PEOPLES MULTIPURPOSE DEVELOPMENT SOCIETY,VILLUPURAM vs. ITO, EXEMPTIONS WARD-1,, CHENNAI

The facts leading to the present appeal are that the assessee is a charitable society, now registered u/s.12AB of the Act and earlier u/s.12AA of the Act. The assessee was formed with the main object of uplifting the poor, developing the rural areas of the country, enabling the weaker sections to make use of government’s welfare schemes etc. The assessee obtained registration u/s.12AA of the Act on 26.03.1998 and has been regularly filing its Returns of Income (ROI) since then, claiming exemption u/s.11 of the Act.

During this year (F.Y.2017-18), the assessee has carried out various charitable activities and has maintained separate financials for the same. The list of activities carried out by it have been furnished before us in the form of the audited financials for this year. Out of these activities, the activity of functioning as a Business & Development Correspondent (B&DC) for NABFINS, a subsidiary of NABARD, has come under scrutiny during the assessment proceedings. Under an Agreement for B&DC executed on 23rd June, 2015, the assessee identifies the downtrodden people, women and self-help groups (SHGs) in the rural areas of the village, eligible for availing the credit facilities extended by NABFINS. The assessee then; a. ensures appropriate and adequate documentation for the loans to be disbursed to the groups/members, b. assists NABFINS for getting confirmation of receipt of loans proceeds by each members of the groups financed, c. checks end use of funds and regularly monitors the groups and/or borrowers, including visits to the borrowers at their usual place of residence or work or the address furnished as part of loan application, d. collects interest and/or principal due to NABFINS from the borrowers and/or their representative as per the loan repayment schedule, or as per the request of the borrowers and remit the amount so collected to the designated Bank Account of NABFINS.

In consideration of the services rendered by the assessee-trust, it receives commission @ 2% on the loan disbursed, paid by NABFINS. The first 1% commission of the loan amount disbursed, is paid by the 10th of the next month for all loans disbursed during the previous month and the remaining 1% of commission is calculated on the principal amount recovered and remitted to NABFINS, will be paid on or before the due date. The AO after considering the B&DC activities, proposed to disallow the exemption on the income earned from this particular activity as he believed the same to be in the form of business. Objecting to the same, the assessee filed a detailed objections before the AO outlining its activities, and how the same come under the purview of relief to the poor. These submissions are reproduced here;

The AO however did not accept the submissions and proceeded to hold in his order of assessment dated 17.03.2021 that the assessee was carrying out the activity of micro-finance and was earning commission on the same. According to the AO, this activity could not be considered as a charitable activity and that the same was being carried out on commercial lines. He then classified this activity of the assessee as a general public utility (GPU), and held that since the same was being carried out in the nature of trade, commerce or business, the same cannot be regarded as charitable purpose. The AO then concluded that since the assessee had not maintained separate books of accounts for the B&DC activity, the net income from the same amounting to Rs.6,56,287/- was directed to be taxed as its income at the maximum marginal rate.

Aggrieved by the order of the AO, the assessee preferred an appeal challenging the above order with the ld.CIT(A). The assessee filed detailed written submissions explaining that its activities as a B&DC were indeed charitable in nature and were not akin to microfinance activities as misunderstood by the AO. However, the ld.CIT(A) did not accept the assessee’s submissions and affirmed the AO’s conclusion that the assessee’s activities as a B&DC for NABFINS constituted business activities, carried on for earning profit. Challenging this order, the present appeal has been filed before us.

Before us, the Ld.AR submitted that the assessee has been registered as a charitable society u/s.12AA of the Act since 26.03.1998. It began acting as a B&DC for NABFINS in 2012 and has been carrying out this activity since then. The commission earned from the same has been declared in its ROI and exemption on it has been claimed and allowed. The Ld. AR again explained the scope of activities carried out by the assessee. He filed a copy of the bye-laws of the assessee-society containing its objects, which inter alia included the following objects;

He submitted that the objects of the assessee have centred around development of rural areas and the economic emancipation of the downtrodden people. The assessee is not only merely facilitating loans from NABFINS for the needy. But the assessee also helps identify the needy, educates them about the credit services from NABFINS, encourages the formation of self-help groups (SHGs) among women and then facilitates the credit linkage facilities. This is a vital step as it bridges the final gap between NABFINS and those in need of the credit facilities, without which, it would not be possible for NABFINS to distribute the credit facilities in the rural areas of the state, which the assessee is well conversant with by employing local people, who have knowledge about the same.

The Ld. AR also submitted that the assessee’s registration u/s.12AB of the Act was examined by the ld.CIT(E) and he granted extension of registration for the A.Ys.2027-28 to 2036-37, after examining the objects and activities of the assessee in detail, including the activity of B&DC for NABFINS. In addition

The Ld.DR on the other hand relied on the orders of the lower authorities to contend that the activity of B&DC was in the nature of business for earning profit and the AO had rightly disallowed exemption on the same u/s.11 of the Act. He thus prayed for upholding the orders of the lower authorities.

We have heard the rival submissions, carefully perused the orders of the lower authorities, the material placed on record, and the paper book filed by the assessee. On a consideration of the facts and circumstances of the case, we find that the assessee has been consistently carrying on the activity of acting as a Business & Development Correspondent (B&DC) for NABFINS and has regularly disclosed the commission income earned therefrom in its returns of income.

It is an undisputed fact that in the assessment proceedings for the Assessment Year 2017-18, the AO had examined the very same activity and accepted the assessee's claim for exemption u/s.11 of the Act in respect of the income derived therefrom. It is also evident from the records that the ld.CIT(E), while granting registration u/s.12AB of the Act for a period of ten years, had duly considered the nature of this activity and found no impediment in granting such registration. Thus, both the registration authority as well as the AO, in the earlier assessment, had accepted the charitable character of the activity undertaken by the assessee.

Before us, the Revenue has neither brought on record any material to demonstrate that the nature or manner of carrying on the B&DC activity has undergone any material change during the year under consideration nor pointed out any distinguishing feature warranting a departure from the view consistently taken in the earlier assessment year. In the absence of any change in the factual matrix or the applicable legal position, we find no justification for the AO in denying the exemption which had been allowed in the earlier year after due examination.

It is well settled that though the principle of res judicata is not strictly applicable to income-tax proceedings, the rule of consistency demands that where the material facts and circumstances remain identical from year to year, a view consistently accepted by the Department should not be departed from without cogent reasons. This salutary principle has been authoritatively laid down by the Hon'ble Supreme Court in Radhasoami Satsang v. CIT [(1992) 193 ITR 321 (SC)], wherein it was held that consistency and certainty in tax administration should ordinarily be maintained where the foundational facts continue to remain unchanged. Respectfully following the said dictum, we hold that the exemption allowed to the assessee in the earlier assessment year

The ld.AR further placed on record the audited financial statements of the assessee for the Assessment Years 2021-22 to 2025-26, together with a year- wise statement depicting the net income/loss arising from the Business & Development Correspondent (B&DC) activity undertaken for NABFINS. A perusal of the said details reveals that, in two out of the five assessment years, the assessee had applied amounts towards its charitable objects in excess of the income generated from the said activity, resulting in a deficit. In the remaining three assessment years, the surplus earned was only nominal. These facts clearly demonstrate that the activity has not been undertaken with any profit-making motive, but solely as a means to further the charitable objects of the assessee.

Having carefully considered the rival submissions, the material placed on record, and the nature of the activity carried on by the assessee, we are of the considered view that the B&DC services rendered by the assessee for

Accordingly, we direct the AO to grant the benefit of exemption u/s.11 of the Act in respect of the income arising from the B&DC activity carried on by the assessee, as disclosed in its return of income and the audited financial statements by allowing the grounds of appeal raised by the assessee.

In the result the appeal of the assessee is allowed.