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2016 (2) TMI 882

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..... dated 30.09.2010 of DRP by way of I.T.A.No. 5705/Del/2010 qua Assessment Year 2007-08 on the grounds inter alia that: A. I.T.A.No.3284/Del/2012: "Ground No.1: (i) Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in not allowing the exemption under Section 10(34) of the Act claimed by the appellant on its share of dividend income of Rs. 43,48,571 out of dividend income received by SARA Fund (venture capital Fund - VCF). (ii) Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in failing to appreciate that the companies from which SARA Fund had earned dividend had already paid additional income-tax as required under Section 115-O of the Act and SARA Fund was not required to pay additional income-tax for the second time on the same income. Ground No.2 Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts, in disallowing expenses of Rs. 1, l3,11,955 by taxing the share of the appellant in interest income from VCF under the head "Other Sources" on gross basis and not on net basis in disregard of the fact that income of a VCF can be .....

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..... 10: On the facts and circumstances of the case and in law, the Learned Assessing Officer (' AO') has erred in passing the assessment order u/s 143(3) r.w.s 144C of the Income Tax Act, 1961 ('the Act') and thereby approved by the Hon'ble Dispute Resolution Panel (DRP). Each of the ground is referred to separately, which may kindly be considered independent of each other. Ground No.1 Based on the facts and circumstances of the case, the learned Assessing Officer has erred in law and on facts in not allowing the exemption under Section 10(34) of the Act claimed by the assessee on the dividend income of Rs. 30,39,471 received by the assessee as its share from SARA Fund, a venture capital Fund (VCF) out of the dividend income of the nature referred to in Section 10(34) of the Act. Ground 0.2 Based on the facts and circumstances of the case, the learned Assessing Officer has erred in law and on facts, in disallowing expenses of Rs. 37,94,980 by taxing the share of the assessee in interest income from VCF under the head "Other Sources" on gross basis and not on net basis in disregard of the fact that income of a VCF can be passed on to its investors o .....

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..... tter of record that the total paid up capital of SARA Fund as on 31.03.2006 with Rs. 1100 million consisting 2,20,000 units each of Rs. 5,000/- out of which the assessee has 50,000 units making its total investment to Rs. 25,00,00,000/-. The income of SARA fund is exempt as per the provisions of Section 10(23FV) of the Act and it enjoys pass through status of the income earned by it which is taxable in the hands of investor in the funds u/s 115U of the Act. 4. Section 10(23FB) of the Act allows exemption to the income of venture capital company (VCC) / venture capital fund (VCF) set up to raise fund to be invested in a venture capital undertaking and both the VCC and VCL are not chargeable to tax in its own hands but will pass through its income to the shareholders / investors for being subjected to tax at the rates applicable to them. Statute ensures that the burden of tax falls on the ultimate beneficiary. Statutory provisions also confer pass through status on the VCC and VCL. During assessment proceedings, assessee after obtaining numerous opportunities, filed written submissions along with mathematical chart to the queries raised by the A.O. vide para 4.1, 4.2 and 4.3 of the .....

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..... 'other income', he was further given time till 30th Dec., 2008 to file the admissible details as detailed in para 5.6 of the assessment order. 7. During the year SARA fund made total distribution of Rs. 17,60,00,000/-. The assessee claimed that out of this only amount of Rs. 11,97,38,454/- was out of the income of VCF and rest was paid out of its own capital. Finding the submissions made by the assessee not tenable, the amount received by the assessee found to be fully taxable. The assessee claimed an amount of Rs. 56,26,1546/- (Rs.176000000 - 199738454) to be of capital nature out of total distribution of SARA funds out of which the assessee's share at 22.73% made out to be at Rs. 12788250/- which is taxed in the hands of assessee as income from other sources. 8. The assessee in computation showed dividend income of Rs. 43,48,571/- which was claimed exempt u/s 10(34) of the Act, which was examined in the light of the provisions contained u/s 10(30), 115-O an 115U(4) of the Act. The A.O. came to the conclusion that while distributing the aforesaid dividend the VCF was not obliged to deduct dividend distribution tax as Section 115U(4) clearly shows that the character of such dist .....

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..... loss claimed on account of other income, should be distributed in the same proportion. 13. We have heard both the Ld. Authorized representatives and gone through the material placed on record in the light of facts and circumstances of the case and orders of tax authorities. 14. Ground No.1(i) and 1(ii) of I.T.A.No. 3284/Del/2012 and Ground No.1 of I.T.A.No. 5705/Del/2010: Now, the first question arises for determination in this case is, "as to whether the assessee is entitled for exemption u/s 10(34) of the Act and the share of dividend income of Rs. 434857/- out of dividend income received by SARA fund by venture capital fund (VCF)". 14.1 To decide the controversy at hand, newly added provisions contained u/s 115U of the Act vide CBDT Rule No.794 dated 09.08.2000 are reproduced s under for ready reference: "13.8. Section 115U of this Chapter provides that, (i) any income received by a person out of investments made in a venture capital company or a venture capital fund shall be chargeable to Incometax as if it were the income received by such person from investments made directly in the venture capital undertaking ; (ii) the person responsible for making payment of the .....

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..... ction 115U: as exist at the relevant time: "115U: (1) Notwithstanding anything contained in any other provisions of this Act, any income received by a person 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 received by such person had he made investments directly in the venture capital undertaking. (2) The person responsible for 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 receiving 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 during the previous year and such other relevant details as may be prescribed. (3) The income paid by the venture capital company and the venture capital fund shall be deemed to be of the same nature and in the same proportion in the hands of the person receiving such income as it had been received by, or had accrued to, the venture capital compa .....

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..... of Chapter XIID or XII-E or XVII-B shall not apply to the income paid by the VCC or VCF. This mean that no tax shall be payable u/s 115-0 or section 115R and no tax deduction at source shall be made under the provisions contained in Chapter XVII-B from the income paid by the VCC or VCF to an investor. 11.1 As per sub.-sec (2) of section 115U, it is mandatory on the part of the VCC or VCF to furnish a statement in the prescribed form and verify in the prescribed manner giving the details of nature of income paid during the previous year. Form 64 is provided for making the statement of income distributed by VCC or VCF to be furnished u/s 115U of the IT Act. It makes clear that VCC or VCF has to furnish the details of the nature of income received by the investor from VCC or VCF. The details specifically requires about the income/amount paid under long term capital gains, short term capital gains, dividend or other income such as interest etc. Thus, section mandates that the nature of income which is received by the VCC or VCF from the Venture Capital undertaking and further distributed to the investor shall be taxable in the hands of the investor by treating the same nature of inc .....

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..... g the same nature of income like LTCG, STCG, Dividend and other income such as interest etc. and as such, to be taxed as per the provisions as applicable under different heads of income. Section 115U provides for pass through status by treating the VCC and VCF a pass through vehicle and further guarantee some concession in the shape of non applicability of provisions of Chapter 14D, 12E and 17B but never provide that the income received by the investor from VCC and VCF is exempt. 14.5 Ld. CIT(A) endorsing the findings returned by the A.O., came to the conclusion as under: "I have considered the submissions of the appellant findings of the AO and the facts on record. After' examining the various provisions of law it is clear that the nature of payment by SARA fund to the appellant is in the nature of dividend/income from mutual fund. The exemption from levying additional tax on dividends allowed u/s 115U(4) would not change the nature of the income in the hand of the appellant. On the other hand unless additional tax has been paid as per the provisions of section 1150 and 115R, the appellant cannot enjoy tax free income U/S 10(34) and 10(35) of the IT Act. In view of the disc .....

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..... nt and as such could not be claimed as deduction by the assessee. 15.2 Ld. A.R. contended that when the fund is required to distribute only net income it must take into consideration the earlier year and current year losses and also expenses incurred to run the fund in earlier year and current year while determining the quantum of distribution. 15.3 On the other hand, Ld. CIT(A) also arrived at the decision that such taxable entity is to be taxed on its net income i.e. gross income less expenses incurred for earning such income. In the instant case, the SARA fund which has earned income inter alia from entering into mutual fund and that its entire book expenses incurred by it and distributed the balance to the beneficiary, since the assessee is claiming expenditure incurred by SARA fund as loss under the head 'other income', the same are not allowable. 15.4 The issue in controversy is again required to be determined in consonance with the provisions contained u/s 115U discussed in the preceding paragraphs which mandates that venture capital company and venture capital fund is given the status of pass through vehicle for the purpose of treatment of income received on account of i .....

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..... ion of income under various heads in the same proportion as the income received by the fund under various heads on behalf of all the beneficiaries. 16.3 From the perusal of Form 64 and balance sheet / revenue account of SARA fund, it is proved that distribution of Rs. 17,60,00,000/- qua A.Y. 2006-07 and Rs. 11,72,890/- qua A.Y. 2007-08 was made to its beneficiaries as per the number of units purchased by each beneficiary, which fact is explained in the foot note 3 of Form 64 and it also appears in the balance sheet / revenue account of SARA fund and the assessee has rightly disclosed the income at Rs. 119738454/- by subtracting the amount of Rs. 56261546/- which is the amount of capital nature and as such not taxable in the hands of investor by treating the same nature of income like LTCG, STCG, Dividend and other income such as interest etc. and as such to be taxed as per the provisions as applicable under different heads of income meaning thereby a person who makes investment in the VCC and VCF, the assessee in this case, earned the income out of such investment, which income shall be treated as if the investment was directly in the VCU and VCF and VCC is only a pass through veh .....

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