TaxTMI 
TaxTMI 
2019 (8) TMI 1909
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.... of Income-tax (Appeals) ['CIT(A)'] erred in upholding the denial of the exemption under section 1O(23FB) of the Income-tax Act, 1961 ('Act'). Rs.3963,89,687 2 Ground No.2: Assessment of alleged income as 'Income from NA other sources' instead of assessment under provisions of section 161(1) of the Act On the facts and circumstances of the case, and in law the CIT(A) having upholding the denial of exemption under section 10(23FB) of the Act, he erred in upholding that the alleged income ought to be assessed under the head 'Income from other sources' and not in terms of section 161(1) of the Act. The CIT(A) further erred in holding that the provisions of section 161(1) of the Act are not applicable to the Appellant trust. NA 3 Ground NO.3: Taxation of income which had already been considered in the returns of income of the beneficiaries On the facts and circumstances of the case, and in law the CIT(A) erred in taxing in the hands of the Appellant, income which had already been considered in the returns of the beneficiaries of the trust. NA 4 Ground NO.4: Denying exemption under section 10(34) of the Act On the facts and circ....
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.... Rs. 49,04,49,323 2. The brief facts of the case are that assessee was set up by way of trust deed dated 18th March 2006, registered under the provisions of Indian Trusts Act 1882. The assessee is further registered under the provisions of Registration Act 1908. The assessee is also registered with Securities and Exchange Board of India (SEBI) as a Venture Capital Fund (VCF) under SEBI Venture Capital Regulations 1996, accordingly the assessee is engaged in investments activities. The assessee raised funds from investors to make investments in Venture Capital Undertakings (VCUs). For assessment year 2015-16, the assessee filed its return of income on 27th August 2015 declaring income of Rs. Nil. In the return of income the assessee claimed exemption of its income under section 10(23FB) of the Act. The return of income was selected for scrutiny. During the assessment, the Assessing Officer made a reference of Joint Commissioner of Income tax (JCIT) under section 144A. The assessee was informed about initiation of proceeding/reference to JCIT vide notice dated 09.11.2017. The Assessing Officer completed the scrutiny assessment under section 143(3) on 13.12.12017. The Assessing Off....
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....espective returns of income. The assessing officer denied the exemptions claim by assessee under section 10(23FB) of the Act and taxed the entire income under the head 'Income from Other Sources'. The assessing officer treated the investment made by assessee in mutual funds as a violation of SEBI (VCF) Regulations. The assessing officer while denying the exemption under section 10(23 FB) took his view that the assessee has violated the object clause of the trust deed. The learned Commissioner (Appeals) confirmed the action of assessing officer. 4. The learned Sr. Counsel for assessee submits that in order to claim exemption under section 10(23FB), the assessee (VCF) needs to comply three conditions i.e. (i) the Venture Capital Fund is operating under the trust deed registered under the provisions of Registration Act, (ii) a certificate of registration should be granted to the funds by the Security and Exchange Board of India (SEBI) before 21st May 2012, and (iii) the funds should be regulated under the SEBI (VSF) Regulations. The learned Sr. Counsel submits that once these three conditions are satisfied by the assessee, there is no basis for denying the exemption under section 1....
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....gainst the assessee toward violation of SEBI regulations or withdrawal of the certificate of registration as a VCF, the assessing officer cannot make such allegation only for the purpose of denying assessee's claim for exemptions under section 10(23 FB) of the Act. To buttress his submission the learned Sr Advocate of the assessee relied upon the following decisions: (a) Milestone Real Estate Fund Versus ACIT (ITA No. 2509 /Mum/2018), (b) DHFL capital fund Versus ITO [2016] 157 ITD 60 (Mumbai Tribunal), (c) G.V.K. Bioscience Private limited Vs ACIT[2014] 67 SOT 163 (Hyderabad Tribunal), (d) ACIT Versus Small is Beautiful (2013) 60 SOT153 (Hyderabad Tribunal), (e) ITO Versus Gujarat Information technology fund (supra). 6. The learned Counsel for assessee submits that on similar set of fact Mumbai Tribunal in a recent decision in HDFC Property Fund versus ITO (ITA No.7472/Mum/2017) while considering the similar disallowances/ denial of exemption under section 10 (23FB) held that investment made by assessee in mutual funds in line with SEBI (VCF) Regulation and the same is not a non-compliance of SEBI (VCF) Regulation, therefore, assesse....
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....p of investment made in mutual fund j. CBDT Circular No. 157F. No. 228/8/73-IT(A-II) dated December 26, 1974 k. Financial Statements for the year ended March 31, 2015 l. Return of Income for Assessment Year 2015-16 m. And copy of various written submissions filed before the Assessing Officer as well as before the ld. Commissioner (Appeals). 9. On the other hand the learned CIT-DR for the revenue supported the order of lower authorities. The learned DR for the revenue submits that the Assessing Officer identified four focal point i.e. (i) the assessee made investment in debt instruments of non-portfolio companies (Non- Venture Capital Undertaking) "J.M. Financial Mutual Fund" and violated objectives of the trust-deed, (ii) Clause 8 of Venture Capital Fund Regulations was violated by assessee which prescribed that certificate granted under Regulation 7 shall subject to main condition that the VCF shall not carry on any other activity than that of a VCF (iii) Sub-clause (c) of Clause-12 of VCF Regulations stated that VCF shall not invest in an associated company and (iv) the assessee also claimed exempt dividend income under section 10(34) & 10(3....
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....apital 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 Regulations) made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), and which fulfils the following conditions, namely:-- (i) it is not listed on a recognized stock exchange; (ii) it has invested not less than two-thirds of its investible funds in unlisted equity shares or equity....
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....such person had he made investments directly in the venture capital undertaking. (2) The person responsible for crediting or making payment of the income on behalf of a venture capital company or a venture capital fund and the venture capital company or venture capital fund shall furnish, within such time as may be prescribed, to the person who is liable to tax in respect of such income and to the prescribed income- tax authority, a statement in the prescribed form and verified in the prescribed manner, giving details of the nature of the income paid or credited during the previous year and such other relevant details as may be prescribed. (3) The income paid or credited by the venture capital company and the venture capital fund shall be deemed to be of the same nature and in the same proportion in the hands of the person referred to in sub-section (1) as it had been received by, or had accrued or arisen to, the venture capital company or the venture capital fund, as the case may be, during the previous year. (4) The provisions of Chapter XII-D or Chapter XII-E or Chapter XVII-B shall not apply to the income paid by a venture capital company or venture c....
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....investments directly in the VCUs. Thus, so far as the assessment year under consideration is concerned, the relevant legal position can be summarised as follows. That any income of a VCF earned from investments in VCUs is exempt in the hands of the VCF, subject of course, to the conditions prescribed in section 10(23BF) of the Act; that such income would be taxable in the hands of the unit holders of the VCF; that such income is taxable in the hands of the unit holders in the manner as if it were the incomes accruing or arising to or received by such unit holders had the unit holders made the investments directly in the VCUs; and, that so far as the income of VCFs earned from investments other than the investments in VCUs is concerned, the same would be taxable in the hands of VCF itself. 13. Now turning to the facts of the present case the assessing officer denied the exemption under section 10(23FB) to the assessee by holding that holding that the assessee made investment in mutual funds and violated SEBI (VCF) Regulation and also violated the objects of clause of the trust deed. The assessing officer has not disputed that the trust deed of the assessee is registered under the....
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.... rule 4 of Part A of the Fourth Schedule to the Act, and not sit in judgment over it." Thus it was held that it was not open to the AO to take the view contrary to the registration already granted by the CIT and therefore disallow a part of the contribution. It was pointed out that when recognition continues in operation it would be implied that the conditions laid down there-under are satisfied and any part of disallowance would tantamount to questioning the recognition. In other words entries made in the register of independent body should be accepted as true and they should 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 i....
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....SEBI, which has final authority to determine about the violation of the conditions, as it is the authority competent to deal with the same. It was also held that the Assessing Officer has made his own interpretation of the term 'corpus', which was found to be incorrect as per the definition given in the new regulation which is not sustainable. 16. We have noted that the coordinate bench of Mumbai Tribunal in HDFC Property Fund Versus ITO (supra) on similar set of facts on similar denial of exemption under section 10(23FB) passed the following order: "12. We have carefully considered the rival submissions. Ostensibly, as our discussion in the earlier paras show, the sum and substance of the stand of Assessing Officer revolves around the manner in which assessee has made certain investments; firstly, in the units of Mutual funds; and, secondly, towards Debenture application monies. The first objection of the Assessing Officer is that such investments are not permitted in terms of the Trust Deed itself. In this context, we find that the appellant has been constituted in terms of the Trust Deed dated 06.11.2004 settled by Housing Development Finance Corporation Ltd.....
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....s. 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 Venture Capital Fund in liquid mutual funds or bank deposits or other liquid assets of high quality such as treasury bills, etc. were permissible. Moreover, we cannot lose sight of the fact that the Certificate of Registration as a Venture Capital Fund issued by SEBI continues to subsist during the period under consideration, which clearly belies the assertion of the Assessing Officer that there has been a violation of VCF Regulations of SEBI. Thus, on an overall analysis of the situation, we find that the temporary investment made in the units of mutual funds is within the ambit of appellant's Trust Deed and also within the ambit of VCF Regulations of SEBI. 13. Insofar as the investment made by the assessee in Debenture application monies is concerned, in this context also we find that appellant has a good....
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.... in units of mutual funds as well as in Convertible Debenture application money. Thus, in our view, assessee is entitled to exemption envisaged under Section 10(23FB) of the Act. 17. Considering the aforesaid discussions, we find that the certificate of Registration of assessee in the capacity of a VCF with SEBI is still continues to subsist; that there is no adverse report brought by assessing officer taken or likely to be taken by SEBI for violation of any VCF Regulations; that the targeted investment in VCUs is within the purview of VCF Regulations of SEBI; wherein the assessee is permitted by its Trust Deed dated 18th March 2006 as well as by the VCF Regulations of SEBI to deploy the funds in units of mutual funds. Therefore, in our view, the denial of exemption prescribed under Section 10(23FB) of the Act was not warranted, we hold so. 18. The submission of ld. DR for the revenue is not acceptable to us as the co-ordinate bench of Tribunal in HDFC Property Fund (supra) and in Gujarat Information Technology Fund (supra) has held that a VCF (assessee) operating in terms of trust-deed and has been granted a certificate of registration as VCF by SEBI which continued to subsi....
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....e and held that section 10(23FB) of the Act is more specific Visa with section 10(34) and 10(35) of the Act. The assessing officer held the assessee is not qualified as a BSF under the provisions of subsection 10(23FB) of the act and that it cannot be granted exemption under section 10(34) and 10(35) of the Act. 22. The learned senior counsel for the assessee further submits that the exemption under section 10(34) and section 10(35) was denied to the assessee on the ground that assessee is not eligible for exemption under section 10(23 FB) of the Act. The learned senior counsel would further submit that in case the assessee is held as eligible for claim of exemption under section 10(23FB), then the basis on which the exemption under section 10(34) and section 10(35) was denied itself would not subsist. In alternative submission the learned senior counsel would submit that there are no conditions attached with section 1034 and section 10(35) or under section 10(23 FB), which is a specific over the other. Therefore the treatment made by assessing officer is absolutely misplaced. There is no applicability of doctrine of generally especially clear bus known dialogue went. In another....