ITAT Upholds NPCI’s Section 11 Exemption Despite Transaction-Based Payment Service Fees

DCIT Vs National Payments Corporation of India (ITAT Mumbai)

Summary: The Mumbai ITAT dismissed the Revenue’s appeals for AYs 2013-14 and 2014-15 and upheld the CIT(A)’s decision granting National Payments Corporation of India (NPCI) exemption under Sections 11 and 12. The Revenue argued that NPCI’s transaction-based receipts of Rs.2,16,91,14,950 from ATM, IMPS, CTS, RuPay, NACH and AEPS services constituted systematic trade, commerce or business attracting the proviso to Section 2(15), and also alleged violation of Section 13(1)(c)(ii) read with Section 13(3). NPCI was incorporated as a Section 25 non-profit company pursuant to the initiative of RBI and the Indian Banks’ Association for operating nationwide payment and settlement infrastructure. The Tribunal noted that its earlier order in NPCI’s own case for AY 2010-11 had treated its predominant object as advancement of general public utility, holding that charging fees to fund technology-intensive infrastructure and earning surplus did not by themselves establish a commercial purpose. It had also found that services were uniformly available and promoter banks received no fee concession or preferential benefit. The Revenue relied upon the Supreme Court decision in ACIT (Exemption) Vs Ahmedabad Urban Development Authority, but the Tribunal found the facts admittedly identical to NPCI’s earlier case and, respectfully following that decision, found no infirmity in the CIT(A)’s view. The Revenue’s appeals for both assessment years were consequently dismissed.

The Mumbai ITAT upheld NPCI’s exemption under Sections 11 and 12, rejecting the Revenue’s argument that transaction-based fees from services such as RuPay, IMPS, NACH, AEPS and ATM switching made its operations commercial under the proviso to Section 2(15).

The Tribunal held that NPCI was established at the initiative of the RBI and Indian Banks’ Association to create nationwide payment infrastructure serving a general public utility. Charging fees and generating a surplus did not alter this dominant charitable purpose, particularly as the fees financed technology-intensive infrastructure and were not driven primarily by profit.

It also rejected the alleged violation of Section 13(1)(c)(ii): NPCI’s services were offered uniformly, and its promoter banks received no preferential pricing or special benefit. Following its earlier ruling in NPCI’s own case on materially identical facts, the Tribunal upheld the CIT(A)’s orders.

List of Cases Discussed / Relied Upon

1. National Payments Corporation of India – assessee’s own case,ITA No. 5431/Mum/2015, AY 2010-11, ITAT Mumbai, order dated 06.07.2020 — followed by the Tribunal as the facts for AYs 2013-14 and 2014-15 were admittedly identical.
2. ACIT (Exemption) Vs Ahmedabad Urban Development Authority,(2022) 143 taxmann.com 278 (SC) — relied upon by the Revenue regarding applicability of the proviso to Section 2(15) to systematic activities carried on for consideration.
3. Hiralal Bhagwati Vs CIT,(2000) 246 ITR 188 (Gujarat HC) — discussed in the earlier NPCI order regarding the Assessing Officer’s ability to re-examine charitable objects after registration.
4. Institute for Development & Research in Banking Technology (IDRBT),63 taxmann.com 297 (ITAT Hyderabad) — relied upon in the earlier NPCI order since NPCI had taken over the National Financial Switch activity from IDRBT; Revenue’s appeals were stated to have been dismissed by the High Court of Andhra Pradesh & Telangana in the judgment reported at 400 ITR 66 and the SLP was dismissed on 20.07.2018.
5. India Trade Promotion Organisation Vs DGIT (Exemption) & Ors.,371 ITR 333 (Delhi HC), judgment dated 22.01.2015 — discussed for the dominant-purpose test and the principle that collection of a fee or consideration does not by itself destroy charitable character where profit-making is not the dominant objective.
6. Institute of Chartered Accountants of India Vs DGIT,347 ITR 99 (Delhi HC) — among the decisions considered in India Trade Promotion Organisation Vs DGIT (Exemption) on the scope of charitable purpose and the proviso to Section 2(15).
7. Bureau of Indian Standards Vs DGIT,(2013) 212 Taxman 210 (Delhi HC) — among the decisions considered while examining the application of the proviso to Section 2(15).
8. Institute of Chartered Accountants of India Vs DGIT,358 ITR 91 (Delhi HC), judgment dated 04.07.2013 — discussed for the proposition that the dominant object of an institution is material and that incidental consideration or fees do not necessarily constitute trade, commerce or business.
9. GSI India Vs DGIT,(2013) 219 Taxman 205 (Delhi HC) — among the decisions considered in the dominant-purpose jurisprudence referred to in the earlier NPCI order.
10. Maharashtra Housing & Area Development Authority Vs ADIT,ITA No. 6678/Mum/2013, ITAT Mumbai, order dated 04.06.2019 — cited for application of the dominant-purpose test in determining whether activities are in the nature of trade, commerce or business.
11. DIT(E) Vs Shree Nashik Panchvati Panjrapole,ITA No. 1565 of 2014, Bombay HC, judgment dated 24.02.2017 — discussed for the relevance of profit intent while determining whether an activity constitutes trade, commerce or business.
12. DIT(E) Vs Sabarmati Ashram Gaushala Trust,(2014) 362 ITR 539 (Gujarat HC) — relied upon for the principle that the proviso to Section 2(15) was aimed at commercial activities masked as charity and not genuine charitable activities producing incidental receipts.
13. Ahmedabad Urban Development Authority Vs ACIT,396 ITR 323 (Gujarat HC), judgment dated 02.05.2017 — discussed in the earlier NPCI order for the predominant-object test in determining whether an entity pursuing an object of general public utility loses its charitable character because it earns income.
14. CIT Vs Lucknow Development Authority,265 CTR 433 (Allahabad HC), judgment dated 16.09.2013 — discussed for the proposition that an entity pursuing charitable objects without a profit motive does not necessarily fall within the proviso to Section 2(15) merely because some profit arises in the course of its activities.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Present appeals filed by revenue arises out of the orders dated 18/02/2026 passed by NFAC, Delhi [hereinafter referred to as “Ld.CIT(A)”] for A.Ys. 2013-14 & 2014-15. The grounds of appeal for both the Assessment years are identical except for variance in the quantum. Grounds of appeal for AY 2014-15 are extracted for ready reference:-

“1) On the facts and circumstances of the case and in law, the Ld. without appreciating that the objects of the assessee fall under advancement of any other object of general public utility and are therefore subject to strict applicability of proviso to section 2(15), and further failed to appreciate that the assessee is earning substantial income of Rs. 2,16,91,14,950/- by providing payment and settlement platform services (ATM, IMPS, CTS, RuPay, NACH, AEPS etc.) to banks for consideration based on volume of transactions, which reflects a fee-based commercial model and clearly establishes that the activities are in the nature of trade, commerce OR business, and thus required proper examination by Ld CIT(A), NFAC under proviso to section 2(15), which has not been done.

2) On the facts and circumstances of the case and in law, the Ld. CIT(A), NFAC erred in not appreciating that the assessee is engaged in systematic, continuous and large scale activities involving huge volume of transactions and consideration, which are not incidental in nature, and further that the services rendered by the assessee are directly in relation to the business activities of member banks, which are commercial entities, thereby clearly establishing that the assessee is carrying on activities in the nature of trade, commerce OR business for consideration, attracting the proviso to section 2(15) of the Act.

3) On the facts and circumstances of the case and in law, the Ld. CIT(A), NFAC erred in ignoring that profit motive is not a relevant OR decisive test after amendment to section 2(15), and that even activities carried out in the nature of trade, commerce OR business for consideration are sufficient to attract the proviso to section 2(15) and deny exemption u/s. 11, as clearly laid down by the Honble Supreme Court in the case of Ahmedabad Urban Development Authority vs. ACIT (2022) 143 taxmann.com 278 (SC), wherein it has been held that WHARE an entity carries out activities for consideration in a systematic manner, such activities would fall within the scope of trade, commerce OR business, and that the absence of profit motive OR application of income for charitable purposes is not determinative once the proviso to section 2(15) is attracted.

4) On the facts and circumstances of the case and in law, the Ld. CIT(A), NFAC erred in accepting the contention of the assessee that the assessee is part of RBI mechanism, without appreciating that the assessee is not a statutory body and is not created by any Act of Parliament, and is promoted by commercial banks, and thereby cannot claim any special status consequently liable for application of the proviso to section 2(15) of the Act.

5) On the facts and circumstances of the case and in law, the Ld. CIT(A), NFAC erred in not considering that even if the activities of the assessee are treated as advancement of object of general public utility, the same are hit by proviso to section 2(15) of the Act, as the assessee is carrying on systematic and regular activities in the nature of trade, commerce OR business for consideration, and consequently failed to examine that once the proviso to section 2(15) read with section 13(8) of the Act, and further erred in not appreciating that the provisions of section 13(1) (c)(ii) read with section 13(3) are independently attracted in the facts of the case.

6) On the facts and circumstances of the case and in law, the Ld. CIT(A), NFAC erred in relying upon the decision of the Honble ITAT in assessees own case for AY 2010-11 without appreciating that the said decision of Honble ITAT has not attained finality, as the Department has filed further appeal before the Honble Bombay High Court in ITXA No. 273 of 2022, which is pending for adjudication.

7) The appellant craves leave to add, amend, alter vary and/OR withdraw any of the grounds of appeal.”

As the issues involved in both the assessment years are identical, except for the variance in quantum, both the appeals were heard together and are being disposed of by this consolidated order.

ITA No. 5328/Mum/2026 for AY 2014-15 is taken up as the lead case, and the adjudication therein shall apply mutatis mutandis to the other appeal.

2. Brief facts of the case are as under:-

The assessee, National Payments Corporation of India (NPCI), is a non-profit company incorporated as a company u/s. 25 of the Companies Act, 1956 on 19/12/2008, pursuant to the initiative of the Reserve Bank of India (RBI) and Indian Banks Association (IBA), for implementation of the Payment and Settlement Systems Act, 2007. The assessee was registered u/s. 12A/12AA of the Income-tax Act, 1961 with effect from 01/04/2009. Its stated objects, inter alia, include promoting, establishing, operating and maintaining payment and clearing systems and developing secure communication infrastructure for the banking and financial sector, with a view to providing efficient and cost-effective payment

2.1. For AY 2014-15, the assessee filed its return of income on 29/09/2014 declaring total income at Nil. During the year, the assessee reported income of Rs. 2,09,18,00,908/- from property held for charitable purposes and claimed application of Rs. 2,06,29,02,084/- towards its objects. The assessee accordingly claimed exemption u/s. 11 and 12 of the Act.

2.2. The assessment was completed u/s. 143(3) by the Ld. AO vide order dated 25/11/2016, determining the total income at Rs. 74,64,92,530/-. The Ld.AO rejected the assessee’s claim of exemption u/s. 11 and 12 primarily on the ground that its objects fell within the limb of “advancement of any other object of general public utility” and that its activities were hit by the proviso to section 2(15) of the Act. The Ld.AO noted that the assessee had received Rs. 2,16,91,14,950/- as income from providing payment- platform/gateway services in respect of ATM, IMPS, CTS, RuPay, NACH and AEPS transactions undertaken for member banks. According to the Ld. AO, the assessee was rendering services for consideration in relation to the business of its client banks and the activities were systematic and substantial in volume, and hence were in the nature of trade, commerce or business.

2.3. The Ld.AO further rejected the assessee’s contention that it formed part of the RBI mechanism, observing that the assessee was not a statutory or regulatory authority created by an Act of Parliament and that RBI was not its promoter or part of its legal establishment. The Ld.AO noted that the assessee was promoted by ten commercial banks and was merely subject to the regulatory

2.4. The Ld.AO also invoked section 13(1) (c)(ii) read with section 13(3) of the Act. According to the Ld.AO, the ten banks which had subscribed to the share capital of the assessee constituted related persons within the meaning of section 13(3), and the assessee’s payment-system activities, particularly the National Financial Switch/ATM-switch services, facilitated and benefited the business of such commercial banks. The Ld.AO accordingly held that the assessee’s income had been applied directly or indirectly for the benefit of persons referred to in section 13(3).

2.5. The Ld. AO further held that, once the proviso to section 2(15) was attracted, the benefit of sections 11 and 12 was unavailable in view of section 13(8) of the Act. Consequently, the assessee was held not to be entitled to exemption u/s. 11 and 12. The Ld.AO also made an addition of Rs. 41,47,12,988/- on account of interest relating to Settlement Guarantee Mechanism (SGM) investment, observing that the income had been credited as a liability and had not been offered to tax.

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A).

3. Before the Ld.CIT(A), the assessee, inter alia, contended that it was established for advancement of an object of general public utility. It was submitted that payment and settlement activities of the assessee were undertaken in a regulated environment under the supervision of RBI The assessee further submitted that the fees charged were nominal and intended to recover costs; and that its basis. The assessee also relied upon the decision of the Tribunal in its own case for AY 2010-11.

3.1. The Ld. CIT(A), allowed the assessee’s substantive grounds relating to exemption u/s. 11 and 12. The Ld. CIT(A) relied on the decision of the Mumbai Bench of the Tribunal in assessee’s own case in ITA No. 5431/Mum/2015 for AY 2010-11 and noted that the issue involved was the same. The Ld. CIT(A) observed that the Tribunal had held the assessee’s primary objects to be charitable and that the receipts generated from its activities were incidental to carrying out its charitable objects.

3.2. The Ld. CIT(A) further observed that the Ld. AO had failed to establish any distinguishing feature in AY 2014-15 vis-à-vis the earlier assessment years considered by the Tribunal. The Ld. CIT(A), therefore, followed the decision of the Tribunal and deleted the disallowance of exemption u/s. 11 and 12. The Ld. CIT(A) also held that no substance was found in the allegation of violation of section 13(1) (c)(ii).

3.3. As regards the addition of Rs. 41,47,12,988/- relating to SGM investment, the Ld.CIT(A) noted that the assessee had already accounted for the interest income and had subsequently obtained rectification of the issue from the Ld.AO vide rectification order dated 28/02/2018. The corresponding ground was, therefore, held to have become infructuous and was dismissed. The Ld.CIT(A)

directed consequential recomputation of interest u/s. 234B. Aggrieved by the aforesaid order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal

4. The Revenue, in the present appeal, has challenged the action of the Ld. CIT(A) in allowing exemption u/s. 11 and 12, primarily contending that the assessee’s objects fall under the category of advancement of any other object of general public utility and that its substantial fee-based payment and settlement activities constitute activities in the nature of trade, commerce or business, thereby attracting the proviso to section 2(15).

4.1. The Revenue has also challenged the finding of the Ld. CIT(A) regarding the assessee’s status as part of the RBI mechanism, the applicability of section 13(1) (c)(ii) read with section 13(3), and the reliance placed upon the Tribunal’s decision in assessee’s own case for AY 2010-11, contending that the said decision has not attained finality and is pending before the Hon’ble Bombay High Court.

4.1.1. It is noted that this Tribunal in assessee’s own case in ITA No.5431/Mum/2015 vide order dated 06/07/2020 has observed as under:

“8.1 For determination of issues, we find it imperative to appreciate the basic factual matrix in which the assessee entity has come into existence. It is undisputed fact that the assessee has been granted a valid registration u/s 12AA of the Act which has never been revoked by the revenue authorities. The registration has been granted post-insertion of proviso to Sec.2(15) obviously after looking into the object of the assessee. The assessee has been incorporated under special provisions of Sec.25 of The Companies Act, 1956 which provide for registration of entities which are set up for promoting commerce, art, science, charity of any other similar useful object to promote public good and which do not intend to distribute their profits by way of dividend. As per various clauses of Memorandum & Articles of Association, the assessee is prohibited from distributing its profits by way of dividend to its members. Even in case of dissolution or winding up, the residual surplus was not to be distributed amongst the members but were to be transferred to specified entity having similar objects.

8.2 The RBI in its vision document 2005-08 (issued during May, 2005) titled as ‘Payment Systems in India’ take note of the fact that with a view to help with the payment settlement process, the facility of ATM-switch was set up and operated by IDRBT, Hyderabad. A need has been felt that Indian Retail Clearing function, in its entirety, could be entrusted to a separate legal entity at national level and RBI could provide settlement services for all the clearing systems, besides being regulator and supervisor of the payments systems. The Broad framework of the proposed new national entity was elaborated therein. The formation of national level entity would ensure uniformity of structure, operations and procedures. This entity would deploy professionally skilled competent personnel to manage and run clearing operations and pave the way for conducting all clearing functions at national level leading to better information dissemination and better customer education on various services and systems. The document also envisages drafting comprehensive legislation on payment system by way of a payment system bill. The main objective would be to establish safe, secure, sound and efficient payment system in India, matching international standards and best practices. This proposed entity would provide a robust and technologically intensive centralized system offering Electronic Clearing Services (ECS), Electronic Funds Transfer (EFT) and National Electronic Fund Transfer (NEFT) services covering the entire country and to take initiatives on ATM-switching, multi-application smart card, e-commerce and m-commerce based payment systems. This new entity would bring about efficiency enhancements and uniformity in the existing payment products and develop new products taking advantage of technology innovation. In this background, the document envisions setting up of an institution at national level which would own and operate all retail payment systems of the country. To achieve this, the document proposes enactment of Payments and Settlement Bills.

8.3 Subsequently, Govt. of India introduced ‘The Payment and Settlement Systems Bill, 2006’ in the year 2006 to facilitate the oversight of Payments and Settlement Systems in the country by RBI. After review of the bill by a standing committee set up by Parliament, the said bill was passed by the Parliament on 26/11/2007 and accordingly, it became an Act. As per Section 4 ‘The Payment and Settlement Systems Act, 2007’ (in short ‘PSS Act’), no person other than RBI could operate or commence a payment system unless authorized by RBI.

8.4 The standing committee on finance for examination and report on the bill, submitted its 56th Report after obtaining information from Finance Ministry and after incorporating the views of various concerned parties. The committee referred to the background and framework of NPCI and discussed issues raised by officers of RBI on NPCI being given the task of implementing the PSS. At para-29, the Report quotes Finance Ministry as stating that NPCI would be a Section 25 company owned and operated by banks and that no bank or bank group can have shareholding of more than 10% and shares would be held by as many banks as possible and it was also decided that RBI would have representation on the Board. Para-32 of the Report take note of RBI’s reply that RBI has not been operating the clearing system to generate income. Income generation was only incidental. RBI started the cheques processing center as a part of its initiative to build a sound cheque clearing system. A need was felt to consolidate all clearing centers under an umbrella organization to bring efficiency and standardization of procedures and practices. Further, the profits to be generated by the new company were not to be paid to the shareholders as dividend but would be used only for further development of payment system.

8.5 At the time of passage of the PSS Bill, 2006 the then Hon’ble Finance Minister, inter-alia, reiterated that NPCI was a non-profit corporation and a Section 25 company and that its income would not be distributed as dividends but would be ploughed back for creation of infrastructure. He further stated that NPCI will be a public sector corporation owned by Public Sector Banks, who will own not less than 51% in NPCI.

8.6 Accordingly, NPCI was incorporated as Section 25 Company and it was specifically provided in its Memorandum of Association that none of its objects shall be carried out on a commercial basis. The income and the property of NPCI shall be applied solely for the promotion of its objects and that no part thereof shall be paid or transferred by way of dividend, bonus or otherwise by way of profit.

8.7 The Board for Regulation and Supervision of Payment and Settlement Systems, at its meeting held on 24/09/2009, granted in-principle authorization to NPCI for operating various retail payment systems in India. The RBI on 15/10/2009, in exercise of powers conferred under the PSS Act, 2007, granted authorization to assessee to take over the operations of National Financial Switch (NFS) from IDRBT. The assessee took over NFS operations from 14/12/2009 and it started charging a fee of Re.1 per transaction undertaken by customers of banks using the NPCI’s infrastructure. The fee has gradually been reduced over the years by as much as 70% notwithstanding the fact that the assessee was enjoying monopoly over the payment systems. As of today, the assessee is stated to have received authorization from RBI.

8.8 Thus, from the perusal of chronology of these events, it is quite discernible that the assessee has sole authorization from RBI to operate the payment systems in India. The overall regulation as well as supervision was to be exercised by RBI in terms of PSS Act, 2007. Although the assessee was not created under PSS Act, 2007 but it was sole authorized arm of RBI to carry out payment settlement system in India in a professional manner by utilizing the latest technology. The overall purpose was to achieve broad-based social objective to bring efficiency in the clearing systems in India with a view to benefit society at large. Hence, it could be concluded that the assessee’s objectives were to promote the welfare of general public.

8.9 The clearing functions of RBI were divested to the assessee with the emergence of PSS, Act 2007. The electronic payment infrastructure created by the assessee would enable a larger section of the society to enjoy unparalleled secure and convenient payment systems. The systems being developed by the assessee would bring down cost of clearing transactions which would ultimately benefit public at large availing the
banking services. The greater penetration of e-payments would encourage larger participation of citizen in banking system and help in meeting the larger objective of cash-less economy. Therefore, it could safely be concluded that the primary objective of the assessee was to administer the payment settlement system for the larger benefit of general public and not to run the clearing system in a commercial manner or on a commercial basis.

8.10 So far as the issue of charging of fees is concerned, we find that the assessee was engaged in providing technology intensive infrastructure facilities at national level and would obviously require funds to meet the operational cost which would necessitate the charging of fees by the assessee. However, the said fact would not materially alter the primary objective for which the assessee entity was created. It is also evident that the fee charged by the assessee per transaction has drastically been reduced by as much as 70% over several years which would only bolster assessee’s claim that it was not running as commercial organization and its primary motive was not to make profits.

8.11 The observation of Ld. AO that the assessee paid Service Tax of Rs.17 Crores, in our opinion, would not be determinative of assessee’s primary objective. The liability to pay service tax arose to the assessee under separate enactment in view of the fact that the assessee’s activities fell within the meaning of Service as defined in Service Tax Regulations. However, the payment thereof would not bring about material change in assessee’s primary objective. The assessee would naturally be bound to follow the law of land as applicable to it.

8.12 The Ld. CIT-DR has sought to equate the activities of the assessee with that of e-commerce payment system paytm. However, no substance could be found in the same since the assessee was a national level entity envisioned by RBI to take over the clearing mechanism in a unified manner on PAN India basis. The activities of the assessee could not be equated with e-commerce payment system paytm which was merely facilitating e-payments to certain users and it would merely be using the infrastructure created by the assessee. Therefore, the said argument could not be accepted.

8.13 So far as the applicability of the provisions of Sec.13(1) (c)(ii) are concerned, we find that the facilities / services being provided by the assessee were uniformly available to the user of the system against same fee. No concession in fee was given to the promoter entities and it could not be said that the assessee directly or indirectly applied its income for the benefit of persons as specified in Sec.13(3). Another pertinent observation is that the promoter banks were mere subscriber to assessee’s share capital and not entities who made substantial contribution of exceeding Rs.50,000/- in assessee entity. It is matter of common knowledge that there is clear distinction between subscribers to the shares vis-à-vis contributors.

8.14 Regarding Ld. Sr. Counsel’s argument that there would be difference in facility and services and therefore, the assessee would not be covered by the proviso to Sec. 2(15), we are of the opinion that the assessee was engaged in creating infrastructure facilities to improve the clearing mechanism. However, by creation of this facility, the assessee would ultimately be rendering the services to various entities and therefore, the fine distinction between the expression facility and services, in such a case, would get blur. On the facts and circumstances, it would not be correct to say that the assessee was merely creating facility and not providing any services and not hit by proviso to Sec.2(15). We do not find much substance in this argument.

8.15 Another argument raised is that the assessee has been granted a valid registration u/s 12AA of the Act which has never been revoked by the revenue authorities. The registration has been granted post-insertion of proviso to Sec.2(15). Therefore, considering the said fact alone, the deduction could not be denied to the assessee. However, the said fact on standalone basis, in our considered opinion, would not entitle the assessee to claim the exemption u/s 11 & 12 which is evident from the terms of registration certificate itself. It has clearly been mentioned in clause-4 of the registration certificate that registration u/s 12AA does not automatically exempt the income of the Trust. The question of taxability of the income of the Trust has to be examined and decided by Ld. AO based on the activities, compliance with various statutory and other requirements etc. Further, the fact that whether the assessee has actually carried out its activities as per its objects or not, could only be determined on the basis of its financial statements which would be available only at the time of framing of assessment. At the time of registration, the only thing that was required to be seen by the registering authority was that whether the objects of the trust would fall within the expression charitable purposes as defined in Sec. 2(15) or not. Whether the assessee has actually carried out its objects could only be ascertained at the time of framing of assessment by Ld. AO. Therefore, the said plea also could not be accepted. In the case law of Hon’ble Gujarat High Court in Hiralal Bhagwati V/s CIT (2000 246 ITR 188), as relied upon by the assessee, it was held that Ld. AO could not go into the re-examination of assessee’s objects to determine whether it was charitable in nature or not. However, in the present case, Ld. AO has merely invoked proviso to Sec.2(15) to deny the exemption to the assessee. Therefore, the said case law as well as other case laws drawing strength from the same, is on different tangent and do not touch upon the issue of proviso to Sec.2(15) and hence, not applicable to the present case. In the present case, the fact that the assessee was registered with a charitable purpose has not been doubted by Ld. AO.

8.16 Another pertinent factor which goes in assessee’s favor is that the assessee took over existing activities of National Finance Switch (NFS) from Institute for Development & Research in Banking Technology (IDRBT), Hyderabad. That entity is stated to be carrying out the activity of NFS since the year 1996. Similar exemption was denied by revenue authorities to IDRBT for AYs 2010-11 & 2011-12. The assessee agitated
the same with success before Hyderabad Tribunal which is reported at 63 Taxmann.com 297. The revenue contested the order of Tribunal before Hon’ble High Court of Andhra Pradesh & Telangana wherein by judgment dated 09/10/2017 (400 ITR 66), the revenue’s appeals were dismissed for both the years. The Special Leave Petition preferred by the revenue against the same has subsequently been dismissed by Hon’ble Supreme Court vide SLP No. 19564/2018 dated 20/07/2018. It is quite evident that existing activity of NFS was taken over by the assessee from IDRBT and the same was continued. Therefore, in terms of the aforesaid decision also, the assessee would be entitled to claim the deduction u/s 11 & 12.

8.17 The Hon’ble Delhi High Court in assessee’s Writ Petition No. 1872 of 2013 dated 22/01/2015 titled as India Trade Promotion Organization vs. DGIT (Exemption) & Ors. (371 ITR 333), while upholding the constitutional validity of the 1st proviso, has held that in both the activities i.e. (i) activity in the nature of trade, commerce or business or (ii) any activity of rendering any service in relation to any trade, commerce or business, dominant and prime objective is to be seen. If the dominant objective was ‘profit motive’, the trust would not be entitled to claim its objective to be charitable in nature. On the other hand, if the institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it would be an institution established for charitable purposes. It was also observed that merely because a fee or some other consideration is collected or received by the assessee, it would not lose its character of having been established for a charitable purpose. The dominant activity of the assessee was to be examined. If it was not business, trade or commerce then any such incidental or ancillary activity would also not fall within the categories of business, trade or commerce. Although the revenue’s Special Leave Petition [SLP] against the same has been admitted by Hon’ble Supreme Court (84 Taxmann.com 283), however, there is no stay on the operation of this judgement and the same is very well applicable to the facts of present case.

The Hon’ble Court, in the course of stated judgement, has elaborately considered its own decisions rendered in: –

(i) Institute of Chartered Accountants of India V/s DGIT (347 ITR 99)

(ii) Bureau of Indian Standards V/s DGIT (2013 212 Taxman 210)

(iii) Institute of Chartered Accountants of India V/s DGIT [358 ITR 91 04/07/2013]

(iv) M/s GSI India V/s DGIT (2013 219 Taxman 205)

In the case of Institute of Chartered Accountants of India V/s DGIT [358 ITR 91 04/07/2013], it was observed by Hon’ble court that the purpose and dominant object for which an institution carried on its activities is material to determine whether the same is business or not. The purport of the first proviso to Section 2(15) was not to exclude entities which are essentially for charitable purpose but are conducting some activities for a consideration or a fee. The objective to introduce the proviso was to exclude organizations which were carrying on regular business from the scope of charitable purpose. The expression business, trade or commerce was to be interpreted restrictively and where the dominant objective was charitable any incidental activity for the furtherance of the said objective would not fall within the expression trade, business or commerce.

The ratio of aforesaid decisions i.e. dominant purpose test has been applied by co-ordinate bench of this Tribunal in Maharashtra Housing & Area Development Authority V/s ADIT (ITA N. 6678/Mum/2013 04/06/2019) and held that the profit motive is the determinative and critical factor to judge the activities which could be reckoned as in the nature of business, trade or commerce.

The Hon’ble Bombay High Court, while refusing to admit revenue’s substantial question of law, in its decision titled as DIT(E) V/s Shree Nashik Panchvati Panjrapole (ITA N0. 1565 of 2014 dated 24/02/2017), observed that the presence of profit intent (even if it does not fructify) would normally be a sine qua non for the activity to be considered as trade, commerce or business. The Lordship chose to follow the ratio of decision of Hon’ble Gujarat High Court rendered in Sabarmati Ashram Gaushala Trust (2014 362 ITR 539) wherein it was held that the proviso to Sce.2(15) was not aimed at excluding the genuine charitable trusts of general public utility but was aimed at excluding activities in the nature of trade, commerce or business which were masked as charitable purpose. The decision of Hon’ble Delhi High Court in Institute of Chartered Accountants of India V/s DGIT [358 ITR 91 04/07/2013] was also referred to in the stated decision of Hon’ble Bombay High Court and ultimately the application of dominant activity test was upheld.

8.18 The Hon’ble Gujarat High Court in the case of Ahmedabad Urban Development Authority V/s ACIT [396 ITR 323 02/05/2017] has observed that the expression trade, commerce and business must be read in the context of the intent and purpose of Section 2(15) of the act and the same was not meant to exclude entities which are essentially for charitable purposes but conducting some activities for a consideration or a fees. The test which has to be applied is whether the predominant objective of the activity involved in carrying out the object of general public utility was to sub-serve the charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility would cease to be a charitable purpose. But where the predominant object of the activity was to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity.

8.19 Similarly, Hon’ble Allahabad High Court in CIT V/s Lucknow Development Authority 265 CTR 433 16/09/2013 has held that where a trust is carrying on its activities for the fulfilment of its aims and objectives which are of charitable in nature with no motive to earn profit and in the process, earns some profit, the same would not be hit by proviso to Section 2(15).

8.20 Therefore, considering the entirety of facts and circumstances and applying the theory of dominant purpose test, the inevitable conclusion that could be drawn is that the assessee was entitled for exemption u/s 11 & 12. The mere fact that certain fee was charged by the assessee while rendering certain services and surplus was generated, the said fact alone, would not disentitle the assessee to claim the impugned exemption u/s 11 & 12 considering the fact that the primary objects of the assessee were charitable in nature. No substance could be found in the allegation of violation of Sec.13(1) (c)(ii). Accordingly, the lower authorities are directed the grant the exemption to the assessee u/s 11 & 12.

8.21 Resultantly, the appeal stands allowed in terms of our above order.

ITA No. 3382/Mum/2016, AY 2012-13

9.1 In this year, the assessee has similarly been assessed u/s 143(3) on 20/02/2015. The Ld. AO, applying the proviso to Sec.2(15) as well as the provisions of Sec.13(1) (c)(ii), denied exemption u/s 11 & 12 and computed total income at Rs.3842.95 Lacs as against Nil return filed by the assessee on 28/09/2012. The stand of Ld. AO, upon confirmation by learned first appellate authority vide impugned order dated 03/02/2016, is under challenge before us. The assessee is under further appeal before us, with more or less, similar grounds of appeal.

9.2 Facts being pari-materia the same as in AY 2010-11, our adjudication, as contained therein, would mutatis-mutandis apply to this year also. Consequently, Ld. AO is directed the grant the exemption to the assessee u/s 11 & 12.

9.3 Resultantly, the appeal stands allowed, in similar manner.

4.2. Respectfully following the above in admittedly identical facts we do not find any infirmity in view adopted by the Ld.CIT(A) and the same is upheld.

Accordingly, grounds raised by the revenue stands dismissed.

Applying the same observation mutatis mutandis for 2013-14 we uphold view adopted by the Ld.CIT(A).

Accordingly, grounds raised by the revenue stands dismissed.

In the result appeals filed by the revenue for assessment year 2013-14 and 2014-15 stands dismissed.

Order pronounced in the open court on 21/08/2026.