Housing Credit To Poor Through Borrowings From Financial Institutions; Not A Charitable Activity: ITAT

The Bench of Sonjoy Sarma (Judicial Member) and Manoj Kumar Aggarwal (Accountant Member) held that the activity undertaken by the assessee trust was purely a money lending activity and though the objective of the assessee was noble, it was not eligible for registration under Section 12AA of the Income Tax Act.

The assessee- Dhan Housing and Habitat Development of Poor for Empowerment Confederation, filed an application under Section 12AA of the Income Tax Act for registration as a Charitable Trust, which was rejected by the Commissioner of Income Tax (Exemption), Chennai (CIT(E)). The CIT(E) ruled that the assessee was not carrying on any activity of a charitable purpose as per the provisions of Section 2 (15) of the Income Tax Act. Against this, the assessee filed an appeal before the ITAT.

The assessee submitted before the ITAT that it was incorporated as a trust to grant financial help to the lower strata of society by granting housing credit at an affordable cost. The revenue department contended that the assessee was merely into a money lending business and hence, its activities did not constitute a "charitable purpose" under Section 2 (15).

The ITAT observed that the CIT(E) had ruled that the assessee borrowed loans on interest from third parties and lent the same at a higher interest rate to the people belonging from the lower strata, which amounted to a money lending business. Thus, the CIT(E) held that such money lending business was not a charitable purpose falling under the category of "object of general public utility" under Section 2 (15).

Further, the CIT(E) opined that since the assessee was charging interest at the rate of 13% for granting housing loans, its activities could not be said to be in the nature of "relief of the poor" under Section 2 (15), in view of the fact that the banks offer housing loans at much lesser rate.

The ITAT noted that the assessee was obtaining loans from financial institutions at the interest rate of 11.5%, which was further advanced to the poor people at the interest rate of 13%, leaving a margin of only 1.5% in the hands of the assessee. Further, the Tribunal observed that the donations received by the assessee were negligible and that the main source of funding was the loan obtained by the assessee from the financial institutions.

Observing that the assessee facilitated the poor people to get access to housing credit, which was otherwise not available to them due to the mortgage requirements, the ITAT held that though the objective of the assessee was noble but it could not be said to be a Charitable Trust being eligible for registration under Section 12AA of the Income Tax Act, since the activity undertaken by the assessee was purely a money lending activity.

While holding that the only activity carried out by the assessee was obtaining loans and extending the same to the lower strata of society, and that the only source of funding was the borrowings from the financial institutions, the ITAT ruled that the activity undertaken by the assessee could not be said to be a charitable activity.

Hence, the ITAT upheld the order of the CIT(E) and dismissed the appeal of the assessee.

Case Title: Dhan Housing and Habitat Development of Poor for Empowerment Confederation versus CIT (Exemptions)

Dated: 18.08.2022 (ITAT Chennai)

Representative for the Appellant/Assessee: Mr. T. Banusekar (CA) snd Mr. Yeshwanth (CA)

Representative for the Respondent: Mr. ARV. Sreenivasan (Addl. CIT)

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