2024 (3) TMI 1450 - AT - Income Tax

Denial of exemption u/s 10(23FB) and u/s. 10(35) - income derived from investments in certain Venture Capital Undertakings (VCUs) Claim u/s 10(23FB) - HELD THAT - Assessee had filed financial statements of M/s Startech Infra-projects Pvt Ltd from which we find M/s Startech Infra-projects Pvt Ltd qualifies as a VCU under the SEBI Regulations and therefore it qualifies as VCU for the purpose of Section 10(23FB). Similarly in so far as investment made in M/s Ozone Projects Private Limited again the shares of which are not listed on a recognised stock exchange which also carries on business activity in India and nowhere it has been pointed out that these activities are covered in the negative list under Schedule III to the SEBI Regulations. Financial statement of M/s Ozone Projects Private Limited for the year ending 31/03/2018 was also enclosed. Thus investment in this company also qualifies as a VCU under the SEBI regulations. Accordingly we do not find any infirmity in the order of the CIT(A) in following the earlier Tribunal order. Decided against revenue. Claim u/s 10(35) - assessee had received dividend from its investment in units of Mutual Funds - Its claim for exemption u/s 10(35) was not allowed by AO because according to the AO the assessee is not a person within the meaning of section 2(31) of the Act and Income of VCF is exempt only if it is from investment in VCUs and all other incomes are liable for taxation - HELD THAT - ITAT for A.Y. 2017-18 2024 (3) TMI 1448 - ITAT MUMBAI as noted that the 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 under section 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) - Decided against revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the exemption claimed by the assessee under section 10(23FB) of the Income-tax Act for income derived from investments in certain Venture Capital Undertakings (VCUs) is rightly allowed or whether the Assessing Officer (AO) was correct in denying it on grounds that some investee companies did not qualify as VCUs.

(b) Whether the status of three investee companies of the assessee as VCUs is correctly upheld or should be treated as non-VCUs based on their business activities and compliance with SEBI (Venture Capital Fund) Regulations, 1996.

(c) Whether the exemption under section 10(35) of the Act on dividend income received from mutual funds is rightly allowed or denied.

(d) Whether the AO was justified in disallowing exemption on the ground that certain VCUs engaged in lending money to third parties were violating SEBI regulations and thus income from such investments was not exempt.

(e) Whether the AO erred in denying exemption under section 10(23FB) due to amendments restricting the scope of eligible investments only to Venture Capital Undertakings post 01.04.2008.

(f) Whether the CIT(A) and Tribunal correctly followed binding precedents in allowing exemptions claimed by the assessee.

(g) Ancillary grounds relating to procedural and general submissions by the revenue.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Eligibility of exemption under section 10(23FB) for income from investments in VCUs and status of investee companies as VCUs

Legal Framework and Precedents: Section 10(23FB) of the Income-tax Act provides exemption to income of a Venture Capital Fund (VCF) from investments made in Venture Capital Undertakings (VCUs). The definition of VCU is governed by SEBI (Venture Capital Fund) Regulations, 1996, specifically section 2(n), which defines a VCU as a domestic company whose shares are not listed on a recognized stock exchange and which is engaged in specified business activities excluding those in a negative list notified by SEBI.

Explanation clauses (b)(A) & (B) to section 10(23FB) require cumulative fulfillment of conditions for exemption.

Court's Interpretation and Reasoning: The AO denied exemption on the ground that four investee companies (CSN Estates Pvt. Ltd., Starteck Infraprojects Pvt. Ltd., Amrapali Smart City Development Pvt. Ltd., and Ozone Projects Pvt. Ltd.) did not fulfill the VCU criteria. Specifically, Amrapali was found not to have carried out any business activity, CSN Estates was acting as a pass-through entity lending money to third parties, and Starteck and Ozone lacked proof of business operations during the relevant year.

The CIT(A) reversed this denial, relying heavily on the Tribunal's earlier decisions for AY 2016-17 and 2017-18, which had upheld the assessee's claim for exemption in respect of similar facts and companies. The Tribunal noted that the financial statements of Starteck and Ozone demonstrated active business operations in real estate, not falling under the negative list of SEBI regulations, and that CSN Estates and Amrapali had no income during the year, rendering the exemption issue academic for those entities.

Key Evidence and Findings: Financial statements for Starteck Infra-projects Pvt. Ltd. and Ozone Projects Pvt. Ltd. for the relevant years showed active business operations in real estate. The companies' shares were unlisted and activities were not in SEBI's negative list. For CSN Estates and Amrapali, no income was shown, and the AO's assertion of pass-through activity was not supported by adverse findings from SEBI or higher authorities.

Application of Law to Facts: The Tribunal applied the statutory definition of VCU under SEBI regulations and the conditions under section 10(23FB). It held that the AO's denial was contrary to binding precedent and unsupported by evidence. The exemption was rightly allowed by the CIT(A) and upheld by the Tribunal.

Treatment of Competing Arguments: The AO argued non-fulfillment of VCU criteria and violation of SEBI regulations, but the Tribunal found no adverse view from SEBI and noted that the AO's conclusions were not substantiated by evidence. The Tribunal gave precedence to earlier binding decisions and financial data.

Conclusions: The exemption under section 10(23FB) was correctly allowed for income from the VCUs in question. The investee companies qualified as VCUs under SEBI regulations and the Act.

Issue 3 & 7: Exemption under section 10(35) on dividend income from mutual funds

Legal Framework and Precedents: Section 10(35) exempts income by way of dividends from mutual funds specified under section 10(23D). The AO denied exemption on the ground that the assessee, being a VCF, was only entitled to exemption under section 10(23FB) and not under 10(35). The AO also questioned the assessee's status under section 2(31) of the Act.

Court's Interpretation and Reasoning: The CIT(A) and the Tribunal rejected the AO's view, holding that exemptions under sections 10(23FB) and 10(35) operate independently and can be availed concurrently if conditions are met. The Tribunal relied on its earlier ruling for AY 2016-17, which held that the AO's reasoning was inapplicable.

Key Evidence and Findings: The assessee had invested in mutual funds and received dividend income of Rs. 76,18,730/-. The Tribunal found no legal bar in claiming exemption under section 10(35) for such dividend income.

Application of Law to Facts: The Tribunal applied the independent operation principle of exemption provisions and found the assessee eligible for exemption under section 10(35).

Treatment of Competing Arguments: The AO's contention that the assessee could not claim exemption under both sections was rejected as incorrect and unsupported by law.

Conclusions: Exemption under section 10(35) on dividend income from mutual funds was rightly allowed.

Issue 4 & 5: Lending activity by investee company and SEBI regulations compliance

Legal Framework and Precedents: SEBI (Venture Capital Fund) Regulations prohibit VCUs from engaging in activities outside the permitted business. The AO contended that CSN Estates Pvt. Ltd. lent money to third parties, thus violating SEBI regulations and disqualifying exemption under section 10(23FB).

Court's Interpretation and Reasoning: The Tribunal noted that there was no adverse view or action taken by SEBI against CSN Estates. The AO's assertion was not supported by evidence. The Tribunal also observed that the financials showed no income from CSN Estates during the relevant year, making the issue academic.

Key Evidence and Findings: No adverse findings from SEBI; no income shown from CSN Estates; no proof of violation of SEBI regulations.

Application of Law to Facts: Without evidence of violation or adverse regulatory action, the AO's denial of exemption was unsustainable.

Treatment of Competing Arguments: Revenue's reliance on AO's observations was outweighed by absence of regulatory findings and binding precedents.

Conclusions: Exemption was rightly allowed; no violation of SEBI regulations was established.

Issue 6: Effect of amendment restricting exemption to investments in VCUs post 01.04.2008

Legal Framework and Precedents: Section 10(23FB) was amended to restrict exemption to income from investments in VCUs only. The AO argued that the assessee's investments did not comply with this restriction.

Court's Interpretation and Reasoning: The Tribunal found that the investee companies qualified as VCUs under SEBI regulations and thus the exemption was applicable. The amendment did not disqualify the exemption where conditions were met.

Key Evidence and Findings: Financial statements and SEBI compliance of investee companies.

Application of Law to Facts: The assessee's investments fell within the amended scope of section 10(23FB).

Treatment of Competing Arguments: The AO's denial was based on incorrect application of law and facts.

Conclusions: Exemption was rightly allowed post amendment.

Issue 8 & 9: General and procedural grounds

No specific submissions were made by the assessee on these grounds; accordingly, they were dismissed.

3. SIGNIFICANT HOLDINGS

The Tribunal upheld the CIT(A)'s order and dismissed the appeal filed by the Revenue. Key legal reasoning includes:

"The issue of disallowance of exemption under section 10(23FB) of the Act in respect of the aforesaid companies was in dispute for the immediately preceding assessment year and the said issue has been decided in favour of the appellant by the Hon'ble Tribunal. The financial statements clearly show business activities not covered under the negative list, and the objections of the Assessing Officer are devoid of merits."

"Exemption under section 10(23FB) and exemption under section 10(35) of the Act operate in different fields. Assessee's income in VCU is exempt under section 10(23FB) and the dividend income is exempt under section 10(35). Hence, there is no infirmity in the assessee's claim of exemption on dividend income under section 10(35) of the Act."

"The Assessing Officer'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."

"The order of the CIT(A) has followed the binding precedent of the Tribunal in the case of the assessee for immediately preceding assessment years, which has not been reversed by any higher appellate forum."

Core principles established include the independent operation of exemption provisions under sections 10(23FB) and 10(35), the necessity of factual and evidentiary support for denial of VCU status, and the binding nature of Tribunal precedents in subsequent assessment years.

Final determinations:

• Exemption under section 10(23FB) on income from investments in VCUs was rightly allowed.
• Investee companies in question qualified as VCUs under SEBI regulations and section 10(23FB).
• Exemption under section 10(35) on dividend income from mutual funds was rightly allowed.
• AO's denial based on alleged SEBI regulation violations and amended scope of section 10(23FB) was unsustainable.
• Revenue's appeal was dismissed in entirety.