2013 (10) TMI 1134 - AT - Income Tax

Charitable purpose u/s 2(15) - A trust for providing a common platform for trading in shares and securities - Revenue has denied the benefit of registration u/s 12A on the ground that the same does not cater to the members of the public at large, but only to the members of the public who invest in shares - Funding of Corpus fund is in dispute Held that - if the said funding by way of contribution by the stock exchanges is, in turn, recovered from the individual member brokers, the arrangement would in essence becomes one of insurance by the individual brokers of the stock exchange to meet their liabilities arising in the course of their trade. This is as, simply put, the loss to the investor arising on account of the default of the broker is only the broker s liability, and a trade liability at that. This then assumes the form of an underwriting arrangement, or an insurance scheme under the aegis of the stock exchange, which is only a trade association set up or formed for the benefit of its members. The only difference is that such a fund instead of being created by the settlor stock exchange within itself, is so done by way of a separate fund. The word consideration in proviso to section 2(15) is, to our mind, wide enough to cover such indirect funding, if any. An individual member of a particular member stock exchange is not called upon to pay any direct charges to the applicant fund. In fact, a part of the auction money of the defaulting money is also, in terms of the SEBI circular (FITTC/FII/02/2002 dated 15.05.2002), made over to the corpus of the fund. Accordingly, the object of the applicant cannot be as a service in relation to any trade, etc. Further, even assuming so, the same does not involve any consideration inasmuch as no quid pro quo can be attributed to the mandatory contributions to the fund by the participating stock exchanges Therefore, applicant fund is a public charitable fund, set up to advance an object of general public utility, and has been wrongly denied registration as one by the Revenue Decided in favor of Assessee.

Issues Involved:
1. Whether the assessee trust qualifies for registration under section 12A of the Income Tax Act, 1961.
2. Whether the assessee trust's activities fall within the definition of 'charitable purpose' under section 2(15) of the Income Tax Act.
3. The impact of the proviso to section 2(15) introduced by Finance Act, 2008 on the assessee trust.
4. The relevance of section 10(23EA) in determining the tax-exempt status of the assessee trust.
5. The genuineness of the assessee trust's activities and its entitlement to registration under section 12AA.

Detailed Analysis:

1. Qualification for Registration under Section 12A:
The assessee, a trust formed by Inter-connected Stock Exchange India Ltd. (ISEL), sought registration under section 12A of the Income Tax Act, 1961. The trust was established to provide compensation to investors in case of loss due to default by any member of a participating stock exchange. The Director of Income-Tax (Exemption) rejected the application, arguing that the trust's benefits were limited to a specific group (investors in shares) rather than the general public. The tribunal noted that an object beneficial to a section of the public is considered an object of general public utility, citing the Supreme Court's decision in Ahmedabad Rana Caste Association vs. CIT. Therefore, the trust's objective qualifies as a charitable purpose.

2. Definition of 'Charitable Purpose' under Section 2(15):
The tribunal examined whether the trust's activities fall within the definition of 'charitable purpose' under section 2(15). The assessee argued that the trust's purpose aligns with the advancement of any other object of general public utility. The tribunal agreed, noting that the trust's aim to protect investors is a public charitable cause. The Revenue's argument that the trust's benefits were limited to investors in shares and not the general public was rejected, as the trust's purpose serves a sufficiently defined and identifiable section of the community.

3. Impact of the Proviso to Section 2(15) Introduced by Finance Act, 2008:
The Revenue contended that the trust's activities involved trade, commerce, or business, and thus were excluded from the definition of 'charitable purpose' due to the proviso to section 2(15) introduced by Finance Act, 2008. The tribunal clarified that the proviso excludes activities involving trade, commerce, or business for a fee or consideration. However, the trust's funding through contributions from stock exchanges, which are exempt under section 10(23EA), does not constitute a trade or business activity. The tribunal emphasized that the trust's activities are aimed at investor protection, not commercial gain.

4. Relevance of Section 10(23EA):
The tribunal considered the relevance of section 10(23EA), which exempts income by way of contributions received from recognized stock exchanges for investor protection funds. The Revenue argued that the trust's funding was already tax-exempt under section 10(23EA), and thus the trust did not need registration under section 12AA. The tribunal disagreed, stating that the exemption under section 10(23EA) does not negate the trust's eligibility for registration under section 12AA. The trust's objective of advancing a public charitable cause remains valid, irrespective of the tax-exempt status of its funding.

5. Genuineness of Activities and Entitlement to Registration under Section 12AA:
The tribunal examined the genuineness of the trust's activities and its entitlement to registration under section 12AA. The tribunal noted that the trust was formed in compliance with SEBI guidelines for investor protection and aimed to serve the investing public. The trust deed clarified that the fund was for settling investor claims, not compensating defaulting members. The tribunal found no evidence of any trade or business activity linked to the trust's funding. Consequently, the tribunal concluded that the trust's activities were genuine and aligned with its charitable purpose.

Conclusion:
The tribunal vacated the findings of the Director of Income-Tax (Exemption) and directed the grant of registration under section 12AA to the assessee trust. The assessee's appeal was allowed, affirming that the trust's objective of investor protection qualifies as a charitable purpose under section 2(15) and that the trust is entitled to registration under section 12AA. The order was pronounced in the open court on September 20, 2013.

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