Microfinancing activity by charging exorbitant interest not charitable in nature: ITAT Bangalore

Sanghamitra Rural Financial Services Vs ACIT (Exemptions) (ITAT Bangalore)

ITAT Bangalore held that microfinancing activities by charging exorbitant interest cannot be considered to be charitable purpose in terms of section 2(15) of the Income Tax Act accordingly exemption claimed u/s 11 and 12 duly deniable.

Facts- Main issue involved here is whether the microfinancing activity conducted by the assessee falls under the first limb of section 2(15) of the Act or activities such as advancement of any other object of general public utility or any other activity, which falls outside the scope of section 2(15) of the Act.

Conclusion- If such assessee is engaged in any activity in the nature of trade, commerce or business or renders any service In relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose. In such a case, the object of general public utility will be only a mask or a device to hide the true purpose which is trade, commerce or business or the rendering of any service in relation to trade, commerce or business. Each case would, therefore, be decided on its own facts and no generalization is possible. Assessees, who claim that their object are charitable purpose within the meaning of section 2(15), would be well advised to eschew any activity which is in the nature of trade, commerce or business or the rendering of any service in relation to any trade, commerce or business.

Held that the assessee is only doing the microfinancing activities by charging exorbitant interest, which does not commensurate with the prevailing rate. It is also noted that the activity is not also in lieu of any benefit to low-income group who are very vulnerable and are not in a position to cope up with such financial burdens. In order to consider the activity to be charitable in nature, the services rendered must commensurate with the benefit that may arise to such low-income group. The facts of the case relied by the ld. A.R. is quite opposite to the facts of the present case, which has been brought out in the earlier paragraphs of this order. It is also noted that nothing has been spent by the assessee, which could be considered in the nature of charity and therefore, the benefit under the proviso to section 2(15) of the Act is not available to the assessee.

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