TMI Blog2020 (4) TMI 295X X X X Extracts X X X X X X X X Extracts X X X X ..... sec.61 to 63 and the provisions of sec.10(23FB) operate in different manner, yet the conclusion is that the assessee should not subjected to tax to capital gains and interest income. We also notice that the beneficiaries have offered their respective share of income in their hands, meaning thereby, the assessee also seeks to avail the benefits of sec. 61 to 63 of the Act. The assessee has also submitted that it is a pass through entity, meaning that the income from investments is taxable in the hands of beneficiaries. It is pertinent to note that the revenue has not challenged the observations of Ld CIT(A) in holding that the assessee cannot be assessed to tax the very same income which has been offered by the beneficiaries in their respective hands. This observation of Ld CIT(A) were, apparently, based on the fact that the assessee is a revocable trust and alternatively it is a pass through entity. Since we have held in the preceding paragraphs, that the assessee cannot be subjected to tax for capital gains, there was no necessity to examine the question of applicability of provisions of sec.10(38) of the Act to the capital gains earned by the assessee on sale of shares. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income filed on 31.08.2015 and the revised return of income filed on 27.09.2016. Later, the assessee, vide letter dated 25.10.2016, had made claim for exemption u/s 10(23FB) of the Act in respect of the said Long Term Capital gain accrued. Therefore, the assessee itself was not certain regarding the provisions of the IT Act, i.e. either Sec. 10(38) or Sec. 10(23FB) of the Act, under which it had to claim the exemption in respect of the said Long Term Capital gain accrued. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not considering the fact that the assessee, being a VCF, required to adhere to the provisions of sec. 10(23FB) of the Act in order to become eligible to claim exemption on any income earned on investments from VCUs. The assessee has sold listed shares of non VCU and thus, the assessee's claim for exemption u/s 10(23FB) of the Act has been rightly disallowed by the AO. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not considering the fact that the assessee did not hold the listed equity shares for a minimum period of 12 months to consider the said shares as Long Term Capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t income from Venture Capital Undertakings earned by the Respondent need to be examined in the hands of the ultimate beneficiaries. 4. The assessee herein is a Venture Capital Fund. It filed its return of income for the year under consideration declaring Nil income on 31/8/2015. Subsequently the assessee filed revised return of income on 27/9/2016 declaring again Nil income. There are 20 beneficiaries under this fund, out of which 91.3% is held by an investor named Indium III Mauritius Ltd . Before the AO, the assessee claimed that it is eligible for exemption u/s 10(23FB) of the Act in respect of income from investments made in a venture capital undertaking. 5. The AO has made two additions, viz., the capital gains earned by the assessee and notional interest income on a loan given by the assessee. The facts relating to both the additions are discussed in brief. The assessee had invested its funds in a Venture Capital Undertaking named M/s Mahindra Hinoday Industries Ltd (earlier known as Mahindra Castings P Ltd) during the financial years 2007-08 to 2011-12 as detailed below:- Sl. No. Date of Purchase No. of shares Pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioned that the capital gain is exempt u/s 10(23FB) of the Act. During the course of assessment proceedings, the assessee filed a letter dated 25/10/2016 before AO, wherein also it claimed that the capital gain is exempt u/s 10(23FB) of the Act. In addition to income from capital gain, the assessee also declared interest income of ₹ 487.72 lakhs from loans given to other Venture Capital undertakings. The assessee also claimed the same as exempt u/s 10(23FB). 7. During the course of assessment proceedings, the AO noticed that the provision of sec. 10(38) of the Act allows exemption of long term capital gain arising on sale of shares, if they are listed shares and are held continuously for more than 12 months, i.e., the AO took the view that, for availing exemption u/s 10(38) of the Act, the status of listed shares should be maintained throughout the period of 12 months. In the instant case, the AO noticed that the assessee has acquired listed shares of Mahendra CIE Ltd., only in the month of December 2014 and sold the same in January 2015. In fact, shares of Mahendra CIE Ltd was held for about two months only and earlier to that, the assessee has held unlisted shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed exemption to the above said amount of ₹ 4.87 crores. However, the AO denied exemption u/s 10(23FB) to the interest income of ₹ 17.23 crores computed by him on the loan given to Innovative B2B Logistic Solution Ltd. In the remand report submitted to Ld CIT(A), the AO gave following explanations for not allowing exemption u/s 10(23FB) of the Act on the interest income so assessed:- The assessee has claimed exemption u/s 10(23FB) of the Act on ₹ 4,87,72,436/- being the interest from VCUs which has been allowed as this amount has been taxed in the hands of the investors. Similarly, notional interest is also to be taxed either in the hands of the assessee or the investors. The Assessing Officer do not have jurisdiction over the investors and therefore, it has been brought to tax in the hands of the assessee. 11. The assessee challenged both the above discussed additions by filing appeal before Ld CIT(A). Before him, the assessee made detailed submissions and hence the Ld CIT(A) called for remand reports from the assessing officer from time to time. We notice that the AO has furnished remand reports three times. In reply to the remand report, the assessee su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ops, even in such a situation one should compute the gain made by the VCF in the shares of the VCU till the date of amalgamation. Thus, the gain made from the date of (20092011) initial investments in the shares of the VCU to the date of amalgamation Dec 2014, shall be treated as covered by the provisions of Sec 10(23FB) of the Act as exempt. The balance gin made by the appellant upon conversion of shares to listed shares consequent to amalgamation till the date of sale, be considered as taxable. Since, both these events (December 2014 January 2015) happened during the Financial Year relevant to the Assessment Year 2015-16, the AO may under-take this exercise to split the capital gains into two transactions. The Ld CIT(A) has expressed the view that the capital gains arising upto the date of amalgamation should be allowed exemption u/s 10(23FB) of the Act and the balance amount of capital gains shall be taxable. However, in paragraph 5.1 of the order, the Ld CIT(A) has held that the issue relating to denial of exemption u/s 10(38) in the hands of the assessee is academic in nature, since he has held that the income of the assessee is exempt u/s 10(23FB) of the Act. 13. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 3,33,27,40,895, made by the AO to the total income of the Appellant, is not taxable on account of section 61, as well as section 10(23FB), as well as section 10(38) of the Act. Determinate status of the trust not to be affected if trust deed is capable of identifying the beneficiaries and determining their respective shares 4.34 However, even if one seeks to go by the intention of the legislature in case of Section 10(23FB) the intention of the legislature was to extend the exemption to the entire income of a VGF (sic. VCF) which is set up to raise funds for vestment in VGUs (sic. VCUs) as is evident from the Finance Minister's Speech (243 ITR 46 Statutes) (page 24 25 of paper book) in the Lok Sabha, dated May 3, 2000 while moving the Finance Bill 2000-01 for consideration of the House, which states as under: Venture Capital Fund shall enjoy a complete pass through status. There will be no tax on distributed or undistributed income of such funds. The income distributed by the funds will only be taxed in the hands of investors at the rates applicable to the nature of income . 4.35 In light of the above, it is clear that the intention of the legislature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argeable to tax at maximum marginal rate in the hands of the trustee in their representative capacity. 4.42 Similar questions arose for consideration before the Authority for Advance Ruling in the case of XYZ, In Re 224 ITR 473 (AAR). XYZ., In Re 224 ITR 473 (AAR): The Authority for Advance Ruling (AAR) held that if the trust deed sets out expressly the manner in which the beneficiaries are to be ascertained and also the share to which each of them would be entitled without ambiguity, then it cannot be said that the Trust deed does not name the beneficiaries or that their shares are indeterminate. The persons as well as the shares must be capable of being definitely pin-pointed and ascertained on the date of the trust deed itself without leaving these to be decided upon at a future date by a person other than the author either at his discretion or in a manner not envisaged in the trust deed. Even if the Trust deed authorises addition of further contributors to the trust at different points of time in addition to initial contributors, than the same would not make the beneficiaries unknown or their share indeterminate. Even if the scheme of computation of income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is exempt u/s 10(23FB) of the Act. The decision rendered by Ld CIT(A) in this regard is extracted below:- 5.0 In the light of the above facts, especially considering the fact that the beneficiaries/investors have independently offered to tax their share of income received from the appellant, it is held that all the incomes of the appellant arising from the investment in the VCU, irrespective of the fact that the said VCU is subsequently amalgamated into a listed entity, are exempt under the provisions of Section 10(23FB) of the Act. Otherwise it amounts to double taxation both in the hands of appellant and the investors/beneficiaries. Further, denying the exemption under Section 10(23FB) merely on the ground of subsequent amalgamation, which is beyond the control of either the appellant or the beneficiaries, is not in the interest of equitable justice. 15. In view of the above decision, the Ld CIT(A) expressed the view that the issue relating to rejection of exemption u/s 10(38) of the Act is academic in nature. However, he expressed the view that the issue relating to exemption u/s 10(38) of the Act as well as taxability of interest income need to be examined in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defined in clause (n) of regulation 2 of Venture Capital Funds Regulations; or (ii) a venture capital undertaking as defined in clause (aa) of sub regulation (1) of regulation 2 of the Alternative Investment Funds regulations. There is no dispute with regard to the fact that the assessee is a Venture capital fund and is regulated by the Venture Capital Funds Regulations. The Ld CIT(A) has extracted the submissions made by the assessee on Venture Capital Funds regulations as under:- 4.10 To appreciate the issue it is relevant to appreciate the provisions of Section 10(23FB) of the Act. As per the provisions of Section 10(23FB) of the Act, the exemption is available to the income of the VCF from investment in a VCU if the following two conditions are satisfied: a. The fund is a venture capital company or a VCF; and b. The income is from investment made in a venture capital undertaking (VCU), 4.11 The Clause (b) of the Explanation to section 10(23FB) of the Act defines venture capital Fund' as below (relevant extracts only): (b) venture capital fund means a fund - (A) operating under a trust deed registered under the provisions of the Regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... negative list by the Board with the approval of the Central Government by notification in the Official Gazzette in this behalf Also, the third schedule to the VCF Regulations lays down the list of items in the negative list, The activities specified in the negative list are i. * ii. Non-banking financial services [excluding those Non- Banking Financial Companies which are registered with the Reserve Bank of India and have been categorised as Equipment Leasing or f-I/re Purchase Companies]. iii Gold financing **[excluding those Companies which are engaged in gold financing for jewellery]. iv Activities not permitted under industrial policy of Government of India. v Any other activity which may be specified by SEBI in consultation with the Government of India from time to time,] As per Regulation 12 of VCF Regulations - '12. 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% corpus of the fund in one ventur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regulation, (a) at least 66.67% of investible funds shall be invested in unlisted equity shares and (b) not more than 33.33% of the investible funds may be invested by way of (i) subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed; (ii) debt or debt instruments .; (iii) preferential allotment of equity shares of a listed company subject to lock in period of one year; (iv) the equity shares or equity linked instruments of a financially weak company or a sick industrial company whose shares are listed While clause (a) prescribes a limit of 66.67% for investing in unlisted shares, the clause (b) prescribes a limit of 33.33% for investing in shares which are going to be listed. Thus clause (b) visualizes listing of shares in future, meaning thereby, the subsequent listing of shares should not be a bar for availing exemption u/s 10(23FB) of the Act. It can be noticed that the VCF Regulations prescribes conditions to be followed at the time of making investments only. Thus, there is merit in the contentions of the assessee that the VCF Regulations do not prohibit cases where the initial investments made in unli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on VCFs was removed from the VCF Regulations with effect from 30th December, 2000. The very fact that the investment by a VCF in listed shares which earlier had to be exited within a period of one year from the date on which the shares of the VCU are listed in a recognized stock exchange, is now omitted, it is evident that a VCF can continue holding its investment in equity shares of a listed company. Considering the fact that the above restrictive condition has been deleted, it is clear that a VCF is free to sell its listed investments at any time and the same does not impact the tax benefits it seeks to avail under the Act. Based on the above, the appellant pleaded that on plain reading of the VCF Regulations, it is clear that sale of shares of a listed company is not prohibited by VCF Regulations, to claim exemption on the initial investment made in the unlisted shares of a VCU. 20. Hence, we are of the view that there is merit in the submission of the assessee that it is eligible for exemption u/s 10(23FB) of the Act. We have noticed earlier that the Ld CIT(A) has taken the view that the exemption u/s 10(23FB) is available for the capital gains accrued to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of such funds. The income distributed by the funds will only be taxed in the hands of investors at the rates applicable to the nature of income . 4.35 In light of the above, it is clear that the intention of the legislature is to treat the entire income of VCFs as exempt from tax under section 10(23FB) irrespective of its nature, and instead tax the same in the hands of its investors at the time of distribution under section 115U on a pass through basis, else it would amount to double taxation once in the hands of VCF and then again in the hands of the investor. 4.36 The subsequent amendment of Section 10(23FB) by Finance Bill 2007 is effective from 1.4.2008 restricting the exemption available u/s 10(23FB) to only income of venture capital fund from an investment in venture capital undertaking. 4.37 The taxation of domestic Venture Capital Funds (VCFs) and Alternative Investment Funds (AlEs) has undergone various changes over the years Currently, VCFs1 and Category 1/ 11 AIFs2 have been granted tax pass through status under the Income-tax Act, 1961 (the Act) in relation to specified income Such income is directly chargeable to tax in the hands of the beneficia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust deed, Even if the Trust deed authorises addition of further contributors to the trust at different points of time in addition to initial contributors, than the same would not make the beneficiaries unknown or their share indeterminate. Even if the scheme of computation of income of beneficiaries is complicated, it is not possible to say that the share income of the beneficiaries cannot be determined or known from the trust deed. 4.43 In a recent decision, the Karnataka High Court in the case of the Trust (India Advantage Fund-VII in ITA No. 191/2015 dated 20-02-2017), upheld the decision of the Bangalore Income-tax Appellate Tribunal in ITA No 178/2012 AY 2008-09 and held that for a trust to be a determinate trust, it would be sufficient trust deed laid down that the beneficiaries would be the persons who had made or had agreed to make, contributions to the trust in accordance with the contribution agreement, and their shares were capable of being determined based on the provisions of the trust deed. The issue before the Karnataka High Court was: Whether the Tribunal was right in holding the Trust as a determinate trust and not assessing the Trust at the maximum margina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d their respective share of income in their hands, the assessee should not be taxed again. Accordingly, he has held that the assessee should be allowed exemption u/s 10(23FB) of the Act. Though the provisions of sec.61 to 63 and the provisions of sec.10(23FB) operate in different manner, yet the conclusion is that the assessee should not subjected to tax to capital gains and interest income. We also notice that the beneficiaries have offered their respective share of income in their hands, meaning thereby, the assessee also seeks to avail the benefits of sec. 61 to 63 of the Act. The assessee has also submitted that it is a pass through entity, meaning that the income from investments is taxable in the hands of beneficiaries. 23. It is pertinent to note that the revenue has not challenged the observations of Ld CIT(A) in holding that the assessee cannot be assessed to tax the very same income which has been offered by the beneficiaries in their respective hands. This observation of Ld CIT(A) were, apparently, based on the fact that the assessee is a revocable trust and alternatively it is a pass through entity. 24. Since we have held in the preceding paragraphs, that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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