2012 (10) TMI 668 - AT - Income Tax

Denial of claim of exemption u/s 11 & 12 on ground that it was carrying on business activity which was distinctly separate from its charitable activities - due to frequent transactions in various schemes of mutual funds and buying/selling of units by the assessee with the objective of earning profit, the AO concluded that the society carried on business activities - Held that - Indisputably, the assessee is a society registered u/s 12A. It is seen that undeniably, the investments made by the assessee in units of mutual funds were covered u/s 10(23D). These investments are- within the prescribed modes of investment u/s 11(5) (xii) read with Rule 17 C of the I.T. Rules. The investments were made with the intention of getting a better yield upon appreciation/dividends from such mutual funds, in order to augment the resources of the trust. The proceeds of the mutual funds were applied by the assessee for charitable purposes, in compliance of the provisions of sections 11 & 12. The assessee had been making such investments in the past. Separate identifiable accounts had been maintained for each of the mutual fund investments. In these facts, there was no justification in holding, merely due to the frequency of the transactions, that the assessee had been carrying on business activity which was not incidental to its charitable activities and that such business activity was being carried on with the sole objective of earning profits. It was also erroneous to hold that the units were held by the assessee as stock in trade and not investment. Hence, CIT(A) righly allowed the exemption - Decided in favor of assessee

Summary

Issues Involved:
1. Whether the assessee is entitled to the benefits of sections 11 and 12 of the Income Tax Act.
2. Whether the activities of the assessee constituted a business activity separate from its charitable activities.
3. Whether frequent transactions in mutual funds by the assessee were business activities aimed at earning profits.

Detailed Analysis:

Issue 1: Entitlement to Benefits of Sections 11 and 12 of the Income Tax Act

The primary issue is whether the assessee, a charitable society registered under section 12A of the Act, is entitled to the benefits of sections 11 and 12. The Assessing Officer (AO) denied these benefits, treating the assessee's mutual fund transactions as business activities. However, the CIT(A) allowed the benefits, relying on a previous ITAT decision in the assessee's own case for AY 2006-07. The CIT(A) noted that the investments were made in compliance with section 11(5) and were applied for charitable purposes, thus qualifying for exemptions under sections 11 and 12. The ITAT upheld this view, emphasizing that the investments were within the prescribed modes and aimed at better yield for charitable purposes.

Issue 2: Business Activity Separate from Charitable Activities

The AO argued that the assessee's frequent mutual fund transactions constituted a business activity distinct from its charitable activities. The CIT(A) disagreed, stating that the transactions were not business activities but investments aimed at better yield. The ITAT supported this, noting that the investments were made as prescribed by section 11(5) and were not intended for business purposes. The ITAT also highlighted that the frequency of transactions alone does not determine the nature of the activity, especially when the investments were made to augment resources for charitable purposes.

Issue 3: Frequent Transactions as Business Activities

The AO concluded that the frequent transactions in mutual funds were business activities aimed at earning profits. The CIT(A) and ITAT rejected this view, stating that the transactions were not with third parties but within the mutual fund schemes, aimed at better yield. The ITAT noted that the transactions were actual purchases and sales, demonstrating the intention to hold the units as investments for capital appreciation and dividend, not business profits. The ITAT also pointed out that the investments were made in compliance with section 11(5) and were not treated as business income.

Conclusion:

The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow the benefits of sections 11 and 12 to the assessee. The ITAT emphasized that the investments in mutual funds were within the prescribed modes, aimed at better yield for charitable purposes, and did not constitute business activities. The ITAT also noted that the frequency of transactions alone does not determine the nature of the activity, especially when the investments were made to augment resources for charitable purposes. The ITAT's decision was based on the consistency principle and the absence of any contrary material or decision presented by the Revenue.