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2016 (2) TMI 882 - ITAT DELHI

2016 (2) TMI 882 - ITAT DELHI - TMI - Entitlement to exemption u/s 10(34) - dividend income distributed as per the provisions of Sections 115-O and 115-R - Held that:- CIT(A) have taken a wrong view by holding that the assessee cannot grow tax free income u/ss 10(34) and 10(35) of the Acts unless additional tax has been paid as per the provisions of Sections 115-O and 115-R of the Act and as such the exemption claimed u/ss 10(34) and 10(35) is to be allowed only if the dividend income distribute .....

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vested, had already paid additional income tax on the earned dividend as required u/s 115-O of the Act, SARA fund was not required to pay additional income tax second time on the same income - Decided in favour of assessee

Disallowance of expense - taxing the share of appellant as interest income from VCF under the head ‘other income’ on gross basis and not on net basis - Held that:- The provisions contained u/s 115U discussed in the preceding paragraphs which mandates that venture ca .....

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s only a pass through vehicle. So, in these circumstances, the assessee company is entitled to book expenditure incurred by SARA fund as if the same has been incurred by the assessee directly in the venture capital fund. So, we are of the view that the expenses of ₹ 1,13,11,955/- disallowed by Ld. CIT(A) by taking the shares of the assessee in interest income from VCF under the head other sources on gross basis and not the net basis, which requires to be determined by treating the same nat .....

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as rightly taken the net income for tax at ₹ 11,97,38,454/- by subtracting the amount of ₹ 5,62,61,546/- and the assessee is liable to be taxed accordingly. So, Ld. CIT(A) has erred in holding that the appellant’s share in the payment of ₹ 5,62,61,546/- (17,60,00,000 – 11,97,38,454) @ 22.73% i.e. ₹ 1,27,88,250/- as income from other sources in the hands of assessee, which is required to be assessed in view of the provisions contained u/s 115U of the Act - Decided in favou .....

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y way of consolidated order. 2. The appellant, M/s. Japan International Cooperation Agency, (hereinafter referred to as the assessee ), by filing the present appeals sought to set aside the impugned orders dated 27.04.2012 by way of I.T.A.No. 3284/del/2012 qua the Assessment Year 2006-07 passed by Ld. CIT(A) VIII, New Delhi and order dated 08.10.2010 passed by Assessing Officer in consonance with the order dated 30.09.2010 of DRP by way of I.T.A.No. 5705/Del/2010 qua Assessment Year 2007-08 on t .....

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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 ₹ 1, l3,11,955 by taxing the share of the appellant in interest income from VCF under the head &qu .....

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CF while the income component of the distribution was the amount of ₹ 142, l34,265. (ii) Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts and has failed to appreciate that out of the total distribution made in the previous year the income component in accordance with the statutory declaration u/s 115U(2) made by SARA Fund was alone assessable in the hands of the appellant. (iii) Based on the facts and circumstances of the case, the learned .....

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tatements of SARA Fund and submissions filed. (v) Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in not appreciating that in terms of the provisions of Section 115U(2) of the Act, the appellant could not provide or furnish information different from and/or conflicting with the statutory declaration in Form 64 furnished to the income-tax authority by the venture capital fund (SARA Fund) and was bound by the stand adopted by SARA Fund. (vi) Based .....

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. No.5705/del/2010: 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 .....

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ing 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 only after adjusting the expenses it incurred out of the funds provided by the investors, to earn such income. Ground No.3 Based on the facts and circumstances of the case, the learned Assessing Officer has erred in law and on facts, in holding that the assessee's share in the amo .....

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n the facts and circumstances ofthe case, the learned Assessing Officer has erred in law and on facts. in levying interest under Section 234B of the Act. Ground 0.6 Based on the facts and circumstances of the case, the learned Assessing Officer has erred in law and on facts in initiating penalty proceedings u/s 271(1)(c) of the Act against the assessee for furnishing inaccurate particulars of income. Ground No.7 Based on the facts and circumstances of the case, the Hon'ble Dispute Resolution .....

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vernment financial institution incorporated in Japan having its representative office in India having statutory mandate to carry on lending and other operations for the promotion of Japan Export Import and economic activities overseas. The assessee is acting as coordinator between various Government of India public sector undertakings. The assessee has made investments in South Asian Regional Apex (SARA) Fund, which is a SEBI registered venture capital fund (VCF) as per SEBI Venture Capital Fund .....

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me 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 t .....

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istributed and as such, the assessee in this situation and in view of the provisions contained in Section 115U offered only proportionate amount of money received on distribution for tax and the remaining amount was out of the capital of VCF and as such, should be treated as return of part capital. 5. However, the A.O. came to the conclusion that the queries raised by him remained unanswered. Ld. A.R. however, explained the modus operandi of distribution of income and treatment thereof verbally .....

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₹ 220,211,220. 4.7.2 The ratio of Total Income to Total Reserve available, as on March 31, 2008 was 80.76%. The assessee argued that for every 100 Rs. distributed by the assessee, only 80.76 correspond to Income, balance being distributed out of capital sums. 4.7.3 SARA Fund, as per its audited accounts incurred Administrative & Operative Expenses of ₹ 31,438,256 out of which it, in the Form 64issued, booked an amount of Rs. (25,083,999) under the head 'Other Income'. In .....

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f the Act. 6. The assessee vide letter dated 26.12.2008 was asked to explain the other income to which he filed reply vide letter dated 29.12.2008. Since the assessee has failed to provide the details for allowability of expenses under the head 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 ₹ 17,60,00,000/-. The assessee claimed that out of .....

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e as income from other sources. 8. The assessee in computation showed dividend income of ₹ 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 distribution by the VCF is indeed dividend .....

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to the conclusion that the assessee s case does not fall u/s 115U of the Act. The A.O., also came to the conclusion that no right minded person would spend an amount of more than ₹ 3,00,00,000/- on earning interest income of ₹ 24145/- only and SARA fund is no exception and as such the expenses debited in the P & L account by SARA fund are not allowable against the income earned from and independently examined the allowability in the hands of VCF. So, consequently, the A.O. disall .....

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and has relied upon the order passed by ITAT in case entitled Scope Pvt. Ltd. Vs DCIT (2013) 33 Taxman.com 167 (Mumbai Tribunal). 12. However, on the other hand, Ld. D.R. repelled the arguments addressed by Ld. A.R. by contending inter alia that except that capital of SARA fund remained consistent and it is case of distribution of income and not a case of distribution of capital; that the contention of the assessee that he is bound by Form 64 is not tenable, which alone cannot absolve the asses .....

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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 ₹ 434857/- out of dividend income received by SARA fund by v .....

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ital undertaking ; (ii) 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 the venture capital fund will be required to furnish within the prescribed time a statement in the prescribed form and verified in the prescribed manner giving details of the nature of income distributed during the previous year. This statement is to be furnished to the person receiving such income and to the prescribe .....

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enture capital fund under this Chapter is means that no tax shall be payable under section 115-O and section 115-R and no tax deduction at source shall be made under the provisions contained in Chapter XVII-B from income paid by venture capital company or a venture capital fund to an investor. 14.2 Undisputedly, Assessee Company has invested in SARA fund, a SEBI registered VCF as per SEBI Venture Capital Regulations 1996. Ld. A.R. for the assessee contended that Section 115U provides pass throug .....

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ITAT Mumbai Bench E in case cited as Scope Pvt. Ltd. Vs DCIT 33 Taxman.com 167. The Coordinate bench decided the issue in controversy as under: 10.1 The dispute before us is regarding taxability of the receipt/income of the assessee as received from IVF in the shape of shares of Biocon and short term capital loss on sale of shares by IVF itself. The treatment of such income has been provided under sec. 115U. For the sake of ready reference, we quote section 115U: as exist at the relevant time: & .....

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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 nat .....

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;venture capital fund' and 'venture capital undertaking' shall have the meanings respectively assigned to them in clause 23(FB} of sec. 10)." 10.2 As it is manifest from the provisions of see 115 U that any income accruing or arising or to receive by a person out of investment made in venture capital company or venture capital fund shall be chargeable to tax in the same manner as if such person had made investment directly in the venture capital undertaking. Thus, as per section .....

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or Venture Capital Company, is only a pass through vehicle. 11. Chapter XII-F and section 115U have been introduced in the statute vide Finance Act 2000 for making VCFNCC as a pass through vehicle and taxing investors as if they had received income directly from the Venture Capital undertaking. This section has been introduced corresponding to the insertion of new clause (23FB) in section 10 being an enabling provision for taxing investors, who receives the income from VCCNCF because, as per th .....

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the concession in tax is in the shape that the provisions 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 v .....

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nterest 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 income like long term capital gain short term capital gains, dividend or other income such as interest etc., 'and accordingly be taxed as per the provisions as applicable under different heads of the income. Hence, section 115U prescribes the p .....

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under clause 23FB of section 10. 12. In view of the above discussion, we are of the considered opinion that the income received by the assessee from IVF is taxable in the manner as prescribed U/S 115U and discussed above. Since the Assessing Officer has assessed the income as short term capital gain; therefore, the claim of the assessee as short term capital loss has to be allowed. Accordingly, we find merit and substance in the alternative plea of the ld AR regarding the claim of short term ca .....

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ecome apparently clear that the nature of income received by VCC or VCF for Venture Capital Undertaking (VCU) and further distributed to the investors should be taxable in the hands of investors by treating the same in the nature of income like long term capital gain, short term capital gain, dividend income or other income such as interest and is to be taxed as per the provisions applicable under different heads of income. So, it is proved that the assessee company has invested in SARA fund, a .....

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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 exe .....

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0/115R and therefore, this ground of appeal is dismissed. 14.6 However, we are of the considered view that the A.O. as well as Ld. CIT(A) have taken a wrong view by holding that the assessee cannot grow tax free income u/ss 10(34) and 10(35) of the Acts unless additional tax has been paid as per the provisions of Sections 115-O and 115-R of the Act and as such the exemption claimed u/ss 10(34) and 10(35) is to be allowed only if the dividend income distributed as per the provisions of Sections 1 .....

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ncome tax on the earned dividend as required u/s 115-O of the Act, SARA fund was not required to pay additional income tax second time on the same income. Consequently, grounds 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 are determined in favour of the assessee. 15. Ground No.2 of I.T.A.No. 3284/Del/2012 and Ground No.2 of I.T.A.No. 5705/Del/2010: Now, the next question arises for determination is, as to whether the A.O. as well as Ld. CIT(A) have er .....

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/- representing the assessee s share of expenses incurred by SARA fund earning income under various heads on the ground that the aforesaid claim of expenses were incurred by SARA fund during the course of its business and not by the appellant 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 th .....

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ing 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 investment made in the venture capital undertaking. A person who .....

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ital fund. So, we are of the view that the expenses of ₹ 1,13,11,955/- disallowed by Ld. CIT(A) by taking the shares of the assessee in interest income from VCF under the head other sources on gross basis and not the net basis, which requires to be determined by treating the same nature of income like long term capital gain, short term capital gain, dividend and other income such as interest etc. So, Grounds No.2 of both the appeals are determined in favour of the assessee. 16. Ground No.3 .....

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was out of the income of VCF and similarly, out of total distribution of ₹ 23,10,00,000/- in A.Y. 2007-08, only ₹ 22,58,39,902/- was out of the income of VCF and the rest was paid out of its capital . Again, this issue is required to be determined in the light of the provisions contained u/s 115U, which determines the taxability of the income in the hands of investor upon its receipt. 16.2 Ld. A.R. contended that any income received by a person from the investment made in the VCF sha .....

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.3 From the perusal of Form 64 and balance sheet / revenue account of SARA fund, it is proved that distribution of ₹ 17,60,00,000/- qua A.Y. 2006-07 and ₹ 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 ₹ 119738454/- by subtracting th .....

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as directly in the VCU and VCF and VCC is only a pass through vehicle. So, the assessee has rightly taken the net income for tax at ₹ 11,97,38,454/- by subtracting the amount of ₹ 5,62,61,546/- and the assessee is liable to be taxed accordingly. So, Ld. CIT(A) has erred in holding that the appellant s share in the payment of ₹ 5,62,61,546/- (17,60,00,000 - 11,97,38,454) @ 22.73% i.e. ₹ 1,27,88,250/- as income from other sources in the hands of assessee, which is required .....

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