KAE CAPITAL FUND ,MUMBAI vs. ITO WARD 25(1)(1), MUMBAI

We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that the assessee is a Venture Capital Fund registered with SEBI under the SEBI (Venture Capital Funds) Regulation, 1996 and SEBI has issued a registration certificate, certifying the assessee as a Venture Capital Fund. For the year under consideration, the assessee originally filed its return of income on 14.12.2020, claiming exemption of dividend earned on mutual funds under section 10(35) of the Act and exemption under section 10(23FB) of the Act in respect of its income as a Venture Capital Fund. During the hearing, the learned Authorized Representative (“learned AR”) by referring to the original return of income filed by the assessee on 14.12.2020, which forms part of the paper book from pages 1-76, submitted that the assessee in the Schedule-BP in respect of computation of income from business or profession correctly mentioned the amount of dividend income from mutual funds to the tune of Rs.10,08,99/- which was claimed as exempt under section 10(35) of the Act and also correctly mentioned profit of Rs.1,55,51,062/- claimed as exempt under section 10(23FB) of the Act. However, in the Schedule-EI declaring the details of exempt income, the assessee only mentioned the dividend income of Rs.10,08,399/- claimed as exempt under section 10(35) of the Act and inadvertently did not mention the amount claimed as exempt under section 10(23FB) of the Act. The learned AR submitted that the assessee immediately on the next date, i.e., 15.12.2020 filed the revised return of income under section 139(5) of the Act, however again repeated the same mistake of correctly mentioning the total exempt income of Rs.1,65,59,461/- in the schedule of income from business or profession and not reporting the same amount in the schedule of exempt income. Thus, the learned AR submitted that even in the revised return of income, which forms part of the paper book from pages 77-152, the assessee only claimed an exempt income of Rs.1,35,16,769/-, which was also an incorrect figure as the correct amount of exemption was to the tune of Rs.1,65,59,461/-. The said revised return of income filed by the assessee was processed vide intimation dated 26.12.2021 computing the total income at Rs.30,42,690/- as against Rs. Nil declared by the assessee in its return of income. The learned AR submitted that the said addition is nothing but the difference between the actual exemption of Rs. 1,65,59,461/- claimed by the assessee in its return of income in the Schedule of income from business or profession and the exempt income of Rs. 1,35,16,769/- as declared by the assessee in the Schedule of exempt income. The learned AR submitted that against the aforesaid intimation issued under section 143(1) of the Act, the assessee filed a rectification under section 154 of the Act, pointing out the correct exempt income earned by the assessee amounting to Rs.1,65,59,461/- claimed as exempt under section 10(35) and section 10(23FB) of the Act. However, it is evident from the record that vide order dated 23.12.2022 passed under section 154 of the Act, the entire exemption of Rs.1,65,59,460/- was denied and the said amount was added to the total income of the assessee, as compared to the addition only of Rs.30,42,690/- vide intimation issued under section 143(1) of the Act.

The learned CIT(A), vide impugned order, in the appeal filed by the assessee against the rectification order dated 23.12.2022, passed under section 154 of the Act, held that the provisions of section 10(35) are not applicable to the year under consideration. Further, the learned CIT(A) held that the exemption under section 10(23FB) of the Act is only available to the assessee if it is not in the category of Venture Capital Fund which has become non-operational from the assessment year 2016-17 onwards. The relevant findings of the learned CIT(A), vide impugned order, are reproduced as follows: “6. Ground No. 1 I have considered the facts of the case, submissions of the appellant, grounds of appeal and order of the CPC Bangalore. During course of appellate proceedings, it has been submitted by the appellant that the appellant states that their incomes are exempt u/s 10(23FB) and 10(35) of the Act as they are governed by sec. 115U of the Act. However, it is seen that Section 10(35) of the Act provides for exemption of the income received in respect of M.F. Units which will NOT be the applicable from A.Y. 2020-21. The case of the assesse pertains to A.Y. 2020-21 and therefore erroneous section has been quoted both in terms of the nature of income and the applicability of the section from the A.Y. point of view. Therefore, the appellant is not eligible for claiming exemption u/s 10(35) of the Act. 6.2 Further, even section 10(23FB) will cease to the operational from A.Y.2016-17 if the VC fund is an investment fund specified in clause (a) of the Explanation 1 to section 115UB. The appellant has not categorically stated whether they fall under this category or not. In absence of this information, exemption u/s 10(23FB) of the Act cannot be granted. 6.3 However, in the interest of natural justice and the fact that the impugned order is issued not u/s 143(3) but u/s 154 of 143(1) order, both issued by the CPC, the AO is directed to allow exemption u/s 10(23FB) of the Act only if it is proved that the appellant is not the category of VC fund for which exemption u/s 10(23FB) is not operational from A.Y. 2016-17 onwards. The appellant may be given due opportunity in this regard.”

During the hearing, the learned AR, by referring to the relevant provisions of the Act, submitted that the assessee has been allowed exemption in other years under section 10(23FB) and section 10(35) of the Act, and for the year under consideration also, the assessee duly satisfies the conditions as laid down in the aforesaid provisions for claiming exemption. However, as noted in the foregoing paragraph, the learned CIT(A) rejected the plea of the assessee in the absence of requisite information. From the perusal of the impugned order, we find that the assessee specifically made a request before the learned CIT(A) for the grant of an opportunity of a personal hearing to explain the relevant grounds. During the hearing, the learned AR submitted that no opportunity of personal hearing through video conferencing was granted by the learned CIT(A).

We find that the Faceless Appeal Scheme, 2021, formulated by the Central Government in the exercise of powers conferred by sub-section (6B) and sub-section (6C) of section 250 of the Act, provides that the Appellant or his authorised representative may request for personal hearing so as to make his oral submission or present his case and the concerned Commissioner (Appeals) shall allow such request and communicate the date and time of hearing to the Appellant through the National Faceless Appeal Centre. The relevant clause of the Faceless Appeal Scheme, 2021, in this regard, reads as follows: - “12. No personal appearance in the Centres or Units.–– (1) A person shall not be required to appear either personally or through authorised representative in connection with any proceedings under this Scheme before the income-tax authority at the National Faceless Appeal Centre or appeal unit set up under this Scheme. (2) The appellant or his authorised representative, as the case may be, may request for personal hearing so as to make his oral submissions or present his case before the Commissioner (Appeals), through the National Faceless Appeal Centre, under this Scheme. (3) The concerned Commissioner (Appeals) shall allow the request for personal hearing and communicate the date and time of hearing to the appellant through the National Faceless Appeal Centre.

As, it is evident from the record that the assessee, though made the request to the learned CIT(A) for grant of opportunity for personal hearing through the National Faceless Appeal Centre, the same was not granted to the assessee. Therefore, in view of the above, we deem it appropriate to restore the appeal to the file of the learned CIT(A) for de novo adjudication after granting the opportunity to the assessee for personal hearing as per the Faceless Appeal Scheme, 2021. The assessee can make a fresh request in this regard as per the aforesaid clause (12) of the Faceless Appeal Scheme, 2021. With the above directions, the impugned order passed by the learned CIT(A) is set aside. As the matter is being restored to the file of the learned CIT(A) for consideration afresh, the other grievances raised by the assessee in the present appeal do not call for adjudication at this stage.

During the hearing, the learned AR, reiterating the submissions made by the assessee before the learned CIT(A), submitted that the assessee has already exited from all its investments and necessary intimation has also been issued to the SEBI regarding the winding up of the funds. The learned AR submitted that, only due to the pending litigation on this issue in the year under consideration, the assessee is unable to close the funds as per the relevant SEBI guidelines. Accordingly, the learned AR prayed that a specific direction be issued to the learned CIT(A) to decide the present appeal at the earliest so that statutory compliance under other laws can be ensured. Considering the peculiar facts of the present case, we accede to the request of the learned AR and direct the learned CIT(A) to decide the present appeal as expeditiously as possible, preferably within a period of six months from the date of this order. Accordingly, the grounds raised by the assessee are allowed for statistical purposes.

In the result, the appeal by the assessee is allowed for statistical purposes. Order pronounced in the open Court on 27/11/2025