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2026 (2) TMI 757
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....ssee filed its returns of income declaring nominal taxable income after claiming exemption in respect of income earned from investments made in portfolio companies treated as Venture Capital Undertakings (VCUs) under section 10(23FB) of the Income-tax Act, 1961. The assessee also claimed exemption in respect of dividend income received from units of mutual funds under section 10(35) of the Act. 3. The cases were selected for scrutiny and notices under section 143(2) and section 142(1) of the Act were issued. During the course of assessment proceedings, the assessee furnished details of investments made in portfolio companies, nature of income earned therefrom and the basis for claiming exemption under section 10(23FB) and section 10(35) of the Act. It was explained that the interest income was earned on Optionally Fully Convertible Debentures and other instruments issued by portfolio companies and that the dividend income was received from liquid schemes of mutual funds. 4. The Assessing Officer, however, did not accept the assessee's claim of exemption in respect of interest income earned from certain portfolio companies, holding that the investee entities did not qualify as....
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....,38,985/- * A.Y. 2017-18 - Rs. 5,30,71,555/- * A.Y. 2018-19 - Rs. 5,74,69,950/- 7. Taking A.Y. 2016-17 as the lead year, the learned Authorised Representative (AR) submitted that the issue involved in all the three assessment years is identical and arises out of the same set of facts and, therefore, the submissions for A.Y. 2016-17 apply mutatis mutandis to the remaining years. 8. The learned AR submitted that the exemption under section 10(23FB) was disallowed by the Assessing Officer mainly on the ground that the investee company, namely Mahip Hospital Private Limited, was not carrying on any eligible business activity and that the funds invested by the assessee were allegedly used for purposes other than providing services, production or manufacture of articles or things for which the company was incorporated. It was held by the Assessing Officer that the said company functioned merely as a pass-through entity and, therefore, did not qualify as a Venture Capital Undertaking within the meaning of section 10(23FB) read with the SEBI Regulations. On this reasoning, the interest income earned by the assessee from such investment was treated as taxable and the....
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....defines "venture capital undertaking" as 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. The AR submitted that, after the aforesaid amendment, the definition of "venture capital undertaking" for the purposes of section 10(23FB) is no longer governed by the earlier restrictive list of specified businesses under the Income-tax Act but is required to be examined strictly with reference to the SEBI (Venture Capital Funds) Regulations, 1996. It was contended that the Assessing Officer erred in relying upon the pre-amended definition and in testing the eligibility of the investee company on the basis of the nature of business carried on, instead of examining whether the investee entity satisfies the definition of "venture capital undertaking" under the SEBI Regulations. It was further submitted that the investee company in the present case squarely falls within the definition of "venture capital undertaking" as prescribed under the SEBI (Venture Capital Funds) Regulations, 1996, inasmuch as it is a domestic company whose shares are not listed....
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....ndertaking" as contained in clause (n)(ii) of the SEBI (Venture Capital Funds) Regulations, 1996 is not free from ambiguity, inasmuch as it provides that such undertaking should be engaged in providing services, production or manufacture of articles or things and at the same time "does not include such activities or sectors which are specified in the negative list by the Board." It was contended that, in view of the said wording, the investee company must satisfy both conditions simultaneously, namely, that it is engaged in eligible business activity and that it does not fall within the negative list. According to the DR, the Assessing Officer has rightly examined the actual activities carried on by the investee company and has correctly concluded that it did not qualify as an eligible venture capital undertaking. The DR, therefore, submitted that the exemption under section 10(23FB) was rightly denied and the orders of the lower authorities deserve to be upheld. 15. For A.Y. 2017-18, the learned Departmental Representative further drew attention to the specific findings recorded by the Commissioner of Income-tax (Appeals). The DR submitted that the CIT(A) has categorically note....
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....friction at the fund level, while the tax incidence, if any, is ordinarily intended to arise at the level of investors or at the appropriate stage as contemplated by the scheme of the law. However, the exemption is not an unfettered blanket immunity for all receipts. The statute, on its plain language, links exemption to income of a SEBI-registered VCF/VCC from investment in a Venture Capital Undertaking, and therefore, the character and eligibility of the investee as a "venture capital undertaking" remains a jurisdictional fact which must be satisfied. 19. The assessee has specifically contended that Explanation 1 clause (c), as substituted w.e.f. 01.04.2013, aligns the meaning of "venture capital undertaking" to the SEBI (Venture Capital Funds) Regulations, 1996 framed under the SEBI Act, 1992. On this aspect, we agree with the proposition that, post-substitution, the enquiry as to whether an investee qualifies as a "venture capital undertaking" is required to be tested with reference to the SEBI regulatory framework. Accordingly, to the extent the lower authorities may have proceeded on a pre-amended understanding or an incorrect statutory benchmark, the same would require co....
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....followed by demerger of the hospital undertakings into separate Special Purpose Vehicles, namely Mahip Hospital Pvt. Ltd., Mahip Healthcare & Lifesciences Pvt. Ltd. and Marcus Healthcare Pvt. Ltd., each corresponding to a distinct hospital unit. The said structure was relied upon to show that the investment was not in the nature of a mere financial accommodation but formed part of a planned business model for acquisition, segregation and operation of hospital and healthcare assets through dedicated SPVs. 24. In this context, the material placed on record, including the scheme of amalgamation and demerger produced by the assessee, assumes significance. The structure demonstrates that the investee company was conceived as part of an integrated healthcare acquisition model, whereby hospital undertakings were first consolidated and thereafter demerged into separate Special Purpose Vehicles corresponding to individual hospital units. This supports the assessee's explanation that the investment was aligned with acquisition and operation of healthcare assets and was not in the nature of a temporary parking or pass-through of funds. 25. On this core controversy, it is important to no....
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....and was aligned with the regulatory framework governing Venture Capital Funds. The assessee has produced before the lower authorities as well as before us the relevant documents, including the NCLT-related records, SEBI quarterly and sector-wise filings and investment deployment details, which establish that the investee entity was incorporated and structured for acquisition and operation of hospital and healthcare assets. These materials further show that the sectoral deployment of funds was in healthcare and real estate, which do not fall within the negative list prescribed under the Third Schedule to the SEBI (Venture Capital Funds) Regulations, 1996. 30. We find that the Assessing Officer and the CIT(A) have proceeded largely on inferences drawn from the absence of immediate commercial operations and from the onward deployment of funds, without appreciating the business model of venture capital investments, which inherently involves phased implementation and use of SPVs for acquisition and consolidation of operating assets. The conclusion that the investee acted merely as a pass-through entity is not borne out by the contemporaneous material placed on record. On the contrary....