2010 (3) TMI 776 - AT - Income Tax

Benefits of sections 11 and 12 - Since, section 11(4A) provides that exemption would not be denied if the business incidental to the attainment of the objectives of the trust and separate books of account are maintained in respect of such business. Undeniably, the activity of the assessee in making investments in mutual funds, was incidental to the attainment of the objects of the trust - It was not a separate business activity - Then again, undeniably, the assessee was maintaining separate books of account, identifying each of the mutual funds separately. The bank account for purchase and sale of mutual funds was also separately maintained by the assessee - Copies of separate books of account as well as the mutual funds ledger were placed before the Assessing Officer - None of these was considered by the Assessing Officer - The assessee was able to identify each transaction, fund-wise - Therefore decided in favour of assessee.

Summary

Issues Involved:
1. Whether the assessee was entitled to benefits under sections 11 and 12 of the Income-tax Act despite being involved in business activities separate from its charitable activities.
2. Whether frequent transactions related to mutual funds constituted a business activity aimed at earning profits.

Detailed Analysis:

Issue 1: Entitlement to Benefits under Sections 11 and 12
The Department challenged the CIT(A)'s directive to allow the assessee benefits under sections 11 and 12, arguing that the assessee's business activities were separate from its charitable activities. The CIT(A) found that the investments made by the assessee were in accordance with section 11(5) of the Income-tax Act, which prescribes the forms and modes of investing and depositing money for charitable purposes. The investments in mutual funds were covered under section 10(23D) and were within the prescribed modes of investment under section 11(5)(xii) read with rule 17C of the Income-tax Rules. The proceeds from these investments were applied for charitable purposes, complying with sections 11 and 12. The CIT(A) held that the frequency of transactions alone did not justify treating the activities as business separate from charitable activities.

Issue 2: Nature of Frequent Transactions in Mutual Funds
The Department contended that frequent transactions in mutual funds were business activities aimed at earning profits. The CIT(A) disagreed, noting that the investments were intended to yield better returns to augment the trust's resources. The transactions were primarily switch in/switch out operations within the same mutual fund company, without involving any third party. The CIT(A) referred to the Supreme Court's decision in G. Venkataswami Naidu & Co. v. CIT, which distinguished between capital accretion and adventure in the nature of trade. The CIT(A) concluded that the high frequency of transactions did not alone constitute a business activity, especially when the investments were within the prescribed modes under section 11(5).

Additional Considerations:
The CIT(A) also considered section 11(4A) of the Act, which allows exemption if the business is incidental to the attainment of the trust's objectives and separate books of account are maintained. The assessee maintained separate identifiable accounts for each mutual fund investment, complying with section 11(4A).

Conclusion:
The Tribunal upheld the CIT(A)'s order, finding no error in the conclusion that the assessee's activities were in compliance with sections 11 and 12 of the Income-tax Act. The investments in mutual funds were within the prescribed modes and aimed at better yields for charitable purposes. The frequency of transactions did not constitute a separate business activity. The appeal by the Department was dismissed.