TaxTMI 
TaxTMI 
2026 (1) TMI 1382
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....Tax Appellate Tribunal, Mumbai- 'I' Bench (for short "ITAT"). By the impugned order, the ITAT quashed and set aside the order dated March 28, 2018 passed by the Appellant (Pr. Commissioner of Income-tax -25, Mumbai) [for short "PCIT"] under Section 263 of the Act, wherein the Appellant held that the assessment order dated March 17, 2016, passed by the Assessing Officer for Assessment Year 2013-14 in case of Milestone Real Estate Fund ("Assessee" / "Fund"), is erroneous and prejudicial to the interest of the Revenue. 3. In the Appeal before us, although the Revenue has proposed various questions as substantial questions of law, the Revenue has pressed only the following question as a substantial question of law:- "Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in setting aside the order passed by the Pr.CIT-25, Mumbai u/s 263 of the I.T. Act, 1961 and restore the order passed by the AO?" 4. To understand the controversy, it would be necessary to set out some brief facts. The Assessee is a Trust created under the Indian Trust Act, 1882 and is a Venture Capital Fund ("VCF") which is registered with the Securities Exchang....
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....d explanations regarding eligibility as well as working of its claim for exemption under Section 10(23FB) of the Act. The order sheet entry dated February 12, 2016 also records that the Assessing Officer asked the Assessee to furnish documentary evidences inter alia including the SEBI Certificate recognizing the Assessee as a VCF, copy of reports sent to SEBI for the relevant Financial Year 2012-13, fund-wise and investment-wise fund details, basis for differentiation of income from VCU and Non venture capital units, TDS on distribution of income to beneficiary investors, etc. and called upon the Assessee to explain as to how it is covered under Section 10(23FB) and Section 115U of the Act. All the relevant details were furnished by the Assessee vide its letter dated February 22, 2016. Another order sheet entry dated February 22, 2016, records that the Assessing Officer sought from the Assessee, details of investments made in VCUs, details of business carried on by VCUs, and whether VCUs are carrying on activities mentioned in the Third Schedule of VCF Regulations. In its reply to the said query, the Assessee, vide its letter dated February 25, 2016, provided requisite details incl....
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....tting aside the assessment order passed under Section 143(3) of the Act, holding that the assessment order for the A.Y.2013-14 is erroneous and prejudicial to the interest of the Revenue. The PCIT held that the assessment order was set-aside to verify the claim for exemption under Section 10(23FB) of the Act inter alia on the following grounds: (a) The investment made by the Assessee in VCUs which are engaged in the real estate sector are not eligible VCUs for the purpose of Section 10(23FB) of the Act. The PCIT accepted the contention of the Assessee that the Assessee's case is governed by the VCF Regulations and not SEBI AIF Regulations, however, drawing an analogy between the definition in the VCF Regulations and SEBI AIF Regulations, the PCIT was of the view that the intention of the legislature is to permit exemption only to such sectors which are involved in providing services and production and manufacturing of articles or things, and therefore, the real estate sector does not come within the ambit of a VCU. (b) By making investment in mutual funds, the Assessee has violated SEBI Regulations as investment in mutual funds is not as per the investment conditi....
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....as material brought on record, completed the assessment allowing the Assessee's claim of exemption under Section 10(23FB) of the Act. The ITAT therefore held that it is not a case where the Assessing Officer has either not conducted any enquiry or has accepted the Assessee's claim without applying his mind to the facts and material on record or the relevant statutory provisions. The ITAT therefore held that the view taken by the Assessing Officer in allowing the Assessee's claim for exemption under Section 10(23FB) of the Act, is certainly a possible view and therefore, the assessment order cannot be held to be erroneous. 12. The ITAT further held that in compliance with the provisions of Section 115U of the Act, the Assessee has submitted statements in Form No.64 before the appropriate authority and there is no adverse observation by the concerned authority that the Assessee has violated the conditions of Section 115U of the Act. The ITAT further observed that thus, looked at from this angle, there is no prejudice caused to the Revenue as the disputed income has been subject to tax, though, not in the hands of the VCF, but in the hands of the unit holders. Hence, no prejudice i....
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....lated SEBI Regulations, and hence is not eligible to avail of exemption under Section 10(23FB) of the Act was unsustainable. 16. Finally, the ITAT came to the conclusion that the Assessing Officer, while accepting the Assessee's claim of exemption under Section 10(23FB) of the Act, has made an extensive enquiry and applied the law correctly to the facts brought on record, and the assessment order passed can neither be held to be erroneous nor prejudicial to the interests of Revenue, and the Assessee is therefore bound to succeed on both, lack of jurisdiction to exercise powers under Section 263 of the Act, as well as on merits. 17. The Revenue has filed the present Appeal to challenge this order of the ITAT. In the backdrop of what we have narrated above, the learned counsel for the Revenue, Mr. Ravi Rattesar, relying on the order of the PCIT, submitted that the ITAT has erred in setting aside the order of the PCIT. The learned counsel argued that:- (a) The investment made by the Assessee in VCUs which are engaged in the real estate sector are not eligible VCUs for the purpose of Section 10(23FB) of the Act. The main thrust of the Government is to promote sectors lik....
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....e had recorded a categorical finding in the assessment order at paragraph 5, which is extracted hereinabove. Therefore, it is clearly a case where the Assessing Officer has enquired into the issue in detail and decided that the Assessee is entitled to exemption under Section 10(23FB) of the Act. Accordingly, the view taken by the Assessing Officer in allowing Assessee's claim for exemption under Section 10(23FB) of the Act, is certainly a possible view, and therefore, the assessment order cannot be held to be erroneous. (b) The Tribunal has recorded a categorical factual finding that in compliance with the provisions of Section 115U of the Act, the Assessee has submitted statements in Form No.64 before the appropriate authority and there is no adverse observation by the concerned authority that the Assessee has violated the conditions of Section 115U of the Act. Therefore, as the disputed income has been subjected to tax, even though, not in the hands of the VCF but in the hands of the unitholders, no prejudice is caused to the Revenue. Thus, the assessment order cannot be said to be prejudicial to the interest of the revenue. (c) The assessment order cannot be sa....
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....n of law arises for consideration, and hence, the appeal should be dismissed. 20. Mr. Ravi Rattesar, learned advocate appearing on behalf of the Appellant has filed short arguments of the Appellant. Mr. J. D. Mistri, learned Senior Advocate, appearing for the Respondent, has filed a brief synopsis of the matter. 21. We have heard Mr. Ravi Rattesar, the learned Advocate appearing on behalf of the Appellant, as well as Mr. J. D. Mistri, learned Senior Advocate, appearing for the Respondent. 22. We note that Section 10(23FB) of the Act was introduced by the Finance Act, 2000 with effect from April 01, 2001. The aforesaid provision provides for exemption from tax of any income of a VCF from investment in a VCU. Simultaneously with the introduction of Section 10(23FB) of the Act, Section 115U of the Act was also introduced which provided for taxation of income derived by a VCF from a VCU in the hands of the unit holders who have made investments in the VCF, as if, the income received by the VCF from the VCU is directly received by the unit holders from the VCU. Thus, we note that a VCF was given a pass through status i.e. income derived by them from the VCU will be exempt in th....
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....-Banking Financial Companies which are registered with Reserve Bank of India and have been categorized as Equipment Leasing or Hire Purchase Companies.]. (3) Gold financing ^4[excluding those Companies which are engaged in gold financing for jewellery.]. (4) Activities not permitted under industrial policy of Government of India. (5) Any other activity which may be specified by the Board in consultation with Government of India from time to time.] 28. Accordingly, "real estate" has been removed from the Negative List with effect from April 05, 2004. 29. In the backdrop of the aforesaid legal position, we have to consider whether the ITAT was justified in quashing the order passed by the PCIT under Section 263 of the Act. Having considered the orders of the lower authorities, and the arguments of the parties, we find that the Assessing officer has examined the claim of exemption under Section 10(23FB) of the Act in detail at the time of passing the original assessment order dated March 17, 2016. The ITAT has noted this irrefutable position, and in paragraph 21 and 22 of its order has held as under:- "21. Keeping in perspective the aforesaid ....
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....ation 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 sheet entry, called upon the Assessee to furnish details of investment made in Venture Capital Undertakings in respect of all the funds as well as the details regarding the nature of business activities carried on by the Venture Capital Undertakings and also to explain whether the Venture Capital Undertakings are carrying on activities which are in the negative list as mentioned in the Third Schedule of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. He directed the Assessee to comply with these queries on 25th February 2016. In response, the Assessee vide reply dated 25th February 2016 submitted the det....
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....made a detailed enquiry in the matter during the course of assessment proceedings. We, therefore, find that what the PCIT has done in his order under Section 263 of the Act dated August 10, 2018 is only to substitute her views in place of the views of the Assessing Officer. This is clearly contrary to the ruling of this Court in CIT v/s Gabriel India Limited (203 ITR 108). The detailed factual aspects of the matter have been discussed in the impugned order and set out hereinabove, with reference to the queries posed, details sought, and replies furnished, clearly establishing how the Assessing Officer has applied his mind to the facts of the present case. After applying his mind and considering the explanation given by the Assessee, the exemption was allowed by the Assessing Officer. We, therefore, find that the PCIT was not justified in invoking the provisions of Section 263 by only substituting his views in place of the views of the Assessing Officer. 31. Further as held by the Apex Court in Malabar Industrial Co. Ltd. v. CIT [(2000) 243 ITR 83 (SC)], for exercising jurisdiction under Section 263 of the Act, both the conditions i.e. the assessment order being erroneous and bei....