2025 (5) TMI 1879 - HC - Income Tax

Exemption u/s 11(4A) - microfinance would fall under any other object of general public utility OR relief of the poor - Income from property held for charitable or religious purposes - Appellant charged processing fees ranging between 2% to 2.5% on the amount lent to such borrowers who approached the Appellant through self-help groups. HELD THAT - Proviso to definition in Section 2(15) of the IT Act inserted with effect from 01.04.2009 which makes it clear that the advancement of any other object of general public utility shall not be considered as a charitable purpose if it involves the carrying on of any activity in the nature of trade commerce or business or any activity of rendering any service in relation to any trade commerce or business for a cess or fee or any other consideration irrespective of the nature of use or application or retention of the income from such activity is not relevant. Scope of amendment to the definition of Charitable Purpose -Whether the exceptions provided in sub-section (4A) to Section 11 of the IT Act is attracted or not? - A reading of sub-section (1) (2) (3) (3A) and the Explanation to sub-section (1) and sub-section (4A) indicates that although such Section (4A) to Section 11 of the IT Act is uninfluenced by sub-section (1) (2) (3) and (3A) of the IT Act income of the Trust or an institution can be exempted even if such income is from business incidental to the attainment of the objective of the Trust. In this case the main objective of the Appellant/Assessee itself is microfinance i.e. to do lending operation in the microfinance sector to earn commission ranging from 2% to 2.5%. It is not charitable in nature. The business carried on by the Appellant/Assessee by lending operation is not incidental to the attainment of the objectives of the Appellant/Assessee as a Charitable Institution . Rather it is main business object. Therefore the Appellant/Assessee cannot claim the benefit of exemption either u/s 11(1) or u/s 11(4A) of the IT Act as held in New Noble Educational Society 2022 (10) TMI 855 - SUPREME COURT The income that is the subject matter of assessment is neither from property nor from contributions to be exempted under Sections 11 12 of the IT Act nor from a business of the Trust which is incidental to the object of the Trust. Thus the claim of the Appellant has been rightly rejected by the Appellate Tribunal - Decided against assessee.

Summary

The legal issues considered in this appeal primarily revolve around the entitlement of a charitable trust engaged in microfinance activities to claim exemption under Section 11(4A) of the Income Tax Act, 1961 ("IT Act") for the Assessment Year 2009-2010. The core questions addressed are:

i. Whether microfinance activities carried out by the trust fall under "any other object of general public utility" or "relief of the poor" within the meaning of charitable purposes, especially given the factual finding that the trust's activities benefit the poor.

ii. Whether the income derived from processing fees charged by the trust in its microfinance lending operations amounts to business income that is not incidental to the trust's charitable objectives, particularly since interest was not subsidized.

iii. Whether the Tribunal was correct in not following certain coordinate bench decisions that favored exemption, contrary to the Supreme Court ruling in a precedent concerning charitable trusts and business income.

Issue-wise detailed analysis:

1. Scope and Interpretation of Section 11(4A) of the IT Act

The Court examined the legal framework governing exemption under Section 11, focusing on sub-section (4A), which provides that income derived as profits and gains of business by a trust or institution can be exempted only if the business is incidental to the attainment of the trust's objectives and separate books of account are maintained.

The Court traced the legislative history, noting that sub-section (4A) was introduced by the Finance (No.2) Act, 1991, and clarified that it is an exception to the general provisions of sub-sections (1), (2), (3), and (3A) of Section 11. The Court emphasized that income from business can be exempted only if incidental to the charitable objectives, not if it constitutes the main business activity.

The Court further analyzed the provisions of Section 11(1), which exempts income derived from property held under trust wholly or partly for charitable or religious purposes, and Section 12, which deems voluntary contributions to be income derived from property held under trust for charitable purposes. The Court stressed that mere registration under Section 12AA or certification under Section 80G does not automatically entitle a trust to exemption under Sections 11 or 12.

The Court highlighted that to claim exemption under Section 11(4A), the trust must demonstrate that the business income is incidental to its charitable objectives and maintain separate accounts for such business.

2. Definition of "Charitable Purpose" and Its Temporal Application

The Court considered the definition of "charitable purpose" as provided under Section 2(15) of the IT Act, which, during the relevant period (Assessment Year 2009-2010), included "relief of the poor, education, medical relief and the advancement of any other object of general public utility."

The Court noted that an amendment effective from 01.04.2009 introduced a proviso excluding activities involving trade, commerce, or business for a fee or consideration from charitable purposes. However, since the income under dispute related to the previous year 2008-2009 (assessed in AY 2009-2010), the Court held that this amendment was prospective and not applicable to the facts of the case.

Thus, the Court rejected the Tribunal's reliance on the amended definition and related budget speech, holding that the pre-amendment definition governs the case.

3. Nature of the Trust's Activities and Income

The Court examined the factual matrix where the trust engaged in microfinance lending by borrowing from banks and lending to self-help groups, charging processing fees between 2% and 2.5%. The trust claimed exemption on income from such processing fees under Section 11(4A).

The Court observed that the trust's primary objective was microfinance lending, which is a business activity rather than an incidental activity to a charitable purpose. The income from processing fees was therefore business income and not incidental profits or gains related to charitable objectives.

The Court relied on the Supreme Court's decision in "New Noble Educational Society Vs. Commissioner of Income Tax" (2023) which emphasized that exemption under Section 11(4A) requires the business to be incidental to the trust's objectives, and separate books of account must be maintained. The Court found that in the present case, the business of lending was the main object, not incidental.

4. Treatment of Competing Decisions and Precedents

The Court addressed the appellant's contention that the Tribunal erred in not following coordinate bench decisions favoring exemption in cases such as "Kurinji Social Welfare Society Vs. ACIT" and "Socio Economic Development Association Vs. ITO," and the Supreme Court ruling in "Honda Siel Power Products Ltd. Vs. CIT."

The Court distinguished these precedents on the facts, noting that the mere recognition of microfinance as a tool for poverty alleviation does not automatically confer charitable status or exemption under Section 11(4A) where the trust's primary activity is business lending.

The Court held that the Honda Siel decision, which dealt with the applicability of business income exemption to charitable trusts, was not applicable to the facts of the present case.

5. Application of Law to Facts and Conclusion

Applying the legal principles to the facts, the Court concluded that the trust's microfinance lending business was not incidental to its charitable objectives but was the main business activity. The income from processing fees was therefore taxable business income and not exempt under Section 11(4A).

The Court further held that the amendment to the definition of charitable purpose was prospective and did not affect the assessment year in question.

Accordingly, the Court upheld the Tribunal's order denying exemption and dismissed the appeal.

Significant holdings:

"Thus, the underlying objective of the seventh proviso to Section 10(23-C) and of Section 11(4-A) are identical. These have to be read in the light of the main provision which spells out the conditions for exemption under Section 10(23-C) - the same conditions would apply equally to the other sub-clauses of Section 10(23-C) that deal with education, medical institution, hospitals, etc."

"The business carried on by the Appellant/Assessee by lending operation is not incidental to the attainment of the objectives of the Appellant/Assessee as a 'Charitable Institution'. Rather, it is main business object. Therefore, the Appellant/Assessee cannot claim the benefit of exemption either under Section 11(1) or under Section 11(4A) of the IT Act."

"Merely because microfinance has emerged as an effective tool for alleviating poverty in many countries and further impetus was given in setting up such institutions ipso facto would not mean that the Appellant/Assessee was a 'Charitable Institution' and income from lending business was incidental for its object."

Core principles established include:

• Exemption under Section 11(4A) requires that business income be incidental to the charitable objectives of the trust, not its main activity.
• The definition of "charitable purpose" applicable is that prevailing during the relevant assessment year; amendments are prospective unless expressly retrospective.
• Registration under Section 12AA or certification under Section 80G does not automatically confer exemption under Sections 11 or 12.
• Income from microfinance lending business charging processing fees is business income and not exempt if it is the main object of the trust.
• Coordinate bench decisions and Supreme Court precedents must be applied in light of factual distinctions; recognition of microfinance as a poverty alleviation tool does not ipso facto confer charitable status.

Final determinations:

The Court answered the substantial questions of law against the appellant trust and in favor of the Income Tax Department, affirming that the trust was not entitled to exemption under Section 11(4A) of the IT Act for the income from processing fees earned through microfinance lending during the Assessment Year 2009-2010. The appeal was dismissed accordingly.