Guarantee fee charged by trust for providing third-party guarantee to small-scale industries does not amount to profit motive: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) Mumbai bench held that the guarantee fee charged by the trust for providing third-party guarantees to small-scale industries did not amount to a profit motive.

The assessee, Credit Guarantee Fund Trust for Micro and Small Enterprises, is an irrevocable trust settled by the President of India, acting through the Ministry of Small Scale Industry (SSI) & Average Rate Index (ARI), Government of India, and Small Industries Development Bank of India (SIDBI). Its purpose is to provide effective credit guarantees and/or counter-guarantees for Micro, Small & Medium Enterprises (MSME) and advances extended by eligible scheduled commercial banks and rural banks (Member Lending Institutions - MLIs) without collateral security and/or third-party guarantees.

After filing the income tax return, the case was selected for scrutiny. During the scrutiny proceedings, the Assessing Officer (AO) held that the assessee's case is hit by the provision to section 2(15) of the Act, thereby rejecting the claim of exemption under section 11 of the Income Tax Act.

The AO also disallowed the deduction of the provision for guarantee claims of Rs.3,47,04,32,777/- based on collateral valuation, restricting it to the actual payment, stating that provisions of expenses are not allowable under the Income Tax Act. The assessee's claim for the deduction of provisions for guarantees to the tune of Rs.9,67,79,67,223/- was also contested.

Aggrieved by the order, the assessee filed an appeal before the CIT(A), who partly allowed the claim. Subsequently, the assessee filed a second appeal before the tribunal.

During the proceedings, the counsel for the assessee argued that the identical issue had already been decided in favor of the assessee in its own case for A.Y. 2010-11, 2011-12 & 2014-15. They emphasized that there was no change in the activities undertaken by the assessee during the year under consideration compared to earlier years. The trust, they argued, had no profit motive and rendered services purely for charitable purposes.

The counsel for the Revenue contended that the assessee trust, by promoting the activities of banking institutions lending to MSMEs, was thriving commercially and, therefore, hit by the proviso to section 2(15) of the Income Tax Act.

The tribunal observed that the assessee trust had received Rs.830.79 crores but incurred expenses of Rs.1322.76 crores in providing guarantees to loan recipients for setting up small-scale industries, resulting in a deficit of Rs.491.98 crores. The bench determined that the trust demonstrated its ability to facilitate inclusive growth within the financial ecosystem by offering assurance to small and micro enterprises without collateral security or third-party guarantees.

After reviewing the facts and records, the two-member bench concluded that the assessee trust, established by the Government of India, pursued the activity of advancing general public utility without engaging in trade, commerce, or business. Therefore, the guarantee fee charged by the trust for providing third-party guarantees to small-scale industries did not amount to a profit motive.

To Read the full text of the Order CLICK HERE

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