Mahavir Singh, JM.
1. This appeal by the Revenue is arising out of the order of CIT (A)-1, Mumbai in appeal No. CIT (A)-I/E1 (118)/2010-11 dated 30-06-2014. The Assessment was framed by DDIT (E)-I (1), Mumbai for the A.Y. 2008-09 vide order dated 29-12-2010 u/s 143(3) of the Income Tax Act, 1961 (hereinafter 'the Act').
2. The only issue in this appeal of Revenue is against the order of CIT(A) in allowing exemption u/s 11 of the Act on sale of mutual funds. For this Revenue has raised following two grounds:-
"1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to allow the exemption as claimed u/s .11 of the I.T. Act, 1961, when the assessee's activity of sale of mutual fund is in very organized manner and purely looking the frequency of such trading, it can be established beyond doubt that the motive of the trust is to earn quick and shod term profits."
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to allow the exemption as claimed u/s .11 of the I.T. Act when the activities are being carried on commercial lines and also not in conformity with the objects of the assessee society."
3. Briefly stated facts are that Seth Maturadas K. Natha Bhatia High school Trust is the Educational institution. It runs High School at Sai Baba Nagar, Borivali-West, Mumbai-400092. It has no other activities. It is registered u/s 12AA (1)(b)(1) of the Income Tax Act, 1961. It has field Form NO. 10B i.e. Audit report under section 12A(b) of the Income tax, 1961. It has also given notice u/s 11(2) of the Income Tax Act, 1961 in form no.10. Both the forms were field along with Return of Income for the year under consideration. The assessee also claimed exemption u/s 10(23C) of the Act being an education institute. The assessee trust is collecting moderate fees from the student and expense of the trust for the school are always more than educational receipts, which are made out of dividend/interest income of its investment made as per section 11(5) of the Act but the AO denied the exemption claimed by the assessee. The AO noted from income and expenditure account that it has shown profit from sale of mutual funds to the tune of Rs. 59,55,030/-, dividend income from mutual funds at Rs. 53,72,052/- and receipts out of fee students of school at Rs. 28,99,866/-. The AO noted that the assessee is carrying out a very organized and regular trading of mutual funds and hence he denied exemption u/s 11 of the Act by observing as under: -
"The sources of investments in mutual funds is out of the accumulations made by the assessee u/s. 11(2) which was subsequently invested in mutual funds to be utilized within a period of five years on the objects of the trust. The assessee has mis-utilized this facility and instead of investing the accumulation made u/s.11(2) for longer stints is engaged into the activity of trading of mutual funds. This clearly establishes that the assessee is a concern purely created-for the purpose of profit. The profits so derived out of the trading in mutual funds and the dividend received thereon are also not utilized I applied for any charitable activity during the previous year. A close examination of the profit and loss account reveals that the assessee has received tuition and other related fees to the extent of Rs. 37,45,812/- and the total expenditure on the educational purposes debited to the P & L A/c. stands at Rs. 39,13,6631-. From this, this is clearly evident that the education receipts are applied towards the furtherance of education. However, the profits derived on sale of mutual funds and the dividend income are shown as surplus and are carried over to the balance sheet and again re-invested into the specified modes i.e. mutual funds as per section 11(5) and deemed application of income is claimed uls.1 1(2.) to the tune of Rs. 91,77,759/- and accumulation uls.11(1)(a) to the tune of Rs. 60,90,224/-. This clearly establishes that the assessee is mis-utilizing the provisions of section 11(1)(a) and 11(2) as the amounts accumulated are utilized towards purchase of mutual funds. The assessee has formed a very vicious cycle by which the profits derived on sale of mutual funds is re-invested again in mutual funds by claiming the benefits of section 11. However, the surplus is never applied towards any charitable activity.
From the discussion above, it is clear that assessee is not acting as a charitable organization. There is generation of huge profits year after year. From the discussion above it is clear that entire character & focus of assessee has become totally commercial with eye on huge profits and it is no more charitable organization as discussed supra. Therefore, even with registration allowed to assessee u/s 12A of the Act, since its activities are being carried on commercial lines and also not in conformity with the objects of the assessee society, it is not eligible for exemption u/s 11 of the Act. Therefore, the assessee is required to be taxed as AOP without grating exemption u/s 11 of the IT Act.
Accordingly, he added back the net profit discloses as per income expenditure account at Rs. 1,18,72,109/- and taxed accordingly. Aggrieved assessee preferred the appeal before CIT(A).
4. The CIT(A) allowed the claim of the assessee by observing that 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) of the Act. We find that the CIT(A) relied on the coordinate Bench decision of Delhi Tribunal in ITA No.179/Del/2010 dated 10-03-2010 in the case of ITO v. Jesuit Conference of India (2011) 47 SOT 29/12 taxmann.com 297 and allowed the claim of assessee by observing as under: -
"4.7. I have considered the facts and circumstances of the case, the submissions of the appellant and assessment order. It is noticed that the AO has denied the exemption to the appellant u/s 1Ibf the I.T. Act by holding 'that the appellant 115 engaged in running educational institution for earning profit because it has earned income from sale of mutual funds and dividend income from its investments sold during the year. However, there is no dispute to the fact that the educational institution is run by the appellant during the year, that the surplus from the sale of investments have not been misutilized or diverted for, any other purpose and that there is any violation of section 11(5) of the I.T. Act, 1961. In fact, my learned Predecessor has specifically asked the Remand Report on this issue has noted above and it is noticed from the Remand Report that no such violation has been reported. ii: has been specifically reported that
The details it is evident that education receipts are applied towards the furtherance of education. However, the profits derived on safe of mutual funds and the dividend income are shown as surplus and are carried over to the balance sheet and again reinvested into the specified modes i.e. mutual funds as per section 11(5) and deemed application of income is claimed u/s 11(2).
4.8. Therefore, under the circumstances and from the facts of the case, it is on record that there is no violation of the provision of section 11(5) of the I.T. Act are any other such reasons attracting forfeiture of exemption u/s 11 of the I.T. Act as claimed by the 'appellant and as such A.O. has not questioned this aspect. The appellant is also Registered u/s 12A of the I.T. Act which continues during the year. In fact, the similar issue has been considered in the order of the Hon. Delhi Tribunal as reproduced above, without taking any adverse view on allowability of exemption u/s 11 of the I.T. Act. Thus, for the above reasons, the denial of exemption u/s 11 of the. I.T. Act by the A.O. is erroneous and contrary to the facts and circumstances of this case.
4.9. It seems that the AO has denied the exemption u/s 11 61 the I.T. Act to the appellant by wrongly interpreting that the' appellant has carried, out business activity during the year for which exemption u/s 11 of the I.T. Act should be forfeited in reference to the proviso to section 2(1) of the J.T. Act, 1961. However, proviso to section 2(15) is not applicable in reference to charitable activity of education as in the case of the appellant as per Circular No. 11/2008 dated 19.12.2008, para 2.1 that 'the newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(1), relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute charitable purpose even if it incidentally involves the carrying on of commercial activities.
In view of the above discussion and of the reasons therein, Ground No.1 of appeal is allowed."
Aggrieved against the order of CIT(A), Revenue came in second appeal before Tribunal.
5. We have heard rival contention and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee is a trust duly registered under section 12A of the Act with the commissioner of Income Tax/ DIT (Exemptions), Mumbai. 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 section 11(1a) of the Act. The assessee is also eligible for the specific accumulation of income under the provisions of sub-section (2) of section 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. The assessee under the provisions of clause 17 of section 11(5) of the Act is entitled to Invest sum accumulated under a scheme of mutual funds prescribed u/s 10(23) of the Act. The pattern of investment has been notified in Rule 17C of the Income Tax Rules 1962. We find that entire sum earmarked for the purpose of specific accumulation has been invested in the specified securities as per the as per the provisions of section 11(5) of the Act and therefore as far as Investments are concerned there is no violation of provisions of section 11(5) of the Act. We are of the view that under the provisions of sub-section of section 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-section 3 of section 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 v. Commissioner of Income Tax (1992) 193 ITR 321/60 Taxman 248 (SC).
6. Further, from the facts of the case it is inconceivable that assessee trust is doing the business and therefore the provision of section 1 1(4A) does not come into play. It was again a narrow interpretation by the AO to treat one single transaction of reshuffle of mutual fund as business activities carried on by the trust and not applying the income for the charitable purposes. The entire income earned by way of long term capital gain and dividend income is out of investments into specified securities as envisaged under the provisions of section 11(5) of the Act and the surplus arising out of dividend income and capital gain income has been diverted for the specific purpose u/s 11(2) of the Act for the school building construction.
7. Further, the case law relied on by the learned Counsel for the assessee in support of its contention of Delhi ITAT decision in the case of ITO v. Jesuit Conference of India (2011) 12 Taxman.com 297 (Delhi-ITAT) is fully applicable and more precisely observation by the Hon'ble Tribunal in Para No.14 to 17, which are very relevant and are being reproduced as under :-
"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 under section 10(23D) of the Act. These investments are within the prescribed modes of investment under section 11(5)(xii) r/w rule 17C of the Income-tax 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 and 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. Venkataswami Naidu & Co. v. Commissioner of Income Tax (1959) 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 procedure was 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 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 Assessing Officer, it is seen, did not consider of 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 herein above. 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 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 outride 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 s
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hown any violation of the provisions of section 11(5) of the Act as having been committed by the assessee. Rather, it 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 at the rate of 8 per cent, whereas the investment in the mutual funds brought interest to the assessee at the rate of 14.64 per cent. It would be a travesty of justice to uphold the Assessing Officer's action for the aforesaid act of the assessee carried out in compliance of the provisions of the Act 17. Otherwise too, though this aspect has not been considered by the learned 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 herein above, 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. The prescription of section 11(4A) of the Act was thus duly met with." 8. In view of the above given facts and circumstances of the case, we confirm the order of the CIT(A) allowing the claim of the assessee and this appeal of Revenue is dismissed. 9. In the result, the appeal of Revenue is dismissed.