TMI Blog2011 (3) TMI 387X X X X Extracts X X X X X X X X Extracts X X X X ..... s clarificatory but must be considered as prospective in effect - It is not in dispute that the assessee is otherwise eligible for exemption u/s. 10(23FB). Hence for the year under appeal, as per the provisions of section 10(23FB) as applicable to the assessment year, any income of the venture capital Fund is exempt - Hence we confirm the order of the CIT(A) and uphold his direction that that interest on temporary investments of Rs.16,09,900/- and profit on sale Units of Mutual fund of Rs 1,00,91,000/- is entitled to exemption u/s. 10(23FB). - ITA No. 2147/Mum/2010 - - - Dated:- 9-3-2011 - Asha Vijayaraghavan, J. ORDER Asha Vijayaraghavan, Judicial Member 1. This appeal filed by the Revenue is directed against the order of the Ld. CIT(A)- 30, Mumbai dated 29.1.2010 for the A.Y. 2006-07. 2. The only ground of appeal by the revenue is against CIT(A) holding that interest on temporary investments of Rs.16,09,900/- and profit on sale Units of Mutual fund of Rs 1,00,91,000/- is entitled to exemption u/s. 10(23FB) and deleting the disallowance made by AO. 3. The brief facts of the case are that the assessee is a venture capital fund, is a trust formed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further reinforced by explanation 2 to section 10(23FB). As such the income of the assessee to the extent not arising from investment in a Venture Capital Undertaking is this not eligible for exemption u/s. 10(23FB) which in the instant case is the income of the assessee declared as interest amounting to Rs.16,09,000/- AO disallowed exemption under section 10(23FB) on this income and brought it to tax under the head "Income from other sources. On similar grounds profit on sale of mutual fund units amounting to Rs 1,00,91,000/- was denied exemption u/s. 10(23FB) and brought to tax under the head Business income as the funds have been obtained with the sole intention investment in mutual fund and the investment are not of surplus fund of the trust. Moreover, the assessee is carrying on the activities in a systematic manner. 4. The assessee carried the matter in appeal before CIT(A) and submitted as under: Section 10(23F) and section 10(23FA) specifically exempted only dividends and long term capital gains (LTCG) of a VCF from investments made by way of equity shares in a VCU. Both those sections specified a special nature of income sought to be exempted viz., dividends and L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the so amended section w.e.f. AY 2008-09 reads as under: 'Any income of a venture capital company or a venture capital fund from investment in a venture capital undertaking.' Thus the objective of the amendment is to now i.e. w.e.f. AY 2008-09 restrict the exemption to the income of a VCF only from the VCUs which prior to amendment was available to any income of a VCF inspective whether it is from VCU or not. Memorandum explaining the provisions of the Finance Act which also supports the above view is reproduced below: "Under the existing provisions of clause (2GFB) of section 10, any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking is exempt from tax..... It is proposed to amend the said clause so as to provide that such exemption will now be available only in respect of income of a venture capital company or venture capital fund from investment in a venture capital undertaking engaged in specified business or industries...... This amendment will take effect from 1st April, 2008, and accordingly apply in relation for the assessment year 2008-09 and subsequent years." Thus it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the said amendment is not retrospective. Therefore, in my considered view, respectfully following the decision of Mumbai Tribunal "F" Bench in appeal nos. ITA No. 3912 and 4095/M/2006 in the case of ITO v. Marigold Mezzanine Investment Funds and ITA No. 7157/Mum/2005 dated 5.11.2009 in the case of M/s India Value Fund v. ACIT-ITAT Mumbai "E" Bench and relevant provisions of section 10(23FB) as prevailing for the year under consideration, exemption in respect of income earned by the appellant on account of profit on sale of mutual fund units and interest on bank deposits is allowed to the appellant and addition made to the returned income of the appellant by the AO of Rs.1,00,91,000/- and Rs.16,09,000/- on account of profit on sale of mutual fund units and bank deposits respectively are hereby deleted. The grounds of appeal are allowed." 6. Aggrieved, Revenue is in appeal before us. The Ld. Counsel for the assessee Shri Sanjiv M. Shah made the following submissions before the Tribunal: 7. The words set up to raise funds for investment have been substituted by the words from investment by the Finance Act, 2007 w.e.f. 1st April, 2008. By this substitution the inference wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Mum.) 611, it has been held as follows: "The contribution and the investment cannot be matched to a particular date. The venture capital fund may identify a particular investment and then he would issue draw down notice on contributors who have agreed to contribute but such contribution may come in staggered fashion and come on various dates. In the intervening period if such monies are kept temporarily in the FDRs no fault can be found. No investor would give money to the venture capital fund for just making investment in FDRs because ultimately even if such interest is distributed to such investors then passed through concept would be applicable and such income becomes taxable in the hands of investor. Merely because FDRs are made for short duration of few months that too, to match contributions with the investment in the intervening period cannot be lead to the conclusion that assessee venture capital fund was mainly engaged in the business of investing fund in FDRs. Conclusion: Words from investment having been substituted in section 10(23FB) for the words set up to raise funds for investment by the Finance Act, 2007, w.e.f. 1st April, 2008, cannot be read in the earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital undertaking has been defined in clause(c) of explanation 1 to clause (23FB) to mean 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, and notified as such in the Official gazette by the Board for the purposes of the clause. With a view to make the tax benefit more focused and to channelize existing as well as future investments in key, risk prone thrust areas clause (23FB) has been amended whereby such exemption will now be available only in respect of income of a venture capital company or venture capital fund from investment in a venture capital undertaking. For this purpose, the said clause (c) of Explanation 1 has also been amended to define "Venture Capital Undertaking" as such domestic company whose shares are not listed in a recognised stock exchange in India and which is engaged in the- (i) Business of (a) Nanotechnology (b) Information technology relating to hardware and software development (c) Seed research and development (d) Bio-technology (e) Research and development of new chemical enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. Consequently on the basis supposed legislature intent addition cannot be made by the quasi judicial authority like the A.O. Having regard to above legal and factual discussions and considering the submissions made in the course of appellate proceedings. The interest income under consideration would fall under the relevant provisions of section 10(23FB) of the Act. Therefore the ground of appeal is decided in favour of the assessee." 13. We heard both the parties. The issue is whether interest on temporary investments of Rs.16,09,900/- and profit on sale Units of Mutual fund of Rs 1,00,91,000/- is entitled to exemption u/s. 10(23FB). Section 10(23FB) as applicable to the year under appeal is as under: Any income of venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking. 14. Thus the exemption in the case of Venture Capital Fund was in respect of any income. There is no restriction or requirement regarding the source of income for grant of exemption u/s. 10(23FB). It is only by Finance Act, 2007, w.e.f. 1st April, 2008, an amendment to section 10(23FB) was brought about restricting the exemption under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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