ITAT Restores 12AB & 80G Approval; Sections 13(1)(c), 13(3) Inapplicable

National Stock Exchange Investor Protection Fund Trust Vs CIT (ITAT Mumbai)

Investor Protection Is Not Member Protection: Registration u/s 12AB &; Approval u/s 80G Restored as Sections 13(1)(c) &; 13(3) Miss the Market

Summary:

Trust Born Out of a Regulatory Mandate

The assessee was a public charitable trust constituted by the National Stock Exchange of India Ltd. on 11 July 1995, pursuant to directions of the Ministry of Finance & the regulatory framework governing recognised stock exchanges.

Its principal object was to compensate investors or constituents for losses suffered when a trading member was declared a defaulter, subject to the limits prescribed by the trustees. Its other objects included investor education, awareness & related research.

The Trust was registered under the Bombay Public Trust Act, 1950 and had obtained registration u/s 12A in 1995. It had also been granted registration u/s 12AB & approval u/s 80G for the immediately preceding period. For continuation from AY 2027-28 onwards, it filed Form No. 10AB on 26 September 2025.

Part of its income was also eligible for exemption u/s 10(23EA), pursuant to CBDT Notification No. 253/2005.

CIT(E) Sees a Benefit to NSE Members

The CIT(E) noticed that the Trust received contributions from NSE & its trading members and utilised its funds to meet investor claims arising upon a trading member being declared a defaulter.

According to the CIT(E), the Trust thereby took over the liability of the defaulting trading member & indirectly benefited NSE and its members, who were specified persons u/s 13(3). He consequently alleged violation of section 13(1)(c) r.w.s. 13(3). The Trust was accordingly treated as falling foul of the statutory restrictions applicable to charitable trusts.

The CIT(E) further held that the Trust benefited only investors dealing through NSE & not the public at large. On these grounds, registration u/s 12AB was rejected. Approval u/s 80G(5) was consequentially denied for alleged non-fulfilment of section 80G(5)(i).

Investor Gets Paid—not the Defaulter

The assessee explained that no payment was made to a defaulting trading member. Compensation was paid directly to an investor whose admitted claim remained unsatisfied because the assets of the defaulting member were insufficient.

The trading member neither received money from the Trust nor acquired any enforceable right over its funds. The Trust did not commercially assume or discharge the member’s liability. It independently operated an investor-protection mechanism prescribed by the securities-market regulatory framework.

The Trust was established pursuant to Government & SEBI directions and not as a private arrangement for NSE or its members. Its dominant purpose was to protect investors, promote confidence in the securities market & undertake investor education.

A Section of the Public Is Still Public

The assessee argued that an object of general public utility need not benefit every member of the population. Advancement of the interests of a sufficiently identifiable section of the public having a common interest also constitutes a charitable purpose u/s 2(15).

The beneficiaries were investors & constituents participating in the recognised securities market. They were not selected because of any private or personal relationship with the Trust, its trustees or contributors.

The ITAT accepted this distinction. The fact that protection was available to a particular class of investors did not convert the activity into a private purpose. Investors in the recognised securities market constituted a section of the public sharing a common public interest.

Contributors & Beneficiaries Are Different

The ITAT rejected the CIT(E)’s assumption that because NSE & its trading members contributed to the fund, they became its beneficiaries.

The contributions were made under the regulatory framework governing the creation & maintenance of Investor Protection Funds. The source of the corpus and the ultimate beneficiaries were distinct. Merely contributing to the fund did not establish that it operated for the contributors’ benefit.

Compensation became payable only after a trading member was declared a defaulter, the investor’s claim was admitted & the available assets of the defaulter were found insufficient.

No Trade, Commerce or Business

The Tribunal also held that the Trust’s activities did not attract the proviso to section 2(15). It was neither carrying on trade, commerce or business nor rendering any commercial service for a cess, fee or other consideration.

Compensation paid to an eligible investor was not consideration for any service rendered by the Trust. Likewise, investor education, awareness & connected research were undertaken in furtherance of its objects and not as commercial activities.

The receipt of contributions from NSE & its members did not alter the character of the activities. The mere receipt and application of funds having monetary value could not transform a regulatorily mandated investor-protection function into business.

Exact Limb u/s 2(15) Left Open

The ITAT held that the activities were genuine, carried out according to the Trust’s objects & outside the proviso to section 2(15).

However, it deliberately refrained from conclusively deciding whether the activities fell under the specific limb of “education” or the residual limb of “advancement of any other object of general public utility”. Such classification was unnecessary because the reasons adopted by the CIT(E) for refusing registration were factually unsustainable.

The CIT(E) was accordingly directed to grant registration u/s 12AB. Since approval u/s 80G(5) had been rejected solely because registration was denied & no independent disqualification was identified, the ITAT also directed grant of approval u/s 80G(5) from AY 2027-28 onwards.

Key Takeaway

A regulatory fund compensating investors does not benefit the defaulting intermediary merely because its default triggers payment. Funding the safety net is not the same as enjoying it. Sections 13(1)(c) & 13(3) cannot be invoked by confusing contributors with beneficiaries, while investor protection remains a valid public purpose even when the beneficiaries form an identifiable section of the investing public.

Cases Discussed

• National Stock Exchange Investor Protection Fund Trust v. ADIT, ITA No. 2359/Mum/2016, order dated 19.12.2019, AY 2011-12.

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI

These appeals by the assessee are directed against two separate orders dated 31/03/2026 passed by the Ld. Commissioner of Income-tax (Exemptions), Mumbai [“Ld. CIT(E)”], rejecting the assessee’s applications for registration under section 12AB and approval under section 80G(5) of the Income-tax Act, 1961 (“the Act”). Since both appeals arise from the same set of facts, they are disposed of by this consolidated order. ITA No.4638/Mum/2026 relating to registration under section 12AB is taken up as the lead appeal.

2. Brief facts of the case are as under:-

The assessee is a public charitable trust created on 11/07/1995 by National Stock Exchange of India Ltd. pursuant to the directions of the Ministry of Finance and the regulatory framework governing recognized stock exchanges. Its principal objects are to compensate investors/constituents for losses suffered on account of a trading member being declared a defaulter, subject to the limits prescribed by the trustees, and to undertake investor education, awareness and related research.

2.1. The assessee was registered under section 12A under the erstwhile regime and was subsequently granted registration under section 12AB as well as approval under section 80G for the immediately preceding period. For continuation of registration from A.Y. 2027-28 onwards, the assessee filed Form No.10AB on 26/09/2025.

2.1. The Ld. CIT(E) observed that the trust receives contributions from NSE and its trading members and applies the fund towards claims arising on a trading member being declared a defaulter. According to the Ld.CIT(E), the trust thereby takes over the liability of defaulting trading members and indirectly benefits NSE and its members, who fall within the category of specified persons contemplated under section 13(3).

It was further held that the trust benefits only investors dealing on NSE and not the public at large. On this reasoning, the Ld.CIT(E) concluded that there was a violation of section 13(1)(c) read with section 13(3) and rejected the application under section 12AB.

2.2. Consequentially, the application under section 80G(5) was also rejected on the ground that the condition prescribed under section 80G(5)(i) was not fulfilled.

Aggrieved by the orders passed by the Ld.CIT(E), the assesse is in appeal before this Tribunal.

3. The Ld. Sr. Counsel submitted that the Ld. CIT(E) proceeded on an erroneous understanding of the nature and functioning of the assessee Trust. It was submitted that the payments made by the assessee are not payments to defaulting Trading Members. Rather, such payments are made to investors whose admitted claims remain unsatisfied on account of insufficiency of the assets of a Trading Member who has been declared a defaulter. Thus, no payment or benefit is extended to the defaulting Trading Member. The activity of the assessee is essentially directed towards protection of the investing public against losses arising from defaults in the securities market.

3.2. The Ld.Sr.Counsel submitted that the National Stock Exchange Investor Protection Fund Trust was constituted by the National Stock Exchange of India Ltd. (NSE) on 11.07.1995 pursuant to the directions of the Ministry of Finance and in accordance with the Rules and Bye-laws of NSE, which were approved by SEBI, as well as the guidelines issued by SEBI from time to time.

3.3. The assessee was registered as a public trust under the Bombay Public Trust Act, 1950 by the Charity Commissioner, Greater Bombay Region, on 10.04.1996. It was also registered under section 12A(a) of the Income-tax Act, 1961 on 24.11.1995. The Ld.Sr.Counsel submitted that the Trust has been claiming exemption under sections 11 and 12 of the Act for several years. Further, part of its income has also been exempt under section 10(23EA) of the Act pursuant to CBDT Notification No.253/2005 dated 29.11.2005.

3.4. It was submitted that the assessee was not established as a private or commercial arrangement but pursuant to the regulatory framework governing the securities market, with the specific purpose of protecting investors and promoting investor education and awareness.

3.5. The Ld.Sr.Counsel submitted that, as per the Trust Deed, the principal object of the assessee is to compensate, within the prescribed limits, any person or constituent for loss suffered on account of a Trading Member being declared a defaulter under Chapter XII of the Bye-laws of NSE. The Trust is also required to undertake activities relating to education of investors, creation of awareness amongst the investor community and research connected therewith. It was submitted that the object is therefore not to provide any commercial or private benefit to NSE or its Trading Members, but to protect investors who participate in the securities market and to promote investor awareness and confidence.

3.6. The Ld.Sr.Counsel submitted that investor protection is an integral part of the regulatory framework governing the securities market. SEBI, vide Circular No. SE/10118 dated 12.10.1992, had advised stock exchanges to establish an Investor Services Fund. Subsequently, SEBI issued Circular No. MRD/DoP/SE/Cir-38/2004 dated 28.10.2004 prescribing comprehensive guidelines for Investor Protection Funds to be maintained by Stock Exchanges. These guidelines were modified from time to time based on the experience of the market and the deliberations with Stock Exchanges, Depositories and the Secondary Market Advisory Committee of SEBI.

3.7. It was submitted that the activities of the assessee have throughout been undertaken within this regulatory framework and that the underlying object of investor protection and investor education has remained unchanged since inception. The Ld.Sr.Counsel submitted that the expression “advancement of any other object of general public utility” occurring in section 2(15) of the Act is of wide amplitude. The expression is not restricted to activities benefiting the public at large without any identifiable class of beneficiaries. An activity undertaken for the benefit of a sufficiently identifiable section of the public having a common interest can also constitute advancement of an object of general public utility.

3.8. In the present case, the beneficiaries are investors and constituents participating in the securities market. The Trust provides a protective mechanism to such investors against losses arising from defaults of Trading Members and also undertakes investor education and awareness activities. The beneficiaries, therefore, constitute a section of the general public having a common public interest in the proper and orderly functioning of the securities market.

3.9. It was further submitted that the activities of the Trust should be examined with reference to its dominant and predominant object and not by isolating individual payments made to investors. The payment made to an eligible investor is merely the mechanism through which the larger object of investor protection is achieved.

He submitted that the Trust does not select particular investors for providing any private or commercial benefit. Payments are made only when the prescribed conditions are satisfied and an admitted claim remains unsatisfied due to insufficiency of the assets of a defaulting Trading Member. He thus submitted that such payments are therefore incidental to and in furtherance of the overarching object of protecting the investing public.

3.10. Similarly, activities relating to investor education, awareness and research are directly intended to promote informed participation in the securities market and thereby advance the interests of investors as a class.

4. Without prejudice to the above, the Ld.Sr.Counsel submitted that the activities of the assessee do not constitute trade, commerce or business. The Ld.Sr.Counsel submitted that the Trust do not carry any commercial activity with a profit motive. It does not provide any commercial service to NSE, Trading Members or investors for consideration. He submitted that the compensation paid to an investor cannot be characterised as consideration for any service rendered by the Trust. He further submitted that the payment is made pursuant to the investor-protection mechanism and is intended to mitigate the loss suffered by an eligible investor on account of the default of a Trading Member.

4.1. The Ld. Sr. Counsel submitted that even where an object falls under the sixth limb of section 2(15), the proviso thereto is attracted only where the assessee is carrying on an activity in the nature of trade, commerce or business, or rendering any service in relation to trade, commerce or business, for a cess, fee or any other consideration, subject to the statutory conditions. He emphasised that the present case, there is no such commercial activity or rendering of services for consideration. The Trust does not charge investors a fee for providing protection against the default of a Trading Member. The compensation mechanism is part of the regulatory investor-protection structure and not a commercial transaction.

4.2. The Ld.Sr. Counsel submitted that merely because the Trust deals with funds or makes payments having monetary value cannot, by itself, result in its activities being characterised as trade, commerce or business. He submitted that, what is relevant is the nature and purpose of the activity, which in the present case is protection of investors and advancement of investor awareness.

4.3. The Ld. Sr. Counsel further submitted that, independently of the above, the Trust’s activities also fall within the specific limb of “education” under section 2(15), insofar as the Trust undertakes investor education, awareness and related research. Thus, according to the Ld. Sr. Counsel, the assessee’s objects satisfy section 2(15) in either of two ways: first, as advancement of the specific charitable object of education; and, alternatively, as advancement of an object of general public utility.

4.4. It was further submitted that the objects of the assessee have remained substantially unchanged since its inception and the Trust has been registered under the charitable provisions of the Act. Registration under section 12A/12AB and approval under section 80G had been granted in the preceding periods. Part of its income has also been recognised as exempt under section 10(23EA) of the Act.

4.5. The Ld. Sr. Counsel submitted that these circumstances demonstrate the consistent charitable and investor-protection character of the Trust’s activities. While the mere existence of registration may not by itself determine the issue for the year under consideration, the same is relevant in appreciating the nature and continuity of the objects and activities of the assessee.

4.6. The Ld. Sr. Counsel placed reliance on the decision of the coordinate Bench of the Tribunal in National Stock Exchange Investor Protection Fund Trust v. ADIT, ITA No.2359/Mum/2016, order dated 19.12.2019, for A.Y. 2011-12, wherein the assessee’s claim was examined in the context of the provisions of section 11(2) of the Act. It was submitted that the Tribunal, after considering the relevant statutory provisions and judicial precedents, accepted the assessee’s activities for the purposes of section 11(2).

4.7. The Ld. Sr.Counsel submitted that the aforesaid decision also demonstrates that the activities of the assessee have previously been examined by the Tribunal in the context of the charitable provisions of the Act.

4.8. Accordingly, the Ld. Sr. Counsel submitted that the assessee Trust was established under the regulatory framework for the securities market with the predominant object of protecting the investing public, providing a mechanism for compensating eligible investors in cases of default by Trading Members, promoting investor education and awareness, and undertaking connected research.

4.9. It was therefore contended that the activities of the assessee constitute a charitable purpose within the meaning of section 2(15) of the Act. In the first instance, the activities relating to investor education and awareness fall within the specific limb of “education”. Alternatively, and without prejudice, the protection of investors and promotion of confidence and awareness in the securities market constitute advancement of an object of general public utility under the sixth limb of section 2(15). Since the assessee does not carry on any activity in the nature of trade, commerce or business, nor render any service for a cess, fee or other consideration, the proviso to section 2(15) is also not attracted.

4.10. The Ld.DR relied upon the findings recorded by the Ld.CIT(E).

We have perused the submissions advanced by both sides in light of the record placed before us.

5. It is noted that the Government of India, vide Notification No. F.No.14/4/SE/85 dated 22.08.1985, stipulated the setting up of Investor Protection Fund (IPF)/Customer Protection Fund (CPF) by stock exchanges with a view to protecting the interests of investors. Pursuant thereto, SEBI issued guidelines to the stock exchanges vide letter No. SMD/RCG/PJ/268/96 dated 19.01.1996 for setting up of Investor Protection Funds. In pursuance of the regulatory framework so prescribed, the National Stock Exchange Investor Protection Fund Trust was constituted on 11.07.1995 with the object of safeguarding the interests of investors.

5.1. It is also relevant to note that the assessee’s income had, in the earlier years, been granted exemption under section 10(23C)(iv) of the Act pursuant to notifications issued by the CBDT. Subsequently, section 10(23EA) was inserted with effect from 01.04.2001, providing exemption in respect of income of an Investor Protection Fund set up by a recognised stock exchange, subject to the conditions prescribed therein. The assessee was notified for the purposes of section 10(23EA) vide CBDT Notification No.253 dated 29.11.2005. Thereafter, consequent upon the amendment to section 10(23EA) by the Finance Act, 2006 with effect from 01.04.2007, the assessee has been claiming exemption in respect of contributions received from the stock exchange and its members under section 10(23EA), while claiming exemption under sections 11(1) and 11(2) in respect of the residual income comprising income from investments.

5.2. More importantly, the regulatory material placed before us, including the SEBI circulars and the Trust Deed, makes it clear that the fund was established for protecting investors and that the benefits of the fund were not intended for the members of the stock exchange. The fund is intended to meet legitimate claims of investors/clients of a defaulting Trading Member. The mechanism for payment also establishes that compensation is made to an eligible investor/constituent only after the Trading Member is declared a defaulter and its available assets are found insufficient to meet the admitted claims.

5.3. In these circumstances, we are unable to accept the premise underlying the order of the Ld. CIT(E) that the assessee Trust takes over the liability of, or confers a benefit upon, the defaulting Trading Member. The defaulting Trading Member neither receives the compensation from the Trust nor acquires any enforceable right in the funds maintained by the Trust. The liability of the Trading Member towards its client is not discharged by the Trust in the sense of assuming such liability; rather, the Trust operates a separate investor-protection mechanism for meeting the eligible claim of the investor in accordance with the prescribed regulatory framework.

5.4. We also find no merit in treating the contributions received from NSE and its Trading Members as establishing that such contributors are the beneficiaries of the Trust. The contributions are made pursuant to the regulatory mechanism for creation and maintenance of the Investor Protection Fund. The source of the corpus and the ultimate beneficiaries of the Fund are distinct. The fact that NSE and its members are required to contribute to the Fund does not, by itself, establish that the Fund is operated for their benefit.

5.5. We further note that the beneficiaries of the investor-protection mechanism are investors/constituents participating in the securities market. The fact that the benefit is available to a particular class or section of the public does not, by itself, take the activity outside the scope of a public purpose. What is material is whether the class of beneficiaries is identified by reference to a private or personal relationship or whether it constitutes a section of the public having a common public interest. In the present case, the beneficiaries are investors/constituents of the recognised securities market and not a group of persons selected on the basis of any private relationship with the Trust, its trustees or the contributors.

5.5. We are conscious that, while examining an application for registration under section 12AB, the Ld. CIT(E) is entitled to examine whether the activities of the assessee are genuine and are being carried out in accordance with its objects. Registration can also be declined where the activities are found to be non-genuine or where the activities fall within the mischief of the proviso to section 2(15) of the Act. However, in the present case, we find that the activities of the assessee are carried out pursuant to the regulatory framework governing the Investor Protection Fund and are consistent with the stated objects of the Trust.

5.6. We further find that the activities of the assessee do not fall within the mischief of the proviso to section 2(15). The assessee is not carrying on any activity in the nature of trade, commerce or business, nor is it rendering any service in relation to any trade, commerce or business for a cess, fee or any other consideration. The payment made to an eligible investor upon the default of a Trading Member is made pursuant to the investor-protection mechanism and is not consideration for any service rendered by the Trust. Likewise, the activities relating to investor education, awareness and connected research are undertaken in furtherance of the stated objects of the Trust and are not shown to constitute commercial activities undertaken for consideration.

5.7. The receipt of contributions from NSE and its Trading Members under the regulatory framework also does not alter the character of the activities undertaken by the Trust. The mere fact that the Trust receives contributions from persons connected with the securities market cannot, without more, result in its activities being characterised as trade, commerce or business or as rendering services for consideration.

5.8. In view of the above, we find that the material on record does not support the premise adopted by the Ld. CIT(E) that the activities of the assessee result in conferring a benefit upon the defaulting Trading Members. On the contrary, the regulatory framework, Trust Deed and manner of utilisation of the Fund establish that the Fund is operated for the protection of eligible investors.

We, therefore, hold that the activities of the assessee are genuine, are being carried out in accordance with its stated objects and do not fall within the mischief of the proviso to section 2(15) of the Act.

5.9. In the above circumstances, we do not consider it necessary, for deciding the present appeal, to record a conclusive finding as to whether the activities of the assessee fall under the specific limb of “education” or under the sixth limb of “advancement of any other object of general public utility” in section 2(15). Since the basis adopted by the Ld. CIT(E) for denying registration is not borne out from the material on record, and the activities are neither shown to be non-genuine nor to fall within the proviso to section 2(15), the refusal of registration under section 12AB cannot be sustained.

5.10. We, therefore, hold that the activities of the assessee are genuine, are in accordance with its stated objects and do not violate the proviso to section 2(15) of the Act. In view thereof, and without expressing any concluded opinion as to whether the activities are specifically covered by the limb of “education” or by the sixth limb of “advancement of any other object of general public utility” under section 2(15), we find no sustainable basis for refusal of registration under section 12AB of the Act.

Accordingly, grounds raised in ITA No.4638/Mum/2026 stands allowed.

6. The application under section 80G(5) was rejected solely as a consequence of rejection of registration under section 12AB. Since we have directed that registration under section 12AB be granted and no other independent disqualification under section 80G(5) has been recorded by the Ld. CIT(E), the consequential order dated 31/03/2026 rejecting the assessee’s application under section 80G(5) is also set aside. The Ld. CIT(E) is directed to grant approval under section 80G(5) from A.Y. 2027-28 onwards in accordance with law.

Accordingly, grounds raised in ITA No.4639/Mum/2026 are accordingly allowed.

In the result, both appeals filed by the assessee stand allowed.

Order pronounced in the open court on 31-08-2026.