TaxTMI 
TaxTMI 
2019 (3) TMI 1027
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....lleging that the appellant has violated the Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996 ("the VCF Regulations") to disallow the claim for exemption under section 10(23FB) of the Act. The CIT(A) failed to appreciate that it is not within the domain of the income-tax department to determine the infraction of other laws. 3. Without prejudice to what is stated above, the appellant submits that the CIT(A) failed to appreciate that for availing exemption under section 10(23FB) of the Act what is relevant is compliance of the provisions of the Act and not the provisions of the VCF Regulations. 4. The CIT(A) erred in confirming the action of the Assessing Officer that the appellant's action has resulted in following infraction of the VCF Regulations- (a) The CIT(A) erred in observing that the clause in the appellant's Trust Deed dealing with "Temporary Investments" is contrary to the VCF Regulations. The appellant submits that the learned Commissioner of Income-tax (Appeals) failed to appreciate that the Temporary Investment represents deployment of funds that are pending either for investment in Venture capita....
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....hout prejudice to what has been stated above, the appellant submits that the CIT(A) failed to appreciate the fact that income from mutual funds ought to have been granted exemption under section 10(35) of the Act. 10. Without prejudice to what has been stated above, the appellant submits that the CIT(A) erred in upholding the action of the Assessing Officer in holding that the appellant in not a "person" and hence not eligible to claim exemption under section 10(23FB) of the Act. The appellant submits that in the event the appellant is held not to be a "person" no assessment is permissible in case of the appellant. 11. The appellant submits that the Assessing Officer be directed: a. to grant exemption to the appellant under the provisions of section 10(23FB) of the Act and to delete addition of a sum of Rs. 264,39,31,082/-; b. Without prejudice to what has been stated above, if contention at (a) above is not accepted, to direct the Assessing Officer to tax income as per normal provisions of the Act and not under the head "Income from other sources"; c. Without prejudice to what has been stated above, if contention at (a) above i....
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....priate to refer to the relevant provisions of the Act which have a bearing on the issue. 5. In this context, we may reproduce hereinafter the provisions of Section 10(23FB) of the Act, as it stood for the assessment year under consideration before us. "(23FB) any income of a venture capital company or venture capital fund from investment in a venture capital undertaking. Explanation.-For the purposes of this clause,- (a) "venture capital company" means a company which- (A) has been granted a certificate of registration, before the 21st day of May, 2012, as a Venture Capital Fund and is regulated under the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 (hereinafter referred to as the Venture Capital Funds Regulations) made under the Securities and Exchange Board of India Act, 1992 (15 of 1992); or (B) has been granted a certificate of registration as Venture Capital Fund as a sub-category of Category I Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (hereinafter referred to as the Alternative Investment Funds....
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....ction 10(23FB) of the Act, as it is contained in Chapter III of the Act, seeks to exclude the income prescribed therein from the total income of an assessee subject to tax. Pertinently, it prescribes for exemption from tax in respect of income of a Venture Capital Company or a VCF registered with Securities and Exchange Board of India (hereinafter referred to as „SEBI‟). Since the assessee before us is a Venture Capital Fund, shorn of other details, we would examine the provisions of Section 10(23FB) of the Act in that light alone. Explanation (b) of section 10(23FB) gives the meaning of „Venture Capital Fund‟ to be a Fund which (i) operates under a trust deed registered under the provisions of Registration Act, 1908; (ii) has been granted certificate of registration as a VCF before 21st May, 2012; and, (iii) is regulated by SEBI (Venture Capital Funds) Regulations, 1996 (herein after referred to us "VCF Regulations"). 7. Simultaneously, we may also look at the provisions of Section 115U of the Act as they stood for assessment year under consideration before us since, sections 10(23FB) and 115U of the Act provide a schematic understanding of the taxation ....
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.... the meanings respectively assigned to them in clause (23FB) of section 10. Explanation 2.-For the removal of doubts, it is hereby declared that any income which has been included in total income of the person referred to in sub-section (1) in a previous year, on account of it having accrued or arisen in the said previous year, shall not be included in the total income of such person in the previous year in which such income is actually paid to him by the venture capital company or the venture capital fund." 8. Notably, a conjoint reading of sections 10(23BF) and section 115U of the Act brings out the intention of the Legislature to accord a pass-through status to SEBI registered VCFs. Pertinently, while section 10(23BF) of the Act grants exemption in the hands of VCF in respect of incomes earned from investments in Venture Capital Undertakings; at the same time, in terms of section 115U of the Act the income accruing or arising to the unit holders of the such VCF out of investments made in Venture Capital Undertakings is prescribed to be taxable in the hands of such unit holders in the manner as if it were the income accruing or arising to or received by such unit hold....
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....as been asserted by referring to the provisions of Explanation- (b)(A)(I) to section 10(23FB) of the Act to say that the assessee fulfils the three conditions, viz. that it is operating under trust deed; that the deed is registered under the provisions of Registration Act, 1808; and, that its certificate of registration granted under SEBI-VCF Regulations dated 23.12.2004 continues to be subsist. Coming to the specific point by the Assessing Officer that it has violated the provisions of VCF Regulations of SEBI, the learned counsel for the assessee emphasised that the Assessing Officer is wrong in saying so in the absence of any adverse action by the concerned regulator, i.e. SEBI. It has been canvassed on the basis of the judgement of the Hon'ble Supreme Court in the case of Gestetner Duplicators P. Ltd. vs. CIT 117 ITR 1 that it was not open for the Assessing Officer to assume violation of VCF Regulations of SEBI so long as the certificate of registration granted by SEBI is not withdrawn by a process known to law. Even regarding the purported violation of assessee‟s own trust deed, as sought to be made out by the Assessing Officer, the learned A.R. explained that until t....
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....ding to him, every VCF is obligated to abide by the prescribed Regulations and that it should carry out no activity other than that of VCF. The case made out is that making of investment in Mutual Funds and earning interest on debenture application monies constitute activities in violation of VCF Regulations of SEBI and therefore the Assessing Officer and the CIT(A) made no mistake in rejecting the claim under Section 10(23BF) of the Act. In particular para 6.7 of the order of the Assessing Officer has been referred to, which reads as under: - 6.7 Therefore, in view of above facts and legal position, it is established that during the year under consideration, the assesse does not fulfill the condition of being VCF within the meaning of sub clause (b) (i) and (b) (ii) to Explanation [1] of section 10(23FB) because it has derived its income in violation of Trust deed and sure have violated the regulations in its behalf hence his registration also does not hold good for the year. i) he income of the assesse is not derived from investment in VCU. ii) The amount of Rs. 19,94,00,000/- is debenture application money and income derived on that amount is not from ....
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....y investments. The aforesaid clearly brings out that the appellant is empowered by its Trust Deed to make temporary investments which, inter-alia, would include within its purview the investments in question. Apart therefrom, we find enough potency in the pleadings of the appellant that there is an industry and trade practice whereby Venture Capital Funds retain certain amounts with them, pending regular investments in Venture Capital Undertakings for certain purposes, like disbursement of expenses, distribution to unit-holders, etc. Till such time the funds are not utilised for the main purposes, advisably the Venture Capital Fund would make temporary investments to earn monies. The course adopted by the assessee in this regard was by investing in units of mutual funds or even by way of fixed deposits with banks. Insofar as the objection of the Assessing Officer regarding non-compliance with the VCF Regulations of SEBI is concerned, here also we do not find any support for the stand taken by the Assessing Officer. In fact, our attention was drawn to SEBI (Informal Guidance) Scheme, 2003 issued by SEBI with regard to VCF Regulations where the temporary deployment of funds by a Vent....