DCIT Vs BSE Investors Protection Fund (ITAT Mumbai)
Summary: The Mumbai Bench of the Income Tax Appellate Tribunal disposed of six Revenue appeals involving BSE Investors Protection Fund for AYs 2009-10, 2012-13, 2014-15, 2016-17, 2017-18 and 2023-24 through a consolidated order, with ITA No. 7628/MUM/2025 for AY 2009-10 treated as the lead case and the findings applied mutatis mutandis to the remaining years. The assessee-trust was constituted on 10.07.1986 pursuant to Central Government and SEBI directives for protecting small investors, including compensation of eligible claims arising against defaulting trading members, investor education, awareness and research.
It was registered under section 12A and was notified by CBDT Notification No. 65/2007 dated 02.03.2007 for the purposes of section 10(23EA). For AY 2009-10, the assessee had declared total income of Rs.43,47,638 after claiming exemption under section 11. The assessment was reopened under section 147 and the Assessing Officer denied exemption under sections 11 and 12, alleging, inter alia, that BSE and its members were specified persons under section 13(3), that compensation to investors indirectly benefited defaulting members, that corpus donations of Rs.37,28,00,305 were non-exempt, that interest of Rs.6,96,09,411 on auction proceeds was taxable, and that the trust was not irrevocable, leading to invocation of section 164(2). The CIT(A) deleted the additions. Before the Tribunal, the Revenue contended that the trust’s activities benefited specified persons and that simultaneous exemption under sections 11 and 10(23EA) was unavailable under the pre-amendment section 11(7).
The assessee submitted that the Fund compensated investors only after realization of defaulting members’ assets and only for the shortfall, while Clause 24 of the SEBI Circular dated 28.10.2004 prohibited compensation to brokers or associate brokers. The Tribunal found that the payment to eligible investors did not extinguish the defaulting member’s liability and that the Revenue had not produced material establishing any direct or indirect benefit to BSE or its members. Relying on the Supreme Court decision in DIT (Exemption) v. National Stock Exchange Investor Protection Fund Trust, the Tribunal held that simultaneous exemption under section 10(23EA) for eligible contributions and section 11 for other income was available for the relevant years, with the amendment to section 11(7) being prospective from AY 2025-26.
It also upheld the treatment of corpus donations of Rs.37,28,00,305 as capital receipts exempt under section 11(1)(d) and eligible contributions under section 10(23EA). On irrevocability, the Tribunal relied on Clauses 5 and 29(iii) of the Trust Deed, noting that funds were to be transferred to SEBI upon dissolution of the Stock Exchange rather than reverting to BSE. Regarding Rs.6,96,09,411 interest on auction proceeds, the Tribunal held that the assessee held the funds in a fiduciary capacity in a separate account and had no beneficial ownership; the TDS credit and subsequent redeposit did not alter that character. Applying the real-income principle and referring to CIT v. Jayshree Charity Trust and CBDT Circular No. 5-P(LXX-6), the Tribunal upheld deletion of the interest addition. Since there was no violation of section 13(1)(c) read with section 13(3), section 164(2) was held inapplicable.
The Rule 27 challenge to reassessment became academic. All six Revenue appeals were accordingly dismissed and the CIT(A)’s orders were upheld.
Cases Discussed
- DIT (Exemption) v. National Stock Exchange Investor Protection Fund Trust [(2018) 96 taxmann.com 160 (SC) / (2019) 109 taxmann.com 276 (SC)]
- CIT v. Jayshree Charity Trust [159 ITR 280]
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These six appeals preferred by the Revenue arise out of the respective orders dated 16.09.2025, 19.09.2025, 23.09.2025 and 14.10.2025, passed by the Ld. Commissioner of Income-tax (Appeals) [hereinafter referred to as “the Ld. CIT(A)”] for Assessment Years (AYs) 2009-10, 2012-13, 2014-15, 2016-17, 2017-18 and 2023-24.
2. Since the issues involved in all these appeals are identical, they were heard together and are being disposed of by this consolidated order for the sake of convenience. The appeal in ITA No. 7628/MUM/2025 for AY 2009-10 was treated as the lead case by both the parties, and it was agreed that the decision rendered therein shall apply mutatis mutandis to the remaining assessment years.
ITA No. 7628/MUM/2025 for AY 2009-10. The Revenue has raised following grounds:
1. “On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the relief to assessee solely relying on the notifications issued by the CBDT recognizing the trust u/s. 10(23EA) and guidelines issued by the SEBI, without examining the actual activities and reverting any factual findings on the core allegation of the Assessing Officer that the application of the trust fund has directly benefited the settlors of the trust, (Le. Bombay Stock Exchange) and its substantial contributors (le. trading members) who are specified persons covered u/s. 13(3) of the Act, thereby, clearly violating the provisions of section 13(1)(c) (i) & (ii) r.w.s 13(3) of the Act.”
2. “On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the receipts of assessee from Bombay Stock Exchange and its members are exempt for tax by virtue of notification No 65/2007 dated 02.03.2007 issued by the CBDT notifying the assessee u/s. 10(23EA) of the Act ignoring the provisions of section 11(7) of the Act | as applicable prior to its amendment by the Finance (No. 2) Act, 2024 w.e.f. 01.04.2025) wherein it was stipulated that once a trust or institution is granted registration under section 12A / 12AA / 12AB and such registration is in force, no exemption under section 10 (other than those specified in clauses (1), (23C), (23EC), (46), and (46A) | can be availed, thereby, the benefit of exemption u/s. 10(23EA) shall not be available to a trust simultaneously registered u/s. 12A which is the case of the assessee”.
3. * On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing exemption u/s 11 and 12 of the Act to assessee trust by holding that the provisions of section 13(1)(c)(i) & (it) of the Act were not attracted in the case of assessee without appreciating that the substantial receipts of the assessee trust were formed and financed by the Bombay Stock Exchange and its members and any utilization of such funds resulting in benefit to the Bombay Stock Exchange and its members covered under section 13(3)(b) of the Act that constitutes a violation of section 13(1)(c) r.w.s 13(3) of the Act.”
4. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in failing to appreciate that the Assessing Officer had clearly established that the activities and transactions of the assessee were primarily for the benefit of the defaulting stock exchange members, whose liabilities were being met out of the assessee’s funds and since the contributors and beneficiaries of the assessee trust are the same, the provisions of section 13(1)(c)(i) read with section 13(3) squarely applicable, disentitling the assessee from exemption u/s. 11 and 12 of the Act.”
5. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the assessee’s claim for exemption under section 11 of the Income-tax Act, 1961, without appreciating that the trust deed does not contain a clear and irrevocable clause specifying the destination of the trust funds upon dissolution, and that the terms of the deed imply that the funds would revert to or flow back to the settlor, i.e., the Stock Exchange, thereby defeating the mandatory condition of irrevocability required for exemption under sections 11 and 12 of the Act and in absence of such a binding stipulation transferring the assets to another charitable institution with similar objects renders the trust non-compliant with the requirements of sections 11 and 12 of the Act and the settled legal position governing charitable trusts.
6. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that as per clause (29) of the trust deed, the question of the trust funds flowing back to the Stock Exchange does not arise, ignoring the fact that the clause itself provides for liquidation or winding up only on the dissolution of the Exchange, which effectively links the existence of the trust to that of the settlor and undermines the condition of irrevocability.
7. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that corpus donations of Rs 37,28,00,305/ received from BSE and its members are exempt under section 11(1)(d) ignoring that such contributors fall within the ambit of section 13(3)(b) of the Act and, therefore disentitle the assessee from the benefit of exemption u/s. 13(3) of the Act.”
8. • On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that in relying on SEBI circulars and on the judgment of the Hon’ble Supreme Court in DIT (Exemption) v. NSE Investor Protection Pund Trust ((2018) 96 taxmann.com 160 (SC)) without verifying whether the facts of the present case and the actual application of funds were in conformity with the principles laid down therein, whether the contributors in that case were similarly covered under section 13(3) of the Act”.
9. On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in holding that the assessee is not the beneficial owner of the interest income of Rs. 6,96,09,411/- earned on auction fund proceeds merely on the basis of SEBI circular No MRD/DoP/SE/Cir-38/2004 dated 28.10.2004 and SEBI letter No IES/MSD(N)1240/97 dated 21.03.1997, without verifying the actual conduct, accounting treatment, and control over the funds and further ignoring that SEBI guidelines and letters does not alter the taxability of income under the Income-tax Act, 1961, once such income has accrued to and been recognized in the books of the assessee.”
10. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the fact that the interest earned on auction proceeds represents income having direct and proximate nexus with the assessee’s operational activities and further, the assessee having claimed TDS credit on such interest income has itself acknowledged ownership and accrual thereof which disentities the assessee from claiming exemption u/s. 11 of the Act.
11. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in relying on the decision of the Hon’ble Calcutta High Court in CIT v. Jayshree Charity Trust [159 ITR 280] and CBDT Circular No. 5-P(LXX-6) dated 19.05.19-18 without appreciating that once the assessee ceases to be eligible for exemption under section 11, the concept of “real income” or “application of income for charitable purposes becomes inapplicable.”
12. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that section 164(2) of the Income-tax Act, 1961 is not attracted in the facts of the case of the assessee on the basis of incorrect presumption that the exemption u/s. 11 of the Act is allowable to the assessee ignoring the fact that the Assessing Officer recorded findings of violation of section 13(1)(c) r.w.s 13(3) of the Act, which disentitle the assessee trust from claiming exemption u/s. 11 of the Act, and therefore section 164(2) of the Act mandatorily applies in the case of the assessee.
13. The appellant craves leave to add, amend, alter vary and/or withdraw any the grounds of appeal.
3. The assessee, BSE Investors Protection Fund (formerly known as The Stock Exchange Investors Protection Fund), is a trust constituted on 10.07.1986 pursuant to the directives issued by the Central Government (Ministry of Finance) and the guidelines issued by the Securities and Exchange Board of India (SEBI) under the Rules, Bye-laws and Regulations of the Bombay Stock Exchange (BSE). The principal object of the trust is to safeguard the interests of small investors by compensating eligible claims arising against defaulting trading members and by promoting investor education, awareness and research for the development of a healthy securities market.
4. The assessee is registered as a charitable institution under section 12A of the Income-tax Act, 1961 (“the Act”) vide Registration No. TR/25443 dated 15.12.1986. It is also registered with the Charity Commissioner, Mumbai, bearing Registration No. E-10908. Further, the Central Government, vide CBDT Notification No. 65/2007 dated 02.03.2007, has notified the assessee as an Investor Protection Fund for the purposes of section 10(23EA) of the Act.
5. For AY 2009-10, the assessee filed its return of income declaring total income of Rs.43,47,638 after claiming exemption under section 11 of the Act. The assessment was originally completed under section 143(3) on 28.11.2011 accepting the returned income. Subsequently, the assessment was reopened under section 147, and an assessment under section 143(3) read with section 147 was completed on 30.03.2015, whereby the Assessing Officer (“AO”) denied exemption under sections 11 and 12 and made various additions/disallowances, resulting in assessment of a higher total income.
6. The AO denied exemption primarily on the following grounds:
(i) the assessee received interest income of Rs.24,30,16,064, contribution of Rs.16,50,528 from BSE and Rs.22,00,112 from trading members. Since the contributions exceeded Rs.50,000, the AO treated BSE and its members as specified persons under section 13(3)(b);
(ii) relying upon Clauses 5A and 6 of the Trust Deed, the AO concluded that the income of the trust enured directly or indirectly for the benefit of specified persons, thereby attracting section 13(1)(c)(i);
(iii) compensation of Rs.11,58,198 paid to clients of defaulting members was held to have discharged the liability of the defaulting members and conferred business benefit upon BSE, thereby attracting section 13(1)(c)(ii);
(iv) corpus donations of Rs.37,28,00,305 received from BSE and its members were held to be non-exempt in view of the alleged violation of section 13(1)(c);
(v) interest of Rs.6,96,09,411 on auction proceeds was treated as taxable in the hands of the assessee;
(vi) the Trust Deed allegedly did not contain an irrevocable destination of the trust funds upon dissolution, and according to the AO, the funds would ultimately revert to BSE; and
(vii) consequently, the AO invoked section 164(2) and taxed the income at the maximum marginal rate.
7. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), who, vide order dated 16.09.2025, allowed the appeal and deleted all the additions made by the AO.
8. The Revenue is now in appeal before us.
9. The Revenue has raised various grounds challenging the order of the Ld. CIT(A), inter alia, contending that the Ld. CIT(A) erred in deleting the additions made under section 13(1)(c) read with section 13(3), allowing exemption under sections 11 and 12, holding that section 11(7) was not attracted, accepting the irrevocable nature of the trust, deleting the addition of interest on auction proceeds, holding corpus donations to be exempt and in holding that section 164(2) was not applicable.
10. The Ld. Departmental Representative strongly relied upon the assessment order and submitted that BSE and its member brokers were substantial contributors within the meaning of section 13(3)(b). It was contended that by compensating the clients of defaulting brokers, the assessee effectively discharged the liabilities of such brokers, thereby conferring a direct or indirect benefit upon specified persons in violation of section 13(1)(c). It was further argued that prior to the amendment, section 11(7) prohibited simultaneous claim of exemption under section 10(23EA) and section 11. The Revenue also submitted that Clause 29 of the Trust Deed rendered the trust revocable and that interest of Rs.6,96,09,411 on auction proceeds was taxable since the assessee had recognized the income and claimed TDS credit thereon.
11. Per contra, the Ld. Authorised Representative relied upon the detailed submissions made before the authorities below and supported the order of the Ld. CIT(A). It was submitted that the assessee trust was established pursuant to the directives of the Central Government and SEBI exclusively for protecting genuine investors. The Fund compensates investors only after realization of the assets of the defaulting member and only to the extent of any shortfall. Under Clause 24 of the SEBI Circular dated 28.10.2004, no broker or associate broker is entitled to receive any compensation. Therefore, neither the defaulting members nor BSE derive any direct or indirect benefit from the activities of the assessee.
12. It was further submitted that Clause 5 of the Trust Deed expressly declares the trust to be irrevocable, while Clause 29(iii) provides that upon dissolution the remaining funds are to be transferred to SEBI for investor education, awareness and research and not to BSE. It was also submitted that the assessee, being notified under section 10(23EA), was entitled to claim exemption under that provision along with exemption under section 11 in view of the judgment of the Hon’ble Supreme Court in DIT (Exemption) v. NSE Investor Protection Fund Trust. The amendment to section 11(7), restricting such simultaneous claims, is prospective and applicable only from AY 2025-26.
13. Regarding the addition of interest on auction proceeds, it was submitted that under the SEBI Circular dated 04.05.1999 and communications dated 21.03.1997 and 08.12.1998, the assessee merely holds such funds in a fiduciary capacity in a separate bank account until final adjudication by the Courts or SEBI. Consequently, the assessee is not the beneficial owner of such interest. The assessee also raised a challenge under Rule 27 to the validity of the reassessment proceedings but submitted that the same would become academic if the order of the Ld. CIT(A) was upheld.
14. We have carefully considered the rival submissions and perused the material available on record. The principal dispute raised by the Revenue is that by compensating investors of defaulting trading members, the assessee conferred a benefit upon specified persons covered under section 13(3), thereby attracting section 13(1)(c).
15. We find that the assessee trust was constituted pursuant to the directive of the Ministry of Finance dated 22.08.1985 and the SEBI Circular dated 28.10.2004 with the sole object of protecting small investors. Upon declaration of a trading member as a defaulter, the assets and deposits of such member are first realized by the Defaulters’ Committee. The assessee compensates only the shortfall remaining after realization of such assets.
16. Clause 24 of the SEBI Circular specifically prohibits payment of compensation to any broker or associate broker. The payment made by the assessee to eligible investors does not extinguish the liability of the defaulting member either towards the Exchange or towards the Fund. The right of recovery against the defaulting member continues to remain with the Fund. Thus, the ultimate beneficiary of the application of funds is the investing public and not the defaulting member or BSE. Except for making general allegations, the Revenue has not brought any material on record to establish that any direct or indirect benefit accrued to BSE or its members.
17. We further find that the Hon’ble Supreme Court in DIT (Exemption) v. National Stock Exchange Investor Protection Fund Trust [(2018) 96 taxmann.com 160 (SC) / (2019) 109 taxmann.com 276 (SC)] has held that an Investor Protection Fund registered under section 12A is entitled to claim exemption under section 10(23EA) in respect of eligible contributions while simultaneously claiming exemption under section 11 for its other income. The amendment made to section 11(7), restricting such simultaneous claims, is prospective and applies only from AY 2025-26. Accordingly, we find no infirmity in the finding of the Ld. CIT(A) that the corpus donations of Rs.37,28,00,305 constitute capital receipts exempt under section 11(1)(d) and that eligible contributions are exempt under section 10(23EA).
18. The Revenue has also challenged the irrevocable nature of the trust by placing reliance upon Clause 29 of the Trust Deed.
19. On a perusal of Clause 5 of the Trust Deed dated 10.07.1986, we find that it specifically declares the trust to be irrevocable and further provides that no money belonging to the Fund shall be recoverable by the Stock Exchange. Clause 29(iii) categorically provides that in the event of the Stock Exchange being wound up, dissolved or liquidated, the balance lying in the Fund, after satisfying pending claims, shall be transferred to SEBI as trustee for utilization towards investor education, awareness, research and such other purposes as SEBI may specify. Thus, the trust funds do not revert to BSE or its members. We, therefore, concur with the finding of the Ld. CIT(A) that the trust satisfies the requirement of irrevocability under the Act.
20. The next issue relates to the addition of Rs.6,96,09,411 towards interest on auction proceeds.
21. The material on record shows that under the SEBI Circular dated 04.05.1999 and the communications dated 21.03.1997 and 08.12.1998, the auction proceeds and the interest accrued thereon are required to be maintained in a separate bank account until final adjudication by the competent authorities. The assessee merely holds these funds in a fiduciary capacity and has no beneficial ownership over them. The mere fact that TDS credit was claimed and the refund, upon receipt, was redeposited into the dedicated account does not alter the fiduciary character of the funds. Applying the principle of real income, as explained in CIT v. Jayshree Charity Trust [159 ITR 280] and CBDT Circular No. 5-P(LXX-6), such interest cannot be assessed as the income of the assessee. We, therefore, find no reason to interfere with the order of the Ld. CIT(A) on this issue.
22. Since we have upheld the finding of the Ld. CIT(A) that there is no violation of section 13(1)(c) read with section 13(3) and that the assessee is entitled to exemption under sections 11 and 10(23EA), the provisions of section 164(2) are not attracted.
23. The remaining ground is general in nature and does not call for any separate adjudication.
24. Insofar as the assessee’s application under Rule 27 is concerned, since we have upheld the order of the Ld. CIT(A) on merits, the challenge to the validity of the reassessment proceedings has become academic and requires no adjudication.
25. Both the parties fairly submitted that the issues involved in ITA Nos. 7629, 7630, 8888, 8889 and 8890/MUM/2025 relating to AYs 2012-13, 2014-15, 2016-17, 2017-18 and 2023-24 are identical to those involved in ITA No. 7628/MUM/2025 for AY 2009-10. Accordingly, our findings recorded hereinabove shall apply mutatis mutandis to these appeals also. Consequently, all the appeals filed by the Revenue stand dismissed.
26. In the result, all six appeals filed by the Revenue for AYs 2009-10, 2012-13, 2014-15, 2016-17, 2017-18 and 2023-24 are dismissed and the orders of the Ld. CIT(A) are upheld.
Order pronounced in the open court on 13.08.2026.
