Charging Interest in Microfinance Doesn’t Kill Charitable Status: ITAT Delhi

Humana People to People India Vs DCIT (ITAT Delhi)

ITAT Delhi Holds Microfinance as Charitable – Charging Interest Doesn’t Kill Charitable Nature – ITAT Backs NGO’s Livelihood Work

Background

• Assessee: Humana People to People India (HPPI), a not-for-profit company registered u/s 25 of Companies Act & u/s 12A of the Income Tax Act.
• Activities: Education, relief to poor, medical relief, environment & microfinance (since 2007).
• AO’s Findings (29.12.2019 u/s 143(3)):
  • Noted income from commission, processing fee, interest, and microfinance exceeded 20% of total receipts.
  • Applied proviso to s.2(15), held microfinance activity commercial.
  • Treated specified grants of ₹31.71 Cr as income.
  • Assessed taxable income at ₹5.43 Cr, denied exemption u/s 11.
• CIT(A)/NFAC (30.09.2024): Upheld AO’s order, treated assessee as AOP, confirmed denial of exemption.

Tribunal’s Findings

1. Charitable Nature of Microfinance

• Microfinance started in 2007 to provide credit to rural poor women.
• Tribunal noted:
  • Earlier years’ assessments consistently accepted microfinance as charitable.
  • RBI circulars allow NGOs to act as business correspondents; income incidental to livelihood support.
• Cited precedents:
  • Spandana (Rural & Urban Development Organization) (AP HC, 2013).
  • Navodaya Grama Vikas Charitable Trust (ITAT Bangalore, 2023).
  • Janodaya Trust (ITAT Bangalore, 2016).
  • Adhikar, Bhubaneshwar (ITAT Cuttack, 2018).
• Held: Charging 14–26% effective interest to cover costs does not make activity commercial.

2. Specified Grants

• AO wrongly treated earmarked grants (₹31.71 Cr) as income.
• Tribunal relied on DIT vs. Society for Development Alternatives (Del HC, 2012):
• Specified grants are liabilities, not voluntary contributions, as they must be used only for earmarked purposes.

3. Application of Proviso to Section 2(15)

• AO’s reliance on Circular 11/2008 misplaced.
• Tribunal: Assessee engaged in relief of poor, education & livelihood support.
• Microfinance subserves main charitable objects; not business or trade.

Decision

• Exemption u/s 11 & 12 restored.
• Additions of ₹5.43 Cr deleted.
• Both orders of AO (29.12.2019) & CIT(A) (30.09.2024) set aside.
• Appeal allowed in full

FULL TEXT OF THE ORDER OF ITAT DELHI