TaxTMI 
TaxTMI 
2024 (2) TMI 1670
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....of income u/s. 139(1) of the Income Tax Act, 1961 ("the Act") for the assessment year declaring total income of Rs..NIL after claiming exemption of Rs..47,76,75,319/-. The breakup of exempt income is as under: - Sr No. Nature of Income Amount Exempt u/s 1 Dividend from investments in mutual funds 1,68,97,076 10(35) 2. Dividend from venture capital undertaking 8,23,05,575 10(34) 3. Interest from Venture Capital Undertaking. 37,84,72,668 10(23FB) Total 47,76,75,319 4. The case of the assessee was selected under complete scrutiny through CASS and assessment was completed by the Assessing Officer under section 143(3) on 30.12.2018 after due enquiry and accepting the returned income. 5. Subsequently, Assessee's case was reopened by issuance of notice u/s. 148 of the Act on 31.03.2021. It was brought to the notice of the Assessing Officer the decision of ITAT and after acknowledging at Para No. 4.23 of the reassessment order that an identical issue has been decided in favour of the Assessee by the Coordinate Bench in A.Y. 2017-18, Assessing Officer has still disallowed the exemption claimed u/s. 10(23FB),....
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.... On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the Ld. AO of denying the exemption under section I O(23FB) of the Act on the alleged ground that the Appellant had violated the terms of the Trust Deed and also the SEBI (Venture Capital Fund) Regulations, 1996. 3.2 The Ld. CIT(A) failed to appreciate that the amendment to section 10(23FB) only restricts the deduction to income from investment in a venture capital undertaking ("VCU") and does not grant any powers to the Ld. AO to determine any violations by the Appellant as a Venture Capital Fund ("VCF"). 3.3 The Ld. CIT(A) also failed to appreciate and ought to have held that in any case there is no violation and that the said practice has been consistently followed by the Appellant and there being no change in the facts in the current year, exemption u/s. IO(23FB) of the Act ought to be granted. 3.4 The Appellant prays that the Ld. CIT(A) be directed to allow the exemption u/s. IO(23FB) of the Act. WITHOUT PREJUDICE TO THE ABOVE GROUNDS GROUND NO. IV: SAME INCOME CANNOT BE SUBJECT TO TAX TWICE: On the facts and circumstance....
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....t is submitted that the issue is squarely covered in favour of the Appellant Assessee by the order of the coordinate bench in its own case for AY 2017-18 in ITA No. 1635/Mum/2020 (Copy of the Tribunal order is placed at page no. 274 of the FPB). The relevant findings of the Hon'ble Tribunal in the said order are as under: 2.2.1. Short term investment in mutual funds is authorized by the Private Placement Memorandum ("PPM") which in turn is in accordance with the trust deed of the Appellant Assessee, 2.2.2. The allegation that the Appellant Assessee has violated the SEBI VCF Regulations is only contended by the departmental authorities, whereas there is absolutely not even a whisper of any such allegation by SEBI regarding any violation committed by the Appellant Assessee of the Regulations; 2.2.3. The clarification issued by SEBI in the case Tata Capital Ltd. states that VCFs registered with SEBI can make investment of the un-invested portion of their investible funds in liquid mutual funds or bank deposits or other equity assets of higher quality, such as treasury bills, CBLOs, commercial papers, certificate of deposits, etc. till deployment of funds....
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....as under: "2.1.16. Thus, the Assessee has invested in mutual funds for temporary purposes, and is duly permitted to do such investments and has not violated any conditions of its Trust deed by making such investments in mutual funds." (Emphasis supplied) Infact, even during the course of assessment proceedings u/s. 143(3), the Appellant Assessee vide its letter dated December 28, 2018 (given at page no. 113 of FPB) had submitted before the then Ld. AO complete details of the temporary investments made in mutual funds and that the said temporary investment is made in accordance with the Private Placement Memorandum and Trust deed. 2.4 The Appellant Assessee also submits that the interest income which has been claimed exempt u/s. 10(23FB) has already been subject to tax in the hands of the investors, which can be seen from Form 64 (refer FPB page no. 303). Therefore, taxing the same income in the hands of the Appellant Assessee would amount to taxing the same income twice. 2.5 Basis the above, the Appellant Assessee submits that the issue involved in the captioned assessment year is duly covered by the order of the Hon'ble Tribunal for AY 20....
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....s of The Registration Act, 1908, and secondly, it have been registered as a VCF with the competent authority, which, in the present case is SEBI. There is no dispute that the qualifies the conditions of VCF as provided in Explanation-(b) to section 10(23FB) of the Act. 13. Having held so, it is necessary to look into the reasoning of the Departmental Authorities for denying assessee's claim of exemption under section 10(23FB) of the Act. The first allegation is, investment in mutual fund is not authorised by the trust deed. Elsewhere in this order, while referring to the submissions of the learned Sr. Counsel for the assessee, we have referred to certain clauses of the trust deed. It Is the case of the assessee that the investment in mutual fund is authorised by PPM which is in terms of the trust deed. On a perusal of the trust deed, a copy of which is at Page-42 of the paper book, it is seen, as per clause 2.2 of the trust deed, the contributions received is to be invested in equity/quasi equity and equity related investment including preference shares, warrants for equity conversion, debt Instruments etc. However, clause 2.3 of the trust deed provides that the contri....
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....l funds or bank deposits or other equity assets of higher quality, such as, treasury bills, CBLOS, commercial papers, certificate of deposits, etc., till deployment of funds as per investment objective. Thus, the aforesaid clarification issued by the SEBI also permits short term investment of idle funds in mutual funds and other short-term investments. The reasoning of the Departmental Authorities that the clarification Issued by SEBI is in case of another assessee is of little consequence as in Para-(d) of the aforesaid letter dated 10th June 2016, SEBI has referred to to all SEBI registered VCFs and not simply limited to Tata Capital Ltd. Therefore, the allegation of the Departmental Authorities that the assessee has violated the terms of trust deeds by investing in mutual funds has no reasonable basis. 15. The other allegation of the Departmental Authorities is that the assessee has violated the VCF regulations framed by SEBI and thereby has violated the conditions of registration granted by the SEBI. In this the only thing we want to say is, it is only the departmental authorities who are alleging violation of SEBI (VCF) Regulations and the terms of registration grante....
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....registration of assessee under registration Act and certificate of registration dated 13th October 2006 granted by SEBI (VCF) Regulations Before discussing the issue involved in the present appeal, we may refer the relevant provisions of section 10(23FB) and section 115U of the Act. "(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 | Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (hereinafter referred to as the Alternati....
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....n out of investments made in a venture capital company or venture capital fund shall be chargeable to income-tax in the same manner as if it were the income accruing or arising to or received by 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 mature 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 rued or arisen to, the venture capital company or the ensure capital fund, as the case ....
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....n the manner as if it were the income accruing or arising to or received by such unit holders, had such unit holders made 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 ....
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....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 thereunder 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 subclause (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 is not required to go into violation of conditions, if any, pertaining to the ....
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....thority 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 Lid It has been constituted to pool together resources, both institutional and other investors, for making ....
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....any support for the stand taken time and again reiterated by the assessee before the lower authorities as well as before us and we find that in neither of the orders of the authorities below there is any negation to the same. So far as VCF Regulations of SEBI are concerned, we are in agreement with the assessee that it does envisage investments in Convertible Debenture application money as being investments which can be said to be linked to investment in equity shares. Thus, on account of the aforesaid discussion, we find that the assessee fulfils the requirements of claiming exemption under Section 10(23FB) of the Act so far as it is relatable to the year under consideration. 14. To reiterate, it is abundantly clear that assessee is a VCF operating in terms of a Trust Deed registered under the provisions of the Registration Act, 1908, that it has been granted a Certificate of Registration as VCF by SEBI which continues to subsist, that there is no adverse action taken or contemplated by SEBI for violation of any VCF Regulations; that the targeted investment in VCUs is within the purview of VCF Regulations of SEBI, that assessee is permitted by its Trust Deed as well as by the VCF ....
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....0(23FB) of the Act is taxable. According to the Assessing Officer, the expression 'person' as defined under section 2(31) of the Act does not include VCF. He observed, VCF being a trust enjoying special status for specific purpose is provided exemption specifically under section 10(23FB) of the Act. The Assessing Officer held that since the assessee being a VCF is qualified to avail exemption under section 10(23FB) of the Act, it cannot claim exemption under section 10(34) and 10(35) of the Act in respect of dividend earned on a funds. Accordingly, he disallowed assessee's claim. 20. Learned Commissioner (Appeals) also sustained the disallowance accepting the reasoning of the Assessing Officer. 21. The learned Sr. Counsel for the assessee submitted, there cannot be any doubt that the assessee is a person as defined under section 2(31) of the Act. He submitted, exemption under section 10(34) and 10(35) of the Act are in respect of specific Income, hence, are not covered under any other provisions. He submitted, when section 10(23FB) of the Act does not specifically prohibits grant of exemption under any other provision in respect of any other income ear....
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.... under section 10(34) and 10(35) of the Act. The other reasoning of the Departmental Authorities is, since assessee is specifically provided exemption under section 10(23FB) of the Act, it cannot avail exemption under any other provision. 24. As could be seen from the language of section 10 of the Act, certain categories of income earned by any person are exempt under different clauses of the said section. While dividend income is exempt under section 10(34) of the Act income earned from units of mutual fund is exempt under section 10(35) of the Act. Undisputedly, though, the assessee is a VCF, however, the status of the assessee comes within the definition of 'person' as defined under section 2(31) of the Act. Therefore, it cannot be said that the assessee is having a special status other than any of those as per section 2(31) of the Act. Further, on a careful reading of section 10(23FB) of the Act, we find that it only exempts income earned by a VCF or VCC from investments made in a VCU. Thus, the exemption provided under section 10(23FB) of the Act is in respect of a special category of income. Further, on a careful reading of section 10(23FB) of the Act we do n....
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....al is partly allowed. ITA no.1636/Mum./2020 30. The facts and issues involved in this appeal are identical to the facts and issues involved in ITA no. 1635/Mum./2020, decided by us in the earlier part of the order. Even, the grounds raised in the present identical and corresponding to the grounds raised in ITA no. 1935/Mum/2020. Therefore, our decision in ITA no. 1635/Mum./2020 Will apply mutatis mutandis to this appeal as well. Following the same, grounds no.(i), (ii) are dismissed as not pressed; grounds no.(iii) and (iv) are allowed and grounds no.(iv), (vi), (vii), (viii) and (ix) being of academic nature, do not require adjudication. Ground no. (x) being consequential is dismissed. 31. In the result, both the appeals are partly allowed." 13. Respectfully following the above decision, the facts in this appeal also exactly as similar in the earlier years and also it is brought to our notice that SEBI has issued separate communication to the Assessing Officer informing that there is no violation in the investment process of the assessee and it was informed that the assessee is allowed to make short term investments which is not in violation of object....
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....provided, reopening is to be quashed: The Appellant Assessee submits that the reopening is bad in law even on the ground that no reasons for reopening were provided even after multiple requests made in this regard (Please see the reply dated May 31, 2021 on FPB page no. 40, reply dated March 16, 2022 on FPB page no. 58-60 and reply dated March 26, 2022 on FPB page no. 92-94). In support of the same, the Appellant Assessee places reliance on the decisions cited in the legal chart and legal compilation submitted at bar during the course of the hearing. 2.7 The arguments preferred by the Ld. DR during the course of hearing have been summarized as under: 2.7.1. Since the return of income pursuant to notice u/s. 148 was not filed within time, the same is non-est. 2.7.2. "Any income" of a VCF was included within the ambit of section 10(23FB) as it stood prior to April 1, 2008. However, pursuant to the amendment brought about by Finance Act, 2007, the scope of the said section was restricted to "income of a VCF from investment in a venture capital undertaking". Therefore, income earned from mutual funds cannot be exempted in the hands of the Ap....
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....the said deed does not mention for investing in mutual funds. In this regard, the Appellant Assessee draws attention to Clause 2.1 of the Trust deed at page no. 135 of FPB which reads as under: "The primary objective of the Trust will be to carry on, through its various Schemes, the activity of a venture capital fund as permissible under the Regulations and for the purpose of raising resources to make available venture capital assistance to Portfolio Companies, so as to achieve long-term capital appreciation for its Contributors." (Emphasis supplied by Appellant Assessee) Further, clause 2.3 of the Trust deed at FPB page no. 135 reads as under: "The Trust and each of its Schemes shall invest in accordance with the provisions of this Indenture and its respective Memorandum and shall not engage in any business or trade." (Emphasis supplied by Appellant Assessee) Furthermore, Clause 6.1 of the Trust deed at page no. 145 of FPB which reads as under: "The Schemes may receive proceeds by way of interest, dividends, and income from the Fund Investments, returns/ yield on short term investments and proceeds realised from the....
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....o invest in associated companies. The definition of the associated company as per SEBI (VCF) Regulations 1996, is reproduced as hereunder 1[aa) "associate company", means a company in which a director or trustee or sponsor or settlor of the venture capital fund or asset management company holds either individually or collectively, equity shares in excess of 15 per cent of the paid-up equity share capital of venture capital undertaking] 14.4.3 In the instant case, the assessee has invested in the units of the mutual funds created by the Aditya Birla group of companies. In this case, the sponsor of this fund is 'Aditya Birla Financial Services Pvt. Ltd.', the settlor is 'Aditya Birla Nuvo Limited', the trustees are "Aditya Birla Trustee Company Private Limited' and the manager is 'Aditya Birla Capital Advisors Private Limited'. Therefore, on this relationship, there is an investment made by the assessee in associated company, which is in violation of SEBI (VCF) Regulations, 1996." (Emphasis supplied by Appellant Assessee) Indeed, this order was before the Hon'ble Tribunal when the appeal for AY 2017-18 was decided by the Hon'ble T....