TaxTMI 
TaxTMI 
2011 (5) TMI 572
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....are that the assessee, Gujarat Information Technology Fund (a venture capital fund) is constituted under a trust deed executed by Gujarat Venture Finance Ltd. on 21-3-2000 with initial corpus of Rs. 5 lacs. The main object of the fund was to obtain capital growth by making investments in the concerns engaged in information technology sector or related business. During the year under consideration total receipts was shown at Rs. 85,87,919 with break up as under :- Nature of Income Amount (i) Income from Venture Assistance 10,31,478 (ii) Other Income 75,56,551 The assessee claimed exemption in respect of entire income under section 10(23FB) of the Act. The AO examined the past as well as subsequent return of income and found that income earning activities of the firm vis-à-vis object of the firm were as under :- Sl. No. Asst. Year R.R. No. Dt. of filing Income from Venture Capital Assistance (Rs.) Income from other sources (Rs.) 1. 2002-03 6646 18/10/2002 3,81,281 76,49,395 2. 2003-04 6596 23/10/2003 10,31,478 75,56,441 3. 2004-05 5080 25/10/2004 8,34,286 49,97,348 4. 2005-06 2243 11/08/2005 5,64,988 ....
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....he Act, as it violates the provisions of SEBI Regulations as well as the provisions of the Trust deed. In view of the same, the receipts of the assessee need to be taxed as income from other sources since, the income of the assessee comprises of (i) interest income (ii) scrutiny fee (iii) royalty and miscellaneous income. All these income fall under the head of income from other sources. The income of the assessee is thus taxed as income from other sources and the expenses are allowed as per the provision of section 57 of Income-tax Act, 1961 as discussed below. Similar action is being taken for preceding years as well as subsequent years since, the investment pattern as well as the income earning pattern of the assessee violates the provisions of the IT Act, SEBI Regulations and provisions of the Trust Deed." While explaining conclusion in para 11.2 the AO mentioned that the restriction granted under section 7(3) of Securities and Exchange Board of India (Venture Capital Fund) Regulation, 1996, the venture capital fund is subject to the condition specified in the Act and the Regulations made thereunder. The fund does not come within the meaning of Venture Capital Fund since the f....
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....initial public offer of a venture capital undertaking whose shares are proposed to be listed (b) debt or debt instrument of a venture capital undertaking in which the venture capital fund has already made an investment by way of equity. (c) preferential allotment of equity shares of a listed company subject to lock-in-period of one year (d) the equity shares or equity linked instruments of a financially weak company or a sick industrial company whose shares are listed. According to above, the assessee should have invested Rs. 12.7 crores in Venture Finance Assistance whereas it has invested only Rs. 10.54 crores. 5. In respect of conclusion drawn at para 11.3(iii) that there is a violation of regulation 8 of SEBI (VCF) Regulation, 1996 the AO explained that the regulation 8 requires to fulfil following conditions :- (a) The venture capital fund shall abide by the provisions of the Act, and these regulations; (b) The venture capital fund shall not carry on any other activity other than that of a venture capital fund; (c) The venture capital fund shall forthwith inform the Board in writing if any informa....
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....e earned as interest from bank deposits would be taxable as income from other sources and not income of venture capital fund which would get exemption under section 10(23FB). In nutshell the AO rejected the claim and exemption under section 10(23FB) mainly on three counts - (i) investment pattern of the assessee firm does not conform to the requirement of SEBI Regulation and trust deed. (ii) there is a violation of SEBI Regulation and the provisions of the trust deed. (iii) Income from bank deposits is taxable as 'income from other sources' and is not an income from assisted concern and hence should not get exemption under section 10(23FB). 8. The ld. CIT(A) in a detailed and reasoned order allowed the claim of the assessee. His findings in this regard are as under :- "24. After having carefully considered the arguments of both the sides, I find force in the arguments of the counsel for the appellant. The Explanation (1)(b) to section 10(23FB) defines the Venture Capital Fund. The conditions stipulated by this provision are that the fund should be registered under the Registration Act, 1908, it should have been granted a certificate of registrati....
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....fulfilled the conditions prescribed in section 10(23FB) for claiming exemption and has moreover has not violated the provisions of SEBI Regulations, 1996. The AO is directed to allow the exemption to the appellant under section 10(23FB). The ground No. 2 of the appellant is allowed." The gist of the reasoning given by ld. CIT(A) is that - (1) For getting exemption under section 10(23FB) it is nowhere stipulated in that section that provisions of SEBI Regulations have to be complied with; (2) Assessee has obtained registration of the trust deed under the Registration Act and Certificate of Registration from SEBI. (3) SEBI have not specified life cycle of the investment. The Explanation inserted in 2004 provides the fulfilling the investment pattern by the end of life cycle of the fund which is 10 years. (4) Parking of fund in bank deposits is not a violation of SEBI Regulation. 9. Before us, the ld. DR submitted that- (1) Object of the trust for which it was created was not fulfilled. Its investment pattern is in contravention of the Regulation. (2) For examining whether assessee is a venture capital fun....
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....om investment made by way of equity shares in venture capital undertaking i.e. assisted concerns. In order to enlarge the scope of income to be earned by venture capital fund or venture capital company section 10(23FB) has been enacted by Finance Act, 2000 with effect from 1-4-2001. For the sake of convenience he referred to that section as under :- "10(23FB) any income of a venture capital company or venture capital [from investment] in a venture capital undertaking. Explanation (1).-For the purposes of this clause,- (a) "venture capital company" means such company- (i) which has been granted a certificate of registration under the Securities and Exchange Board of India 1992 (15 of 1992), and regulations made thereunder; (ii) which fulfils the conditions as may be specified, with the approval of the Central Government, by the Securities and Exchange Board of India, by notification in Official Gazette, in this behalf; (b) "venture capital fund" means such fund- (i) operating under a trust deed registered under provisions of the Registration Act, 1908 (16 of 1908; operating as a venture capital scheme made by the I....
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....t exist upto 31-3-2008. Therefore, upto assessment year 2007-08 any income earned by venture capital fund would be exempt under section 10(23FB). 11. The ld. AR then submitted that it is incorrect to hold that assessee is not a venture capital fund. The assessee is a trust, which came into existence through a trust deed registered under the provisions of Registration Act. It has been granted certificate of registration by SEBI. It fulfils all the conditions laid down by SEBI. The SEBI has given a certificate to this effect. Assessing authority is not empowered to look into whether there is any violation of regulation of SEBI or violation of provisions of trust deed. Once assessee has been given certificate by SEBI and trust is registered under Registration Act then requirement of explanation 1(b) of section 10(23FB) is fulfilled. If AO finds any violation then he has to report to the SEBI which can take necessary action against the assessee by canceling the registration. 12. The ld. AR also submitted that it is incorrect on the part of AO to hold that investment pattern is not in accordance with trust deed or SEBI regulation. He submitted that trust deed permits only 80 per cent ....
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....he corpus fund then assessee fund has only followed the trust deed in this regard. Thus there is no violation of any provisions of the trust deed. 15. The ld. AR submitted that assessee fund has been filing annual return with the SEBI and no fault has been found therein. It has been clearly returning to the SEBI the pattern of investment every year. 16. The ld. AR referred to the decision of Hon. Gujarat High Court in CIT v. Hazarat Pir Shah-E-alam Roza Estate Trust [2002] 256 ITR 193/122 Taxman 755 and that of Hon'ble Supreme Court in the case of Gestetner Duplicators (P.) Ltd. v. CIT [1979] 117 ITR 1/1 Taxman 1 for the proposition that if trust deed is found in order by the Commissioner of Charities then the AO has to abide by it. 17. The ld. AR advancing the discussion on the subject referred to the decision of Hon. Gujarat High Court in the case of Hazarat Pir Shah-E-alam Roza Estate Trust (supra) for the proposition that entries in the register of public trust showing that the trust is registered as a public trust and properties are registered in the name of the trust would be relevant material before an authority or a court to decide as to whether the public trust existed ....
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....enture capital fund" means such fund, operating under a trust deed registered under the provisions of the Registration Act, 1908 (16 of 1908), establishing to raise monies by the trustees for investments mainly by way of acquiring equity shares of a venture capital undertaking in accordance with the prescribed guidelines." The basic ingredients of a Venture Capital Fund (V.C.F.) as per this definition are (i) It should operate under a trust deed (ii) The trustees can raise money for investment (iii) Such investment should be mainly in acquiring equity shares of venture capital undertakings. This provision remained in force till 1999-2000. By Finance Act, 1999, w.e.f. 1-4-2000, the operation of this clause came to an end. In its place section 10(23FA) was inserted which provided practically the same definition of VCF but the definition of venture capital undertaking, in which venture capital fund was required to make investment by acquiring equity shares, was amended and enlarged. Earlier in section 10(23F) the definition of venture capital undertaking whose equity shares was to be acquired by venture capital fund were confined to limited industries such as business of generation a....
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....p to raise fund for investment", the words "from investment" in section 10(23FB). Thus earlier section 10(23FB) read as under :- "10(23FB) any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking." This change was explained in the Memorandum explaining the amendments as under :- "10(23FB) any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking. "Under the existing provisions of clause (23FB) of section 10, any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking is exempt from tax..... It is proposed to amend the said clause so as to provide that such exemption will now be available only in respect of income of a venture capital company or venture capital fund from investment in a venture capital undertaking engaged in specified business or industries...... This amendment will take effect from 1st April, 2008, and accordingly apply in relation for the assessment year 2008-09 and subsequent years." It means that income of VCF would be fully exempt ....
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....ey are as under :- "8. Conditions of certificate . -The certificate granted under regulation 7 shall be inter alia, subject to the following conditions, namely:- (a) the venture capital fund shall abide by the provisions of the Act and these regulations; (b) the venture capital fund shall not carry on any other activity other than that of a venture capital fund; (c) the venture capital fund shall forthwith inform the Board in writing if any information or particulars previously submitted to the Board are found to be false or misleading in any material particular or if there is any change in the information already submitted." The certificate is granted by SEBI as per regulation 7 which reads as under :- "7(1) If the Board is satisfied that the applicant is eligible for the grant of certificate, it shall send an intimation to the applicant. (2) The Board shall on receipt of the registration fee grant a certificate of registration in Form -B." It also provides in Regulation 10 that in case where the venture capital fund is not granted certificate and its application is rejected then it shall not carry on any activity as a venture capi....
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....cycle of the fund. In brief, if a VCF satisfies conditions for grant of certificate laid down under section SEBI (VCF) Regulation, 1996 and a certificate is so granted by SEBI on satisfaction of such conditions then it will operate as a VCF. It would in turn also satisfy the conditions laid down under section 10(23FB) Explanation 1(b)(ii). (4) Whether assessee is a venture capital fund: From the perusal of records submitted before us, particularly the orders of AO and of the ld. CIT(A), we notice that assessee trust has been registered under the provisions of Registration Act, 1908 on 7th April, 2000. The registration is recorded at Sr. No. 1125 in the book No.4 with the Commissioner of Charities. This trust deed was executed on 21st March, 2000 and submitted to the Registrar on 22nd March, 2000 and was accordingly registered by the Sub-registrar on 7th April, 2000. 23. The assessee trust is also registered under SEBI as per Regulation 7(3) of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 on June 26, 2000 as per copy of certificate enclosed on page 87 of assessee's paper book. Once this certificate is issued to the assessee trust t....
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....e conditions laid down in the SEBI (Venture Cepital Funds) Regulations, 1996. Neither the AO nor the ld. DR could point out any default noticed by SEBI or action taken by SEBI for such default. Accordingly, there is no reason to hold that assessee trust does not fulfil any condition laid down even in Regulation No.12 of SEBI (Venture Capital Funds) Regulations, 1996. In view of above, we hold that assessee is a venture capital fund within the meaning of clause (b) under Explanation 1 to section 10(23FB). (5) Whether AO can look into whether venture capital fund fulfils conditions laid down in SEBI (Venture Capital Funds) Regulations, 1996. 24. In our considered view the AO is duty bound to enquire whether the assessee trust is registered under the Registration Act, 1908 and has been granted certificate of registration by SEBI under SEBI (Venture Capital Funds) Regulations, 1996. But his role is confined to satisfy himself with such certificates granted and not beyond. Sub-clause (i) and sub-clause (ii) of clause (b) under Explanation 1 only requires to ensure that assessee trust has certificates as mentioned therein. Even if certificates are granted under mis-represen....
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....ed before the AO. Therefore, he is not required to go into violation of conditions, if any, pertaining to the matters of grant of such certificates. 25. So far as condition laid down in sub-clause (iii) of clause (b) under Explanation 1 is concerned what we consider appropriate for the AO is to find out whether any action for default has been taken by SEBI under regulation -30 as referred to above for default committed by the assessee trust. So far as any violation of investment pattern as laid down in regulation 12(d) is concerned it is also covered under clause (a) of regulation-30 which shows that assessee trust can be penalized for contravention of any provision of this Act or these regulations. Thus, if assessee trust contravenes regulation-12(d) then SEBI is competent to penalize assessee trust within the powers given under regulation 30. So long as SEBI does not find any default of any contravention of the provisions of the SEBI Act or SEBI (VCF) Regulation 1996 then it can be inferred that assessee trust fulfils the conditions laid down under these regulations. The AO, however, can look into the issue whether assessee trust fulfils such conditions as laid down in regulatio....
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..... of corpus and not to 100 per cent. of the corpus. May be in the opinion of AO, 20 per cent. of the corpus is too high a sum for keeping apart for administration and management or as working capital, but so long as it is permitted by the trust deed and no mala fide is found, or no contravention of any provision of SEBI (VCF) Regulation 1996 is found, the AO cannot question why 20 per cent. was kept apart and why not 2 or 3 per cent. only which in his opinion could have been reasonable. There are clear stipulations in the SEBI (VCF) Regulation 1996 which put restriction on any other investment other than permitted under the regulation. Accordingly, when the claim of the assessee is that it has invested 66.67 per cent. of 80 per cent. of the corpus in specified undertaking, then no fault in investment pattern can be found. In our view the interpretation adopted by the AO that entire corpus should be treated as investible fund is not sustainable in law. It is for the assessee trust to decide how much should be investible fund out of the corpus of the fund, which is net of expenditure for administration and management. The copy of the trust deed is clearly submitted to the SEBI as per....
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.... as contained in Regulation 12(d) shall be achieved by the Venture Capital Fund by the end of its life cycle. This explanation seems to have taken care of the difficulties of Venture Capital Fund in achieving investment norms within the very year of its creation or subsequently thereafter, on account of the fear of losing their capital by investing in wrong undertakings. This aspect will also be considered little later in the following paragraph. We, for the present, are of the considered view that, there is no violation of investment norms. Even if there is a short-fall then it could not be dubbed as non-fulfilment of the condition attracting sub-clause (iii) of clause (b) of Explanation-1 to section 10(23FB). As observed above, it is for the SEBI authorities to decide whether there is any violation of SEBI Regulation including the deficiency in investment pattern as per Regulation 12(d). Even if the AO thinks that there is a short-fall in investment in specified undertaking and hence there is violation of SEBI Regulation, he should have referred the matter to the SEBI authorities and waited for their decision and till then could have proceeded to frame a protective assessment. Ha....
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....fund to achieve such target by the end of life cycle. In any case any perceived default has to be resolved by SEBI. Apparently SEBI does not find any fault by virtue of explanation in Regulation 12(d) whereby deficiency in earlier years has been condoned by permitting the capital venture fund to fulfil the target by the end of their life cycle. Therefore, such deficiency in earlier years (prior to 5-4-2004) cannot be treated as default and violation. From that point of view also explanation would be retrospectively operative, though stated to be effective from 5-4-2004 only. Therefore, if we consider the explanation under regulation 12(d)(ii) we do not treat the deficiency, if any, as a default or violation of SEBI regulation and therefore, any violation of sub-clause (iii) of clause (b) under Explanation-1 of section 10(23FB). (8) What is the effect of amendment by Finance Act, 2007 w.e.f. 1-4-2008: 30. As observed above, there is a change in the pattern of income exempted under section 10(23FB). As explained in the explanatory note referred to above while introducing the amendment in section 10(23FB), the exemption is now restricted to income from investment in spec....
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....ffect. It is not in dispute that the assessee is otherwise eligible for exemption under section 10(23FB). Hence for the year under appeal, as per the provisions of section 10(23FB) as applicable to the assessment year, any income of the venture capital Fund is exempt. Hence we confirm the order of the CIT(A) and uphold his direction that that interest on temporary investments of Rs. 16,09,900 and profit on sale Units of Mutual fund of Rs 1,00,91,000 is entitled to exemption under section 10(23FB). 15. In the result, the appeal filed by the revenue is dismissed. Order pronounced on this 9th day of March, 2011." 31. The above view is also supported by CBDT Circular of 2008 which clarifies the position as under :- "The CBDT Circular No. 3 of 2008 this case has been clarified. Exemption for certain income of a venture capital company or venture capital fund. 14.2 Clause (23FB) of section 10 provides exemption in respect of any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking. Such Venture capital undertaking has been defined in clause (c) of Explanation 1 to clause (23FB) to mean a venture capital und....
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....me of an authority for marketing commodities only income derived from the letting of godowns or warehouses for storage, etc., has been provided to be exempt. Thus the legislature in its own wisdom has provided exemption in various formats and in some cases either whole of the income is provided to be exempt or income from particular sources is provided to be exempt or income derived from particular activity is provided to be exempt. (Paras 20 & 21) Thus, under section 10(23BF) exemption is available on any income to a venture capital fund or venture capital company, which has been set up to raise funds for investment in venture capital undertakings. Perhaps the legislature has itself noted the situation that there may be circumstances where income may be earned from other activities for example income from interest and therefore, legislature has incorporated the restricted expression by substituting the words "set up to raise funds for investment" by the words "from investment" w.e.f. assessment year 2008-09, which means from that year the exemption would be available only from income generated from such investments in the venture capital The contribution and the investment cann....
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....ecified undertaking and upto 33.33 per cent. in other avenues as per clause (ii) of regulation 12(d). In other words there is likelihood of some surplus, if 33.33 per cent. is not invested in other avenues. Such surplus or surpluses arising out of working capital of 20 per cent. of investible funds can be parked in the F.D. as provided in the trust deed. Accordingly, in our considered view the investment in F.D. does not violate any of the provisions either under SEBI guidelines or of the trust-deed. In fact there is no express prohibition of investment in FD as per regulation 12(d). Therefore, as per above discussion, we hold that ld. CIT(A) was justified in granting exemption under section 10(23FB) on interest income of Rs. 75.56 lacs earned from bank deposits. 35.1 Accordingly, the order of ld. CIT(A) is upheld and appeal filed by the Revenue is dismissed. ITA No. 245/Ahd/2009 assessment year 2001-02 (Revenue's appeal) 36. In this appeal the Revenue has raised the following ground :- (1) The ld. CIT(A) has erred in facts and on law in deleting the addition made on account of violation of SEBI Regulation and Provisions contained in section 10(23FB) by the assessee....