2017 (2) TMI 1089 - AT - Income Tax

Exemption u/s 11 on sale of mutual funds - whether there is no violation of the provision of section 11(5) of the Act for making this investment and moreover profit derived from sale of mutual fund and dividend income, which are shown as surplus and are carried over in the balance sheet, is again reinvested into the specified mode of investment i.e. mutual funds as per section 11(5) of the Act and claimed the same as deemed application of income u/s 11(2)? - Held that - The assessee is running a school and existing solely for the purpose of education. Due to the reasons of subsidized fee structure expenditures on the education activities always exceed receipts by way of fees from the students. The assessee trust is eligible for the deemed exemption of 15% of the Income during the year under the provisions of sec. 11(1a) of the Act. The assessee is also eligible for the specific accumulation of income under the provisions of sub-section (2) of sec. 11 of the Act. The specific accumulation is for the purpose of having an independent building premise as currently the trust is running the school in the lease premises and there is an existing dispute with the owner of the property in respect of lease premises. The fact that assessee is eligible for the accumulation u/s 11(la) of the Act. We are of the view that under the provisions of sub-sec. of sec. 11 of the Act, there is no lower limit for the lock-in period nor there is stipulation that investments so made cannot be reshuffled during the outer limit of five years period. In this context, the AO s observation that one set of mutual funds were divested of within the period of sixty days is untenable. The most importantly during the year, the assessee trust have reshuffled one set of investments only with the purpose of safeguarding interest of the trust and in the view of the apprehension, that value of the mutual fund was fast declining. By doing so, the trustees of the trust have acted, in the best and paramount interests of the trust and not for the purpose of any benefit or a pecuniary gain to any person specified under sub-sec. 3 of sec. 11 of the Act. Again by doing so, the trust have not violated any stipulation or conditions, as a matter of fact there is no stipulation u/s 11(5) of the Act placing restriction on the reshuffle of specified investment. The assessee trust is being assessed to tax for the several year and enjoying benefit of exemption u/s 11 and 12 of the Act and this position has been continuously accepted by the department in the form of assessments/acceptance of the return of income. Moreover, the facts of the case are exactly identical to the facts of the preceding assessment years, hence, according to us the principle of rules of consistency shall apply as laid down by the Supreme Court of India in the case of Radha Soami Satsang Vs. CIT (1991 (11) TMI 2 - SUPREME Court ). - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the CIT(A) erred in allowing exemption under section 11 of the Income Tax Act, 1961 for the sale of mutual funds, despite the organized and frequent trading activities by the assessee.
2. Whether the CIT(A) erred in allowing the exemption under section 11 of the Income Tax Act, 1961 when the activities were carried out on commercial lines and not in conformity with the objects of the assessee society.

Detailed Analysis:

Issue 1: Exemption under Section 11 for Sale of Mutual Funds
The primary issue revolves around whether the assessee's activity of selling mutual funds in an organized manner disqualifies it from the exemption under section 11 of the Income Tax Act, 1961. The Assessing Officer (AO) denied the exemption, arguing that the frequent trading of mutual funds indicated a profit motive rather than charitable intent. The AO noted that the profits from the sale of mutual funds and dividends were not utilized for charitable activities but were reinvested, creating a cycle of profit generation.

The CIT(A) overturned the AO's decision, stating that there was no violation of section 11(5) of the Act as the investments were made in specified modes. The profits and dividends were reinvested in mutual funds, which is permissible under section 11(5). The CIT(A) relied on the Delhi Tribunal's decision in the case of ITO v. Jesuit Conference of India, which held that investments in mutual funds for better yield do not constitute a business activity if the proceeds are used for charitable purposes.

The Tribunal agreed with the CIT(A), noting that the assessee is a trust registered under section 12A and is engaged in educational activities. The trust's expenditures on education exceeded the receipts from student fees, and the investments in mutual funds were made to safeguard the trust's interests. The Tribunal emphasized that there is no lower limit for the lock-in period for investments under section 11(5) and reshuffling investments to protect the trust's assets does not violate the Act.

Issue 2: Activities on Commercial Lines
The second issue concerns whether the activities of the assessee were carried out on commercial lines, disqualifying it from the exemption under section 11. The AO argued that the trust's activities were commercial, focusing on profit generation, and thus, it should be taxed as an Association of Persons (AOP) without the exemption.

The CIT(A) refuted this, stating that the educational institution run by the assessee did not misuse or divert the surplus from investments for non-charitable purposes. The CIT(A) highlighted that the trust is registered under section 12A and continues to operate within its charitable objectives. The Tribunal concurred, noting that the trust's activities were solely for educational purposes, and the surplus from investments was used for constructing a school building, aligning with the trust's objectives.

The Tribunal also referred to the Supreme Court's ruling in Radha Soami Satsang vs. CIT, emphasizing the principle of consistency, as the trust had been granted exemptions in previous years under similar circumstances.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, allowing the exemption under section 11 of the Income Tax Act, 1961, for the assessee. The Tribunal dismissed the Revenue's appeal, confirming that the trust's activities were charitable and in compliance with the provisions of the Act. The order was pronounced in the open court on 17-02-2017.