Venture capital fund wins section 10(38) exemption for long-term capital gains on unlisted shares despite no STT on acquisition

ITAT Mumbai upheld CIT(A)'s decision allowing exemption u/s 10(38) for long-term capital gains on share sales by a venture capital fund. The tribunal rejected revenue's contention that exemption was unavailable due to lack of Securities Transaction Tax on acquisition, finding the notification's main provision applicable to unlisted shares. However, ITAT set aside CIT(A)'s relief regarding dividend exemption u/s 10(35), ruling the disallowance by CPC during return processing had attained finality as it remained unchallenged. The tribunal confirmed assessee's entitlement to claim exemption directly since its pass-through entity status under s.10(23FB) was rejected.

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Issues Involved:
1. Exemption under Section 10(38) of the Income Tax Act.
2. Exemption under Section 10(23FB) of the Income Tax Act.
3. Exemption under Section 10(35) of the Income Tax Act.
4. Applicability of Securities Transaction Tax (STT) on acquisition of shares.
5. Status of Venture Capital Fund (VCF) as a pass-through entity under Section 115U of the Income Tax Act.

Detailed Analysis:

1. Exemption under Section 10(38) of the Income Tax Act:
The primary issue was whether the assessee was entitled to claim exemption under Section 10(38) for Long Term Capital Gains (LTCG) despite not claiming it in the original return of income. The Revenue contended that the exemption was a fresh claim and should have been filed through a revised return. The Tribunal held that the assessee's alternative claim was merely a change of the section under which the exemption was claimed, not a fresh claim. Therefore, the Tribunal rejected the Revenue's grounds on this issue.

2. Exemption under Section 10(23FB) of the Income Tax Act:
The assessee initially claimed exemption under Section 10(23FB) but was denied by both the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal noted that the assessee did not challenge this denial, and thus, this issue attained finality for the assessment year in question.

3. Exemption under Section 10(35) of the Income Tax Act:
The assessee claimed exemption for dividend income under Section 10(35), which was initially denied by the Centralized Processing Centre (CPC) and not challenged by the assessee. The CIT(A) allowed this exemption, but the Tribunal found that since the disallowance by CPC was not challenged, the CIT(A) should not have granted relief. Consequently, the Tribunal set aside the CIT(A)'s order on this issue and restored the AO's addition.

4. Applicability of Securities Transaction Tax (STT) on Acquisition of Shares:
The Revenue argued that the assessee was not eligible for exemption under Section 10(38) because the shares were acquired off-market without paying STT. The Tribunal examined the third proviso to Section 10(38) and the relevant Central Government notification, concluding that the assessee's acquisition of unlisted shares was covered by the notification. Therefore, the Tribunal upheld the CIT(A)'s decision that the assessee was eligible for exemption under Section 10(38), even though STT was not paid at acquisition.

5. Status of Venture Capital Fund (VCF) as a Pass-Through Entity under Section 115U:
The Revenue contended that the assessee, being a VCF, was a pass-through entity, and only investors could claim exemption under Section 10(38). The Tribunal clarified that a VCF becomes a pass-through entity only if it is granted exemption under Section 10(23FB). Since the assessee's claim under Section 10(23FB) was denied, it did not attain pass-through status for this year. Therefore, the assessee, as a legal entity, was entitled to claim exemption under Section 10(38).

Conclusion:
The Tribunal partly allowed the Revenue's appeal by restoring the AO's addition concerning the exemption under Section 10(35) and upheld the CIT(A)'s decision on the exemption under Section 10(38). The cross-objection filed by the assessee was dismissed. The order was pronounced in the open court on 26th July, 2024.

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