2018 (1) TMI 1607 - AT - Income Tax

Assessee's Appeal Partly Allowed, Revenue's Appeal Dismissed, LTCG Exemption Upheld

The tribunal partly allowed the assessee's appeal for statistical purposes, remanding the STCG issue back to the Assessing Officer for further ... Short-term capital gains charged to securities transaction tax - Application of Section 111A - concessional rate for STCG from equity shares charged to STT - Deeming provision under Section 115U treating income from a venture capital fund as income of the investor - Exemption under Section 10(23FB) for income of a venture capital fund - Recognition of accrued income from venture capital funds for exemption purposesShort-term capital gains charged to securities transaction tax - Application of Section 111A - concessional rate for STCG from equity shares charged to STT - Whether the assessee's claim to tax short-term capital gains at the concessional rate under Section 111A is admissible. - HELD THAT: - The Tribunal found that none of the authorities below examined whether the share transactions claimed as giving rise to short-term capital gains satisfied the conditions mandated by Section 111A - namely that the transfers were of equity shares entered into on a recognised stock exchange and chargeable to securities transaction tax. The Assessing Officer's assessment order recorded an adverse conclusion regarding delivery of shares but did not explain how that conclusion was reached. In view of this absence of a reasoned finding on the statutory conditions of Section 111A, the Tribunal set aside the orders of the lower authorities and remitted the matter to the Assessing Officer for fresh consideration and determination in the light of the conditions specified in Section 111A. [Paras 7]Set aside and remitted to the Assessing Officer for fresh consideration of the Section 111A claim; assessee's ground allowed for statistical purposes.Deeming provision under Section 115U treating income from a venture capital fund as income of the investor - Exemption under Section 10(23FB) for income of a venture capital fund - Recognition of accrued income from venture capital funds for exemption purposes - Whether long-term capital gains credited to the assessee by investment in a venture capital fund are exempt under Section 10(23FB) read with Section 115U, and whether such income can be recognised on an accrual basis. - HELD THAT: - The Tribunal held that Section 115U is a deeming provision which makes income arising to a person from investments in a venture capital fund to be treated as if the person had invested directly in the venture capital undertaking; consequently, the exemption available to a venture capital fund under Section 10(23FB) applies to the investor where conditions are satisfied. The Venture Capital Fund had furnished Form No.64 as required by Rule 12C and subsection (2) of Section 115U, and the Assessing Officer did not find defect in that form. Section 115U encompasses accrued income; therefore the income need not be confined to a receipt basis. On these grounds the Tribunal found no error in the Commissioner (Appeals) allowing the assessee's claim under Section 10(23FB) read with Section 115U. [Paras 15]Revenue's appeal dismissed; exemption under Section 10(23FB) read with Section 115U sustained and accrual accounting accepted.Final Conclusion: The assessee's appeal is partly allowed (the claim under Section 111A is remitted to the Assessing Officer for fresh consideration), while the Revenue's appeal is dismissed - the Tribunal upholds the exemption under Section 10(23FB) read with Section 115U and accepts accrual recognition of the venture capital fund income. Issues Involved:1. Reopening of assessment for the impugned assessment year.2. Taxation of short-term capital gains (STCG) from the sale of shares at 30%.3. Exemption claimed by the assessee on long-term capital gains (LTCG) from transactions relating to units in ICICI Emerging Sector Fund.Issue-wise Detailed Analysis:1. Reopening of Assessment:The assessee initially contested the reopening of the assessment for the impugned year but later chose not to press this ground. Consequently, the ground was dismissed.2. Taxation of Short-Term Capital Gains (STCG):The core issue was whether the STCG from the sale of shares should be taxed at 10% under Section 111A of the Income Tax Act, 1961, or at the normal rate of 30%. The assessee reported STCG of Rs. 71,85,696 and paid tax at 10%, citing Section 111A, which allows a concessional rate if the transactions are subject to Securities Transaction Tax (STT).The Assessing Officer (AO) challenged this, arguing that the assessee's transactions through M/s. Stock Holding Corporation of India Ltd., including the purchase and sale of shares of M/s. Accel Frontline Ltd., were not adequately substantiated to qualify for the concessional rate. The AO noted that the holding period of shares was not clearly ascertainable, and some transactions occurred within a short span, raising doubts about their nature.The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the assessee failed to provide details of actual delivery of shares.Upon appeal, the tribunal noted that the lower authorities did not adequately address whether the transactions met the conditions of Section 111A. The tribunal found the AO's conclusion about the non-delivery of shares unclear and decided that the issue required further examination. The tribunal set aside the lower authorities' orders and remitted the matter back to the AO for reconsideration in light of Section 111A's conditions.3. Exemption on Long-Term Capital Gains (LTCG):The Revenue contested the exemption claimed by the assessee under Section 10(38) of the Act for LTCG amounting to Rs. 1,36,16,621 from transactions in ICICI Emerging Sector Fund units. The AO disallowed the exemption, arguing that under Section 115U read with Section 10(23FB), the exemption was not available since the STT liability was borne by the Venture Capital Fund (VCF) and not the assessee.The assessee argued that Section 115U deemed that income from VCF investments should be treated as if the investments were made directly by the assessee, thus qualifying for the exemption. The Commissioner of Income Tax (Appeals) agreed with the assessee, noting that the assessee followed the accrual method consistently, and the AO had accepted this in earlier years.The tribunal upheld the Commissioner of Income Tax (Appeals)'s decision, emphasizing that Section 115U mandates treating income from VCF investments as if directly earned by the investor, thereby qualifying for the exemption under Section 10(23FB). The tribunal noted that Form 64, filed by the VCF as per Rule 12C, implied compliance with the necessary conditions. The tribunal found no error in allowing the exemption on an accrual basis and dismissed the Revenue's appeal.Conclusion:The assessee's appeal was partly allowed for statistical purposes, requiring further examination of the STCG issue. The Revenue's appeal was dismissed, upholding the exemption on LTCG as claimed by the assessee.