ITAT Delhi on SROs in Microfinance: When Regulatory Bodies Qualify as Charitable under General Public Utility

1. Background and Core Issue

The Delhi Bench of the Income Tax Appellate Tribunal examined whether a Self-Regulatory Organization (SRO) in the microfinance sector, recognized by the Reserve Bank of India (RBI), can be treated as a charitable institution under the limb of “advancement of any other object of general public utility” in Section 2(15) of the Income Tax Act 1961.

The assessee, Micro Finance Industry Network, is a society registered under the Telengana Societies Registration Act, 2001. It functions as an SRO for NBFC-MFIs (non-banking finance companies operating in the microfinance space) and had been granted provisional registration under Section 12AB for AYs 2021-22, 2022-23 and 2023-24. It also sought continuation of registration under Section 12AB and approval under Section 80G.

The Commissioner of Income-tax (Exemptions), Chandigarh [CIT(E)] cancelled the registration under Section 12AB and rejected the assessee’s application for renewal and for Section 80G approval, essentially on the ground that the assessee was operating as a commercial apex body for profit-oriented NBFC-MFIs and not for the benefit of the general public.

The Tribunal was called upon to decide whether the assessee’s activities fall within “general public utility” (GPU) and whether the rejection/cancellation of registration and approval was legally sustainable.

2. Facts: Nature and Activities of the Assessee Society

  • The assessee is a society registered under the Telengana Societies Registration Act, 2001.
  • It is recognized by the RBI as a Self-Regulatory Organization (SRO) for NBFC-MFIs since 16.06.2014.
  • It functions as an industry platform for the microfinance sector, working closely with regulators like RBI and other stakeholders.

2.2 Stated Objectives

The objects of the assessee, as placed on record, include:

  1. Facilitating a conducive ecosystem and setting standards for sustainable, customer-centric microfinance.
  2. Acting as an SRO for NBFC-MFIs and ensuring adoption and implementation of best practices and code of conduct.
  3. Liaising with regulatory and policy authorities including Government of India, RBI, SEBI and others to promote microfinance and to shape a favourable policy framework.
  4. Developing and disseminating sound development, operational and financial practices and minimum performance thresholds for members and encouraging others in the sector to follow them.
  5. Providing a platform for microfinance practitioners to meet and exchange views, expertise and resources.
  6. Conducting research, consultancy and training to build capacity in microfinance.
  7. Linking members with resource institutions such as financial institutions, rating agencies, training and research bodies.
  8. Providing services to members including training, capacity building, advisory on regulatory issues, funding opportunities and assistance in achieving performance thresholds.
  9. Supporting and representing the microfinance sector through creation of suitable institutions and bodies.

The assessee emphasised that it coordinates with RBI, assists in policy formation, conducts educational initiatives and implements RBI directives across the microfinance ecosystem.

3. Commissioner’s Findings and Grounds for Rejection

The CIT(E) examined the assessee’s structure and operations with reference to its website and other material and recorded, inter alia, the following conclusions:

  • The assessee’s structure “mimics a commercial establishment”, controlled by senior executives, with considerable expenditure on advertising, public relations and campaigns.
  • It is an apex-level industry platform working largely for its members, most of whom are profit-oriented NBFC-MFIs, and not for the general public.
  • Activities such as sector coordination, training, compliance audits, member grievance redressal and policy engagement were perceived as regulatory/industry functions benefitting members rather than the public at large.
  • The assessee was described as performing delegated regulatory functions under RBI supervision for a specific class of for-profit entities, which was viewed as not being of a charitable nature but a regulatory duty.
  • According to the CIT(E), there was no discernible “overreach” to the general public or to underprivileged segments, which the Commissioner considered essential to qualify under the GPU limb of Section 2(15).
  • The Commissioner also questioned whether the assessee’s activities attracted the first proviso to Section 2(15) pertaining to trade, commerce or business but, after seeking replies, did not comprehensively analyse the proviso in the final order.

On these premises, the CIT(E):

  • Cancelled registration under Section 12AB.
  • Rejected the fresh application in Form No.10AB under Section 12A(1)(ac)(ii).
  • Rejected the application for approval under Section 80G.

4. Assessee’s Submissions Before CIT(E) and Tribunal

4.1 Compliance and Non-Commercial Nature

The assessee submitted: