Assessee entitled to exemption under s.11/12; s.12AA valid; s.2(15) proviso upheld; no breach of s.13(1)(c)(ii); COVID days excluded

ITAT MUMBAI allowed the appeal and held the assessee entitled to exemption under s.11/12. The Tribunal found the assessee's dominant purpose charitable-operating a nationally-authorized, RBI-regulated payment settlement infrastructure to benefit the public-despite charging nominal fees to meet costs. Registration under s.12AA granted after the proviso to s.2(15) remained valid. No breach of s.13(1)(c)(ii) was found as services and fees were uniformly applied and promoters were only shareholders, not contributors. Delay in pronouncing the order beyond 90 days was excused by COVID-19 lockdown days being excluded.

---

---

Issues Involved:
1. Denial of exemption under Section 11 and Section 12 of the Income Tax Act, 1961.
2. Applicability of the first proviso to Section 2(15) of the Income Tax Act, 1961.
3. Classification of activities as charitable or commercial.
4. Application of income for the benefit of persons under Section 13(3) of the Act.
5. Levy of interest under Section 234B and Section 234D of the Act.

Detailed Analysis:

1. Denial of Exemption under Section 11 and Section 12:
The assessee contested the denial of exemption under Sections 11 and 12 by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)], who rejected the claim on the grounds that the activities were not charitable and were hit by the first proviso to Section 2(15). The Tribunal noted that the assessee was registered under Section 12AA of the Act and was a Section 25 company under the Companies Act, 1956, which prohibits distribution of profits. The primary objective of the assessee was to administer the payment settlement system for the larger benefit of the general public, not to run the clearing system on a commercial basis.

2. Applicability of the First Proviso to Section 2(15):
The first proviso to Section 2(15) states that the advancement of any other object of general public utility shall not be considered charitable if it involves carrying on any activity in the nature of trade, commerce, or business. The Tribunal found that the assessee's activities of providing a national payment infrastructure were not driven by profit motive but were aimed at public welfare. The fees charged were to cover operational costs, and the reduction in fees over the years supported the claim of non-commercial intent. The Tribunal also referred to the CBDT Circular No. 11 of 2008, which clarified that the first proviso applies only to entities carrying on commercial activities.

3. Classification of Activities as Charitable or Commercial:
The Tribunal observed that the assessee's activities, such as operating the National Financial Switch (NFS), Immediate Payment Service (IMPS), Cheque Truncation System (CTS), and RuPay, were aimed at enhancing the payment system infrastructure for public benefit. The dominant purpose was to promote public welfare, not to earn profit. The Tribunal applied the "dominant purpose test" from various judicial pronouncements, concluding that the assessee's activities were charitable.

4. Application of Income for the Benefit of Persons under Section 13(3):
The AO had denied exemption under Section 13(1)(c)(ii), alleging that the income was applied for the benefit of persons referred to in Section 13(3). The Tribunal found that the services were uniformly available to all users, and no special benefits were given to promoter banks. The promoter banks were mere subscribers to share capital, not substantial contributors. Hence, the provisions of Section 13(1)(c)(ii) were not applicable.

5. Levy of Interest under Section 234B and Section 234D:
Grounds related to the levy of interest under Sections 234B and 234D were deemed consequential and did not require specific adjudication.

Conclusion:
The Tribunal directed the lower authorities to grant the exemption under Sections 11 and 12 to the assessee, as the primary objectives were charitable, and the activities did not fall under the proviso to Section 2(15). The appeals for both assessment years were allowed.

---