2026 (3) TMI 1614 - HC - Income Tax

Charitable status for microfinance denied where interest-bearing lending and commercial elements showed a business-like activity.

Microfinance activities carrying commercial elements and interest-bearing lending were treated as business-like rather than charitable for income-tax ... Rejection of application for registration u/s 12A(1)(ac)(iii) - Charitable purpose u/s 2(15) - Microfinance activities - Profit motive or charitable - Rejection of the petitioner's application for registration on the ground that its objects relating to microfinance were not charitable was upheld - HELD THAT: - The Court held that provision of microfinance and credit facilities, even if intended for economic upliftment, would not qualify as a charitable activity where the operations bear commercial features. The governing test is the absence of profit motive. Since the authority found that the petitioner had not satisfactorily explained the manner in which microfinance would be carried on, had not disclosed the rate of interest to be charged, and proposed lending on RBI norms without establishing how such interest-based activity would remain charitable, the conclusion that the microfinance objects in the Memorandum could not be treated as charitable suffered from no perversity or illegality. [Paras 8, 10] Final Conclusion: The Court upheld the order rejecting registration, holding that the petitioner's microfinance objects were not shown to be charitable in nature. It, however, left it open to the petitioner to apply afresh for exemption after duly amending its Memorandum of Association in accordance with law. Issues: Whether microfinance activities, carried on with commercial elements and interest-bearing lending, could be treated as charitable activity so as to sustain approval or registration under the Income-tax Act, 1961.Analysis: The petitioner's objects included providing microfinance and credit to poorer sections for socioeconomic development. Under Section 2(15) of the Income-tax Act, 1961, charitable purpose includes relief of the poor and advancement of any other object of general public utility, but the proviso excludes activities in the nature of trade, commerce or business, or services rendered for consideration, where the activity crosses the statutory threshold. The recorded findings showed that the petitioner did not disclose the lending model, rate of interest, or other operational particulars, and the proposed microfinance was not shown to be free from commercial considerations. On that basis, the activity was treated as business-like rather than charitable.Conclusion: Microfinance activities, on the facts found, were not charitable in nature and the rejection of exemption or registration was justified.