The Income Tax Appellate Tribunal ( ITAT ), Mumbai bench while allowing benefit of section 11 and 12 of the Income Tax Act, 1961 held that levying/collecting fees for guarantee from Member Lending Institutions ( MLIs ) are not profit motive.
The assessee, Credit Guarantee Fund Trust For Micro And Small Enterprises, is a irrevocable trust settled by the President of India for the purpose of providing effective credit guarantee and/or counter guarantee 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 guarantee.
After filing the return of income the assessee claimed exemption under section 11 of the Act was subjected to scrutiny. The Assessing Officer ( AO ) by following the earlier year invoked provision to section 2(15) of the Act and issued the notice under section 142(1) of the Act. The AO proceeded to hold that the assessee’s case is hit by provision to section 2(15) of the Act and thereby rejected the claim of exemption under section 11 of the Act.
Accordingly The AO made a disallowance of the deduction of provision for guarantee claims of Rs.3,47,04,32,777/- made on the basis of collateral valuation.Thereafter AO framed the assessment under section 143(3) read with section 144B of the Act.
The Assessing Officer invoked the provisions of section 14A stating that the assessee has not discharged the onus of evidencing the source of investment is from own funds. Accordingly the assessing officer made a disallowance of Rs.458.866 crores towards interest paid and Rs.17.37 crores towards administration expenses after adjusting the suo moto disallowance made by the assessee.
Aggrieved, the assessee filed further appeal before the CIT(A) who allowed the disallowance made by the assessing officer. Thereafter the assessee filed a second appeal before the tribunal. Bhupendra Karkhanis, Counsel for assesee argued that issue as to the applicability of proviso to section 2(15) of the Act has already been decided by the Tribunal in favor of the assessee in A.Y. 2010-11, 2011-12 & 2014-15.
Further the counsel submitted that assessee’s trust has no profit motive whatsoever so as to hit by proviso to section 2(15) of the Act, rendering of services to trade, commerce or business; that services rendered by the assessee trust are purely institutional or subservient to the main objects of the trust which are “charitable purposes”; that objects of the trust are to be considered for the benefit of underprivileged class of people and also falls within the meaning of relief to poor referred to in section 2(15) of the Act.
Manoj Kumar Sinha, Counsel for Revenue, argued that since the assessee trust is promoting the activities of the banking institution by supporting their commercial activities who are lending loans to the MSME which shows that the business of the assessee trust is thriving day by day and as such it is hit by proviso to section 2(15) of the Act.
The tribunal observed that the on the basis of objects of the activities of the assessee trust is a charitable trust.Further assessee trust is proved to be an enabler in the financial ecosystem to accelerate the inclusive growth by providing guarantee to the small and micro entrepreneurs who are otherwise unable to arrange for collateral security and/or third party guarantee.
After reviewing the facts and records, the two-member bench of Rifaur Rahman, ( Accountant member ) and Kuldip Singh, ( Judicial Member ) held that levying/collecting fees for guarantee from Member Lending Institutions ( MLIs ) are not profit motive.
Therefore the bench allowed the benefit of Section 11 and 12 of the Income Tax Act.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
