HUMANA PEOPLE TO PEOPLE INDIA,DELHI vs. DCIT,CIRCLE EXEMPT 1(1), DELHI

4. Being aggrieved, appellant/assessee preferred present appeal.

5. Learned Authorized Representative for the appellant/assessee submitted that it is registered as a not-for-profit company u/s 25 of the Companies Act, 1956 since 21st May, 1998. It is also registered under the Provisions of section 12A of the Act. During the year 2016-17, various activities carried by the assessee are stated in the Annual Report filed in the paper book from pages 73 to 99. The activities of education, relief to the poor, medical relief and environment. Micro-finance activity is one of the Community Development Initiative coming under livelihood programme which is one of many initiatives. The Micro-finance activity started in 2007 with the objects to provide micro credit /finance to rural poor women in India. In all the earlier years the assessments have been completed accepting micro-finance as part of the 'charitable activities' of the assessee. The project of microfinancing in the earlier years was carried on by the assessee from its own resources of grants / donations made available by the donors /grantors. However, over a period of time since the out reach and the requirements grew and the policy of the RBI to extend micro- credit facilities to NGOs vide their many circulars enclosed in the paper book allowed NGOs with rural outreach to participate in the micro-credit eco-system. Since HPPI had the experience, the requisite team and the branches at the grass root level, it accepted to act as a bridge between the banks and the beneficiaries for the micro-credit lending activity as well as to act as business correspondent (term coined RBI vide Circular No. DBOD.No.BL.BC.43/22.01.009/2010-11 dated 28th Sept. 2010. Paper-book page 132.to 138. 5.1 RBI vide Circular No.RPCD.CO.PLAN.BC.66/04.09.01/2010-11 DATED 3RD MAY, 2011 has allowed interest rates of 26% on reducing balance basis (effectively comes to 14%) and with a spread of 12% to recover for the costs of manpower, interest on loans taken and establishment charges. Similarly, the RBI allows banks to engage NGO as a business correspondent for follow-up and recovery of their micro-credit portfolio. The assessee receives commission income @35% of the interest recovery made for the bank i.e. affectively assessee receives 9% as commission which is for meeting the cost of manpower cost, establishment cost and non-recovery cost. The micro-credit facilities are focused to improving livelihood, mainly to empower women who are organized as self-help group or joint liability groups. The loan size varies from 15000 to 25000 and is typically used for improving agricultural / diary product, petty shops, vegetable vendors etc. Thus, the micro-credit activity is subservient to its main objective of providing livelihood to the marginalized and rural poor. The income thus generated is incidental to the main object of relief to the poor. Without prejudice to the above, even if the activity of micro-credit is considered as falling under any other object of general public utility there is no element of business, trade or commerce or any services in relation to business, trade or commerce. The ingredients of business, trade or commerce are missing.

The AO was swayed by the interest rate of 26%. whereas, as explained to the AO, it is the model of micro-financing which is easier to understand, with less documentation, the repayments in installments are convenient and works on the concept of pay as you earn. Please see the CIT(A) letter dated 15.04.2024 where the assessee has explained with example. [P.B page 1 to 19]. The A.O. has erred in considering the specified grants received both foreign as well as non-foreign as the income of the assessee. It is the contention of the appellant that the specified grants by the donors are a liability in so far as the assessee is only a trustee. The assessee is mandated by the grantor to apply for specific activities. It is not available to the assessee as any other voluntary contribution or donation. The assessee is not free to use for any purpose. The assessee has to give an account for the utilization of the grant given for specified purposes. Neither the grant amount received nor the expenditure against the utilization of the grant can be considered while computing the income of the assessee. 5.2 This issue is settled in favour of the assessee by the jurisdictional Delhi High Court decision in the case of DIT vs. Society for Development Alternatives in and 18/2012 vide order dated 13.01.2012 [Paper book pages 145 to 149]. 5.3 Reliance was placed by the Learned Authorized Representative on following decisions in favour of his case and prayed that micro finance activities are charitable in nature and eligible for section 11 of the Act:

7.1 Ld. CIT(A) in para nos. 6.5 and 6.6 noted as under: " 6.5 The allegation of the AO at page 8 up to page 11 can be summarized as below: i) Assessee is involved in micro-finance on commercial lines charging interest @ 26% per annum on reducing balance method. ii) The assessee is earning commission income by acting as business correspondent which varies from 38% to 43% on the amount of interest charged by bank from the beneficiary i.e. 26% and 50% of the processing iii) There is no element of relief to the poor, big micro-finance organizations acting on similar lines re-listed on stock-exchange as business entities. As such the assessee does not appear to be engaged in 'charitable activity'. iv) The AO places reliance on Circular No. 11/2008 dated 19/12/2008 for application of Proviso to section 2(15). v) AO relied on certain cases for coming to the conclusion that micro- finance activities which are carried on by the assessee are not charitable activity. 6.6 Thus, the assessing officers stand in denying tax exemption u/s 11 and 12 is upheld. The income is computed treating the taxpayer as an AOP. While computing the said income he has not only included income as per Income & Expenditure account but also treated the specified grants appearing in the Balance Sheet of the appellant aggregating to Rs.

31,71,39,409/- as part of income. Consequently, taxable income of Rs. 5,43,53,108/-has been determined by the AO and tax levied on MMR interest u/s 234. It is hereby pointed out that Specified grants are treated as income. There is no proof of filing any letter proposing how to apply this income. There is no proposal for utilizing/application of income in the future years also. There is no proof of investment in specified instruments u/s 11(5) either. The entire amount of Rs. 317139409 is brought to tax and the income at Rs.54353108 is taxed at 30% at MMR. This should be reduced to 15%.”

Page 32 "The learned Tribunal has concluded on fact that the activities of the assessee are in the nature of charitable activities. It has been further held on appreciation of fact that micro financing activity in the instant case is a charitable activity. The leamed Tribunal has also relied upon the judgment of the Bangalore Bench of the Tribunal on identical fact that the micro financing to the poor people is a charitable activity. Under such circumstances, the assessee was granted exemption u/s. 11 of the Income Tax Act, the Learned Tribunal further found that in order to achieve the main purpose of the charitable activity, the assessee has joined hands in some other financial organizations and banks. Such steps to collect money for micro financing does not defeat the real object in order to deprive of the exemption. We do not find any infirmity in the order of the learned Tribunal, which is based on fact finding and such facts attract the provision of exemption."