ITO (E) 2(1), MUMBAI vs. NATIONAL VENTURE FUND FOR SOFTWARE & INFORMATION TEHCNOLOGY INDUSTRY, MUMBAI

Aforesaid appeal by revenue for Assessment Year [in short referred to as ‘AY’] 2012-13 contest the order of Ld. Commissioner of Income- Tax (Appeals)-8, Mumbai, [in short referred to as ‘CIT(A)’], Appeal No. CIT(A)-8/IT-220/15-16 dated 29/09/2016 on following grounds of appeal:-

Whether on the facts of the case and in law the Ld. CIT(A)erred in allowing the appeal of the assessee on account of disallowance of expenditure u/s 57(iii) of the 2 Assessment Year :2012-13 I.T.Act, ignoring the fact that during the course of assessment proceedings the assessee failed to provide any proof to A.O. to prove that the expenses claimed were incurred for earning interest on fixed deposits under the head Income from other sources.

Whether on the facts of the case and in the circumstances of the case and in law the Ld. CIT(A)erred in allowing the appeal, on this issue when during the course of assessment proceedings the assessee itself stated that the expenses have been incurred for earning income from venture capital fund investments which has been brought to tax under the head Long Term Capital Gain and not under the head Income from other sources.

The appellant prays that the order of the Commissioner of Income Tax (Appeals)- 1, Mumbai be set aside and that of the Assessing Officer be restored.

We have carefully heard the arguments advanced by both the representatives and perused relevant material on record. We have also deliberated on the judicial pronouncements as cited before us. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs.

1 Facts on record would reveal that the assessee being resident assessee was assessed for year under consideration u/s 143(3) on 28/03/2015 wherein the income was determined at Rs.102.32 Crores after certain adjustment as against returned income of Rs.99.51 Crores filed by the assessee on 28/09/2012. The assessee is stated to be close- ended venture capital fund registered with SEBI and invest in shares and debentures of unlisted companies with a view to earn long-term capital appreciations. Pending suitable opportunities, available funds are parked by the assessee in fixed deposits with the bank which give rise to interest income.

2 During assessment proceedings, it transpired that the assessee earned exempt dividend income of Rs.9.34 Lacs and interest on fixed

3 Upon consideration of factual matrix, Ld. AO formed an opinion that the expenses were incurred for meeting the basic investment objective of earning long-term capital appreciation. However, these expenses would not in any way lead to earning of interest income. The provisions of Section-57(iii) allows for deduction of any expenditure laid out or expended wholly or exclusively for the purposes of earning such income and therefore, the deduction of the expenditure was not allowable. In defense, the assessee submitted that since venture capital fund generates both exempt as well as taxable income, a disallowance u/s 14A r.w.r. 8D has already been made and balance portion of expenditure

Before, Ld. CIT(A), the assessee, inter-alia, submitted that the assessee acts only through investment manager and trustees. The investment managers were appointed by the trustee to manage the asset of the trust. The investment manager raises funds from contributors at beginning of fund life, parks the same for time being in FDR with Bank, invest the same in investee company, realizes income from investment, make exit at appropriate time, park surplus money in bank FDR and distributes fund amongst contributors. The assets of fund which the investment manager is supposed to manage are in the form of liquid money in bank, FDR with Bank and investment in investee company. In the above background, it was submitted that management fees were incurred wholly and exclusively for earning income from venture capital investment as well as Bank FDR. The assessee also placed on record the position of disallowance made in preceding as well as succeeding years which has already been extracted on page nos.11- 12 of the impugned order. The perusal of the same would reveal that beside this year, disallowance us 57(iii) was made in AY 2010-11. However, the assessee also raised plea of consistency. Reliance was placed on several judicial pronouncements, in support of the claim. The Ld. CIT(A) relied upon appellate order for AY 2010-11. It was also noted that additional disallowance as made u/s 14A was deleted by the 5 Assessment Year :2012-13 Tribunal for AY 2009-10. Therefore, the aforesaid disallowance was deleted. Aggrieved, the assessee is under further appeal before us.

After due consideration of factual matrix as enumerated in preceding paragraphs, it is quite evident that the assessee had earned exempt income against which it has offered disallowance u/s 14A in terms of Rule 8D. However, by implication, it could not be said that rest of the expenditure was incurred to earn the interest income. It is quite evident form assessee’s own submissions before Ld. CIT(A) that the prime objective of the assessee was to make investment as venture capital fund. The income earned therefrom was assessed as capital gains. Only the surplus money held by the assessee was kept as fixed deposits in the bank. The management / trusteeship fees & other expenditure was primarily directed towards venture capital investments. No borrowing costs have been incurred by the assessee. In our considered opinion, the claim of the assessee was to be adjudged at the threshold of Sec. 57(iii) which mandate that any expenditure laid out or expended wholly or exclusively for the purposes of earning such income, would be allowable. However, in the present case, the management / trusteeship fees and other expenses which mainly consist of audit fees, professional fees etc. were directed towards the prime activity i.e. venture capital investment, the income from which has been assessed under the head Capital Gains. Therefore, we find that there was no direct nexus of these expenditure vis-à-vis interest income earned by the assessee. The rule of consistency would not be applicable since matter of disallowance u/s 57(iii) arose in AY 2010-11 also. The decision of 6 Assessment Year :2012-13 Tribunal for AY 2009-10 was concerned with disallowance u/s 14A only and therefore, the same would also not be applicable.

The facts in the decision of Hyderabad Tribunal in ACIT V/s Small is beautiful (ITA Nos. 1004-05/Hyd/2012 dated 04/07/2013) as relied upon by Ld. AR are quite different. Upon perusal of grounds raised by revenue, it is evident that revenue was under appeal on the ground that Ld. CIT(A) allowed the expenditure though the assessee did not fulfill the Venture Capital Fund regulations. The deduction u/s 57(iii) was not the issue under consideration. In the decision of CIT V/s Richardson & Cruddas Ltd. (202 ITR 350), there was nexus of custodian expenditure vis-à-vis interest income and therefore, the same is factually distinguishable.

Keeping in view the totality of facts and circumstances, we find that since there was no material on record which would suggest any nexus of expenditure vis-à-vis interest income, the expenditure thus claim would not be allowable to the assessee. Therefore, we set aside the impugned order and restore the computations made by Ld. AO.

The appeal stands allowed in terms of our above order.