2024 (3) TMI 1448 - AT - Income Tax

Exemption u/s 10(23FB) - status of three investee companies of the assessee as NON-VCU - assessee has shown income from investment in different Venture Capital Undertakings - CIT (A) has deleted the addition - HELD THAT - We find that the Ld. CIT (A) has followed the binding precedent of the Tribunal in the case of the assessee for immediately preceding assessment year i.e. assessment year 2016-17. The order of the Tribunal is still in operation and has not been reversed by any higher appellate forum therefore we do not find any infirmity in the order of the Ld.CIT (A) on the issue in dispute. Disallowance of dividend income from mutual fund which was claimed as exempt - HELD THAT - AO s view that VCF was eligible for deduction under a specific section 10(23FB) and therefore it cannot claim deduction under another section 10(35) of the Act is totally inapplicable in the facts and circumstances of the case. Exemption under section 10(23FB) and exemption under section 10(25) of the Act operates in different fields. Learned CIT (A) is correct in holding that operations of these sections are independent. Assessee s income in VCU is exempt u/s 10(23FB) of the Act and the dividend income is exempt under section 10(35) of the Act. Hence there is no infirmity in the assessee s claim of exemption on dividend income under section 10(35). Appeal of the Revenue is dismissed.

Summary

The core legal questions considered by the Tribunal in this appeal include:

1. Whether the Commissioner of Income-tax (Appeals) erred in deleting the addition made by the Assessing Officer and allowing exemption of Rs. 44,63,29,740/- under section 10(23FB) of the Income-tax Act, 1961.

2. Whether the status of three investee companies of the assessee as Venture Capital Undertakings (VCU) was rightly upheld or whether they should be treated as non-VCU entities.

3. Whether the exemption under section 10(23FB) was correctly allowed on the assumption that interest income reversal from one investee company occurred, when in fact such reversal did not happen in the relevant assessment year.

4. Whether the exemption was valid despite one investee company not carrying on any real estate business or deriving income during the year under consideration.

5. Whether investment in a company which lent money to third parties constituted a violation of SEBI (Venture Capital Funds) Regulations, 1996, thereby disqualifying exemption under section 10(23FB).

6. Whether the absence of any adverse view from SEBI affects the eligibility for exemption under section 10(23FB).

7. Whether the amendment to section 10(23FB) effective from 01.04.2008 restricting exemption only to investments in Venture Capital Undertakings was correctly applied.

8. Whether exemption under section 10(35) of the Act for dividend income from mutual funds was rightly allowed.

Issue-wise Detailed Analysis

Issues 1 to 7: Exemption under Section 10(23FB) and Status of Investee Companies

The legal framework centers on section 10(23FB) of the Income-tax Act, which exempts income of Venture Capital Funds (VCF) from tax if derived from investments in Venture Capital Undertakings (VCU). The definition and eligibility criteria for VCU are governed by SEBI (Venture Capital Funds) Regulations, 1996, specifically section 2(n) defining VCU.

The Assessing Officer disallowed exemption claimed on income of Rs. 44,63,29,740/- from investments in three companies-M/s CSN Estates Pvt. Ltd., Startech Infra Projects Pvt. Ltd., and Amrapali Smart City Developers Pvt. Ltd.-on grounds that these entities did not qualify as VCUs. The AO's findings included lack of real estate business activity, absence of financial records, directors being incarcerated, and one entity acting as a pass-through by lending funds to third parties, violating SEBI regulations.

The CIT(A) deleted the addition relying on the Tribunal's decision in the immediately preceding assessment year (AY 2016-17), where identical issues had been decided in favor of the assessee. The Tribunal in the present appeal noted that the Tribunal's earlier order remained binding and unreversed by any higher forum. The Tribunal emphasized the principle of consistency and binding precedent, holding that the CIT(A) correctly followed the earlier decision.

The Tribunal found no infirmity in the CIT(A)'s order and dismissed Revenue's grounds 1 to 7. The Tribunal held that the investments in the three companies qualified for exemption under section 10(23FB), as per the binding precedent.

Issue 8: Exemption under Section 10(35) for Dividend Income from Mutual Funds

The assessee claimed exemption on dividend income amounting to Rs. 2,24,18,067/- from mutual funds under section 10(35) of the Act. The AO disallowed this exemption on the ground that the assessee being a VCF was only eligible for exemption under section 10(23FB) and not under any other section.

The CIT(A) deleted the addition following the Tribunal's decision in AY 2016-17, which held that exemption under section 10(23FB) and section 10(35) operate independently and are applicable in different fields. The Tribunal observed that the AO's view that exemption under one section precludes exemption under another was inapplicable.

The Tribunal reiterated that the dividend income exemption under section 10(35) is distinct from the income exemption under section 10(23FB) for VCFs. The Tribunal found the CIT(A)'s reasoning cogent and upheld the exemption claim.

Application of Law to Facts and Treatment of Competing Arguments

The Tribunal carefully examined the AO's factual findings regarding the nature and activities of the investee companies. However, it accorded primacy to the binding precedent of the Tribunal in the immediately preceding year, which had considered identical facts and legal issues. The Tribunal emphasized that no higher appellate authority had overturned that precedent, thereby compelling adherence.

The Revenue's arguments regarding non-compliance with SEBI regulations, lack of real business activity, and lending to third parties were considered but found insufficient to overturn the earlier binding decision. The Tribunal noted that the CIT(A) had adequately addressed these contentions and that the AO's reliance on these grounds was not sustainable in light of the precedent.

Similarly, the Revenue's contention that the exemption under section 10(35) should not be allowed alongside section 10(23FB) was rejected based on the independent operation of these provisions as clarified by the Tribunal's earlier ruling.

Significant Holdings

The Tribunal held:

"As can be seen from the above, the issue of disallowance of exemption u/s. 10(23FB) of the Act in respect of the aforesaid 3 companies... was in dispute for A.Y. 2016-17 and the said issue has been decided in favour of the appellant by the Hon'ble Tribunal... Since the issue is decided by the Hon'ble Tribunal... I decide the said issue in favour of the appellant and delete the disallowance of Rs. 44,63,29,740/- made by the Assessing Officer and direct the Assessing Officer to allow exemption u/s. 10(23FB) of the Act."

Regarding exemption under section 10(35), the Tribunal quoted:

"Exemption under section 10(23FB) and exemption under section 10(25) of the Act operates in different fields... Assessee's income in VCU is exempt under section 10(23FB) of the Act and the dividend income is exempt under section 10(35) of the Act... We do not find any infirmity in the same. Accordingly, we uphold the order of learned CIT(A)."

The Tribunal's final determinations were to dismiss the Revenue's appeal on all grounds, thereby upholding the CIT(A)'s order allowing exemption under sections 10(23FB) and 10(35) of the Act.