TMI Blog2019 (3) TMI 1027X X X X Extracts X X X X X X X X Extracts X X X X ..... lations; that the targeted investment in VCUs is within the purview of VCF Regulations of SEBI; that assessee is permitted by its Trust Deed as well as by the VCF Regulations of SEBI to temporarily deploy funds in units of mutual funds as well as in Convertible Debenture application money. Thus, in our view, assessee is entitled to exemption envisaged under Section 10(23FB) of the Act. - Decided in favour of assessee. - ITA No. 7472/Mum/2017 - - - Dated:- 28-2-2019 - Shri G.S. Pannu, Vice President and Shri Ravish Sood, Judicial Member For The Appellant : Shri P.J. Pardiwalla And Shri Madhur Agrawal For The Respondent : Shri R.P. Meena ORDER Per G.S. Pannu, Vice President This appeal has been filed by the assessee against the order of the CIT(A)-28, Mumbai dated 09.10.2017 for A.Y. 2014-15. 2. The assessee has raised the following grounds of appeal: - 1. The learned Commissioner of Income-tax (Appeals) hereinafter referred to as the [CIT(A) ] erred in upholding the action of the learned Income tax Officer 17(1)(5), Mumbai (hereinafter referred as the Assessing Officer ) in bringing to tax a sum of ₹ 264,39,31,0807- [comprising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neither continuous nor substantial considering its fund size. 5. The appellant submits that the CIT(A) (Appeals) failed to appreciate that the appellant has made submissions re: Negative list in the VCF Regulations only to highlight that its investments in VCUs are not violative of such Regulations and the CIT(A) erred in making observations at Para 6.3.2 of his appellate order (that it was an attempt to mislead the appellate authority) and the appellant strongly objects to the same. 6. The appellant submits that as the beneficiaries (Investors) had included the income from the fund (the appellant) in their individual returns and the same would have been assessed in their hands, such income cannot be assessed in appellant's hands as the same would amount to double taxation of the same income . 7. Without prejudice, the appellant submits that in the event the benefit of exemption under section 10(23FB) of the Act were to be denied to it, a suitable direction be given that the benefit of taxes paid by the contributors on the same income be allowed to the appellant. 8. Without prejudice the appellant submits that the CIT(A) failed to appreciate the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as exempt under Section 10(23FB) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) and the net taxable income was returned at ₹ 19,58,410/- which comprised of non-VCU related incomes, being interest on fixed deposits with bank and on income tax refund. In the assessment finalised by the Assessing Officer, the total income has been assessed at ₹ 264,58,89,410/-, and in determining such income the Assessing Officer denied the exemption claimed under Section 10(23FB) of the Act as well as exemption claimed under Section 10(35) of the Act on dividend income earned from the units of Mutual Funds as well as on equity shares of a VCU. This assessment was challenged in appeal before the learned CIT(A) who has confirmed the same and accordingly the assessee is in appeal before us on the aforestated Grounds of appeal. 4. In this background, if one is to peruse the various Grounds raised before us, the substantive grievance of the assessee is against the action of the income-tax authorities in denying the claim of exemption under Section 10(23FB) of the Act. Therefore, we proceed to adjudicate the said issue hereinafter. As noted by us earlier the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day of May, 2012, as a Venture Capital Fund and is regulated under the Venture Capital Funds Regulations; or ( II) has been granted a certificate of registration as Venture Capital Fund as a sub-category of Category I Alternative Investment Fund under the Alternative Investment Funds Regulations and which fulfils the following conditions, namely:- ( i) it has invested not less than two-thirds of its investible funds in unlisted equity shares or equity linked instruments of venture capital undertaking; ( ii) it has not invested in any venture capital undertaking in which its trustee or the settler holds, either individually or collectively, equity shares in excess of fifteen per cent of the paid-up equity share capital of such venture capital undertaking; and ( iii) the units, if any, issued by it are not listed in any recognised stock exchange; or ( B) operating as a venture capital scheme made by the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963); ( c) venture capital undertaking means- ( i) a venture capital undertaking as defined in clause (n) of regulation 2 of the Venture Capital Funds Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner, giving details of the nature of the income paid or credited during the previous year and such other relevant details as may be prescribed. ( 3) The income paid or credited 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 referred to in sub-section (1) as it had been received by, or had accrued or arisen to, the venture capital company or the venture capital fund, as the case may be, during the previous year. ( 4) The provisions of Chapter XII-D or Chapter XII-E or Chapter XVII-B shall not apply to the income paid by a venture capital company or venture capital fund under this Chapter. ( 5) the income accruing or arising to or received by the venture capital company or venture capital fund, during a previous year, from investments made in venture capital undertaking if not paid or credited to the person referred to in sub-section (1), shall be deemed to have been credited to the account of the said person on the last day of the previous year in the same proportion in which such person would have been entitled to receive the income had it been paid in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1882 vide trust deed dated 06.11.2004. It is also not in dispute that the assessee is registered as a VCF under the VCF Regulations of SEBI vide a certificate of registration dated 23.12.2004. Therefore, the assessee is eligible to stake its claim for exemption under Section 10(23FB) of the Act. The said claim has been denied by the income-tax authorities primarily on two grounds. Firstly, the Assessing Officer noted that the investments made by the assessee in the units of Mutual Funds and in Debenture application money do not qualify to be investments in VCUs, thus the same is in violation of the provisions of its trust deed. Secondly, as per the Assessing Officer, the investment in Debenture application money is also in violation of SEBI VCF Regulations. The aforesaid two points prevailed with the Assessing Officer to conclude that the assessee has not complied with the conditions prescribed for a VCF, so as to qualify for exemption under Section 10(23BF) of the Act. 10. In this background, the rival counsels have made their submissions and referred to the relevant material on record. Firstly, the learned counsel for the assessee vehemently asserted that the assessee qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual funds or bank deposits or such-like liquid assets till the deployment of funds made as per the objectives of the VCF. It was therefore pointed out that on both the points the income-tax authorities have erred in denying the assessee‟s claim for deduction under Section 10(23BF) of the Act. 11. On the aspect of exemption under Section 20(23BF) of the Act the learned CIT(A)-DR has taken us through the orders of the authorities below and reiterated their respective stands. The learned CIT(A)-DR emphasised that no doubt the certificate of SEBI was continuing but clause 8 of the SEBI-VCF Regulations, which reads as under, clearly prescribe that the registration granted is subject to the aforesaid conditions: - 8. The certificate granted under regulation 7 shall be inter alia, subject to the following conditions, namely:- ( a) the venture capital fund shall abide by the provisions of the Act 1[* * *] and these regulations; ( b) the venture capital fund shall not carry on any other activity other than that of a venture capital fund; ( c) the venture capital fund shall forthwith inform the Board in writing if any information or particulars previously su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause 6, a copy of which is placed in the Paper Book. Though we are not reproducing the contents of the Trust Deed, its perusal shows that the investments by the appellant are required to be made in compliance with the requirements of VCF Regulations of SEBI. In terms of clause 4.1.27, the Trust Deed also envisages temporary investments which have been defined to mean, inter-alia , money market instruments, units of money market liquid mutual funds or other similar debt instruments. The said clause also brings out that the temporary investments are also to be understood as referring to short term securities issued on guarantee by the Indian Government, or its agencies or instrumentalties, overnight and short term instruments, like- bank deposits, etc. Though we are presently concerned with investments made in liquid mutual fund schemes, we are enumerating the other aspects of the expression temporary investments‟ stated in the Trust Deed only to bring out that the Trust is entitled to make such-like investments of its available funds, awaiting regular investment in the stated purposes. In fact, clause 11.1 of the Trust Deed dealing with Investment of Trust fund‟ speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee asserted before the lower authorities that putting application money in Convertible Debentures is also to be understood as investment in equity linked instruments because ultimately the Debenture will be converted into equity shares. In this context, with reference to the VCF Regulations of SEBI, assessee pointed out that Regulation 12(ii) of the VCF Regulations prescribes that not more than 33.33% of investible surplus may be in debt instrument of a VCU in which the VCF has already made investment by way of equity. The learned representative has pointed out that assessee had made investment in one of the VCUs by way of equity and accordingly, even if the instant Debenture application money is considered as a debt instrument, the same is within the permissible limits though, according to him, investment in equity linked Convertible Debentures is to be understood as linked to equity shares only. All these aspects have been time and again reiterated by the assessee before the lower authorities as well as before us and we find that in neither of the orders of the authorities below there is any negation to the same. So far as VCF Regulations of SEBI are concerned, we are in ag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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