2020 (7) TMI 245 - AT - Income Tax

Denial of exemption u/s 11 12 - Charitable Purpose as defined u/s. 2(15) - core principle of forming the assessee was to assist public and private sector banks in carrying out their commercial activities involving receipts and payments by charging a fee - HELD THAT - It is undisputed fact that the assessee has been granted a valid registration u/s 12AA of the Act which has never been revoked by the revenue authorities.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. 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. 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. 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 epayments 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. Charging of fees - 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 - said fact would not materially alter the primary objective for which the assessee entity was created - 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. CIT-DR has sought to equate the activities of the assessee with that of e-commerce payment system paytm . 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. Applicability of the provisions of Sec.13(1)(c)(ii) - 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 ₹ 50,000/- in assessee entity. It is matter of common knowledge that there is clear distinction between subscribers to the shares vis- -vis contributors. Difference in facility and services and therefore, the assessee would not be covered by the proviso to Sec. 2(15) - 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. 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. Considering all 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). - Decided in favour of assessee. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT - Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. See case of DCIT vs. JSW Limited 2020 (5) TMI 359 - ITAT MUMBAI

Issues Involved:
1. Denial of exemption under Section 11 and Section 12 of the Income Tax Act, 1961.
2. Applicability of the first proviso to Section 2(15) of the Income Tax Act, 1961.
3. Classification of activities as charitable or commercial.
4. Application of income for the benefit of persons under Section 13(3) of the Act.
5. Levy of interest under Section 234B and Section 234D of the Act.

Detailed Analysis:

1. Denial of Exemption under Section 11 and Section 12:
The assessee contested the denial of exemption under Sections 11 and 12 by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)], who rejected the claim on the grounds that the activities were not charitable and were hit by the first proviso to Section 2(15). The Tribunal noted that the assessee was registered under Section 12AA of the Act and was a Section 25 company under the Companies Act, 1956, which prohibits distribution of profits. The primary objective of the assessee was to administer the payment settlement system for the larger benefit of the general public, not to run the clearing system on a commercial basis.

2. Applicability of the First Proviso to Section 2(15):
The first proviso to Section 2(15) states that the advancement of any other object of general public utility shall not be considered charitable if it involves carrying on any activity in the nature of trade, commerce, or business. The Tribunal found that the assessee's activities of providing a national payment infrastructure were not driven by profit motive but were aimed at public welfare. The fees charged were to cover operational costs, and the reduction in fees over the years supported the claim of non-commercial intent. The Tribunal also referred to the CBDT Circular No. 11 of 2008, which clarified that the first proviso applies only to entities carrying on commercial activities.

3. Classification of Activities as Charitable or Commercial:
The Tribunal observed that the assessee's activities, such as operating the National Financial Switch (NFS), Immediate Payment Service (IMPS), Cheque Truncation System (CTS), and RuPay, were aimed at enhancing the payment system infrastructure for public benefit. The dominant purpose was to promote public welfare, not to earn profit. The Tribunal applied the "dominant purpose test" from various judicial pronouncements, concluding that the assessee's activities were charitable.

4. Application of Income for the Benefit of Persons under Section 13(3):
The AO had denied exemption under Section 13(1)(c)(ii), alleging that the income was applied for the benefit of persons referred to in Section 13(3). The Tribunal found that the services were uniformly available to all users, and no special benefits were given to promoter banks. The promoter banks were mere subscribers to share capital, not substantial contributors. Hence, the provisions of Section 13(1)(c)(ii) were not applicable.

5. Levy of Interest under Section 234B and Section 234D:
Grounds related to the levy of interest under Sections 234B and 234D were deemed consequential and did not require specific adjudication.

Conclusion:
The Tribunal directed the lower authorities to grant the exemption under Sections 11 and 12 to the assessee, as the primary objectives were charitable, and the activities did not fall under the proviso to Section 2(15). The appeals for both assessment years were allowed.

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