2008 (8) TMI 606 - AT - Income Tax

Tribunal Denies Registration for Microfinance Entity, Cites Commercial Activities Over Charitable Intent.

Janalakshmi Social Services Versus Director of Income-tax (Exemptions), Bangalore

Janalakshmi Social Services Versus Director of Income-tax (Exemptions), Bangalore - [2009] 33 SOT 197 (BANG.) Issues Involved:1. Rejection of application for registration under section 12A of the Income-tax Act, 1961.2. Determination of whether the appellant's objectives qualify as charitable under section 2(15) of the Income-tax Act, 1961.3. Examination of the genuineness of the appellant's activities and whether they are commercial in nature.Issue-wise Detailed Analysis:1. Rejection of application for registration under section 12A of the Income-tax Act, 1961:The appellant filed an appeal against the order of the Director of Income-tax (Exemptions) [DIT(E)] rejecting its application for registration under section 12A of the Income-tax Act, 1961. The appellant argued that the DIT(E) erred in rejecting the application and not appreciating that the objectives were of general public utility and not profit-driven.2. Determination of whether the appellant's objectives qualify as charitable under section 2(15) of the Income-tax Act, 1961:The appellant's objectives included micro financing activities, providing credit facilities to Self Help Groups (SHGs) and others, and promoting the economic well-being of the urban and rural poor. The DIT(E) observed that the core activity of the company was micro financing, which was carried out as a business. The appellant argued that micro financing aimed at mitigating poverty and enhancing economic capabilities should be considered a charitable activity under section 2(15) of the Income-tax Act, 1961. The appellant cited the Privy Council decision in All India Spinners Association v. CIT [1944] 12 ITR 482 to support the claim that economic assistance to the poor is equivalent to relief of the poor.3. Examination of the genuineness of the appellant's activities and whether they are commercial in nature:The DIT(E) required the appellant to provide details of its activities and agreements with other companies. The DIT(E) found that the appellant was charging high-interest rates (24% per annum) and various service charges, indicating a profit motive. The DIT(E) concluded that the appellant's activities were commercial rather than charitable. The DIT(E) also noted that the appellant's activities were carried out through NGOs and SHGs, further indicating a commercial nature. The appellant's argument that being registered under section 25 of the Companies Act implied charitable nature was rejected by the DIT(E), who emphasized the need to examine the actual activities and objects.Conclusion:The Tribunal upheld the DIT(E)'s decision, stating that for registration under section 12AA, the DIT(E) must be satisfied about the genuineness of the activities and the charitable nature of the objectives. The Tribunal noted that the appellant's activities were primarily commercial, with high-interest rates and service charges, and did not demonstrate a genuine charitable purpose. The Tribunal dismissed the appeal, allowing the appellant to reapply for registration if it could demonstrate charitable activities in the future.