TMI Blog2011 (5) TMI 572X X X X Extracts X X X X X X X X Extracts X X X X ..... ct the scope of income for which exemption under that section was available. Hence this amendment cannot be considered as clarificatory but must be considered as prospective in effect. It is not in dispute that the assessee is otherwise eligible for exemption under section 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 the order of the CIT(A) confirmed that interest on temporary investments and profit on sale Units of Mutual fund of is entitled to exemption under section 10(23FB). The trust deed has clearly empowered the assessee to invest surplus into the fixed deposits. Going through regulation 12(d) of SEBI Regulations it provides a target of 75% upto 5-4-2004 and 66.67% thereafter of the investible fund to be invested in specified undertaking and upto 33.33% in other avenues as per clause (ii) of regulation 12(d). Thus there is likelihood of some surplus, if 33.33% is not invested in other avenues. Such surplus or surpluses arising out of working capital of 20% of investible funds can be parked in the F.D. as provided in the trust deed. thus th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. 2004-05 5080 25/10/2004 8,34,286 49,97,348 4. 2005-06 2243 11/08/2005 5,64,988 60,46,638 The AO examined the claim of the assessee and opined that it does not fulfil various conditions laid down in that section. While concluding the assessment the AO gave following reasons for denying the claim to the assessee:- "Conclusion: 11.1 In view of the foregoing discussion, it is noticed that the assessee fund has violated the provision of the Income-tax Act, SEBI Regulations and the Trust Deed itself. The violations are mentioned in a nut-shell below- 11.2 Violation of Income-tax Act, 1961: The assessee has not fulfilled the criteria for venture capital fund as enumerated in explanation (1)(b)(ii) and (1)(b)(iii) to section 10(23FB). 11.3 Violation of SEBI Regulations: (i) The assessee has violated the regulation 12(b) of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 (as it stood prior to 15/9/2000). (ii) The fund has also violated the regulation 12(d) of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 (as amended by notif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act and the Regulations made thereunder. The fund does not come within the meaning of Venture Capital Fund since the fund failed to adhere to the conditions and Regulation mentioned in SEBI (Venture Capital Funds) Regulations, 1996 and, therefore, violated explanation 1(b)(ii) and 1(b)(iii) contained in section 10(23FB). In respect of conclusion drawn in para 11.3 the AO explained in the assessment order that as per SEBI (Venture Capital Funds) Regulations, 1996, the assessee fund is required to make investment in accordance with the Regulations laid down therein as per Regulation No.12 :- "12. (a) the venture capital fund shall not invest in the equity shares of any company or institution providing financial services. (b) at least 80 per cent. of funds raised by a venture capital fund shall be invested in; (i) the equity shares or equity related securities issued by a company whose securities are not listed on any recognized stock exchange; (ii) the equity shares or equity related securities of a financial weak company or a sick industrial company, whose securities may or may not be listed on any recognized stock exchange; iii) providing financial assistance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iculars previously submitted to the Board are found to be false or misleading in any material particular or if there is any change in the information already submitted. However, the assessee has shown following investment pattern :- Sl. No. Asst. Year Investment in Venture Capital Assistance % of investment out of funds raised Income from venture capital assistance (Rs.) Investment in bank deposits % of investment out of funds raised Income from other sources (Rs.) 1 02-03 8,95,93,450 49 per cent 3,81,281 9,18,53,488 51 per cent 76,49,395 2 03-04 10,45,49,049 55 per cent 10,31,478 8,90,96,815 45 per cent 75,56,441 3 04-05 10,47,10,049 55 per cent 8,34,286 8,38,01,808 45 per cent 49,97,348 4 05-06 11,08,43,383 47 per cent 5,64,988 12,36,51,599 53 per cent 60,46,638 Thus the assessee has mainly income from other sources for last many years. It is a violation of regulation 8(b) which clearly states that Venture Capital Fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by this provision are that the fund should be registered under the Registration Act, 1908, it should have been granted a certificate of registration under the Securities and Exchange Board of India Act, 1992 and Regulations made thereunder and it should fulfil the conditions as may be specified by SEBI with the approval of the Central Govt. by Notification in official gazette. I am inclined to agree with the arguments of the counsel for the appellant. As per the definition of the Venture Capital Fund, it is nowhere stipulated that the provisions of SEBI Regulations, 1996 have to be complied with. What the appellant has to comply with are the conditions which are to be specified by SEBI with the approval of Central Govt. by Notification in official gazette. No such conditions have been specified by the SEBI and hence, there is no violation of the same by the appellant. The other two conditions viz. registration under the Registration Act and obtaining a certificate of registration from SEBI has been fulfilled by the appellant. All the three conditions specified by the explanation 1(b) have been fulfilled by the appellant and therefore, the appellant qualifies for exemption under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n contravention of the Regulation. (2) For examining whether assessee is a venture capital fund as per section 10(23FB) one has necessarily to look as to whether assessee fits into the conditions laid down in that section. For this purpose AO has liberty to look into whether regulations of SEBI are followed by the assessee or not. Similarly he has liberty to see whether there is a violation of provisions of trust deed. (3) Exemption of income has to be examined each year and AO is duty bound to examine the investment pattern of the venture capital fund every year independently and see whether there is a violation of provisions of the trust deed or SEBI regulations. (3) In fact assessee has for own purpose mentioned that investible fund is only 80 per cent of the corpus. In fact for running administration and management only small fund is required and, therefore, 80 per cent. of the corpus should be invested in specified activities and when counted from this point, assessee's investment falls short of the requirement. (4) The ld. DR strongly supported the order of AO and submitted that order of ld. CIT(A) is cryptic and does not deal with the argument of ld. AO. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re capital scheme made by the I Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963); (ii) which has been granted a certificate of registry under the Securities and Exchange Board of India 1992 (15 of 1992), and regulations made there-under; (iii) which fulfils the conditions as may be specified, with the approval of the Central Government, by the Securities and Exchange Board of India, by notification in Official Gazette, in this behalf; and (c) "venture capital undertaking" means such domestic company whose shares are not listed in a recognized stock exchange in India and which is engaged in the (i) business of - (A) nanotechnology; (B) information technology relating to hardware and softward development; (C) seed research and development; (D) bio-technology; (E) research and development of new chemical entities in the pharmaceutical sector; (F) production of bio-fuel; (G) building and operating composite hotel-cum-convention centre with seating capacity of more than three thousand; or (H) developing or operating and maintaining or developing, operating and maintaining any infrastructure facility as defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... administration and management of the fund. Out of the investible fund which is 80 per cent of the corpus assessee is required to invest only 66.67 per cent in assisted concern and rest in specified securities. By this calculation the investment in assisted concern should be only Rs. 10.16 crores whereas assessee has made investment of Rs. 10.54 crores. He submitted that sanctioned fund for assisted concern is 14.54 crores which is about 90 per cent. of the investible fund which is calculated at Rs. 15,24 crores which is 80 per cent of the corpus fund of Rs. 19.05crores. It is incorrect on the part of the AO to hold that entire corpus fund is investible fund. 13. The ld. AR then submitted as per amendment made in section 12(d) of SEBI (VCF) Regulation 1996, an explanation has been inserted though w.e.f. 5-4-2004 according to which investment patter as per clause (d) of regulation 12 should be achieved by the venture capital fund by the end of life cycle which is 10 years in the present case. Therefore, the condition of investment in assisted concern by 66.67 per cent. of investible fund should be achieved at the end of life cycle of the Venture Capital Fund and not every year. Eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of the public trust. The enquiry to be carried out by the AO in this regard is an enquiry for adjudicating upon the title of the property but only limited to enquiry for ascertaining whether exemption claimed under section 11 is warranted. The scope of the enquiry under the IT Act is wholly different from the scope of enquiry under the Bombay Public Trust 1915. The ld. AR also submitted that a similar view was taken in the case of Gestetner Duplicators (P.) Ltd. (supra). 18. We have heard the rival submissions and carefully perused the material on record. The main question to be decided is whether the assessee is entitled to exemption to its interest income earned from deposits in bank and also to other income under section 10(23FB) of the Act. In order to address this question several intermediate issues arise for discussion. Each of these issues is discussed as under : (1) What is Venture Capital Fund: During the course of discussion with the parties it is gathered that venture capital is finance capital provided by different investors to early stage, high potential, high risk, growth start up companies. The venture capital fund makes money by investing in equities i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le-communication services or engaged in the business of other communication services, or developing, maintaining or operating infrastructure facilities, or engaged in the manufacture or production of specified articles or things. In section 10(23FA) definition of venture capital undertaking in whose equity shares venture capital fund would invest was enlarged. It included particularly those undertakings which are engaged in the business of software, information technology, production of basic drugs in the pharmaceutical sector, bio-technology, agricultural and allied sector or any other sector specified by Central Government. However, the new provision of section 10(23FA) remained operative only for one year and was substituted by new section 10(23FB) where definition of venture capital fund was made more specific. This definition effective from 1-4-2001 was as under :- "(b) ''venture capital fund'' means such fund (i) operating under a trust deed registered under the provisions of the Registration Act, 1908 (16 of 1908) ; (ii) which has been granted a certificate of registration under the Securities and Exchange Board of India Act, 1992 (15 of 1992), and regulations m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome earned from investment in venture capital undertakings only. Other income would be taxable. The effect of this change will be discussed in the following paragraphs also. 21. In the present assessment year i.e. assessment year 2003-04 or other asst. years upto 2005-06 involved in the appeals before us, the definition of venture capital fund required following conditions to be satisfied:- (1) The venture capital fund is a trust which is registered under the provisions of Registration Act, 1908. (2) It has been granted a certificate of registration under the Securities and Exchange Board of India Act, 1992 (15 of 1992) and Regulation made therein. (3) It would mean the conditions as specified by Securities and Exchange Board of India after the approval of the Central Government and by notification in the Official Gazette, where a fund which should be a trust specifies the three conditions it would be a venture capital fund within the meaning of section 10(23FB). In other words for the purpose of claiming exemption to its income either fully (prior to assessment year 2008-09) or partly thereafter (assessment year 2008-09) the venture capital fund should satisfy thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions and restrictions. All investment made or to be made by a venture capital fund shall be subject to the following conditions, namely :- (a) venture capital fund shall disclose the investment strategy at the time of application for registration; (b) venture capital fund shall not invest more than 25 per cent. corpus of the fund in one venture capital undertaking; (c) shall not invest in the associated companies; and (d) venture capital fund shall make investment as enumerated below: (i) at least 66.67 per cent. of the investible funds shall be invested in unlisted equity shares or equity linked instruments of venture capital undertaking; (ii) not more than 33.33 per cent. of the investible funds may be invested by way of - (a) subscription to initial public offer of a venture capital undertaken whose shares are proposed to be listed (b) debt or debt instrument of a venture capital undertaking in which the venure capital fund has already made an investment by way of equity (c) preferential allotment of equity shares of a listed company subject to lock-in-period of one year; (d) the equity shares or equity linked instruments of a fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) requires the trust to fulfil the conditions as may be specified by SEBI. When we go through the Regulations of 1996 under which the assessee trust was granted certificate as per Regulation 7(3), we find two sets of conditions. One set of conditions are given in Regulation No.8 and the other set of conditions are given in Regulation No.12. Conditions given in regulation 8 are required to be fulfilled by the assessee trust prior to getting certificate from SEBI. Once a certificate is issued it follows that it is satisfying those conditions. Conditions laid down in regulation No.12 are post certificate conditions required to be followed by the assessee trust during the course of conducting its business. In case of violation of any of the conditions laid down in these regulations, regulation No. 30 provides procedure for action in case of default as under:- "PROCEDURE FOR ACTION IN CASE OF DEFAULT "30. Liability for action in case of default. Without prejudice to the issue of directions or measure under regulation 29, a venture capital fund which - (a) contravenes any of the provisions of the Act or these regulations; (b) fails to furnish any information relating to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to sales-men a fixed monthly salary and commission at fixed percentage of turnover and also paid employer's contribution to the P.F. on the basis of monthly salary as well as commission and credited them into individual account of these sales-men in P.F. maintained and recognized by the Commissioner. A part of such commission and consequently provident fund on such commission was sought to be disallowed. The matter went up to the Hon. Supreme Court. It observed as under :- "It would be conducive to judicial discipline and the maintaining of certainty and uniformity in administering the law that the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the provident fund satisfies all the conditions under rule 4 of Part A of the Fourth Schedule to the Act, and not sit 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 there-under are satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevail over the view of AO. Thus in our view role of the AO in examining the issue about fulfilment of conditions laid down in clause (b) is limited to the extent as described above. (6) Whether there is any violation of investment norms: 26. It is undisputed fact that during the assessment year in question assessee has invested a sum of Rs. 10.54 crores in venture fund assistance i.e. in the equities of specified undertakings. It had a corpus of 19.05 crores this year. View of the AO is that as per regulation 12(d)(i) assessee should have invested 66.67 per cent. of the corpus fund in the equity link instruments. He worked out such 66.67 per cent. of total corpus of 19.05 crores and held that it should have invested 15.25 crores in the equities of specified companies. As against this, it has invested only 10.54 crores and hence there is a violation of investment norms. The case of the assessee is that it is not required to invest 66.67 per cent. of entire corpus but only of investible funds. Entire corpus is not investible funds. In our considered view the contention raised by ld. AR in this behalf is legally correct. Regulation 12(d)(i) requires investment of 66.67 per ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is registered under Registration Act, 1908 and certificate is granted by SEBI to this trust deed for carrying out activities, ear marking 80 per cent. of corpus as investible fund, then the AO cannot adopt a different measure. There is one point which requires special mention. It is mentioned by the AO that before assessment year 2004-05 i.e. before 31-3-2004 assessee trust was required to invest 75 per cent. of investible fund into equity of specified undertaking and the changes to 66.67 per cent. have come only w.e.f. 5-4-2005. If trust is required to invest at rate 75 per cent. of the investible fund then assessee fund was required to invest a sum of Rs. 11.43 crores as against actual investment of 10.54 crores. There is a marginal short-fall. The claim of the assessee is that it has sanctioned for investment of sum of Rs. 14.54 crores which was in the pipe line for investment. In other words, it had identified the undertakings and sanctioned funds but actual investment was taking time due to the procedure and formalities. 27. In our considered view such marginal short-fall cannot be called to be an aberation in the investment norms as per SEBI (VCF) Regulations 1996. This min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eved by the Venture Capital Fund by the end of life cycle. In other words 66.67 per cent. of investment of investible fund in specified undertakings can be achieved by the end of life cycle of the Venture Capital Fund which in the present case is 10 years. The case of the AO is that this explanation will not be applicable to assessment year 2004-05 i.e. F.Y.2003-04 and earlier years. It would be effective for FY 2004-05 onwards. In our considered view the explanation so inserted, clarifies as to what legislators intended by the main provision. This explanation is clarificatory in nature and would be applicable to the existing trust deed/Venture Capital Fund also. It is not a case that this explanation would be applicable only to those venture capital funds which are created on or after 5-4-2004. No such intention emerges from the reading of the relevant regulation. On the other hand, what appears to us is that in order to remove the difficulties faced by the venture capital funds in not meeting the investment norms as per Regulation 12(d) within the year of its inception or subsequent thereto, it was considered fit to introduce the explanation and enable the venture capital fund to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om this it follows that prior to 1-4-2008, if venture capital fund has invested in F.D. in bank and earned interest income therefrom, then such interest income would be exempt as per existing provision. ITAT Mumbai 'A' Bench in the case of ITAO v. Kshitij Venture Capital Fund [IT Appeal No. 2147/Mum./2010] assessment year 2006-07 pronounced on 9th March, 2011 held on similar facts as under :- "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 under section 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 under section 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 that section to income from Investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emption 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 14.3. Applicability : This amendment will take effect from the 1st day of April, 2008, and will accordingly apply in relation to the assessment year 2008-09 and subsequent assessment years." 32. The above view is also supported by the decision of Mumbai Tribunal India Value Fund v. Asstt. CIT [2010] 129 TTJ 611 wherein the issue of exemption of interest income from FDR was involved. The Tribunal in that case held as under :- "Held : 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 would be that any income of a venture capital company or venture capital fund would be exempt only if it is generated from investment in venture capital undertakings. But this restriction cannot be read in the earlier provision, where the expression used was "set up to raise funds for investment". Whenever the legislature wanted to make particular items of income or sources of income to be exempt, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely 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 lead to the conclusion that assessee venture capital fund was mainly engaged in the business of investing fund in FDRs." 33. Thus the effect of amendment of Finance Act, 2007 w.e.f. 1-4-2008 in section 10(23FB) is clear. Before assessment year 2007-08 income from venture capital fund from any source, (whether income from investment as per SEBI guidelines or from any other source) would be exempt including the interest income of F.D. It is only from assessment year 2008-09 onwards the income from investment in specified undertakings would be exempt and other income would be taxable. In this regard we may add that income which is exempt under section 10(23FB) would be shared by the respective investors and would be taxable in their individual hands as per section 15(U) already referred above. (9) Whether investment in FD is violation of SEBI Regulation or of trust dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in facts and on law in deleting the addition made on account of violation of SEBI Regulation and Provisions contained in section 10(23FB) by the assessee. ITA No.2773/Ahd/2008 assessment year 2002-03 (Revenue's appeal) 39. In this appeal the Revenue has raised the following ground :- "(1) The ld. CIT(A) has erred in facts and on law in deleting the addition made on account of violation of SEBI Regulation and Provisions contained in section 10(23FB) by the assessee of Rs. 76,39,30041." 40. As per discussion held by us in assessment year 2003-04 we hold that interest income earned on bank deposit is exempt under section 10(23FB) and there is no decision of SEBI that there is any violation of SEBI (Venture Capital Funds) Regulation 1996 and, therefore, the AO cannot hold that there was such violation. In any case as per discussion held above in assessment year 2003-04 we do not consider that there is any violation as perceived by the AO. As a result, the appeals filed by Revenue are dismissed. 41. C.O.No.24/Ahd/2009 assessment year 2001-02, C.O. No.25/Ahd/2009 assessment year 2004-05, C.O. No. 26/Ahd/2009 assessment year 2005-06 and C.O. No.222/Ahd/2009 assessment year 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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