCHARGED ITS ONUS OF PROVING THAT ITS ACTIVITIES ARE CHARITABLE IN NATURE UNDER THE ROOF 'RELIEF TO THE POOR' WHEN SEEN IN THE LIGHT OF THE FIRST PROVISO TO SECTION 2(15) OF THE ACT. (V) THE APPELLANT CANNOT BE STATED TO BE OR CONSIDERED AS AN INDUSTRIAL OR COMMERCIAL CONCERN ALTHOUGH IT HAS BEEN EARNING PROFITS CONSISTENTLY THROUGH ITS ACTIVITIES. 13 (VI) IN THE OBJECT - CLAUSE V) ABOVE AND THROUGH ITS EXPLANATIONS ABOUT THE NATURE AND SUBSTANCE OF ITS MICRO - FINANCE ACTIVITIES, THE COMMUNITY SOUGHT TO BE BENEFITED HAS BEEN SUFFICIENTLY DEFINED AND IDENTIFIED BY THE APPELLANT BY SOME COMMON QUALITY OF A PUBLIC OR IMPERSONAL NATURE, BY DEFINING AND IDENTIFYING THESE AS THE 'RURAL POOR, BACKWARD, ETC. ' (VII) THE APPELLANT CAN BE CONSIDERED TO BE 'PROMOTING COMMON GOOD' THROUGH THE ENHANCEMENT OF ITS ACTIVITIES IN ITS TARGET AREA OF ACTIVITIES; (VIII) THE APPELLANT'S ACTIVITIES CANNOT BE HELD TO BE 'MERELY REGULATING OR ENHANCING THE BUSINESS OF ITS MEMBERS' S) WITH THE CHANGING ROLE OF NOT - FOR - PROFIT ENTITIES FROM BEING PLAYERS OF 'VANILLA PHILANTHROPY' TO BECOMING GAME CHANGERS IN THE COUNTRY'S SOCIAL AND ECONOMIC GROWTH, MANY OPERATE IN THE ROLE OF CATALYSTS IN VARIOU S FIELDS LIKE SOCIAL ENTERPRISE, SOCIAL INNOVATION AND INSTITUTIONAL PHILANTHROPY, AND NEWER FORMS OF CORPORATE ENGAGEMENTS THROUGH CORPORATE SOCIAL RESPONSIBILITY AND SOCIAL BUSINESS ARE EVOLVING. WE THEREFORE, NEED TO SOMETIMES LOOK BEYOND THE EXISTIN G FRAMEWORK GOVERNING THESE ENTITIES, I.E. BEYOND THE PREJUDICED OPINIONS OF THE PAST BASED ON THE ESSENCE OF TRADITIONAL FORMS OF CHARITY - FUNCTIONING. WHETHER THE SCOPE OF TRADE, COMMERCE OR BUSINESS INVOLVED IN CHARITABLE ACTIVITIES IS COMMERCIAL, QUASI - COMMERCIAL OR PURELY CHARITABLE IN NATURE, IS AN EXTREMELY DEBATABLE TOPIC AND NEEDS TO BE DECIDED WITH SENSITIVITY AND FINESSE AFTER OBTAINING A NUANCED UNDERSTANDING ABOUT THE FACTS AND CIRCUMSTANCES OF EACH CASE CONSIDERED. T) FROM ALL THE ABOVE, IT CANNOT BE STATED THAT THE APPELLANT'S MICRO - FINANCE ACTIVITIES FALL UNDER BY THE DISALLOWANCE PROVISIONS OF THE FIRST PROVISO TO SECTION 2(15) OF THE ACT AND THE CBDT'S CIRCULAR NO. 11 OF 2008 DATED 19.11.2008. SINCE THE ANSWERS TO THE TWO QUESTIONS R ESPECTIVELY STATED AT CLAUSES 7(G)(I) AND 7(G) ((H) ABOVE ARE NOT IN THE AFFIRMATIVE, THE ATTENDANT QUESTIONS STATED AT CLAUSE 7(G) (HI) AS TO WHETHER ITS MICRO - FINANCE BUSINESS ACTIVITY WAS INCIDENTAL TO THE ATTAINMENT OF THE OBJECTS OF THE APPELLANT; AND WHETHER SEPARATE BOOKS OF ACCOUNTS HAVE BEEN MAINTAINED IN RESPECT OF SUCH BUSINESS ACTIVITY ARE NOT RELEVANT. U) HOWEVER, TO HOLD THAT THE MICRO - FINANCE ACTIVITIES ARE PER SE NOT CHARITABLE IN NATURE, WE WOULD NEED TO PROVE THAT THESE: A) DO NOT DRIVE T HE ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY; AND B) THERE IS NO COMMERCIAL INTENT, CONTENT OR SUBSTANCE IN ITS THESE ACTIVITIES. ALTHOUGH THE APPELLANT HAS IN ITS SUBMISSIONS STOUTLY DENIED THAT ITS ACTIVITIES FELL WITHIN THE WID E AND GENE RIC DEFINITIONAL AMBIT OF 'ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY', AND FORECLOSED ITS OPTIONS BY SELECTING TO PLACE ITSELF WITHIN THE MORE SELECTIVE DEFINITIONAL AMBIT OF 'RELIEF TO THE POOR' (WHICH IS CLEARLY NOT APPLICABLE, AS PROVED ABOVE, AND IS REJECTED) WITH THE OBJECTIVE OF WRIGGLING OUT OF THE TRICKY QUESTION OF BUSINESS - COMMERCIAL PURPOSE AND PROFIT INTENT, IT IS APPARENT THAT WE NEED TO CONSIDER THESE SERIOUSLY IF A FULL AND COMPLETE RESOLUTION OF THE DISPUTE IS TO BE OBTAINED. V) ONE PROMISING LEAD WE HAVE IS THE STRENGTH OF SHRI. MOHAMMED YUNUS (REFERRED TO SUPRA) THAT THE DIFFERENTIAL INTEREST EARNED BY THE APPELLANT FALLING WITHIN THE RANGE 10 - 15% IS WITHIN THE PALE OF ACCEPTABILITY IN THE WORLD OF MICRO - FINANCE AND MICRO C REDIT. THE SAID DIFFERENTIAL MARGIN TAKES INTO ACCOUNT THE HIGHER LOGISTICAL, CLIENT SERVICING AND REPAYMENT MONITORING COSTS THAT REPRESENT ACTUAL , THE COSTS INVOLVED IN THE MICRO - MANAGING OF MULTIPLE SMALLER AMOUNTS AND THE NEED FOR PREMIUMS TO ABSORB TH E ADDITIONAL RISKS CREATED BY THE HIGHER UNCERTAINTIES INVOLVED IN THE 14 REPAYMENT ABILITIES OF THE TARGET SEGMENT (THE RURAL POOR, ET AL). THE RANGE OF THE AMOUNTS OF LOANS PROVIDED (THE LOAN SIZE), THE URBAN - RURAL DIVIDE, THE DURATION OF THE LOAN, THE PURP OSE OF THE LOAN, ETC. ARE IMPORTANT DRIVER - PARAMETERS THAT HELP DECIDE THE INTEREST RATE QUOTED BY THE MICRO - FINANCE PROVIDER TO THE RECIPIENT. AN OVERVIEW - CHART OBTAINED THROUGH A RECENT COMPREHENSIVE STUDY MADE IN THIS REGARD THAT COMPUTED THE OF THE ANN UAL PERCENTAGE RATES (APRS) OF THE INTEREST CHARGED FROM THE RELEVANT DATA COLLECTED FROM SEVERAL INDIAN MICROFINANCE PLAYERS (WHICH INCLUDES DATA COLLECTED FROM THE APPELLANT BEING PEOPLE'S FORUM), BY MFTRANSPARENCY. A LEADING DATA AGGREGATING AND MONITOR ING AGENCY, AS EXTRACTED FROM ITS WEBSITE HTTP://DATA . MFTRANSPARENCY. ORG/DATA/ COUNTRIES/IN/DATA/ IS REPRODUCED BELOW: (NB: THE APR IS THE ANNUAL COST OF A LOAN TO A BORROWER . LIKE AN INTEREST RATE, THE APR IS EXPRESSED AS A PERCENTAGE OF THE LOAN AMOUNT, BUT UNL IKE AN INTEREST RATE, UNLIKE AN INTEREST RATE, THE APR INCLUDES OTHER CHARGES OR FEES TO REFLECT THE TOTAL COST OF THE LOAN]. IT CAN BE READILY SEEN THAT THE APRS RANGE [DEPENDING ON THE VARIOUS DRIVER - PARAMETERS BUT PRINCIPALLY ALONG THE PRODUCT (LOAN) SIZE] FROM ABOUT 18.5% TO 52%. THE TABLE CONTAINING THE COMPREHENSIVE DATA ON WHICH THE CHART BELOW HAS BEEN PREPARED IS PROVIDE D AS AN APPENDIX TO THIS ORDER. THE DATA MAY NOT BE SPECIFIC TO THE F.Y. 2009 - 10 UNDER REFERENCE BUT CAN STILL BE CONSIDERED TO BE BROADLY INDICATIVE. W) THE AVERAGE APR ON ALL OF THE 483 LOAN PACKAGES CONSIDERED IS COMPUTED AS 31.53% WHILE THE STANDARD DEVIATION IS 0.55175% WHICH PROVIDES FOR A RELIABLY NARROW RANGE. THE DATA FOR THE APPELLANT IS EXTRACTED FROM THE TABLE IN THE APPENDIX AND PRESENTED BELOW: M F I PRODUCT PURPOSE LOAN LOAN QUOTED QUOTED NUM % SAMPLE SAMPLE APR INDIA DETAILS AMOUNT AMOUNT MIN RATE MAX CLIENTS URBAN LOAN TERM (INT + FEES + (MIN) (MAX) RATE AMOUNT DEPOSIT) 15 PEOPLE'S SHG BUSINESS. 8.000 15.000 12.0% 12.0% 46,865 10% 8000 16 29.4% DETAILS FORUM FINANCE EMERGENCY MONTHS PEOPLE'S SHG BUSINESS, 8.000 15,000 12.0% 12.0% 46,865 10% 1000 16 29.5% DETAILS FORUM FINANCE EMERGENC Y MONTHS PEOPLE'S SHG BUSINESS BUSINESS, FIN EMERG. 8.000 15,000 12.0% 12% 46,865 10% 12000 16 29.1% DETAILS MONHS IT IS READILY SEEN THAT THE URBAN COMPONENT OF THE APPELLANT'S LOAN RECIPIENT BASE OF SELF HELP GROUPS (SHGS) IS LOW AT 10%> WHILE THE QUOTED INTEREST RATE IS UNIFORMLY 12% , WITH THE APR COMPUTED AT 29.4% WHICH IS LOWER THAN THE NATIONAL AVERAGE OF 31.53%. SEPARATELY, THE AVERAGES OF THE QUOTED MINIMUM AND MAXIMUM RATES OF INTEREST OF ALL THE MICRO - FINANCE PLAYERS ARE COMPUTED AT 17.57% AND 17.78% PER ANNUM RESPE CT H TOO ARE SIGNIFICANTLY HIGHER THAN THE AVERAGE RATE OF 12% . PER ANNUM QUOTED BY THE APPELLANT. FURTHER IN - DEPTH ANALYSES CAN BE CONDUCTED ON THE DATE TO ALLOW AND ADJUST FOR DIFFERENCES ALONG THE OTHER DRIVER PARAMETERS SUCH AS THE TARGET POPULATION, PURPOSE OF T HE LOAN, TC., BUT THE RESULTS WILL BE SEEN TO BE NOT SIGNIFICANTLY DIFFERENT. X) IN FEBRUARY, 2014, THE RESERVE BANK OF INDIA (RBI) REMOVED THE 26% INTEREST RATE CAP ON THE LOANS GIVEN BY THE MICROFINANCE COMPANIES REGULATED BY IT AND LINKED THE INTEREST RATE TO THE COST OF FUNDS, PROVIDING A GREATER LEEWAY TO THE LENDERS FROM APRIL 1. AS A RESULT, SUCH LENDERS WILL BE ABLE TO CHARGE MORE THAN 26% IF THEIR COST OF BORROWING FROM BANKS IS HIGHER. ON THE OTHER HAND, THE LENDING RATE WILL FALL IF THE COST OF BORROWING GOES DOWN. RBI SAID THE MICROFINANCE INSTITUTIONS (MFIS) SHOULD ARRIVE AT THE LENDING RATE BY CALCULATING THEIR COST OF FUNDS PLUS A MAXIMUM 10% MARGIN OR THE AVERAGE BASE RATE OF THE FIVE LARGEST COMMERCIAL BANKS BY ASSETS MU LTIPLIED BY 2.75 TIMES, WHICHEVER IS LOWER. THIS AGAIN GOES TO SHOW THAT THE DIFFERENTIAL INTEREST RATES EARNED BY THE APPELLANT IN THE RANGE OF 10.5% REPRESENT LEVERAGED EARNINGS BY THE APPELLANT THAT IS NOT ABNORMAL, AND WHICH, FOR THE IMPUGNED FY. 2009 - 10, ARE LOWER THAN THE RBI - PRESCRIBED RATE. Y) ALL OF THE ABOVE WOULD MEAN THAT THE INTEREST RATES OFFERED BY THE APPELLANT TO ITS TARGET SEGMENT (THE RURAL POOR, ET AL) THAT RANGES BETWEEN 10.5% TO 14% CAN BE HELD AS NOT DRIVEN BY COMMERCIAL MOTIVATIONS AND CALCULATIONS. Z) IT CAN ALSO BE DERIVED THAT THE ACTIVITY OF MICRO - FINANCE AND MICRO - CREDIT PER SE, AS DIRECTLY OBJECTIFIED AND IMPLEMENTED BY THE APPELLANT TARGETING WEAKER ECONOMIC SECTIONS OF SOCIETY FALLS WITHIN THE DEFINITIONAL AMBIT OF 'ADVANCE MENT OF ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY '. THE LACK OF BANKING FACILITIES IN REMOTE RURAL LOCALES IS STILL A PRESSING PROBLEM IN THE COUNTRY AND A MATTER OF MUCH DEBATE. TO STATE AN EXAMPLE, RULE 6DD(G) OF THE INCOME - TAX RULES ALLOWS FOR PAYMENT S IN CASH IN RESPECT OF WORK CARRIED OUT IN SUCH PLACES, PROVIDING A VALUABLE EXCEPTION TO THE GENERAL PROSCRIPTION TO THE CONTRARY U/S 40A(3) OF THE ACT. THE AREA OF DEVELOPMENTAL ECONOMICS HOLDS THAT ONE OF THE PRINCIPAL FACTORS THAT DRIVES BALANCED ECON OMIC PROGRESS IN A SOCIETY IS READY ACCESS TO CAPITAL AND FUNDS TO ALL SEGMENTS OF SOCIETY SO THAT THE PRODUCTION FUNCTION IN THE UNDERPRIVILEGED SEGMENTS CAN TAKE OFF AFTER THEIR BASIC NEEDS ARE ADDRESSED. RECENT GOVERNMENTS AT THE CENTRAL LEVEL HAVE COMM ENCED THE DISBURSEMENT OF MONEYS THROUGH DIRECT CASH TRANSFERS (AS ALSO STATED AS BEING CONTINUED IN THE BUDGET SPEECH DATED 28.02.2015 OF THE HON'BLE UNION FINANCE MINISTER) TO THE ACCOUNTS OF MEMBERS OF THE TARGETED WEAKER SECTIONS WHICH SUPPORTS THE PRI NCIPLE ABOVE. 'CHARITABLE ACTIVITY' IS KNOWN, STATED AND HELD UNDER THE 16 STATUTE TO BE INCLUSIVE IN DEFINITIONAL MEANING AND SUBSTANCE; LIKEWISE, THE RESIDUAL LIMB - CLAUSE U/S 2(15) OF THE ACT BEING 'ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY' TOO HAS A WIDE AND GENETIC AMBIT. THE ACTIVITIES OF MICRO - FINANCE AND ADVANCING MICROCREDITS, WHICH FOR PART OF THE OBJECT - CLAUSES OF THE APPELLANT SOCIETY, WOULD THEREFORE FALL WITHIN THE DEFINITION OF ADVANCEMENT OF GENERAL PUBLIC UTILITY. AA) IN THE DI STINCTIVE LIMBS SITUATE WITHIN THE DEFINITION OF 'CHARITABLE ACTIVITY' U/S 2(15) OF THE ACT, WHILE THE DOMINANT CATEGORY - LIMBS 1 TO 5 REPRESENT A MUCH NARROWER GROUP OF CHARITABLE ENTITIES WITH DISTINCTIVE NATURE OF WORK, THE RESIDUAL CATEGORY NUMBER 6 (VI Z., ADVANCEMENT OF OBJECTS OF GENERAL PUBLIC UTILITY) IS MORE LIKE AN ACCUMULATION OF VARIOUS CHARITABLE ACTIVITIES WITH NO CLEAR DISTINCTION BETWEEN MAIN AND ANCILLARY OBJECTIVES. HOWEVER, TO FALL WITHIN THE AMBIT OF THE RESIDUAL CATEGORY, THE ENTITY SHOU LD NOT HAVE ANY SEPARATE, INDEPENDENT OR INCIDENTAL ACTIVITY WHICH COULD BE CLASSIFIED AS BUSINESS. THE BUSINESS ACTIVITY SHOULD BE INTRINSICALLY WOVEN INTO THE CHARITABLE ACTIVITY UNDERTAKEN BY SUCH AN ENTITY. B B) THE HON 'BLE DELHI HIGH COURT RECENTLY H ELD, IN THE CASE OF M/S GSL INDIA V. DIRECTOR INCOME TAX (EXEMPTION), 2013 - TIOL - 772 - HC - DEL - IT, THAT AMENDMENTS MADE TO THE DEFINITION OF 'CHARITABLE PURPOSE' UNDER SECTION 2(15)~ OF THE INCOME - TAX ACT VIDE THE FINANCE ACT, 2008 DOES NOT DISQUALIFY ANY RESI DUAL CATEGORY (GENERAL PUBLIC UTILITY) CHARITABLE ENTITY FROM CONDUCTING BUSINESS ACTIVITY WHICH IS INTRINSICALLY CONNECTED WITH THE CHARITABLE ACTIVITY, AND THAT THE CARRYING OUT OF SUCH BUSINESS ACTIVITY DOES NOT RESULT IN DENIAL OF TAX EXEMPTION STATUS. THE CASE INVOLVED WAS THAT OF GSL, REGISTERED AS A CHARITABLE ENTITY UNDER THE RESIDUARY CLAUSE OF SECTION 2(15) OF THE IT A BEING GENERAL PUBLIC UTILITY THAT WAS GRANTED EXEMPTION UNDER SECTION 12A AND UNDER SECTION 10(23C) OF THE ACT FROM THE A.Y. 1996 - 199 7 ONWARDS. IN 20 08, THE DIRECTOR OF INCOME TAX EXEMPTION/ DENIED THE SAID REGISTRATION ON THE GROUNDS THAT SUCH ACTIVITIES WERE IN THE NATURE OF TRADE, COMMERCE OR BUSINESS, AND THAT THE INCOMES EARNED FROM THE USE OF IPR FOR CONSIDERATION ROYALTY INCOME/ WERE SIGNIFICANTLY HIGHER THAN THE DIRECT COSTS. FURTHER, GSL INDIA DID NOT MAINTAIN SEPARATE BOOKS OF ACCOUNTS FOR THE BUSINESS/COMMERCIAL ACTIVITY WHICH WAS IN VIOLATION OF THE SPECIFIED CONDITIONS OF SECTION 10(23C)(IV). IN THIS REGARD, THE PETI TIONER APPROACHED THE DELHI HC TO ISSUE MANDAMUS DIRECTING THE TAX AUTHORITIES TO GRANT REGISTRATION. CC) WITH REGARD TO THE SCENARIO PRIOR TO 2008 AMENDMENT, THE HON ! BLE DELHI HIGH COURT APPLIED THE TEST OF PREDOMINANT OBJECT OF ACTIVITY ENUNCIATED BY THE HON 'BLE SUPREME COURT IN ACTT V SWAT CLOTH ASSOCIATION [SUPRA], TO DETERMINE WHETHER THE PRIMARY OBJECT OF THE ACTIVITY INVOLVED IN CARRYING OUT THE OBJECT OF GENERAL PUBLIC UTILI TY MIS TO - SERVE THE CHARITABLE PURPOSE OR TO EARN PROFIT. IN CASE WHER E THE PREDOMINANT OBJECT OF THE A CC OUT CHARITABLE PURPOSE AND NOT TO EARN PR O OF:, U DOES NOT LOSE ITS CHARACTER OF A CHARITABLE PURPOSE MERELY BECAUSE SOME PROFIT ARISES FROM SUCH ACTIVITY. THEREFORE, ACCORDING TO THE HON 'BLE COURT, ANY MONEYS EARNED FROM BUSINESS HELD UNDER TRUST OR OTHERWISE TO FEED CHARITY WOULD NOT DISENTITLE OR NEGATE THE CLAIM OF ENGAGEMENT IN CHARITABLE PURPOSE DEFINED UNDER SECTION 2 15 FOR THE APPLICATION OF SECTION 2(15) TO CHARITABLE ENTITY ENGAGED IN 'ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY ', VARIOUS HON 'BLE COURTS HAVE EARLIER HELD PROFIT MOTIVE' AND 'AN ELEMENT OF RECIPROCITY IN BUSINESS TRANSACTIONS' AS IMPORTANT ELEMENTS THAT NEEDED TO BE FACTORED INTO WHILE UNDERSTANDING THE SCOPE OF ECONOMIC ACTIVITY UNDERTAKEN BY SUCH ENTITY. THE HON 'BLE DELHI HIGH COURT, KEEPING IN VIEW THE AFORESAID DETERM INANTS, EXPLAINED THAT WHILE A BUSINESS ACTIVITY HAS AN IMPORTANT PERVADING ELEMENT OF SELF - INTEREST, CHARITY OR CHARITABLE ACTIVITY IS THE ANTI - THESIS TO ACTIVITIES UNDERTAKEN WITH A PROFITEERING MOTIVE. TO DETERMINE WHETHER A RESIDUAL - CATEGORY CHARITABLE ENTITY IS ENGAGED IN ANY BUSINESS ACTIVITY, THE ISSUE OF SELF - ENRICHMENT AND SELF - GAIN SHOULD BE CAREFULLY LOOKED INTO. A SMALL CONTRIBUTION BY WAY OF FEE SHOULD NOT EMULATE THE TRANSACTION OR THE GIVEN ACTIVITY TO BE COMMERCIAL IN NATURE. 17 DD) IN ITS ABOV E DECISION, THE HON'BLE DELHI HIGH COURT LAID DOWN THE 'CHARITABLE ACTIVITY TEST' TO DETERMINE WHETHER THE LEGAL TERMS 'TRADE, COMMERCE, OR BUSINESS ' IN SECTION 2(15) MEANS ACTIVITY WITH A VIEW TO MAKE OR EARN PROFIT. THE FOUR INDICATORS AS LAID DOWN BY T HE COURT ARE: (A) PROFIT MOTIVE IS A CRITICAL FACTOR TO DISCERN WHETHER AN ACTIVITY IS BUSINESS, TRADE OR COMMERCE; (B) CHARITABLE ACTIVITY SHOULD BE DEVOID OF SELFISHNESS OR ILLIBERAL SPIRIT; (C) THE UNDERLYING PROPELLING MOTIVE IS NOT FOR COMMERCIAL EXPL OITATION BUT GENERAL PUBLIC GOOD; AND (D) FEE CHARGED IF ANY SHOULD BE NOMINAL AND BASED ON COMMERCIAL PRINCIPLES. APPLYING THE ABOVE TESTS, THE HON 'BLE COURT OPINED THAT A MERE LEVY OF FEE IS NEITHER REFLECTIVE OF BUSINESS APTITUDE NOR INDICATIVE OF PROF IT ORIENTED INTENT, AND HELD THAT WHEN THE PROPELLING MOTIVE IS NOT TO EARN PROFIT BUT 'GENERAL PUBLIC GOOD', THE CHARITABLE ENTITY WILL FAIL THE BUSINESS TEST AND MEET THE TOUCHSTONE OF CHARITY. IT WAS FURTHER HELD THAT MERELY CHARGING FEE ON IPR SANS PRO FIT MOTIVE DOES NOT AMOUNT TO COMMERCIAL EXPLOITATION. MOREOVER, WHEN THE FEE CHARGED IS COMMENSURATE AND BASED ON COMMERCIAL OR BUSINESS PRINCIPLES, THE CHARITABLE ACTIVITY TEST IS FULFILLED. THE HON 'BLE COURT RULED THAT AS THE PRIMARY OR PRE - DOMINANT AC TIVITY IS CHARITABLE IN NATURE, THE NOMINAL FEE CHARGED IS IMPORTANT TO COVER THE OPERATIONAL COSTS OF THE PETITIONER. THUS, KEEPING IN VIEW THE 'CHARITABLE ACTIVITY TEST' IT WAS HELD THAT THE BUSINESS ACTIVITY OF THE PETITIONER IS INTEGRAL TO I TS CHARITAB LE PURPOSE AND THE QUESTION OF REQUIREMENT OF SEPARATE BOOKS OF ACCOUNTS FOR THE BUSINESS ACTIVITY WAS REDUNDANT. EE) A CAREFUL CONSIDERATION OF THE FACTS IN THE INSTANT CASE OF THE APPELLANT WOULD REVEAL THAT THE DECISION OF THE HON 'BLE DELHI HIGH COURT REFERENCED ABOVE IS APPLICABLE ON MOST COUNTS. IMPORTANTLY, THE DIFFERENTIAL INTEREST RATES CHARGED BY THE APPELLANT AND HELD BY THE AO TO BE COMMERCIAL WOULD APPEAR TO BE NOMINAL AND GOVERNED BY COMMERCIAL PRINCIPLES, AND COVER PRINCIPALLY THE HIGHER OPE RATING EXPENSES OWING TO THE HIGH RISK - FACTORS THE LOANS WERE IMBUED WITH OWING TO THE LACK OF CREDIT WORTHINESS OF THE TARGET SEGMENT. FURTHER, THE APPELLANT'S PRIMARY AND PREDOMINANT OBJECTIVES UNAMBIGUOUSLY STRIVE TO PROMOTE THE GENERAL PUBLIC GOOD THROU GH THE ADVANCEMENT OF PUBLIC UTILITIES BY DISSEMINATING FINANCIAL POWER AMONGST THE UNDERPRIVILEGED LOT OF THE NATION'S CITIZENRY. THESE CANNOT BE STATED TO BE SELFISH OR BATHED IN OR CONTAMINATED BY AN ILLIBERAL SPIRIT. THE PROFIT THAT HAS EMERGED IN CONS EQUENCE CAN BE CONSIDERED AS INCIDENTAL (TO THE CHARITABLE PURPOSE AND ACTIVITIES BEING CARRIED OUT) IN NATURE. FF) IT IS ALSO TO BE NOTED THAT IN THE CASES OF ORGANIZATIONS LIKE SPANDANA, DISHA INDIA MICRO CREDIT, ETC. (SUPRA) THAT PROFESSEDLY CARRY OUT MICRO - FINANCE ACTIVITIES, THE DEPARTMENT HAS GRANTED THEM THE NECESSARY CERTIFICATION UNDER THE ACT OF BEING CHARITABLE IN THEIR INTENTS AND PURPOSES, AND WHEN THESE WERE QUESTIONED IN ASSESSMENT, SUCH CHARITABLE INTENT AND PURPOSE HAVE BEEN UPHELD BY VARI OUS AUTHORITIES INCLUDING VARIOUS BENCHES OF THE ITAT. THE COMMISSIONER OF INCOME - TAX [CITJ, SAMBALPUR HAS IN A FEW CASES UNDER HIS JURISDICTION GRANTED REGISTRATION U/S 12AA TO ORGANIZATIONS THAT PROFESSEDLY CARRY OUT MICRO - FINANCE ACTIVITIES. THE CASE OF JANLAXMI SOCIAL SERVICES VS. DIT (EXEMPTIONS), BANGALORE CITED BY THE AO IS DISTINGUISHABLE ON FACTS IN THAT THE APPELLANT IN THAT CASE HAD EXTENDED THE FINANCIAL ASSISTANCES TO THE TRADERS NOT TO THE SHGS OR POORER WOMEN, AS IT PROFESSED TO DO. IT IS THE REFORE IMPORTANT THAT THE GOVERNMENT AND THE TAX AUTHORITIES SPEAK IN ONE VOICE ON THE ISSUE AND TAKE A PRINCIPLED STAND BASED ON ECONOMIC PRINCIPLES, THE CONTEXTUAL FACTUAL MATRIX AND THE LEGAL FOUNDATION. GG) IN CONSEQUENCE, I HOLD THAT THE ACTIVITIES OF MICRO - FINANCE AND MICROCREDIT BEING CARRIED OUT BY THE APPELLANT ARE OF THE NATURE AND DEFINITION OF 'CHARITABLE ACTIVITY' AS DEFINED U/S 2(15) OF THE INCOME - TAX ACT BEING NON - COMMERCIAL IN INTENT, PURPOSE AND CONTENT (AS MANDATED BY THE AMENDED FIRST PROVISO TO THE SAID SECTION) AND ALSO SINCE THEY FALL WITHIN THE DEFINITION OF ADVANCEMENT OF GENERAL PUBLIC UTILITY. THE INCOME - TAX EXEMPTIONS OFFERED U/S 11 AND 10(23C) OF THE ACT CLEARLY APPLY IN FAVOUR OF THE A PPELLANT. THE ENHANCEMENT MADE BY THE 18 AO TO THE TAXABLE INCOME OF THE APPELLANT OF RS. 56,55,297 BEING THE TOTAL INCOME/PROFITS GENERATED FROM THE MICRO - FINANCE ACTIVITIES IS DIRECTED TO BE DELETED. GROUNDS NUMBERED 2 AND 3 PREFERRED BY THE APPELLANT ARE A CCORDINGLY ALLOWED. IN THE YEAR UNDER REFERENCE, THE APPELLANTS APR IS 26.6% WHICH IS LOWER THAN AVERAGE APR OF INDIA AT 27.2%. SINCE THE ISSUE IS ALREADY COVERED IN APPELLANTS OWN CASE, I AM INCLINED TO HOLD THAT THE MICR5O FINANCING ACTIVITIES AS CARRIED OUT BY THE APPELLANT ARE CHARITABLE AND ELIGIBLE FOR EXEMPTION U/S 11. IN THE RESULT, THE GROUND NOS.2 & 3 OF THE APPELLANT ARE ACCEPTED. 7. BEFORE ME, LD D.R. RELIED ON THE ORDER OF THE ASSESSING OFFICER, WHEREAS THE LD A.R. OF THE ASSESSEE REL IED ON THE ORDER OF THE LD CIT(A). 8. I HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE, THE UNDISPUTED FACTS ARE THAT THE ASSESSEE IS A SOCIETY REGISTERED UNDER SECTION 1 2A OF THE I.T.ACT. DURING THE YEAR UNDER APPEAL, THE ASSESSEE WAS, INTER ALIA, ENGAGED IN THE ACTIVITY OF MICRO FINANCE. IN THIS ACTIVITY, THE ASSESSEE SECURED LOAN FROM BANKS AND ADV ANCED LOAN TO SELF HELP GROUPS AS ALSO CARRIED OUT IN EARLIER YEARS. THE ASSESSEE GENERATED SURPLUS OF RS.9,28,068/ - AND ALSO PROFIT FROM INCOME GENERATION PROGRAMMES OF RS.24,36,177/ - AGGREGATING TO RS.34,95,930/ - FROM THESE ACTIVITIES DURING THE YEAR UNDER APPEAL. T HE ASSESSING OFFICER NOT ALLOWED DEDUCTI ON U/S.11 OF THE ACT ON THE GROUND THAT THE ACTIVITY WAS CARRIED OUT IN COMMERCIAL LINES. 9. ON APPEAL, LD CIT(A) HELD THAT THE SURPLUS GENERATED IS ELIGIBLE FOR DEDUCTION U/S.11 OF THE ACT. IN HOLDING SO, LD CIT(A) FOLLOWED THE ORDERS OF HIS PREDECESSOR S PASSED IN THE C ASE OF THE ASSESSEE ITSELF FOR THE EARLIER ASSESSMENT YEARS 2009 - 10 AND 2010 - 2011. 19 10. BEFORE ME, LD D.R. COULD NOT POINT OUT THAT THE ORDERS PASSED IN THE EARLIER YEARS BY THE LD CIT(A) WERE REVERSED BY ANY HIGHER AUTHORITY ON AN APPEAL FILED THERE AGAINS T. I FURTHER FIND THAT IN VIEW OF THE DECISIONS OF THE TRIBUNAL IN THE CASE OF ASSISTANT DIRECTOR OF INCOME TAX (EXEMPTIONS) VS BHARATHA SWAMUKHI SAMSTHE, (2009) 28 DTR 0113 (BANG) AND SPANDANA (RURAL & URBAN DEVELOPMENT ORGANISATION) VS ASSISTANT COMMIS SIONER OF INCOME TAX (2010) 48 DTR 0153 (VIS. TRIB), THE ACTIVIT Y UNDER CONSIDERATION FALLS UNDER THE EXPRESSION RELIEF TO POOR AS ENVISAGED UNDER SECTION 2(15) OF THE ACT. T HEREFORE, IN MY CONSIDERED VIEW SIMPLY BECAUSE AN ACTIVITY UNDERTAKEN IN COMMER CIAL LINE IN PURSUANCE TO FURTHERANCE O F THE OBJECT OF SOCIETY TO POOR DOES NOT MAKE THE ACTIVITY NON - CHARITABLE WITHIN THE MEANING OF SECTION 2(15) OF THE ACT. IN THE CIRCUMSTANCES, I DO NOT FIND ANY GOOD REASON TO INTERFERE WITH THE CONCLUSION OF THE LD CIT(A). HENCE, THIS GROUND OF THE REVENUE IS DISMISSED. 11 . IN GROUND N O.4 OF THE APPEAL, THE GRIEVANCE OF THE REVENUE IS THAT THE LD CIT(A) ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF VIOLATION OF PROVISIONS OF SECTION 40(A)(IA) OF THE ACT BY NOT DEDUCTING TAX AT SOURCE ON ADVERTISEMENT EXPENSES OF RS.1,31,687/ - WHEN THE ASSESSEE IS NOT ELIGIBLE FOR EXEMPTION U/S.11 OF THE ACT IN VIEW OF THE VIOLATION OF THE PROVISO TO SECTION 2(15) OF THE ACT. 12 . BRIEF FACTS ARE THAT THE ASSESSING OFFICER DISALLO WED DEDUCTION OF RS.1,31,687/ - FOR ADVERTISEMENT EXPENSES INCURRED BY THE ASSESSEE ON THE 20 GROUND THAT THE ASSESSEE HAS NOT DEDUCTED TDS FROM THE SAME AND, THEREFORE, IT WAS DISALLOWABLE U/S.40(A)(IA) OF THE ACT . T HE ASSESSING OFFICER HAD HELD THAT THE ASS ESSEE IS NOT ELIGIBLE U/S.11 OF THE ACT AND THE SURPLUS OWNED BY THE ASSESSEE WAS ASSESSABLE AS BUSINESS INCOME. 13 . ON APPEAL, LD CIT(A) HELD THAT THE ASSESSEE WAS ELIGIBLE FOR EXEMPTION U/S.11 OF THE ACT AND, THEREFORE, HELD THAT PROVISIONS OF SECTION 40 (A)(IA) ARE NOT APPLICABLE TO THE ASSESSEE AND DELETED THE DISALLOWANCE OF ABOVE EXPENDITURE OF RS.1,31,687/ - . 14 . LD D.R. RELIED ON THE ORDER OF THE ASSESSING OFFICER WHEREAS LD A.,R. RELIED ON THE DECISION OF ITAT MUMBAI IN THE CASE OF M/S. MAHATMA GANDH I SEVA MANDIR VS DDIT (E) IN ITA NO.4138/MUM /2011 FOR A.Y. 2007 - 08 ORDER DATED 11.5.2012, AND SUBMITTED THAT IT HAS BEEN HELD IN THAT DECISION THAT SECTION 40(A) WILL ON LY GO TO ENHANCE THE BUSINESS P ROFIT OF AN ASSESSEE WHOSE INCOME IS ASSESSABLE UNDER SE CTION 28 AND NOT OTHERWISE. HENCE, PROVISIONS OF SECTION 40(A) ARE NOT APPLICABLE IN CASE OF CHARITABLE TRUST OR INSTITUTION WHERE INCOME AND EXPENDITURE IS COMPUTED IN TERMS OF SECTION 11 OF THE ACT. 15 . I FIND THAT THE ISSUE AT HAND IS SQUARELY COVERED BY THE ABOVE DECISION OF ITAT MUMBAI IN THE CASE OF MAHATMA GANDHI SEVA MANDIR (SUPRA). THUS, THE ORDER OF THE LD CIT(A) IS SUPPORTED BY THE ORDER OF THE ITAT MUMBAI 21 (SUPRA) AND HENCE, I CONFIRM THE ORDER OF THE LD CIT (A) ON THIS ISSUE AND DISMISS THE GR OUND OF THE REVENUE. 16 . AT THE TIME OF HEARING, LD A.R. OF THE ASSESSEE DID NOT PRESS THE CROSS OBJECTION FILED AND HAS MADE AN ENDORSEMENT TO THIS EFFECT IN THE GROUNDS OF APPEAL APPENDED TO FORM NO.36 FILED BEFORE THE TRIBUNAL. THEREFORE, THE CROSS OBJECTION FILED BY THE ASSESSEE IS DISMISSED AS NOT PRESSED. 17 . IN THE RESULT, THE APPEAL FILED BY THE REVENUE AND CROSS OBJECTIONS FILED BY THE ASSESSEE , BOTH ARE DISMISSED. ORDER PRONOUNCE D IN THE OPEN COURT ON 3 0 /11 /2016 IN THE PRESENCE OF PARTIES. S D / - ( N.S SAINI) A CCOUNTANT MEMBER CUTTACK; DATED 3 0 /11 /2016 B.K.PARIDA, SPS COPY OF THE ORDER FORWARDED TO : BY ORDER, ASST.REGISTRAR, ITAT, CUTTACK 1. THE APPELLANT : ACIT (EXEMPTIONS), AAYAKAR BHAVAN, BHUBANESWAR. 2. THE RESPONDENT. M/S. PEOPLES FORUM, PLOT NO.HIG 44, DHARMA VIHAR, KHANDAGIRI, BHUBANESWAR 3. THE CIT(A) - 3, BHUBANESWAR. 4. CIT , BHUBANESWAR. 5. DR, ITAT, CUTTACK 6. GUARD FILE. //TRUE COPY//