TaxTMI 
TaxTMI 
2026 (9) TMI 915
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...." u/s 2(15) of the Income Tax Act, 1961. 3. The learned CIT(E) erred in travelling beyond the limited scope of enquiry permissible while considering an application under section 12AB, inasmuch as the issue, if any, relating to application of income or allowability of exemption in a particular year could not form the sole basis for refusing renewal of registration. 4. The Ld. CIT(E) has erred in not abiding by the principles laid down in the CBDT Circular No. 100 dated 24.01.1973 which is binding on the income-tax authorities, and therefore the impugned order is bad in law. 5. The Ld. CIT(E) has erred in treating charitable activity of the applicant as a systematic business activity. 6. The Ld. CIT(E) has erred in solely relying upon the information received from faceless assessment unit without independent application of mind thereon. 7. The Ld. CIT(E) erred in rejecting the Appellant's application for renewal of registration under section 12AB by holding that the activities of the Appellant trust do not constitute a "charitable purpose", while ignoring the settled principle of consistency, inasmuch as on identical facts in earlier y....
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....est-free loans for acquiring residential properties. The assessee specifically contended that the beneficiaries themselves purchased the properties directly from independent builders or through resale transactions and the assessee's role was confined to providing financial assistance. According to the assessee, it sanctioned such assistance only after examining the financial position, eligibility and genuine need of the beneficiary. The assessee further explained that it structured repayment in affordable monthly installments depending upon the repayment capacity of each beneficiary and generally allowed a long repayment period of about 100 months. 5. The assessee further submitted that it did not charge any interest, commission, processing fee, service charge or any other consideration from the beneficiaries. It submitted that, where any installment cheque issued by a beneficiary was dishonored, the assessee recovered only the actual bank charges levied upon it and did not impose any additional or penal charge. The assessee, therefore, contended that it recovered only the principal amount advanced to the beneficiary together with actual bank charges, wherever applicable, an....
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....fee, commission or interest. The assessee also relied upon the decision of the Hon'ble Karnataka High Court in CIT v. Saraswath Poor Students Fund [1984] 150 ITR 142 (Kar.), wherein the Court considered financial assistance to poor and deserving students by way of loans and scholarships in the context of charitable activity. 9. The CIT(Exemptions), however, rejected these explanations. The CIT(Exemptions) observed that the assessee systematically identified beneficiaries, sanctioned loans, prescribed structured repayment schedules and continuously recycled the amounts recovered through a revolving fund. According to the CIT(Exemptions), the organized, repetitive and continuing nature of these operations possessed the characteristics of financial intermediation and was akin to micro-financing. The CIT(Exemptions) took the view that the mere absence of interest or a profit motive would not make the activity charitable if the inherent nature and character of the activity remained commercial or business-like. 10. The CIT(Exemptions) further held that the lending activity constituted a substantial and dominant part of the assessee's operations. According to him, the assess....
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....the definition of "charitable purpose" under section 2(15) of the Act. He further observed that deployment of the assessee's funds in what he described as "non-specified modes" indicated non-compliance with the statutory requirements and, on that basis, invoked violation of section 13(1)(d) read with section 11(5) of the Act. The CIT(Exemptions) held that the assessee's activities could not be regarded as genuine for the purposes of section 12AB of the Act. 14. The assessee is in appeal before us against the order passed by CIT(Exemptions) dismissing the application of the assessee. 15. We have heard the rival submissions and carefully perused the material placed before us. The main controversy before us is whether the activity of providing financial assistance by way of interest-free repayable loans to financially needy persons for acquisition of residential houses can be regarded as a charitable activity within the meaning of section 2(15) of the Act or whether, as held by the learned CIT(Exemptions), the systematic and organized manner in which the assessee carries on this activity makes it a lending or micro-finance business disentitling the assessee to registrati....
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....ver fall within any limb of charity under section 2(15) of the Act. Section 2(15) of the Act does not prescribe that relief to an economically weaker person must necessarily take the form of an outright grant. Nor does the provision exclude assistance for securing a basic residential house merely because such assistance results in acquisition of immovable property by the beneficiary. The statutory test is the charitable purpose which the activity serves. If a trust assists financially needy persons to secure basic housing and the assistance genuinely operates as economic relief without generating commercial return for the trust, the mere fact that the relief takes the form of a recoverable loan instead of an outright donation cannot, by itself, destroy its charitable character. 20. In this regard, CBDT Circular No.100 dated 24.01.1973 is also of relevance. The Circular states, in the context of educational assistance, that advancement of a loan can constitute application of income towards a charitable object and the mere fact that the amount is repayable does not necessarily convert the transaction into money-lending. The Circular deals with educational loans and, therefore, can....
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....es, Courts and Tribunals have recognised the possibility of charitable character. On the other hand, where the institution charges interest and conducts the financing activity substantially on commercial lines, the charitable claim may fail. The recent judgment of the Hon'ble Calcutta High Court in Pranab Micro Services Federation vs. Principal Chief Commissioner of Income-tax [2026] 185 taxmann.com 921 (Calcutta)[25-03-2026] held that where assessee, a Section 8 company, sought registration under section 12AB, Commissioner (Exemptions) rejected application as it failed to explain its microfinance operations, did not specify interest rates, and had not undertaken substantial charitable activities, since microfinance involved commercial elements such as charging interest, it would not qualify as a charitable purpose under section 2(15),of the Act and as assessee failed to establish absence of profit motive, rejection was upheld. 24. The facts before us, subject to verification of the accounts, stand on a different footing because the Revenue itself has not identified any interest, commission, processing charge or other return earned by the assessee from these housing advances....
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....2,21,520/- and received repayment of Rs.11,42,89,977/-, leaving a closing loan balance of Rs.30,98,37,061/-. Thus, the figures are properly reconciled, as the opening loan balance plus fresh loans given during the year, after reducing the repayments received, gives the closing loan balance. The same position is seen in the earlier years. For F.Y. 2023-24, the opening loan balance was Rs.22,56,37,002/-, fresh loans were Rs.13,17,89,345/-, repayments were Rs.9,05,20,829/- and the closing balance was Rs.26,69,05,518/-. Similarly, for F.Y. 2022-23, the opening balance was Rs.21,19,38,994/-, fresh loans were Rs.8,61,97,736/-, repayments were Rs.7,24,99,728/- and the closing balance was Rs.22,56,37,002/-. These figures prima facie show that the amounts received from the beneficiaries have been reduced from the outstanding loans and have not been treated as income earned by the assessee. 29. The fund-flow statements for F.Ys. 2022-23, 2023-24 and 2024-25 also support the assessee's case. The assessee has separately shown the repayment of housing loans on the receipts side and fresh housing loans on the payment side. The assessee has also separately shown interest income from its in....
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.... upon a genuine and consistently applied means-based selection process. The material placed before us shows that the assessee examines the income, dependants, housing requirement and financial capacity of an applicant before sanctioning assistance. So long as the assessee restricts the scheme in substance to persons who genuinely require financial assistance for obtaining reasonable residential accommodation, the activity can fall within "relief of the poor". If, on the other hand, the assessee were to finance property purchases indiscriminately without regard to financial need, the same conclusion would not necessarily follow. 33. We now come to the learned CIT(Exemptions)' further observation regarding section 13(1)(d) read with section 11(5) of the Act. The learned CIT(Exemptions) has stated in general terms that the assessee deployed funds in "non-specified modes", but has not identified the particular investment or deposit, the amount involved or the manner in which it violated section 11(5). This reasoning cannot be sustained merely by treating loans granted in furtherance of charitable objects as investments. 34. In view of the material placed before us, we find th....
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....ation. 37. The material placed before us prima facie supports the assessee's case. The year-wise statements show that the opening loan balances, fresh loans, repayments and closing loan balances broadly reconcile. The fund-flow statements also separately disclose interest income from investments but do not disclose any interest, commission or processing charges from the housing loans. The assessee has further stated that it recovers only the principal amount from the beneficiaries and recycles such recoveries for providing assistance to other beneficiaries. However, these aggregate figures by themselves cannot decisively establish the manner in which every individual loan has been granted and recovered. We therefore consider it appropriate that the learned CIT(Exemptions) verifies the actual working of the scheme before granting registration. 38. We accordingly hereby modify the conclusion and hold that, though we accept the assessee's legal contention in principle that interest-free housing assistance to financially needy persons can constitute a charitable activity within the meaning of section 2(15) of the Act, we hereby direct the learned CIT(Exemptions) to carry out ....
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....f a structured procedure, obtaining post-dated cheques and monitoring of repayments are relevant factual circumstances but are not, by themselves, sufficient to establish commerciality. The decisive consideration is whether, looking at the activity as a whole, the assessee provides genuine financial relief to the intended class of needy beneficiaries without deriving any profit or other commercial benefit. 41. If, upon the above verification, the learned CIT(Exemptions) finds that the assessee selects beneficiaries on the basis of genuine financial need; grants the loans for acquiring reasonable residential accommodation; recovers only the principal amount together with reimbursement of actual out-of-pocket expenses, if any, without any mark-up; does not charge interest, commission, processing fee, penal charges or any other consideration; does not receive any direct or indirect benefit from builders, sellers or beneficiaries; and redeploys the recovered amounts towards its charitable objects, the activity shall be treated as charitable in nature and the learned CIT(Exemptions) shall grant renewal of registration under section 12AB in accordance with law. 42. On the other han....
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.... scope of enquiry permissible while considering an application under section 12AB, inasmuch as the issue, if any, relating to application of income or allowability of exemption in a particular year could not form the sole basis for refusing renewal of registration. 4. The Ld. CIT(E) has erred in not abiding by the principles laid down in the CBDT Circular No. 100 dated 24.01.1973 which is binding on the income-tax authorities, and therefore the impugned order is bad in law. 5. The Ld. CIT(E) has erred in treating charitable activity of the applicant as a systematic business activity. 6. The Ld. CIT(E) has erred in solely relying upon the information received from faceless assessment unit without independent application of mind thereon. 7. The Ld. CIT(E) erred in rejecting the Appellant's application for renewal of registration under section 12AB by holding that the activities of the Appellant trust do not constitute a "charitable purpose", while ignoring the settled principle of consistency, inasmuch as on identical facts in earlier year's assessments were completed accepting the objects as charitable. 8. Your Appellant craves le....