AI for the Public Good: Indian Tax Ruling Sets Precedent for Tech Nonprofits 

AI for the Public Good: Indian Tax Ruling Sets Precedent for Tech Nonprofits 

In a landmark decision that clarifies the legal standing of technology-driven philanthropy in India, the Income Tax Appellate Tribunal (ITAT) in Mumbai has granted charitable status to an artificial intelligence foundation, marking a significant step in recognizing the role of innovation in public service. The case, Legsys AI Technology Foundation v. Commissioner of Income Tax (Exemptions), centered on whether providing AI-powered tools to courts for free constitutes a charitable activity or a commercial service . This ruling provides crucial legal clarity for nonprofits leveraging technology and sets a precedent that could spur further innovation in the public interest. 

Background: A Foundation at the Intersection of Law and AI 

Legsys AI Technology Foundation, a not-for-profit company, was established with a clear, public-spirited mission: to enhance access to justice and improve judicial efficiency through technology . Its flagship innovation, “Adalat AI,” is a sophisticated speech-to-text transcription software designed specifically for courtroom environments. The foundation made this tool available to district courts across India without charging any fees, aiming to streamline court proceedings and reduce the massive backlog of pending cases . 

To fund the development and deployment of this software, Legsys received grants from various donors. Seeking to ensure its sustainability and provide tax benefits to its supporters, the foundation applied for formal registration under Section 12AB of the Income-tax Act, 1961. This registration is essential for an institution to be recognized as charitable and to claim tax exemption on donations received . 

The Dispute: Charitable Purpose or Technical Service? 

The Commissioner of Income Tax (Exemptions) (CIT(E)) rejected Legsys’s application. The tax authority took the view that the foundation was not engaged in a charitable activity but was instead providing technical services in exchange for donations . This characterization, if upheld, would have disqualified Legsys from charitable status, as activities in the “nature of trade, commerce, or business” fall outside the definition of “charitable purpose” under a proviso to Section 2(15) of the Act. 

The rejection prompted Legsys to appeal to the ITAT Mumbai. The foundation, represented by senior advocate V. Sridharan and a team from the law firm Lakshmikumaran & Sridharan, argued that its core objective was purely charitable: promoting social welfare by improving access to justice . It emphasized that its Memoranda of Understanding (MOUs) with various courts were aimed at deploying technology for public benefit, which included training court staff, all without any commercial gain . 

The table below summarizes the key legal questions and the Tribunal’s findings: 

The ITAT’s Ruling and Legal Reasoning 

The ITAT bench meticulously analyzed the arguments and delivered a decisive verdict in favor of Legsys AI Foundation. Its reasoning provides a robust framework for assessing tech-based nonprofits . 

First, the Tribunal confirmed that the foundation’s predominant object—aiding the judiciary for the speedy disposal of cases through AI—fell squarely within the legal definition of charitable purpose. Specifically, it qualified as the “advancement of any other object of general public utility” under Section 2(15) of the Income-tax Act . The judges recognized the severe backlog of cases as a critical threat to judicial functioning and noted that the government itself is actively seeking measures to reduce pendency. Legsys’s tools, therefore, directly supported government efforts and provided a tangible public benefit. 

Second, and crucially, the Tribunal dismantled the notion that receiving donations morphs an activity into commerce. It held that since Adalat AI was provided on a strictly pro bono basis with no commercial terms or quid pro quo for donors, the activity could not be classified as trade, commerce, or business . The ruling emphatically stated that “raising donations from unconnected third party donors, for rendering such charitable activities cannot result in the activities as being in the nature of trade or commerce” . This distinction protects legitimate philanthropic fundraising from being mischaracterized as a commercial transaction. 

Consequently, the ITAT directed the CIT(E) to grant Legsys AI Foundation registration under Section 12AB as a charitable institution and also grant approval under Section 80G. The latter allows donors to the foundation to claim deductions on their donations, a vital feature for attracting future funding . 

Analysis: Broader Implications for Innovation and Philanthropy 

This judgment extends far beyond a single tax case. It represents a forward-looking interpretation of law that accommodates and encourages social innovation. 

• A Blueprint for Tech Nonprofits: The ruling provides much-needed clarity for countless other organizations using technology—in fields like healthcare, education, environmental monitoring, and civic tech—for public benefit. It establishes that developing and deploying proprietary software for free can be a core charitable activity, not a commercial one. Law firms like Lakshmikumaran & Sridharan, which have built expertise in AI governance, are well-positioned to guide such entities through compliance and regulatory landscapes . 

• Nuance in the “Pro Bono” Concept: The case highlights the evolution of “pro bono” from traditional legal services to technological enablement. It resonates with ongoing discussions about how to effectively mandate and scale pro bono work, especially considering the financial disparities within the legal profession itself . Legsys’s model shows how technology can amplify pro bono impact at a systemic level. 

• A Cautionary Counterpoint on AI Reliance: While this case celebrates responsible AI for public good, it stands in contrast to recent warnings from Indian courts about the uncritical use of AI in official functions. In a separate ruling, the Bombay High Court recently nullified a large tax demand because the assessment order was partly based on citations of non-existent court judgments, allegedly sourced from an AI tool . The court cautioned that while AI is useful, “quasi judicial authorities must authenticate such citations before utilising them” and not rely on them blindly . This juxtaposition is instructive: AI is a powerful tool, but its application requires oversight, validation, and a clear, ethical purpose—principles that the Legsys case upholds. 

Conclusion 

The ITAT’s decision in the Legsys AI case is a significant victory for the concept of technology-driven social good. It affirms that the Indian legal and fiscal system can adapt to recognize and support novel forms of philanthropy that address contemporary challenges. By legally distinguishing a charitable, grant-funded tech initiative from a commercial enterprise, the ruling removes a major barrier for innovators seeking to contribute to the public welfare. It signals to entrepreneurs, donors, and the non-profit sector that partnering with the state to leverage technology for public benefit is not only welcome but will be recognized and facilitated by the law. As AI continues to permeate all sectors, this precedent will likely serve as a cornerstone for building a more innovative and socially responsive philanthropic ecosystem in India.