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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”, MUMBAI
Before: SHRI M. BALAGANESH (AM) & SHRI RAM LAL NEGI (JM)
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES “D”, MUMBAI BEFORE SHRI M. BALAGANESH (AM) AND SHRI RAM LAL NEGI (JM) Assessment Year: 2013-14 & Assessment Year: 2014-15 Asst. Commissioner of Income M/s Mile Stone Real Estate Tax – 25(3), Fund, 602, Hallmark Business Room No. 601, C-10, 6th Floor, Plaza, Sant Dnyaneshwar Pratyakshakar Bhavan, Vs. Marg, Opp. Guru Nanak Bandra Kurla Complex, Hospital, Bandra (E), Bandra (East), Mumbai - 400051 Mumbai - 400051 PAN: AAATI5880L (Appellant) (Respondent) Revenue by : Shri V. Sreekar (CIT-DR) Assessee by : Shri J.D. Mistry (AR) Date of Hearing: 30/07/2020 Date of Pronouncement: 22/09/2020 O R D E R PER RAM LAL NEGI, JM The revenue has filed these appeals against the two orders dated 26.12.2017, passed by the Commissioner of Income Tax (Appeals)-37 (for short ‘the CIT(A), Mumbai, for the assessment year 2013-14 and 2014-15, whereby the Ld. CIT(A) has partly allowed the appeals filed by the assessee against the assessment orders passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’). Both the appeals pertain to the same assessee and some of the issues raised in both the appeals are common. Hence, these appeals were clubbed, heard together and are being disposed of by this common order for the sake of convenience. Assessment Years: 2013-14 & 2014-15 Brief facts of the case are that the assessee a Trust established under the Indian Trust Act and registered with the Security and Exchange Board of India (SEBI) as a venture capital Trust, filed its return of income for the assessment year under consideration declaring total income at Rs. 8,94,65,291/-. Later on the assessee filed revised return declaring its total income at Rs. 14,29,12592/-. Since this case was identified for scrutiny, AO issued notice u/s 143 (2) and 142 (1) of the Act. In response thereof, the authorized representative (AR) appeared before the AO and filed the details called for and discussed the case. During the course of assessment, it was noticed that the assessee had claimed exemption u/s 10(23FB) of the Act in respect of income earned out of investments made in venture capital undertakings. The AO after hearing the authorized representative accepted the claim of the assessee. Further, the assessee had shown income from venture capital undertaking amounting to Rs. 144,06,86,967/- and claimed TDS of Rs. 15,05,35,251/-. The AO asked the AR to explain as to why the credit for TDS claimed should not be disallowed in view of the provisions of section 199 of the Act, read with Rule 37BA of the Income Tax Rules. The assessee contended that while making payment of income on investments, the payers deducted TDS as per provisions of the Act and reflected the same in the name of the assessee. The credit for TDS is also reflected in Form 26AS of the assessee, the assessee while filing its return of income included the entire income from all its investments and claimed exemption u/s 10(23FB) of the Act. The assessee further contended that as per the provisions of section 115U of the Act. The assessee furnished the details of income accrued or distributed to each of the contributors and provided the details as per Form 64 to each contributor and complied with the requirements, the assessee is eligible for the TDS credit. The AO rejected the contention of the assessee and denied the credit for tax deducted at source on the ground that the assessee has not offered the income in its return of income. The assessee challenged the assessment order inter alia on the ground that the AO has erred in denying the credit for tax deducted at source holding Assessment Years: 2013-14 & 2014-15 that the appellant has not offered the income in its return of income. The Ld. CIT (A) after hearing the assessee set aside the findings of the AO and directed the AO to verify Form 26AS and grant appropriate credit for TDS for tax deducted at source. Against the said findings of the Ld. CIT (A), the revenue is in appeal before this Tribunal. 2. The revenue has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:- “ 1. On the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in allowing the TDS Credit on the income claimed as pass through by the assesse. 2. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in completely ignoring the Rule 37BA(2) which provide that where under any provisions of the Act, the whole or any part of the income on which tax has been deducted at source is assessable in the hands of a person other than the deductee, credit for the whole or any part of the tax deducted at source shall be given to the other person and not to the deductee. Proviso to clause (i) and clause (ii) & (iii) provides the procedure for filing declaration by the deductee with the deductor for giving credit of tax deducted to other person in whose hands the income is assessable. Whereas, assesse has failed to follow the guidelines for passing on the tax credit to actual person who has earned such income. 3. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in interpreting section 199 r.w.r. 37BA(2), in its letter and spirit. The purpose of this rule is to ensure that the tax credit for tax deducted is available to the person in whose hands the income is assessable. This rule also ensures that the other person reports this income in their respective returns of income. 4. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in interpreting Rule 37BA(1) of the Income Tax Rules. Ld. CIT (A) has failed to acknowledge that deductor has deducted TDS in the hands of assesse as deductor was never provided the information on whose hands the income was assessable by Assessment Years: 2013-14 & 2014-15 the assesse. Therefore, the same cannot be allowed to the assesse. 5. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in not acknowledge the fact that during the scrutiny proceedings assessee failed to discharge its onus to prove that the investors in VCF had offered their income to tax which was passed on to them by the assessee VCF, which further substantiates non allowability of TDS credit to the assessee as per the provisions of section 199 r.w.r. 37BA (2).”
The only issue raised by the revenue is that the Ld. CIT(A) has wrongly directed the AO to allow credit for tax deducted at source on the income claimed as pass through by the assessee. The Ld. Departmental Representative (DR) submitted before us that the Ld. CIT (A) has allowed the credit ignoring that the purpose of the rule 37BA (2) is to ensure that the credit for tax deducted is available to the person in whose hands the income is assessable. The AO has denied the credit of TDS as the assessee had not declared the income from venture capital undertaking as assessable in its hand and has claimed status of pass through entity. As per the provisions of rule 37BA (ii) the assessee was required to file the details with the deductor such as name, address and PAN of the persons to whom credit was to be given along with reasons for giving credit for such persons. Since, the assessee has not followed the provisions of the Rules the assessee cannot take benefit of TDS credit. The Ld. DR further submitted that the facts of the cases relied upon by the Ld. CIT
(A) are different from the facts of the present case and therefore not applicable to the present case. Accordingly, the Ld. DR submitted that the order passed by the Ld. CIT (A) is liable to be set aside. 4. On the other hand, the Ld. counsel for the assessee supporting the order passed by the Ld.CIT (A) submitted that, since the provisions of section 10(23FB) r.w. section 115U of the Act provide that the income of venture capital undertakings from venture capital funds is taxable in the hands of the investors/unit holders on actual basis, there is no infirmity in the order passed by the Ld. CIT (A) to interfere with. The Ld. counsel further submitted that Assessment Years: 2013-14 & 2014-15 since the assessee furnished the details of income accrued or distributed to each of the contributors and provided the details as per Form 64 to each contributor as per the provisions of section 115U of the Act and complied with the requirements, the assessee is eligible for the TDS credit. 5. We have heard the rival contentions of the parties and perused the material on record in the light of the rival contentions. The Ld. CIT (A) has decided the said issue in favour of the assessee holding as under:-
“ 5.18 After consideration of totality of facts and principle laid down in the judicial precedents discussed above and arguments made by the appellant it is clear that the appellant has neither provided the declaration to the deductor nor the deductor has reported the details of tax deducted at source in the name of the other person. The appellant filed Form 64 with the tax authorities and also provided the Form 64 to each of its contributors. It is the responsibility of each of the contributors to include the income in their respective tax returns as reported in Form 64 and pay appropriate tax on the same. The appellant had complied with the obligation casted on it. The appellant is not required to obtained confirmation from each of the contributors that they have included the income in their respective tax returns and also have paid appropriate tax. All details of the contributors including PAN were available with the AO and he could have independently verified with them under the powers available to him. As per the provisions of section 115U of the Act, the income of the VCF is taxable in the hands of the members/contributors. The attention is particularly drawn to the provisions of section 115U (5) of the Act, as per which the income accruing or arising to or received by VCF during a previous year from investments made in VCUs which have not been paid or credited to the members/contributors, shall be deemed to have been credited to the account of such members/contributors, shall be deemed to have been credited to the account of such members/contributors on the last day of the previous year in the same proportion. The members/contributors would have been entitled to receive the income in the previous year. The appellant has complied with the provisions of the Act and it is entitled to the credit for TDS reported in its Form 26AS. Thus, the appellant ought to have Assessment Years: 2013-14 & 2014-15 been granted the benefit of credit for TDS. However, the AO has nowhere in his order mentioned whether the TDS claimed by the appellant is appearing in Form 26AS or not. For giving any credit for TDS, it is necessary to verify that the TDS has actually been deducted and payment have been made to the Government account. It can be verified from Form 26AS. Accordingly, I direct the AO to verify form 26AS and grant appropriate credit for TDS as 26AS. Therefore, the A.O. is directed to grant credit for the tax deducted at source after verification of Form 26AS. This ground is partly allowed.”
As pointed out by the Ld. counsel, Rule 37BA apply only in case the assessee had intimated to the payers about details of the persons, who are beneficial owners and such payers having acted on and deducted TDS in the names of the investors and reported in the TDS returns and TDS certificate. Since, in the present case, the credit for TDS appearing in Form No. 26AS of the assessee, the assessee is entitled for TDS credit. Further, the assessee had furnished the details of income accrued/distributed to each of the contributors as per Form 64, therefore it was the responsibility of each of the contributors to include the income in their tax returns as reported in Form-64 by the assessee and pay the tax on the same. Since, all the details of the contributors were available with the AO, he could have verified the same. In our considered view, the Ld. CIT (A) has rightly pointed out that the deduction of TDS by the deductors was on behalf of the assessee. Since, the information furnished by the deductors to Income Tax authorities refers to the assessee only and not to the investors, the AO was required to give credit to the assessee. We further notice that the Ld. CIT(A) has followed the ratio laid down by the Hon’ble Telangana and Andhra Pradesh High Court in the case of IVRCL-KBL (JV) V. ACIT in Writ Petition Nos., 31680, 31681, 31740, 31741, 31748, 31763, 42408, 42489, 42657, 42666, 42667, 42678, 43038, 43069 & 43708 of 2015 vide its order dated 29th February, 2016. In the said case, the Hon’ble court has held that the assessee is entitled to credit for tax deducted at source in the light of the facts that the assessee has not filed any declaration with the deductor and the deductor has not reported in the name of such other persons. Assessment Years: 2013-14 & 2014-15 Where there is no claim made by such other person the claim for credit cannot be rejected. The Ld. CIT(A) has further considered the judgment of the Hon’ble Delhi High Court in the case of CIT vs. Relcon ITA No 26/2015. In the said case, the Hon’ble Court has held that the assessee is entitled for TDS credit reflected in its Form 26AS in respect of income of its sister concern due to inadvertent error made by the deductor to reflect the TDS in the name of the assessee. The Ld. CIT(A) further considered the decisions of the coordinate Benches in the case of Arvind Murjani Brands (P) Ltd. vs. ITO 149 TTJ 221 (Mum) and ACIT vs. Digi JPR Networks Private Ltd. ITA No 6070/Mum/2017. 7. In our considered view, the findings of the Ld. CIT(A) are based on the ratio laid down by the Hon’ble High Courts and the decisions of the coordinate Benches in the cases discussed above. Since the order passed by the Ld. CIT(A) is well reasoned, in accordance with the provisions of the Act and based on the evidence on record, we do not find any merit in the contention of the revenue. We therefore, uphold the findings of the Ld. CIT(A) and dismiss the appeal of the revenue. The facts of the present case are identical to the facts of the assessee’s case for the AY 2013-14. In this case the assessee filed its return of income for the assessment year under consideration declaring total income at Rs. 12,84,49,120/-. The case was selected for scrutiny and the Assessing Officer passed the assessment order determining the income of the assessee at Rs. 161,69,79,775/- after denying exemption u/s 10(23FB) of the Act. The assessee challenged the assessment order inter alia on the ground that the AO has wrongly denied the benefit of exemption u/s 10(23FB) of the Income Tax Act and that, the AO has wrongly rejected the claim of the assessee for credit of TDS. In the first appeal, the Ld. CIT (A) decided both the issues in favour of the assessee and against the revenue. Aggrieved by the findings of the Ld. CIT (A), the revenue is in appeal before this Tribunal. 2. The revenue has challenged the impugned order passed by the Ld. CIT
(A) on the following effective grounds:- Assessment Years: 2013-14 & 2014-15 1. “On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in allowing the claim of assessee by ignoring the fact that section 10(23FB) clearly states that entire income of a VCF is not exempt but only income from investments in venture capital undertaking which are recognized by SEBI should be exempt from tax. In the present case no separate recognition has been provided to be seven contributory schemes even though all of them are separately auditable and maintain separate books of accounts. The inference of ld. CIT (A) that merely filing quarterly reports with SEBI and intimating it about the schemes will make VCF eligible for exemption is not acceptable. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in ignoring Explanatory notes for the amendment made to section 10(23FB) through finance Act 2013 which implies that pass through status which certain venture capital funds are availing till the date as of 1st April 2013 continuously enjoy that status in subsequent assessment years too and further amendment is made for the new funds which are registered under the SEBI (Alternative Interment Funds) regulations, 2012 w.e.f. 21st May 2012 to get pass through status U/s 115U and exemption u/s 10 (23FB). However, the existing venture capital funds which are not enjoying the pass through status U/s 115U and exemption U/s 10(23FB) which are registered before 21st may 2012 will continue to be governed under the earlier provisions having sectoral restrictions of venture capital undertakings which are eligible for exemption U/s 10(23FB) as existing till A.Y. 2012-13. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in allowing the claim of the assessee by ignoring the fact that investments have been made by assessee in VCUs engaged in real estate activities which is neither a service nor activity involved in production and manufacture of article or things and therefore, will not be eligible to be claimed as VCUs as per the VCF regulation. Hence the exemption claimed by assessee u/s 10(23FB) is not allowable. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in allowing the deduction claimed by assessee by ignoring the fact that assessee has made investments in VCUs which are associated concerns in which trustees held shares exceeding 15% of the paid-up equity share Assessment Years: 2013-14 & 2014-15 capital either individually or collectively and as per sub clause
(c) of Regulation 12, all investments made or to be made by VCF shall not be in the associated companies. 5. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in allowing the claim of assessee by stating that past assessment has been done in the case of assessee and no such inference has been drawn relating to exemption claimed by ignoring the fact that every assessment is a different assessment. 6. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in allowing the claim of assessee of giving credit for the TDS deducted by the investee companies ignoring the fact that assessee has failed to provide the documentary evidence by way of furnishing the details of taxes paid by each of the contributors of fund in respect of income reported in Form 64. 7. On the facts and circumstances of the case and in law, the Ld. Commissioner of Income tax (Appeals) has erred in allowing the TDS credit on the income claimed as pass through by the assessee. 8. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in completely ignoring the Rule 37BA(2) which provide that where under any provisions of the Act, the whole or any part of the income on which tax has been deducted at source is assessable in the hands of a persons other than the deductee, credit for the whole or any part of the tax deducted at source shall be given to the other person and not to the deductee. Proviso to clause (i) and clause (ii) & (iii) provides the procedure for filling declaration by the deductee with the deductor for giving credit of tax deducted to other person in whose hands the income is assessable. Whereas, assessee has failed to follow the guidelines for passing on the tax credit to actual person who has earned such income. 9. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in interpreting section 199 r.w.r. 37BA(2), in its letter and spirit. The purpose of this rule is to ensure that the tax credit for tax deducted is available to the person in whose hands the income is assessable. This rule also ensures that the other person reports this income in their respective returns of income. Assessment Years: 2013-14 & 2014-15 10. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in interpreting Rule 37BA(1) of the Income Tax Rules. Ld. CIT (A) has failed to acknowledge that deductor has deducted TDS in the hands of assessee as deductor was never provided the information on whose hands the income was assessable by the assessee. Therefore, the same cannot be allowed to the assessee. 11. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in not acknowledge the fact that during the scrutiny proceedings assessee failed to discharge its onus to prove that the investors in VCF had offered their income to tax which was passed onto them by the assessee VCF, which further substantiates non allowablity of TDS credit to the assessee as per the provisions of section 199 r.w.r. 37BA(2).”
Vide Ground No. 1 to 5 of the appeal, the revenue has challenged the action of the Ld. CIT (A) in allowing the claim of assessee inter alia alleging that the Ld. CIT (A) has passed the impugned order by ignoring the fact that under section 10(23FB) of the Act, entire income of a VCF is not exempt but only income from investments in venture capital undertakings recognized by the SEBI is exempt from tax. The revenue has further raised the issue that the Ld. CIT (A) has erred in allowing the claim of the assessee holding that in the past assessment no influence has been drawn relating to the exemption claimed. 4. At the outset, the Ld. counsel for the assessee submitted that this issue is covered in favour of the assessee by the order dated 10.08.2018 rendered by the “I” Bench of the Mumbai Tribunal in assessee’s own appeal ITA No. 2509/Mum/2018 for the AY 2012-13. This appeal was filed by the assessee against the order dated 28.03.2018 passed by the Ld. Pr. Commissioner of Income Tax u/s 263 of the Act. The Ld. counsel further submitted that in the assessment year 2013-14, the assessee filed its return of income claiming exemption u/s 10(23FB) of the Act in respect of income earned out of investments made in venture capital undertakings. The AO after verification of the details furnished by the assessee, allowed the claim of the assessee. The Assessment Years: 2013-14 & 2014-15 Ld. Pr. CIT- Mumbai revised the assessment order dated 17.03.2016 passed by the AO by exercising jurisdiction u/s 263 of the Act, holding that the assessee is not eligible to avail exemption u/s 10(23FB) of the Act therefore, the assessment order is erroneous and prejudicial to the interest of the revenue. Accordingly, the Ld. Pr. CIT set aside the assessment order and directed the AO to pass speaking order after examining the eligibility of assessee to claim exemption u/s 10(23FB) of the Act. The assessee challenged the impugned order passed by the Ld. Pr. CIT u/s 263 of the Act before the Tribunal. The Tribunal after hearing the assessee, set aside the impugned order passed by the Ld. Pr. CIT and restored the order passed by the Assessing Officer. The Ld. counsel further submitted that since the ITAT has decided the identical issue in favour of the assessee in assessee’s appeal ITA No. 2509/Mum/2018, A.Y. 2013-14 filed against the order u/s 263 of the Act, there is no merit in the appeal of the revenue. 5. On the other hand, the Ld. Departmental Representative (DR) fairly admitted that the Tribunal has decided the identical issue in favour of the assessee in assessee’s appeal against the order passed u/s 263 of the Act pertaining to the assessment year 2013-14, however, supported the assessment order passed by the AO. 6. We have heard the rival submissions of the parties and perused the material on record including the order passed by the “I” Bench of the Tribunal in assessee’s appeal ITA No. 2509/Mum/2018 for the AY 2013-14. As pointed out by the Ld. counsel for the assessee, the coordinate Bench has set aside the impugned order passed by the Pr. CIT holding that since the assessee is entitled for claim of exemption u/s 10(23FB) of the Act, the assessment order cannot be held to be erroneous and prejudicial to the interest of the revenue. The findings of the coordinate Bench read as under:- “13. We have patiently and carefully considered rival submissions and perused the materials on record. We have also applied our mind to the decisions relied. Before we proceed to decide the issues raised in the present appeal, it is relevant and necessary to look into certain statutory provisions which Assessment Years: 2013-14 & 2014-15 will have a significant bearing on the issues involved in the present appeal. Section 10(23FB) of the Act was introduced by Finance Act, 2000, w.e.f. 1st April 2001. The aforesaid provision provides for exemption from tax any income of a Venture Capital Company or Venture Capital Fund from investment in a Venture Capital Undertaking. As per Explanation to section 10(23FB) of the Act when it was introduced to the statute, Venture Capital Fund meant a fund which is operating under a registered trust deed, was granted certificate of registration by SEBI and which fulfils the conditions specified by SEBI with the approval of the Central Government. Similarly, as per the said explanation a Venture Capital Undertaking meant a domestic company whose shares are not listed in a recognized stock exchange in India and which is engaged in the business of providing services, production or manufacture of an article or thing but does not include such activities or sectors which the SEBI may specify with the approval of the Central Government. Simultaneously, with the introduction of section 10(23FB) of the Act, section 115U of the Act was also introduced to the Act which provided for taxation of income derived by Venture Capital Fund from Venture Capital Undertaking at the hands of the unitholders who have made investment in the Venture Capital Fund, as if, the income received by the Venture Capital fund from Venture Capital Undertaking is directly received by the unitholders from Venture Capital Undertaking. Thus the Venture Capital Fund was given a pass through status. Meaning thereby, the income derived by them from venture capital undertaking, though, is exempt in their hand but would be taxable at the hands of the unitholders who have invested in Venture Capital Funds. Subsequently, the Explanation to section 10(23FB) was amended by Finance Act (No.2), 2004, w.e.f. 1st October 2004, as per which Venture Capital Undertaking would mean a Venture Capital undertaking referred to in the SEBI (Venture Capital Funds) Regulations, 1996 made under the Security Exchange Board of India Act, 1992. Thus, up to assessment year 2007–08, all income of a Venture Capital Fund was exempt from Taxation. At the same time, it was taxable at the hands of unitholder who has made investment in Venture Capital Fund. Again, the definition of Venture Capital Assessment Years: 2013-14 & 2014-15 Undertaking was amended by Finance Act, 2007, w.e.f. 1st April 2008. As per which Venture Capital Undertaking means a domestic company whose shares are not listed in a recognised Stock Exchange in India and which is engaged in certain specified business activity as mentioned in the said definition clause. Thus, after the aforesaid amendment, the situation changed and the entire income of a Venture Capital Fund was no longer exempt from tax but only income from investment in Venture Capital Undertaking engaged in specified business sectors was exempt from taxation in the hand of VCF. Thus, the amendment to Section 10(23FB) of the Act brought by the Finance Act, 2007, made the exemption restrictive. By Finance Act, 2012, another amendment was brought to section 10(23FB) of the Act w.e.f. 1 st April 2013, and as per which Venture Capital Fund was defined as under:– ― “(b) “venture capital fund‖ means such fund –
(i) operating under a trust deed registered under the provisions of the Registration Act 1908 (16 of 1908) or 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); (ii) which has been granted a certificate of registration under the Securities and Exchange Board of India Act, 1992 (15 of 1992), and regulations made thereunder;
(ii) (iii) which fulfils the conditions as may be specified, with the approval of the Central Government, by the Securities and Exchange Board of India, by notification in the Official Gazette, in this behalf;
Similarly, the definition of Venture Capital Undertaking was also amended by substituting the following definition:– “(c) “venture capital undertaking‖ means a venture capital undertaking referred to in the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);” 15. Corresponding amendments were also made under section 115U of the Act. The reason for bringing in the amendment to the Assessment Years: 2013-14 & 2014-15 definition of Venture Capital Undertaking as explained in the memorandum explaining the amendment is as under:– “Provisions relating to Venture Capital Fund (VCF) or Venture Capita! Company (VCC). Provisions of Section 10(23FB) and Section 115U of the Act were intended to ensure a tax pass through status to Securities and Exchange Board of India (SEBI) registered Venture Capital Fund (VCF) or Venture Capital Company (VCC). Section 10(23FB) granted exemption in respect of income of such VCF/VCC. The benefit was available if investment by such VCC/VCF was in unlisted shares of a domestic company, i.e. a Venture Capital Undertaking (VCU). Section 115U ensures that income, in the hand of the investor through VCF/VCC is taxed in like manner and to the same extent as if the investment was directly made by investor in the VCU. Further, TDS provisions are not applicable to any payment made by the VCF to its investor and payment by VCC to the investor is exempted from Dividend Distribution Tax (DDT). Section 1O(23FB) further provides that income of a SEBI regulated VCF or VCC, derived from investment in a domestic company i.e. Venture Capital Undertaking (VCU), is exempt from taxation, provided the VCU is engaged in only nine specified businesses. The working of VCF, VCC or VCU are regulated by SEBI and RBI. In order to avoid multiplicity of conditions in different regulations for the same entities, the sectoral restriction on business of VCU is required to be removed from Income Tax Act and such VCU is to be allowed to be governed by conditions imposed by SEBI and RBI.”
A further amendment was again made in section 10(23FB) of the Act by Finance Act, 2013, w.e.f. 1st April 2013. As per the aforesaid amendment Venture Capital Fund was defined as under:– “(A) operating under a trust deed registered under the provisions of the Registration Act, 1908 (16 of 1908), which—
(I) has been granted a certificate of registration, before the 21st day of May, 2012, as a Venture Capital Fund Assessment Years: 2013-14 & 2014-15 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 O f 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 recognized 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); 17. Whereas, Venture Capital Undertaking after the amendment was defined as under:–
(c) ―”Venture capital undertaking‖ means –
(i) a venture capital undertaking as defined in clause (n) of regulation 2 of the 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.”
Thus, keeping in view the legislative history of the provision of section 10(23FB) as well as section 115U of the Act it becomes clear that income derived by a Venture Capital Company or Venture Capital Fund from investments made in Venture Capital Undertaking was made exempt from the very beginning, subject of–course, to certain sectoral restriction imposed in the definition of VCU in section 10(23FB) with regard to the business activities to be carried on by Venture Capital Undertaking. However, that sectoral restriction was removed by the amendment to section 10(23FB) by Finance Act, 2012. As per section 10(23FB) of the Act which is applicable to the impugned assessment year i.e., A.Y. 2013–14, a Venture Assessment Years: 2013-14 & 2014-15 Capital Fund would mean a fund operating under the Trust Deed registered under the provisions of Registration Act, 1908 and which has been granted a certificate of registration before 21st May 2012, as a Venture Capital Fund and is regulated under the SEBI(Venture Capital Funds) Regulations, 1996. Of course, a fund operating under a trust deed registered under the Registration Act, 1908, which has been granted a certificate of registration as Venture Capital Fund under the SEBI (Alternative Investment Funds) Regulations, 2012, subject to fulfillment of certain conditions, is also treated as Venture Capital Fund. Further, as per the said provision, Venture Capital Undertaking would mean a Venture Capital Undertaking as defined in Clause (n) of Regulation–2 of the SEBI(Venture Capital Funds) Regulations, 1996 or a Venture Capital Undertaking as defined in Clause (aa) of Sub– regulation–1 of Regulation–2 of the SEBI(Alternative Investment Funds) Regulations, 2012. 19. Keeping in view the aforesaid provisions of section 10(23FB) of the Act if we examine the facts of the present appeal, it is seen that the assessee was created vide registered Trust Deed dated 18th July 2005, and was granted certificate of registration by the SEBI as a Venture Capital Fund by the SEBI on 26th September 2005. Thus, as could be seen, the assessee is a Venture Capital Fund as defined under Explanation (b)(A)(i) of section 10(23FB) of the Act. Therefore, the assessee is regulated under the SEBI (Venture Capital Funds) Regulations, 1996. As per Explanation (c)(i) of section 10(23FB) of the Act, Venture Capital Undertaking means a Venture Capital Undertaking as defined in Clause (n) of section 2 of the SEBI(Venture Capital Fund) Regulation, 1996. Therefore, since the assessee is regulated by SEBI(Venture Capital Fund) Regulations, 1996, the definition of Venture Capital Undertaking as per section 2(n) of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 would be applicable to the assessee. As per section 2(n) of SEBI (Venture Capital Fund) Regulations, 1996, Venture Capital Undertaking is defined as under:–
“[(n) ―venture capital undertaking‖ means a domestic company – Assessment Years: 2013-14 & 2014-15 (i) whose shares are not listed on a recognized stock exchange in India; (ii) which is engaged in the business for providing services, production or manufacture of article or things or does not include such activities or sectors which are specified in the negative list by the Board with the approval of the Central Government by notification in the Official Gazette in this behalf.” 20. A reading of the said definition makes it clear that a domestic company is treated as a Venture Capital Undertaking if its shares are not listed in a recognised Stock Exchange in India and if it is engaged in the business for providing services, production or manufacture of article or thing which are not specified in the negative list by the SEBI with the approval of the Central Government and notified in the official gazette. The negative list as provided under Third Schedule to the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 is as under:–
“NEGATIVE LIST (1) [***] (2) Non–banking financial services [excluding those Non– Banking Financial Companies which are registered with Reserve Bank of India and have been categorized as Equipment Leasing or Hire Purchase Companies.]. (3) gold financing [excluding those companies which are engaged in gold financing for jewellery.]. (4) Activities not permitted under industrial policy of Government of India. (5) Any other activity which may be specified by the Board in consultation with Government of India from time to time. 21. Keeping in perspective the aforesaid statutory provisions let us examine the facts of the present appeal. Undisputedly, the assessee in the revised return of income filed for the impugned assessment year has claimed deduction under section 10(23FB) of the Act. It is also a fact that the return of income filed by the assessee was selected for scrutiny and in course of the assessment proceedings, in response to the notice dated 17th December 2013 issued under section 143(2) of the Act the assessee vide letter dated 26th December 2013, furnished copy of computation of income, return of income, Assessment Years: 2013-14 & 2014-15 audited financial statements and statement of income paid or credited to unitholders in Form no.64 which is required to be furnished under section 115U of the Act. The Assessing Officer after verifying the details furnished by the assessee and noticing that the assessee has claimed exemption under section 10(23FB) of the Act as a Venture Capital Fund issued a notice under section 142(1) of the Act on 5th March 2014, requiring the assessee to furnish various details including a note on nature of business activity. In response to the said notice, assessee vide letter dated 12th March 2014 furnished the required details along with supporting documents. Subsequently, the Assessing Officer issued a notice under section 142(1) of the Act on 18th September 2015 requiring the assessee to furnish necessary details regarding its claim of exemption under section 10(23FB) of the Act. In response to the said notice, the assessee filed its submissions before the Assessing Officer on 13th October 2015 explaining in detail its eligibility to claim exemption under section 10(23FB) of the Act. A detailed working of the income derived and exemption claimed was also furnished before the Assessing Officer. After verifying such details furnished by the assessee, the Assessing Officer again vide order sheet entry dated 12th February 2016 called upon the assessee to furnish further documentary evidences like registration certificate issued by the SEBI recognising the assessee as Venture Capital Fund, books of account in soft copy, copy of all reports sent to SEBI for financial year 2012–13, details of fund–wise and investment–wise fund etc. The Assessing Officer also called upon the assessee to explain how it is covered under section 10(23FB) and section 115U of the Act. He also asked the assessee to provide the basis of differentiation of income from Venture Capital Units and Non–venture Capital Units. He also called for details of TDS made on distribution of income to beneficiary investors. In response to above queries, the assessee vide reply dated 22nd February 2016 furnished all the required details as called for by the Assessing Officer including the quarterly reports submitted to the SEBI, copy of statement in Form no.64, registration certificate issued by the SEBI, fund–wise and investment–wise details, etc. On the very same day, the Assessing Officer, through order sheet entry, called upon the assessee to furnish details of investment made in Venture Capital Undertakings in respect of all the funds as Assessment Years: 2013-14 & 2014-15 well as the details regarding the nature of business activities carried on by the Venture Capital Undertakings and also to explain whether the Venture Capital Undertakings are carrying on activities which are in the negative list as mentioned in the Third Schedule of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. He directed the assessee to comply with these queries on 25th February 2016. In response, the assessee vide reply dated 25th February 2016 submitted the details in respect of the investment made in Venture Capital Undertaking as well as the business activity of the Venture Capital Undertakings. In the said reply, it was submitted by the assessee that the fund was created to float various schemes with focus to invest primarily in entities engaged in the real estate sector. The assessee referring to the negative list as per the Third Schedule of Securities and Exchange Board of India (Venture Capital Funds), Regulations 1996 submitted that real estate sector is no longer appearing in the negative list as it has been taken out from the negative list by SEBI (Venture Capital Funds)(Amendment) Regulations, 2004 w.e.f. 5th April 2004. Thus, it was submitted, the assessee is eligible to avail exemption under section 10(23FB) of the Act. 22. The Assessing Officer after considering the submissions of the assessee and applying his mind to the relevant statutory provisions as well as material brought on record, ultimately completed the assessment on 17th March 2016, allowing assessee’s claim of exemption with the following observations:–
“5. The reply of the assessee and facts of the case were examined. The assessee is a SEBI registered Venture Capital Fund (VCF). As per the provisions of the I.T. Act, 1961, as amended by the Finance Act, 2012, in section 10(23FB) and 115U of the Income Tax Act, 1961, (The Act), from April 1, 2012, the income earned by Venture Capital Fund (The Fund or The Scheme) from Venture Capital Undertakings (VCUs) will be exempt from tax in the hands of the Fund and the same will be subject to tax in the hands of the investors on accrual basis. The Fund will continue to pay tax on income other than from VCUs (such as bank interest, income from mutual funds etc.) It is also noticed that the assessee has filed the requisite Form Assessment Years: 2013-14 & 2014-15 no.64 as per Rule 12C of the Income–tax Rules with then Commissioner of Income–tax–21, Mumbai, who had the jurisdiction over the Venture Capital Fund. The assessee has also issued Form no.64 to respective investors of each of the Schemes. Accordingly, the contention of the assessee is found to be correct and accepted and the entire income earned from the investments made in the Venture Capital Undertakings is to be subjected to tax in the hands of investors as per provisions of section 115JU of the Act.” 23. Thus, on a cumulative consideration of the aforesaid facts and material available on record, it is evident, after making a comprehensive enquiry with regard to assessee’s claim of exemption by calling for necessary documentary evidences and other details and applying his mind to the facts and materials on record and keeping in view the relevant statutory provisions, the Assessing Officer has completed the assessment allowing assessee’s claim of exemption. Therefore, it is not a case where the Assessing Officer has either not conducted any enquiry or has accepted assessee’s claim without applying his mind to the facts and material on record or the relevant statutory provisions. On a careful reading of the order passed under section 263 of the Act by the learned Principal Commissioner, it is evident, she has proceeded to exercise her power under section 263 of the Act, prima–facie, on the view that assessee is not eligible to claim exemption under section 10(23FB) of the Act, as, in her opinion the assessee has either violated conditions of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 or it has derived income out of investments made in Venture Capital Undertakings which appear in the negative list. It is apparent on record, the assessee has been registered as a Venture Capital Fund by the SEBI in the year 2005. Therefore, it is regulated by Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. As per the definition of Venture Capital Undertaking under clause 2(n) of the said Regulation, which is applicable to the assessee as per section 10(23FB) Explanation (c) of the Act, only those companies which are engaged in business activities appearing in the negative list under Third Schedule of the said Regulation are not to be treated as Venture Capital Undertaking. A cursory glance of the negative list under Assessment Years: 2013-14 & 2014-15 the Third Schedule of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 makes it clear that the Venture Capital Undertakings in which the assessee has made investment are not appearing there. Admittedly, all the Venture Capital Undertakings, wherein, the assessee made investments are doing business in real estate sector. Real estate sector has been removed from the negative list under the third Schedule of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 w.e.f. 5th April 2004. That being the case, assessee is not ineligible from availing exemption under section 10(23FB) of the Act. 24. It is relevant to observe, the learned Principal Commissioner referring to the definition of Venture Capital Undertaking under Securities and Exchange Board of India (Alternative Investment Funds) Regulation, 2012 has observed, since, the Venture Capital Undertakings, wherein, the assessee has invested are not engaged in the business for providing services, production or manufacture of article or thing, assessee is ineligible to avail exemption. As already discussed hereinbefore, the assessee is governed by Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. In fact, learned Principal Commissioner also subscribes to such view. However, referring to the definition of Venture Capital Undertaking under section 2(aa) of Securities and Exchange Board of India (Alternative Investment Funds) Regulation, 2012 she has concluded that the assessee having not invested in Venture Capital Undertakings engaged in the business activity of providing services, production or manufacture of Article or thing, they will not qualify as Venture Capital Undertaking for the purpose of 10(23FB) of the Act. In our view, such observation of the learned Principal Commissioner runs contrary to the spirit of section 10(23FB) and section 115U of the Act. A careful analysis of the legislative history of section 10(23FB) r/w section 115U of the Act clearly demonstrates that the intention of the legislature from the very inception of the provision was to allow exemption to a Venture Capital Fund in respect of income derived by it from investments made in Venture Capital Undertaking. For that reason alone, the sectoral restrictions imposed in the definition of Venture Capital Undertaking under section 10(23FB) of the Act was subsequently removed by amendment brought by Finance Act, 2012. Thus, for the Assessment Years: 2013-14 & 2014-15 aforesaid reasons, the observation of the learned Principal Commissioner that the assessee is not eligible for exemption under section 10(23FB) of the Act is untenable. 25. Further, the learned Principal Commissioner has observed that the assessee has violated the conditions imposed under Securities and Exchange Board of India Act and Regulations by investing in mutual fund. However, the learned Principal Commissioner has not specified which provisions of SEBI Act or Regulations have been violated by the assessee by investing in mutual fund. On carefully going through the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996, we were unable to locate any restriction / condition imposed therein prohibiting the assessee from investing in mutual fund. On the contrary, the learned Sr. Counsel has brought to our notice a clarification issued by SEBI, wherein, it has been specifically stated that there is no prohibition in investing surplus fund available with Venture Capital Fund in short term liquid mutual fund. In any case of the matter, the allegation of breach / violation of SEBI Regulation has originated from the Principal Commissioner, whereas, there is no such allegation of violation of SEBI Regulations by the competent authority i.e., SEBI. Undisputedly, SEBI has issued registration certificate to the assessee registering it as a Venture Capital Fund in the year 2005. Therefore, the competent authority which can look into any violation is the SEBI. Neither the registration certificate granted has been withdrawn by SEBI nor any action has been taken against the assessee for any violation as alleged by the learned Principal Commissioner. In fact, on going through the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996, we find that as per section 8 of the said Regulations, the grant of registration certificate is subject to the condition that Venture Capital Fund shall abide by the conditions mentioned therein. There is no material on record to indicate that the assessee has violated any of the conditions of section 8 of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. Further, section 22 of the said Regulation empowers SEBI to call upon the Venture Capital Fund to file such report, as the Board may desire with regard to activities carried on by the Venture Capital Fund. Further, section 25 of the said Regulation empowers the Board to inspect or Assessment Years: 2013-14 & 2014-15 investigate the books of account, records and documents of a Venture Capital Fund through an Inspecting or Investigating Officer and on the basis of such report, the Board can take such measures against the Venture Capital Fund as per section 29 or 30 of the said Regulation. Undisputedly, in case of the present assessee there is no such allegation or action by the SEBI which could demonstrate violation of any conditions imposed by SEBI. At least, no material has been brought before us by the learned Departmental Representative to demonstrate such fact. Thus, in the absence of any allegation or action by the SEBI against the assessee towards violation of SEBI Regulations, the learned Principal Commissioner cannot make such allegation only for the purpose of denying assessee’s claim of exemption under section 10(23FB) of the Act. In this context, we may rely upon the following decisions:– i) G.V.K. Biosciences Pvt. Ltd. v/s ACIT, [2014]49 taxmann. com 385; ii) ACIT v/s Small Is Beautiful, [2013] 26 ITR (Trib.) 41; and iii) ITO v/s Gujarat Information Technology Fund, [2011] 45 SOT 529. 26. In fact, in case of DHFL Capital Fund v/s ITO, the Tribunal, while considering a similar issue of claim of exemption under section 10(23FB) of the Act has held that in the absence of allegation of any violation of its Regulations by SEBI, the income tax authorities cannot disallow assessee’s claim of exemption alleging violation of SEBI conditions. Thus, the reasoning of the learned Principal Commissioner that the assessee has violated SEBI Regulations, hence, not eligible to avail exemption under section 10(23FB) of the Act is unsustainable. 27. Further, the learned Principal Commissioner has held that, since, the assessee has invested in Venture Capital Undertakings which are in real estate business, it can be said that assessee is in the business of buying and selling of property, hence, is not eligible for exemption under section 10(23FB) of the Act. We are unable to accept the aforesaid reasoning of the leaned Principal Commissioner. Only because the assessee has invested in Venture Capital Undertakings which are in real estate sector, it cannot be said that the assessee is also engaged in real estate business of purchase Assessment Years: 2013-14 & 2014-15 and sale of immovable property. More so, when the assessee has been registered with SEBI as a Venture Capital Fund and it has invested its funds in the manner prescribed not only under section 10(23FB) of the Act but also under Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. 28. Further, the definition of Venture Capital Undertaking by virtue of amendment to section 10(23FB) of the Act by Finance Act, 2012, has adopted the definition of Venture Capital Undertaking as per section 2(n) of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. As per the said definition, only those companies which are engaged in the business activities relating to a sector appearing in the negative list are not to be treated as Venture Capital Undertaking. Undisputedly, real estate sector has been removed from the negative list under Third Schedule of Securities and Exchange Board of India (Venture Capital Funds) Regulations 1996) in May 2004, which is much before the assessee came into existence in 2005. Thus, after the assessee came into existence and started investing fund in Venture Capital Undertakings, real estate sector was not in the negative list of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. That being the case, the reasoning of the learned Principal Commissioner that the assessee is not eligible for exemption under section 10(23FB) of the Act is unsustainable. In this regard, it needs to be observed, the learned Principal Commissioner has stated that the amendment to section 10(23FB) of the Act by Finance Act, 2012, is prospective and will apply to assessment year 2013–14. There cannot be any dispute with the aforesaid observations of the learned Principal Commissioner. However, the undisputed fact is, the assessee has claimed exemption under section 10(23FB) of the Act for assessment year 2013–14. Hence, the provisions applicable to such assessment year would govern all issues relating to assessee’s claim of exemption. Applying the conditions of section 10(23FB) of the Act applicable to assessment year 2013–14, assessee’s claim of exemption under section 10(23FB) of the Act is allowable”. Assessment Years: 2013-14 & 2014-15 7. Since, the Tribunal has decided the identical issue in favour of the assessee in assessee’s appeal for the AY 2013-14 discussed above, we do not find any merit in the appeal of the revenue. Hence, respectfully following the decision of the coordinate Bench in assessee’s own case, we uphold the findings of the Ld. CIT (A) and dismiss this ground of appeal of the revenue. Accordingly, we direct the AO to allow the exemption. 8. Vide Ground No. 6 to 11 the revenue has challenged the action of the Ld. CIT (A) in allowing the claim of assessee of giving credit for the TDS on income claimed as pass through by the assessee. The revenue has raised the identical issue in its appeal for the AY 2013-14 discussed above and we have upheld the findings of the Ld. CIT (A) and decided the identical issue in favour of the revenue’s appeal for the AY 2013-14. Since, there is no material change in the facts of the present case, consistent with our findings in the revenue’s appeal, ITA No. 1144/Mum/2018 for AY 2013-14, we uphold the findings of the Ld. CIT (A) in the present case also and dismiss Ground No. 6 to 11 of the revenue’s appeal. In the result, appeals filed by the revenue for assessment years 2013- 2014 and 2014-15 are dismissed. Order pronounced on 22 Sept., 2020 under rule 34 (4) of the Income Tax Appellate Tribunal Rules, 1963. (M. BALAGANESH) (RAM LAL NEGI) ACCOUNTANT MEMBER JUDICIAL MEMBER म ुंबई Mumbai; दिन ुंक Dated: 22/09/2020
Alindra, PS आदेश प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- Assessment Years: 2013-14 & 2014-15 4. आयकर आय क्त / CIT 5. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file.
आदेशानुसार/ BY ORDER, सत्य दपि प्रदि //// उि/सहायक िंजीकार (Dy./Asstt.