Venture capital fund exemption applies where healthcare acquisition structure qualifies as a genuine venture capital undertaking

Section 10(23FB) continues to give pass-through exemption to a SEBI-registered Venture Capital Fund only where the income arises from investment in a venture capital undertaking tested under the SEBI Venture Capital Funds Regulations. The investee's status is assessed in substance by reference to the investment structure, scheme documents, SEBI filings and the stated business model. On the stated facts, the healthcare acquisition structure through special purpose vehicles showed a genuine venture capital undertaking, not a mere financial accommodation arrangement, and the absence of full commercial operations during the year did not defeat eligibility. The exemption therefore applied and the disallowance was deleted.

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Issues: Whether the assessee, a SEBI-registered Venture Capital Fund, was entitled to exemption under section 10(23FB) of the Income-tax Act, 1961 in respect of income derived from investment in Mahip Hospital Private Limited, and whether the investee satisfied the definition of a venture capital undertaking under the SEBI regulatory framework.

Analysis: Section 10(23FB) grants pass-through exemption to income of a Venture Capital Fund or Venture Capital Company registered with SEBI from investment in a venture capital undertaking. After the substitution of Explanation 1(c) with effect from 01.04.2013, the eligibility of the investee has to be tested with reference to the SEBI (Venture Capital Funds) Regulations, 1996. SEBI registration is a foundational requirement, but the assessee must still show that the specific income was earned from an investment which, in substance, remained within the permitted regulatory contours. The material placed on record, including the investment structure, scheme documents, SEBI filings and the stated healthcare acquisition model through special purpose vehicles, showed that the investee was conceived for acquisition and operation of hospital and healthcare assets and was not a mere pass-through or financial accommodation arrangement. The activities did not fall within the negative list, and the absence of full commercial operations during the relevant year could not by itself defeat the exemption where the venture capital structure involved phased implementation.

Conclusion: The investee qualified as a venture capital undertaking within the meaning of section 10(23FB) read with the SEBI Regulations, and the assessee was entitled to exemption. The disallowance was unsustainable and is deleted.

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