TaxTMI 
TaxTMI 
2018 (8) TMI 1046
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....f 20 years or until the expiry of the last scheme of the fund whichever is later. For the assessment year under dispute, the assessee filed its return of income on 30th July 2013, declaring total income of Rs. 8,94,65,291. Subsequently, on 29th November 2013, assessee filed a revised return of income declaring total income of Rs. 14,29,12,592. The return of income filed by the assessee was selected for scrutiny. In course of the assessment proceedings, the Assessing Officer while verifying the return of income filed by the assessee noticed that in the computation of total income the assessee has claimed exemption under section 10(23FB) of the Act in respect of income earned out of investments made in Venture Capital Undertakings (VCU). The Assessing Officer after calling upon the assessee to justify its claim of exemption under section 10(23FB) of the Act and verifying the explanation of the assessee in the context of fact and material brought on record completed the assessment by allowing assessee's claim of exemption under section 10(23FB) of the Act, since, corresponding income is taxable at the hands of the investors / unitholders as per section 115U of the Act. Accordingly, he....
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.... the Act. After examining the submissions made by the assessee, the learned Principal Commissioner did not find merit in them. The reasons on the basis of which the learned Principal Commissioner concluded that the assessee is not eligible to avail exemption under section 10(23FB) of the Act and accordingly, held the assessment order to be erroneous and prejudicial to the interests of Revenue broadly are; i) Section 10(23FB) of the Act recognizes Venture Capital Undertaking as defined in Clause-(n) of Regulation- 2 of the SEBI (Venture Capital Funds) Regulations,1996. She observed, as per the said definition real estate sector is mentioned in the negative list. Though, she accepted assessee's argument that assessee's case has to be governed by SEBI (Venture Capital Funds) Regulations and not SEBI (Alternative Investment Funds) Regulations, however, drawing an analogy between the definition of VCU under SEBI (Venture Capital Funds) Regulations, 1996 and SEBI (Alternative Investment Funds) regulations, 2012, the learned Principal Commissioner observed that the intention of the legislature is to permit exemption only to such sectors which are involved in providing services an....
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.... Shri J.D. Mistry, learned Sr. Counsel appearing for the assessee, opened his argument challenging the validity of exercise of power under section 263 of the Act. The learned Sr. Counsel submitted, there is no dispute that the assessee is registered as a Venture Capital Fund with SEBI. In this context, he drew our attention to the registration certificate issued by SEBI, a copy of which is at Page-254 of the paper book. He submitted, in the return of income filed for the impugned assessment year the assessee has claimed the income from Venture Capital Undertaking as exempt under section 10(23FB) of the Act, since, it is taxable at the hands of investors / unitholders as per section 115U of the Act. In this context, he drew our attention to the computation of total income, a copy of which is at Page-71 of the paper book. He submitted, so far as the interest income earned from non-venture capital undertakings is concerned, assessee offered it to tax. He submitted, in the course of assessment proceedings, the Assessing Officer while examining assessee's claim of exemption under section 10(23FB) of the Act has made detail enquiry by calling for all relevant and necessary information an....
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....ally directed the assessee to furnish the details of investment made in Venture Capital Undertakings and the nature of business carried out by such Undertakings with specific emphasis on the fact whether they are in negative list as mentioned in the third schedule of SEBI (Venture Capital Funds) Regulations, 1996. He submitted, in response to the said query the assessee submitted a detail reply on 25th February 2016, categorically stating that none of the Venture Capital Undertakings where it invested are coming within the negative list as mentioned in the third schedule of SEBI (Venture Capital Funds) Regulations, 1996. He submitted, after conducting comprehensive enquiry and examining materials brought on record, the Assessing Officer has completed the assessment by allowing assessee's clam of exemption under section 10(23FB) of the Act. Drawing our attention to the discussions made by the Assessing Officer in the assessment order, the learned Sr. Counsel submitted, the Assessing Officer has also verified the fact that all conditions of section 10(23FB) and 115U of the Act have been complied. He submitted, not only quarterly statement in Form no.64 indicating the distribution of ....
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....id provision section 115U of the Act was introduced which provided for taxation of the income in the hands of unitholders, meaning thereby, the income earned by a Venture Capital Fund from Venture Capital Undertaking, though, will be exempt in its hands, however, under section 115U of the Act it was made taxable at the hands of unitholders. In essence, Venture Capital Fund was given pass through status. He submitted, section 10(23FB) of the Act underwent further amendment by Finance Act, 2004 and Finance Act, 2007. He submitted, as per the amendment brought by Finance Act 2007 to the definition of Venture Capital Undertaking, income of Venture Capital Fund would be exempt only to the extent such investments are in Venture Capital Undertakings which are engaged in specified sectoral business activities. He submitted, section 10(23FB) of the Act was again amended by Finance Act, 2012, w.e.f. assessment year 2013-14 as per which the Venture Capital Undertaking was given the meaning of Venture Capital Undertaking as defined under the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. He submitted, by virtue of such amendment the restrictive meaning given ....
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.... has clarified that Security Exchange Board of India (Venture Capital Fund) Regulations, 1996 does not impose any condition on deployment of un invested portion of the investible fund of VCF. The SEBI has clarified that SEBI registered VCF may invest the un invested portion of their investible fund in liquid mutual fund or bank deposit, etc. In this context, he drew our attention to the letter dated 10th June 2016 of Dy. General Manager, Investment Management Department, Division of Funds-1, SEBI issued to Tata Capital Ltd., a copy of which is at Page-442 of the paper book. The learned Sr. Counsel drawing our attention to clause 2(m) and 2(l) of Security Exchange Board of India (Venture Capital Funds) Regulations, 1996 submitted that they do not prohibit investment in mutual fund. He submitted, as per section 22 of the aforesaid regulation, the Venture Capital Fund has to submit reports with regard to the activities of the fund. He submitted, the SEBI has power to not only revoke the registration of a Venture Capital Fund but can take other actions also if it finds that any provision / condition imposed under its regulations and Act have been violated by a Venture Capital Fund. He ....
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.... to the revisional authority. Thus, in essence, the learned Principal Commissioner by exercising revisional power is trying to substitute her view over the view of the Assessing Officer. He submitted, when the assessee has fulfilled all the statutory conditions and as per the provisions of section 10(23FB)and section 115U of the Act, the assessee is eligible for exemption and having regard to such provision if the Assessing Officer allows assessee's claim, the assessment order cannot be held to be erroneous. The learned Sr. Counsel submitted, in assessee's own case for assessment year 2014- 15, the Assessing Officer disallowed assessee's claim of exemption under section 10(23FB) of the Act on reasoning which are more or less identical to the reasoning of the revisional authority. He submitted, when the assessee challenged the disallowance of exemption before the first appellate authority, he allowed assessee's claim accepting that the assessee having fulfilled all the conditions of section 10(23FB) r/w section 115U of the Act is eligible to claim exemption. He submitted, the very fact that the learned Commissioner (Appeals) has allowed assessee's claim of exemption under section 10....
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....ied. Before we proceed to decide the issues raised in the present appeal, it is relevant and necessary to look into certain statutory provisions which will have a significant bearing on the issues involved in the present appeal. Section 10(23FB) of the Act was introduced by Finance Act, 2000, w.e.f. 1st April 2001. The aforesaid provision provides for exemption from tax any income of a Venture Capital Company or Venture Capital Fund from investment in a Venture Capital Undertaking. As per Explanation to section 10(23FB) of the Act when it was introduced to the statute, Venture Capital Fund meant a fund which is operating under a registered trust deed, was granted certificate of registration by SEBI and which fulfils the conditions specified by SEBI with the approval of the Central Government. Similarly, as per the said explanation a Venture Capital Undertaking meant a domestic company whose shares are not listed in a recognized stock exchange in India and which is engaged in the business of providing services, production or manufacture of an article or thing but does not include such activities or sectors which the SEBI may specify with the approval of the Central Government. Simul....
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....made by the Unit Trust of India established under the Unit Trust of India Act 1963 (52 of 1963); (ii) which has been granted a certificate of registration under the Securities and Exchange Board of India Act, 1992 (15 of 1992), and regulations made thereunder; (iii) 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 the Official Gazette, in this behalf;" 14. Similarly, the definition of Venture Capital Undertaking was also amended by substituting the following definition:- "(c) "venture capital undertaking" means a venture capital undertaking referred to in the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);" 15. Corresponding amendments were also made under section 115U of the Act. The reason for bringing in the amendment to the definition of Venture Capital Undertaking as explained in the memorandum explaining the amendment is as under:- "Provisions relating to Venture Capital Fund (VCF) or Venture Capita! Company (VCC). ....
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....n which its trustee or the settler holds, either individually or collectively, equity shares in excess of fifteen per cent of the paid up equity share capital of such venture capital undertaking; and (iii) the units, if any, issued by it are not listed in any recognized stock exchange; or (B) Operating as a venture capital scheme made by the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);" 17. Whereas, Venture Capital Undertaking after the amendment was defined as under:- "(c) "venture capital undertaking" means - (i) a venture capital undertaking as defined in clause (n) of regulation 2 of the Venture Capital Funds Regulations; or (ii) a venture capital undertaking as defined in clause (aa) of sub regulation (1) of regulation 2 of the Alternative Investment Funds Regulations;" 18. Thus, keeping in view the legislative history of the provision of section 10(23FB) as well as section 115U of the Act it becomes clear that income derived by a Venture Capital Company or Venture Capital Fund from investments made in Venture Capital Undertaking was made exempt from the very beginning, subject of-cours....
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.... applicable to the assessee. As per section 2(n) of SEBI (Venture Capital Fund) Regulations, 1996, Venture Capital Undertaking is defined as under:- "[(n) "venture capital undertaking" means a domestic company - (i) whose shares are not listed on a recognized stock exchange in India; (ii) which is engaged in the business for providing services, production or manufacture of article or things or does not include such activities or sectors which are specified in the negative list by the Board with the approval of the Central Government by notification in the Official Gazette in this behalf." 20. A reading of the said definition makes it clear that a domestic company is treated as a Venture Capital Undertaking if its shares are not listed in a recognised Stock Exchange in India and if it is engaged in the business for providing services, production or manufacture of article or thing which are not specified in the negative list by the SEBI with the approval of the Central Government and notified in the official gazette. The negative list as provided under Third Schedule to the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 ....
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....fficer. After verifying such details furnished by the assessee, the Assessing Officer again vide order sheet entry dated 12th February 2016 called upon the assessee to furnish further documentary evidences like registration certificate issued by the SEBI recognising the assessee as Venture Capital Fund, books of account in soft copy, copy of all reports sent to SEBI for financial year 2012-13, details of fund-wise and investment-wise fund etc. The Assessing Officer also called upon the assessee to explain how it is covered under section 10(23FB) and section 115U of the Act. He also asked the assessee to provide the basis of differentiation of income from Venture Capital Units and Non-venture Capital Units. He also called for details of TDS made on distribution of income to beneficiary investors. In response to above queries, the assessee vide reply dated 22nd February 2016 furnished all the required details as called for by the Assessing Officer including the quarterly reports submitted to the SEBI, copy of statement in Form no.64, registration certificate issued by the SEBI, fund-wise and investment-wise details, etc. On the very same day, the Assessing Officer, through order shee....
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....etc.) It is also noticed that the assessee has filed the requisite Form no.64 as per Rule 12C of the Income-tax Rules with then Commissioner of Income-tax-21, Mumbai, who had the jurisdiction over the Venture Capital Fund. The assessee has also issued Form no.64 to respective investors of each of the Schemes. Accordingly, the contention of the assessee is found to be correct and accepted and the entire income earned from the investments made in the Venture Capital Undertakings is to be subjected to tax in the hands of investors as per provisions of section 115JU of the Act." 23. Thus, on a cumulative consideration of the aforesaid facts and material available on record, it is evident, after making a comprehensive enquiry with regard to assessee's claim of exemption by calling for necessary documentary evidences and other details and applying his mind to the facts and materials on record and keeping in view the relevant statutory provisions, the Assessing Officer has completed the assessment allowing assessee's claim of exemption. Therefore, it is not a case where the Assessing Officer has either not conducted any enquiry or has accepted assessee's claim without applying his mind....
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....ready discussed hereinbefore, the assessee is governed by Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. In fact, learned Principal Commissioner also subscribes to such view. However, referring to the definition of Venture Capital Undertaking under section 2(aa) of Securities and Exchange Board of India (Alternative Investment Funds) Regulation, 2012 she has concluded that the assessee having not invested in Venture Capital Undertakings engaged in the business activity of providing services, production or manufacture of Article or thing, they will not qualify as Venture Capital Undertaking for the purpose of 10(23FB) of the Act. In our view, such observation of the learned Principal Commissioner runs contrary to the spirit of section 10(23FB) and section 115U of the Act. A careful analysis of the legislative history of section 10(23FB) r/w section 115U of the Act clearly demonstrates that the intention of the legislature from the very inception of the provision was to allow exemption to a Venture Capital Fund in respect of income derived by it from investments made in Venture Capital Undertaking. For that reason alone, the sectoral restrictions im....
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....d Regulation empowers SEBI to call upon the Venture Capital Fund to file such report, as the Board may desire with regard to activities carried on by the Venture Capital Fund. Further, section 25 of the said Regulation empowers the Board to inspect or investigate the books of account, records and documents of a Venture Capital Fund through an Inspecting or Investigating Officer and on the basis of such report, the Board can take such measures against the Venture Capital Fund as per section 29 or 30 of the said Regulation. Undisputedly, in case of the present assessee there is no such allegation or action by the SEBI which could demonstrate violation of any conditions imposed by SEBI. At least, no material has been brought before us by the learned Departmental Representative to demonstrate such fact. Thus, in the absence of any allegation or action by the SEBI against the assessee towards violation of SEBI Regulations, the learned Principal Commissioner cannot make such allegation only for the purpose of denying assessee's claim of exemption under section 10(23FB) of the Act. In this context, we may rely upon the following decisions:- i) G.V.K. Biosciences Pvt. Ltd. v/s ACI....
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....Thus, after the assessee came into existence and started investing fund in Venture Capital Undertakings, real estate sector was not in the negative list of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. That being the case, the reasoning of the learned Principal Commissioner that the assessee is not eligible for exemption under section 10(23FB) of the Act is unsustainable. In this regard, it needs to be observed, the learned Principal Commissioner has stated that the amendment to section 10(23FB) of the Act by Finance Act, 2012, is prospective and will apply to assessment year 2013-14. There cannot be any dispute with the aforesaid observations of the learned Principal Commissioner. However, the undisputed fact is, the assessee has claimed exemption under section 10(23FB) of the Act for assessment year 2013-14. Hence, the provisions applicable to such assessment year would govern all issues relating to assessee's claim of exemption. Applying the conditions of section 10(23FB) of the Act applicable to assessment year 2013-14, assessee's claim of exemption under section 10(23FB) of the Act is allowable. 29. In any case of the matter, the Assessin....
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....er which could have been acceptable to her, for that reason the revisional authority cannot exercise revisional jurisdiction, that too, on the basis of proposal sent by a subordinate officer. Thus, in our considered opinion, the assessment order passed cannot be considered to be erroneous. 30. Even otherwise also, as discussed earlier in this order, the legislative history of section 10(23FB) r/w section 115U of the Act, clearly demonstrate the intention of the legislature to exempt the income derived by a Venture Capital Fund from the investments made in Venture Capital Undertaking while providing for taxation of the same income at the hands of the unitholders on distribution as per section 115U of the Act. Further, to ensure that the income derived by a Venture Capital Fund from investments made in Venture Capital Undertaking is taxed in the hands of the appropriate person i.e., the unitholders, section 115U(2) of the Act requires a Venture Capital Fund to furnish statement in Form no.64 before the prescribed authority as per rule 12C, mentioning the details of the nature of income paid or credited. Undisputedly, in compliance to the aforesaid provisions, the assessee has subm....