Commercial microfinance lending was treated as business activity, so charitable exemption was unavailable for the income.

Microfinance lending carried on at a substantial rate of interest and with commercial features was treated as activity in the nature of trade, commerce or business under the proviso to section 2(15), so it did not retain charitable character and exemption under section 11 was unavailable. The activity was held to fall within advancement of any other object of general public utility, but the profit-oriented nature of the lending brought it outside "charitable purpose" for income-tax exemption. The alternative claim under section 11(4A) also failed because the microfinance business was not incidental to the assessee's charitable objects, and the denial of exemption on microfinance income was upheld.

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Issues: Whether the assessee's microfinance activity qualified as a charitable activity so as to entitle it to exemption under section 11 of the Income-tax Act, 1961.

Analysis: The issue was examined in the light of section 2(15) of the Income-tax Act, 1961, as amended by the proviso applicable from 01.04.2009, which excludes from "charitable purpose" any activity in the nature of trade, commerce or business, or rendering services in relation thereto for consideration. The assessee's activity was found to be microfinance lending at a substantial rate of interest, with commercial features and profit orientation. It was held that such activity fell under advancement of any other object of general public utility and, in view of the proviso to section 2(15), could not retain charitable character. The alternative plea under section 11(4A) also failed because the microfinance business was not incidental to the assessee's charitable objects.

Conclusion: The denial of exemption under section 11 was upheld, and the assessee was held not entitled to claim charitable exemption on the microfinance income.

Ratio Decidendi: Where an 's principal activity is commercial microfinance lending with substantial interest income, it is not a charitable activity within section 2(15), and exemption under section 11 is unavailable unless the business is truly incidental to the charitable objects under section 11(4A).

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