Income Tax Appellate Tribunal - Delhi
Jesuit Conference Of India, New Delhi vs Department Of Income Tax on 24 February, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI 'D' BENCH
BEFORE SHRI U.B.S. BEDI , JM & SHRI A.N. PAHUJA, AM
ITA no.2377/Del/2012
Assessment year:2008-09
Income-tax Officer(E) V/s. Jesuit Conference of
Trust W ard-IV, Laxmi India,225,Jor Bagh,
Nagar, Distt. Centre, New Delhi
New Delhi
[PAN : AAATJ 0406 F]
(Applicant) (Respondent)
Assessee by Shri K.V.S.R. Krishna,AR
Revenue by Shri D.K. Mishra, DR
Date of hearing 19-07-2012
Date of pronouncement 19-07-2012
ORDER
A.N.Pahuja:- This appeal filed on 18.05.2012 by the Revenue against an order dated 24th February, 2012 of the ld. CIT(A)-XII, New Delhi,raises the following grounds:-
1) "On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in allowing benefits of section 11 and 12 of the Income Tax Act.
2) On the facts and in the circumstances of the case and in law, the ld.
CIT(A) has failed to appreciate the fact that the AO denied the claim of exemption u/s 11 & 12 of the Act to the assessee as it was carrying on business activity which was distinctly separate from its charitable activities.
3) On the facts and in the circumstances of the case and in law, the ld.
CIT(A) has erred in law by holding that frequent transactions related to purchase, sale, switchover from one scheme of mutual funds to another was not a business activity with the sole objective 2 ITA no.2377/Del./2012 of earning profits and that since units were held as stock in trade, the same were of the nature of investment.
4) The appellant craves leave to add, alter, amend any of the grounds of appeal at the time of hearing.
2. Facts, in brief, as per relevant orders are that return declaring nil income filed on 29.09.2008 by the assessee, a charitable society registered u/s 12A of the Act on 2nd November, 1979, after being processed u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act), was selected for scrutiny with the service of a notice u/s 143(2) of the Act on 22.09.2009. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee earned interest/investment income of ``6,72,16,586/- during the year from its investments in mutual funds. 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. Accordingly, while referring to provisions of section 11 (4A) of the Act and Circular no.4/2007 dated 15th June, 2007 as also advance ruling reported in 288 ITR 641, the AO concluded that the assessee did not fulfill conditions stipulated for claiming exemption of profits from business activities .In these circumstances, relying on his own findings for the AY 2006-07, the AO denied benefit of provisions of section 11 & 12 of the Act, resulting in assessment of income of ``3,90,41,769/-.
3. On appeal, the ld. CIT(A) while relying upon the decision dated 10th March, 2010 of the ITAT in the assessee's own case in I.T.A. no. 179/D/2010 for the AY 2006-07 concluded as under:-
"I have perused the facts stated in the assessment order as well as facts stated by the assessee. I am in agreement with the assessee's submission stated as under:-
"The assessee has made investments in units of Mutual funds which are covered U/S 10(23D) of Income Tax Act, 1961 and are covered also as the 3 ITA no.2377/Del./2012 prescribed modes of investments u/s 11 (5) of the Income Tax Act 1961 more particularly under clause (xii) of Section 11 (5) read with rule 17C of
1. T Rules, 1962. This factual aspect has also been accepted by the AO.
The proceeds of the mutual funds are duly applied by the assessee for charitable purposes duly complying with the provisions of Sec 11 &12 of the IT Act, 1961. The assessee has been making such investments in the past and maintaining separate identifiable accounts for each of the mutual fund.
The chart which the AO has relied upon to allege that the assessee is carrying on frequent purchases and sales and is annexed as part of the order is without understanding the nature of transactions. Assessee is enclosing the ledger copy of each of the mutual fund account maintained separately for investments made out of Nonforeign contribution (NFC) funds and foreign contribution (FC) funds. From the copy of the ledger account it will be noticed that there is hardly any new purchase. In respect of sale, there is only one redemption i.e. of Tata liquid super high appropriation fund made on 11.12.2007. All other transactions are only switch in and switch out within the same mutual fund from one scheme to another permissible by the mutual fund.
The assessee is not carrying on any business activity. The purchase of mutual funds does not involve any labour, time or attention neither the assessee is agent or a broker, there are no dealings with any third party. The purchase, sale, switch in switch out is done with the mutual funds only for better yield and dividend income. The funds of the assessee have always remained invested in the mutual funds prescribed u/s 11 (5) of the IT Act, 1961.
Further we would like to submit that similar issue arose in the case of assessee for the A. Y 200607, the CIT (Appeals) has allowed the appeal of the assessee and the order of CIT (A) has been upheld by the Honorable ITAT by dismissing the Department's Appeal in ITA No. 1791(Del)/2010 vide order dated 10.03.2010 (copy of the order of I[TAT dismissing the Department's appeal is already enclosed in appeal papers at page 1925). The finding is at page no. 9 para number 16 which is reproduced as under: "It is on the anvil of the above ratio laid down by the Hon'ble Supreme Court, that the fact of the present case are needed to be tested. The Assessing Officer, it is seen, did not consider the
4 ITA no.2377/Del./2012 attending factors. He merely went by the high frequency of the transactions in purchase and sale of the mutual funds by the assessee. He overlooked the fact that the investments were made as prescribed by section 11 (5) of the Act, as discussed hereinabove. He remained oblivious of the fact that such frequency of transactions cannot be the sole factor for determining as to whether the assessee was or was not carrying on a business activity of trade in mutual funds, particularly when the essential ingredients of such business are conspicuously absent in the assessee's case. Most of the income of the assessee from the investments in the mutual fund was from the switch in/switch out operations exercised by the assessee from one scheme to the other, for getting a better yield. Pertinently, this option is only with the respective mutual fund company. There was no transaction with any third party when the money stayed with the mutual fund company. In most of the cases, the growth option was exercised by the assessee in order to enable the assessee to realize income after a period of time. The purchases were all actual purchases. The sales were all actual sales. These showed the investment to be the assessee's own investment. This demonstrated that the intention of the buyer was to hold the units as investments for realization of capital appreciation/dividend. "
Similar issue arose for AY 200607, the CIT (Appeals) has allowed the appeal of the assessee and the order of CIT (A) has been upheld by the Honorable ITAT by dismissing the Departmental Appeal. Therefore, following the consistency principle, since the facts are the same, the appeal for this assessment year should also be allowed. Consequently, the benefit of Section 11 & 12 should be allowed.
Without prejudice to the above contention that the assessee is carrying on only charitable activity even assuming that the purchase and sale of mutual fund is considered as business activity the profits are again
5 ITA no.2377/Del./2012 applied for charitable purposes and therefore the· business is incidental to the attainment of the objectives of the society. Please note that the case of the assessee is fully supported by the Supreme Court decision in the case of Assistant Commissioner of Income Tax v. Thanthi Trust 247 ITR 785 (SC) and also the assessee is maintaining separate identifiable accounts in respect of each of the mutual fund investment thus falling within the exception to Sec 11 (4A) of the IT Act, 1961. Therefore also the income is part of total income and since 85% of such income has been applied for charitable purpose the same is exempt from tax. "
Hence keeping in view of the above facts, the benefit of Section 11 & 12 is allowed. The addition made by the Assessing office on account of Excess of Income over expenditure at Rs.3,90,41,769/- is hereby deleted. The appeal is allowed on these grounds."
4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).At the out set, both the parties agreed that the issue is squarely covered by the decision dated 10th March, 2010 of the ITAT in the assessee's own case in I.T.A. no.179/D/2010 for the AY 2006-07.
5. We have heard both the parties and gone through the facts of the case as also the aforesaid decision relied upon by the ld. AR. Indisputably, the assessee is a society registered u/s 12A of the Act w.e.f. 2nd November, 1979. The AO treated the transactions in mutual funds as business activity and accordingly, denied the benefit of provisions of sec.11 & 12 of the Act. On appeal, the ld. CIT(A) allowed the claim in the light of aforesaid decision of the ITAT,adjudicating an identical issue in the AY 2006-07, holding as under:-
"6 We have heard the parties and have perused the material on record. The AO treated the assessee's sale and purchase of mutual funds as a business activity not incidental to the attainment of the objects of the trust. Section 11 (5) of the I.T. Act provides forms and modes of investing and depositing the money' referred to in section 11 (2 )(b) of the Act, as per which, where 85% onwards of the income referred to in section 11 (1 )( a) or section 11 (1 )(b) read with the Explanation thereto is not applied, or is not deemed to have been applied to charitable purposes in India during 6 ITA no.2377/Del./2012 the previous year, but is accumulated or set apart, either in whole or in part., for application in such purposes in India, such income, so accumulated or set apart, shall not be included in the total income of the previous year of the person in respect of the income, subject to the compliance of the conditions laid down in section 11(2).
The case of the assessee is that the investments made by it were within the mode prescribed by section 11 (5)(xii) of the Act. As per section 11(5)(xii), the investment should be in any form or mode of investment or deposit, other than those prescribed in section 11 (5)(i) to (xi), as may be prescribed. Such prescription is contained in Rule 17 C of the I.T. Rules. Rule 17 C(1) of the I.T. Rules specifies as a prescribed mode, investment in units issued under any scheme or mutual fund referred to in section 10(23D). The assessee made investment in such mutual funds. Before the AO, the assessee filed details of investment in mutual funds along with purchases, switch in, switch out and redemption particulars to show that most of the income was from the switch in and switch out option exercised by the assessee from one scheme to another, for getting a better yield and to show that the option was only with the respective mutual fund company and there was no transaction with any outside third party.
7. The AO went against the assessee only for the reason that the frequency of the investment made by the assessee was; according to the AO, huge, inasmuch as the assessee had invested in fifty three different schemes of the mutual fund in the general funds category and it had invested in 27 different schemes for foreign contributions, total amounting to investment in eighty different schemes during the year and that in all these schemes, but for in six of them, there were both purchases and sales during the year. The AO held that considering that there were more than one transaction in many of these funds, the number of transactions came to around -two hundred.
8. However, as rightly held by the ld. CIT(A), the action of the AO was not in accordance with law.
9. Section 11(1) of the Act provides for income not to be included in the total income of the previous year, of the person in respect of the income, subject to the provisions of sections 60 to
63. 7 ITA no.2377/Del./2012
10. According to Section 11(1)(a) such income means income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India and where such income is accumulated or set apart for application to such purposes in India to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property.
11. According to section 11 (1)(b), such income is income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of the Income Tax Act, 1961, to the extent to which such income is applied to such purposes in India where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of fifteen per cent of the income from such property.
12. The Explanation to section 11 (1) of the Act states, inter alia, that if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty five per cent onwards of the income derived during that year from property held under trust or, as the case may be, held under trust in part, by any amount, so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount, made, at the option of the person in respect of the income, be deemed to be income applied to such purposes during the previous year in which the income was derived and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes during the previous year immediately following the previous year: in which the income was derived and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes during the previous year immediately following the previous year in which the income was derived.
13. Section 11(2) of the Act provides that where eighty five per cent onwards of the income referred to in section 11(1)(a) or section 11(1)(b)read with the Explanation thereto is not applied, or is not deemed to have been applied to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in respect of the income, provided, inter alia, that the money so 8 ITA no.2377/Del./2012 accumulated or set apart is invested or deposited in the forms or modes specified in section 11(5) of the Act.
14. Thus, it is the aforesaid relevant provisions of the Act which govern the case of the ·assessee. It is seen that undeniably, the investments made by the assessee in units of mutual funds were covered u/s 10(23D) of the Act. 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 of the Act. 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.
15, As per "G. Venkataswamy Naidu & Co.v. CIT", 35 ITR 594(SC), if a person invests money in lands indenting to hold it, enjoys its income for sometime and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. The Hon'ble Supreme Court has held that cases of realization of investments consisting of purchase and resale, though profitable, are clearly outside the domain of adventure in the nature of trade; that in deciding the character of such transaction, several factors are relevant, such as, whether the proceeds were a profit and the purchase of the commodity and its resale were allied to its usual trade or business or incidental to it, the nature and quantity of the commodity purchased and resold, any act subsequent to the purchase to improve the quality of the commodity purchased and thereby make it more readily resalable, any act prior to the purchase showing a design or purpose, the incidents associated with the purchase and resale, the similarity of the transaction to operations usually associated with trade or business, the repetition of the transaction, the element of pride or possession, etc.; that the presence of all these relevant factors .may help the court to draw an inference that the transaction is in the nature of trade; that however, it is not a matter of merely counting the number of facts and circumstances pro and con; that 9 ITA no.2377/Del./2012 what is important to consider is their distinctive character; and that in each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction.
16. It is on the anvil of the above ratio laid down by the Hon'ble Supreme Court, that the facts of the present case are needed to be tested. The AO, it is seen, did not consider the attending factors. He merely went by the high frequency of the transactions in purchase and sale of mutual funds by the assessee. He overlooked the fact that the investments were made as prescribed by section 11 (5) of the Act, as discussed hereinabove. He remained oblivious of the fact that such frequency of transactions cannot be the sole factor for determining as to whether the assessee was or was not carrying on a business activity of trade in mutual funds, particularly when most of the income of the assessee from the investments in the mutual funds was from the switch in/switch out operations exercised by the assessee from one scheme to the other, for getting a better yield. Pertinently, this option is only with the respective mutual fund company. There was no transaction with any outside third party when the money stayed with the mutual fund company. In most of the cases, the growth option was exercised by the assessee in order to enable the assessee to realize income after a period of time. The purchases were all actual purchases. The sales were all actual sales. These showed the investment to be the assessee's own investment. This demonstrated that the intention of the buyer was to hold the units as investments for realization of capital appreciation/dividend. Moreover, section 11(5) of the Act envisages investment in the prescribed modes. It does not make any qualifications as to capital investment or trade investment. In accordance therewith also, it is immaterial whether the transaction was one or there were numerous transactions. The pertinent point is that the investment was made in accordance with the modes of investment qualifying for exemption, as prescribed thereunder. That being so, there was no reason to treat the same as business income of the assessee. There has not been shown any violation of the provisions of section 11 (5) of the Act as having been committed by the assessee.This was the mandate of the provisions of this section that was carried out in letter and spirit by the assessee, though for the purpose of getting a better yield than that the assessee was getting from FDRs in the bank. The FDRs in the bank were fetching bank interest @ 8 %, whereas the investment in the mutual funds brought interest to the assessee @ 14.64%. It would be a travesty of justice to uphold the .AO's action for the aforesaid act of the assessee carried out in compliance of the provisions of the Act.
10 ITA no.2377/Del./2012
17. Otherwise too, though this aspect has not been considered' by the Id, CIT(A), there was also due compliance of the provisions of section 11 (4A) of the Act by the assessee. This section 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, in view of what has been discussed hereinabove, 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 books of account, identifying each of the mutual funds separately. The bank account for purchase and sale of mutual fund was also separately maintained by the assessee. Copies of separate books of account as well as the mutual funds ledger were placed before the AO. None of these were considered by the AO. The assessee was able to identify each transaction, fundwise. The prescription of section 11 (4A) of the Act was thus duly met with.
18. In view of the above also, it is the case of the assessee which gets buttressed.
19. Therefore, all considered, the order of the ld. CIT(A) is well versed. It cannot be said to be erroneous in any manner whatsoever. The grievance of the Department by way of grounds raised before us is unjustified and is rejected as such. "
6. In the light of view taken in their aforesaid decision by a co-ordinate bench, especially when the Revenue have not placed before us any material, controverting the aforesaid findings recorded by the ld. CIT(A) so as to enable us to take a different view in the matter nor brought to our notice any contrary decision, we are not inclined to interfere. Therefore, ground nos.1 to 3 in the appeal are dismissed
7.. No additional ground having been raised before us in terms of residuary ground no.4 in the appeal, accordingly this ground is dismissed.
8. No other plea or argument was made before us.
11 ITA no.2377/Del./2012
9. In the result, appeal is dismissed.
Order pronounced in open Court
Sd/- Sd/-
(U.B.S. BEDI) (A.N. PAHUJA)
(Judicial Member) (Accountant Member)
NS
Copy of the Order forwarded to:-
1. Assessee
2. Income-tax Officer(E)Trust W ard-IV, LaxmiNagar, Distt. Centre, New Delhi
3. DIT(E),New Delhi
4. CIT (A)-XII, New Delhi
5. DR, ITAT,'D' Bench, New Delhi
6. Guard File.
By Order, Deputy/Asstt.Registrar ITAT, Delhi