TaxTMI 
TaxTMI 
2011 (5) TMI 572
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....come of Rs. 75.56 lacs earned from Bank Deposits. 3. The facts relating to the issue 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 6....
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....tment in Bank deposits to earn interest. 11.5 From the above discussion, it can be concluded that the assessee fund is not a venture capital fund within the meaning of section 10(23FB) of the 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, ....
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....y shares or equity linked instruments [of venture capital undertaking]. (ii) Not more than [33.33 per cent] of the investible funds may be invested by way of (a) subscription to 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....
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....the purpose specified therein. Para 5(B)(i) provides investment of 80 per cent of the corpus in the assisted concern including loans and balance in cash and/or highly liquid money market instruments. Thus the assessee was required to invest only in information related concern and not as bank deposits. He also observed that income 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 ar....
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....nds in the bank deposits cannot be called investment of funds and hence SEBI Regulations have not been violated. Thus I agree with the counsel for the appellant that the provisions of SEBI Regulations 1996 have not been violated by the appellant. In view of the arguments of the counsel for the appellant, it is held that the appellant has 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....
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....me once in the hand of venture capital fund and other in the hands of individual investor section 10(23FB) has been enacted providing exemption to its income. In fact according to the ld. AR similar provisions existed prior to 1-4-2001 in the form of section 10(23FA) which provided exemption to dividend and long term capital gains earned by a venture capital fund from 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 spec....
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....mpt and income from investment elsewhere would be taxable. In other words, if assessee venture capital fund has two sources of income, one investment in venture capital undertakings, and other, say deposit in the bank, then it is only the income from investment in venture capital undertaking would be exempt and income from interest from bank deposit would be taxable under section 56. Such distinction did not 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....
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....e is a violation of trust deed or SEBI regulation. 14. The ld. AR then referred to section 2(hh) of SEBI (VCF) Regulation 1996 which provides that investible funds means corpus of the fund, net of expenditure for administration and management of the fund. Therefore, assessee fund has followed the regulation in defining what should be the investible fund. Once trust has defined investible fund as 80 per cent of the 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 d....
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....ors which gives them adequate return on their investment. A venture capital fund is also referred as pooled investment vehicle. (2) Venture capital fund as per I.T. Act. Section 10(23F) which was inserted by the Finance Act, 1995 w.e.f. 1.4.1996 first provided the definition of 'venture capital fund', in clause (a) to explanation therein as under :- "Explanation.--For the purposes of this clause,-- (a) "venture 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....
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....ation the house as under:- "Venture Capital Fund shall enjoy a complete pass through status. There will be no tax on distributed or undistributed income of such funds. The income distributed by the funds will only be taxed in the hands of investors at the rates applicable to the nature of income". 20. Thereafter Finance Act, 2007 prospectively amended the provision of section 10(23FB) w.e.f. 1-4-2008 thereby inserting in place of the words "set up 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 ....
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....egistered under these regulations which - (i) has a dedicated pool of capital; (ii) raised in a manner specified in the regulations; and (iii) invests in accordance with the regulations; The venture capital fund has to satisfy above definitions contained in Regulation 2(m) for getting a certificate from SEBI as required under section 10(23FB)(b)(ii) of IT Act, 1961. These conditions are provided in regulation 8 of above rules. They 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....
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....ts networth as at the beginning of the previous financial year; (e) Special purpose vehicles which are created by a venture capital fund for the purpose of facilitating or promoting investment in accordance with these Regulations; Explanation -The investment conditions and restrictions stipulated in clause (d) of regulation 12 shall be achieved by the venture capital fund by the end of its life cycle; (e) venture capital fund shall disclose the duration of life 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....
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....ired by the Board; (e) does not co-operate in any enquiry, inspection or investigation conducted by the Board; (f) fails to resolve the complaints of investors or fails to give a satisfactory reply to the Board in this behalf shall be dealt with in the manner provided in the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002." Thus so long as there is no default found by SEBI in any of the clauses of Regulation 30 it can be said that it is fulfilling the 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 Cap....
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....ld not be questioned while deciding the issue relating to the matters concluded by the entries made in such registers. From this it follows that if assessee trust is registered with SEBI as per certificate granted under Regulation 7(3) then it should be accepted that such certificate is granted after ensuring that conditions laid down before granting of such certificate are fulfilled. In other words conditions laid down in sub-clause (i) and sub-clause (ii) are deemed to be fulfilled under explanation-1(b) to section 10(23FB), the moment relevant certificates are produced 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 trus....
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....ration and management of the fund. Sub-clause (i) of clause (B) of provision 5 in the trust deed provides that 80 per cent. of the corpus of the fund is required to be invested in the specified undertakings and the balance in cash and or in highly liquid form. Sub-clause (iii) of clause (B) of provision 5 of trust deed provides that 20 per cent. of the total sum will be kept aside as working capital. Thus the trust deed has empowered the assessee to invest 80 per cent. of the corpus in specified undertaking. Therefore, percentage 66.67 per cent. will be applied to 80 per cent. 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 permit....
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....uisite percentage of investible fund in specified undertakings, in the very year of creation of Venture Capital Fund or even say within a couple of years thereafter, as it may be commercially hazardous to investment money into undertakings without their being any proper evaluation and satisfaction before making investment, therefore, the investment in specified undertaking is likely to take time. Keeping this difficulty in mind SEBI has inserted the explanation below sub-clause (e) in the Regulation 12(d)(ii). This explanation provides that investment conditions and restriction 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-ful....
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....fter 5-4-2004. In other words if a trust has not been able to meet the investment norms in initial years and there is a deficiency which continues to exist in subsequent years then it will not be treated as a default. If deficiency in years after 5-4-2004 is not treated as default then it does not stand to logic that deficiency in years prior to 5-4-2004 should be treated as default. 29. In our considered view by inserting this explanation SEBI has condoned the default of lack of adequate investment in specified undertakings as per Regulation 12(d) and enabled the venture capital 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 th....
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....fine "Venture Capital Undertaking". This amendment was made effective from 1-4-2008. By no stretch of imagination can this amendment can be considered as clarificatory applicable to earlier Assessment Year. The memorandum explaining the amendment to the Finance Bill, 2007 as well as the CBDT circular explaining the provisions of the Finance Act, 2007 clarify that the amendment proposed to section 10(23FB) was to restrict the scope of income for which exemption under that section was available. Hence this amendment cannot be considered as clarificatory but must be considered as prospective in effect. 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 ....
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...., 10(22), 10(23), 10(23FA) and 10(29) would make things clear. The reading of these provisions would make it clear that the legislature has either mentioned various incomes which are exempt; for example in the case of section 10(20) income from house property, capital gains, income from other sources and income from trade or business is exempt. Alternatively, the legislature has given a blank exemption, for example in the case of section 10(22) where any income in case of a university etc., was made fully exempt. In some cases, restrictive expression has been used, for example in case of section 10(29) the income 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, whi....
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....Sub-clause (iv) of clause (B) of provision 5 in the trust deed reads as under :- "(iv) Investment of Temporary Surplus Any surplus funds including funds lying in Working Capital account whether pending disbursement or distribution may be invested in risk free or lower risk investments e.g. bank deposits, units of debit/gift mutual funds, etc." 35. Therefore, the trust deed has clearly empowered the assessee to invest surplus into the fixed deposits. When we go through regulation 12(d) it provides a target of 75 per cent. upto 5-4-2004 and 66.67 per cent. thereafter of the investible fund to be invested in specified 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 F....