JM FINANCIAL INDIA FUND-SCHEME B,MUMBAI vs. ITO WARD 17(2)(1), MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER;

income tax (Appeals)-28, Mumbai, hereinafter referred as learned Commissioner (Appeals) dated 31st December 2018, which in turn arises

from assessment order passed by assessing officer under section 143(3)

dated 13.12.2017 for assessment year 2015-16. The assessee has raised

following grounds of appeal:

Sr. Grounds of Appeal Tax Effect No. relating to each Grounds of appeal Ground NO.1: Denying exemption under section Rs.3963,89,687 1

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

10(23FB) of Rs.39,63,89,687 the Income-tax Act, 1961 On the facts and circumstances of the case, and ill law, the Commissioner of Income-tax (Appeals) ['CIT(A)'] erred in upholding the denial of the exemption under section 1O(23FB) of the Income- tax Act, 1961 ('Act'). Ground No.2: Assessment of alleged income as 2 NA 'Income from NA other sources' instead of assessment under provisions of section 161(1) of the Act On the facts and circumstances of the case, and in law the CIT(A) having upholding the denial of exemption under section 10(23FB) of the Act, he erred in upholding that the alleged income ought to be assessed under the head 'Income from other sources' and not in terms of section 161(1) of the Act. The CIT(A) further erred in holding that the provisions of section 161(1) of the Act are not applicable to the Appellant trust.

3 Ground NO.3: Taxation of income which had NA already been considered in the returns of income of the beneficiaries On the facts and circumstances of the case, and in law the CIT(A) erred in taxing in the hands of the Appellant, income which had already been considered in the returns of the beneficiaries of the trust.

Ground NO.4: Denying exemption under section 4 NA 10(34) of the Act On the facts and circumstances of the case, and in law the CIT(A) erred in law in upholding the denial of exemption under section 10(34) of the Act. Ground No.5: Denying exemption under section Rs. 34,51,470 5 10(35) of the Act On the facts and circumstances of the case, and in law the CIT(A) erred in law in upholding the denial of exemption under section 10(35) of the Act.

Ground No.6: Status of a person under section 2f31) NA 6 of the Act On the facts and circumstances of the case, and in law, the CIT(A) erred in holding that the Income-tax Officer, Ward 17(2)(1), Mumbai ('the AO') has not held in Para 7.5 of the assessment order that the Appellant is not a person. The CIT(A) ought to have held that since the Appellant is not a person as per the AO, the Appellant also did not fall within the scope of section 4 of the Act, and hence was not liable to tax under the Act. 7 Ground NO.7: Without prejudice to Ground No.6 NA above, the status of the Appellant held as AOP On the facts and circumstances of the case, and in law 2

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

the CIT(A) ought to have held the status of the Appellant as trust and not an AOP.

8 Ground No.8: Erroneous conclusions and assertions NA of facts On the facts and circumstances of the case, and in law the CIT(A) erred in making a number of erroneous assertions of facts, including, but not limited to the following: a) The Appellant has violated the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996; b) The Appellant has violated the object clause of the trust deed by investing in units of mutual funds; c) Investments in units of mutual funds in which the Appellant has controlling and governing interests and common trustees would also fall within the gamut of the term "associate company"; d) The AO has never said that the Appellant registration with SEBI is non-existent The AO has neither implicitly nor explicitly held that the Appellant is not a person. Rs.9,06,08,166 Ground NO.9: Interest under section 234B of the 9 Act On the facts and circumstances of the case the CIT(A) ought to have held that the provisions of section 234B of the Act are not applicable in the Appellant's case. Total Tax Effect Rs. 49,04,49,323

Trusts Act 1882. The assessee is further registered under the provisions

of Registration Act 1908. The assessee is also registered with Securities

and Exchange Board of India (SEBI) as a Venture Capital Fund (VCF)

under SEBI Venture Capital Regulations 1996, accordingly the assessee

is engaged in investments activities. The assessee raised funds from

investors to make investments in Venture Capital Undertakings (VCUs).

For assessment year 2015-16, the assessee filed its return of income on 27th August 2015 declaring income of Rs. Nil. In the return of income

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

the assessee claimed exemption of its income under section 10(23FB) of

the Act. The return of income was selected for scrutiny. During the

assessment, the Assessing Officer made a reference of Joint

Commissioner of Income tax (JCIT) under section 144A. The assessee

was informed about initiation of proceeding/reference to JCIT vide

notice dated 09.11.2017. The Assessing Officer completed the scrutiny

assessment under section 143(3) on 13.12.12017. The Assessing Officer

while passing the assessment order held that the assessee made

investment in mutual funds and violated SEBI (VCF) Regulations and

also violated the objects of clause of the trust deed. The Assessing

Officer while passing the assessment order denied exemptions claimed

by assessee under section 10(23FB) on income from VCUs. The

assessing officer also denied exemption under section 10(34) and 10(35)

of the Act. On appeal before the learned Commissioner (Appeals) the action of assessing officer was confirmed vide order dated 31st

December 2018. Hence, further aggrieved by the order of learned

Commissioner (Appeals) the assessee has filed this appeal before

Tribunal. 3. We have heard the submission of Sh. P J Pardiwala, Senior Advocate

with Sh. Pinak Shah Advocate for assessee and Sh. S.K. Poddar (CIT-

DR) with Sh. Nishant Samaiya, Senior DR for revenue. With the active

assistance of ld. representative of both the parties, we have also gone 4

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

through the orders of lower authorities. Ground No. 1 and 8 relates to

denial of exemption under section 10(23FB) to the assessee. The

learned Senior Counsel for assessee submits that assessee being a VCF,

by its very nature, raised funds from investors and invested in Venture

Capital Undertaking as per SEBI (VCF) Regulations. Assessee raised a

total of Rs. 638.6 Crore of capital contribution from various investors.

The assessee received this capital from the investor over a period of

time to make the investments. As the investments in the VCUs made

over a period of time, the surplus funds were invested by assessee in

units of liquid mutual funds. Similarly, post divestments made by

assessee from VCUs, the monies received by the assessee were invested

into units of liquid mutual funds till its distribution to the investors.

Further, certain amounts were retained by assessee for meeting the day

to day expenses of the funds. For assessment year 2015-16, total

investment in liquid mutual funds as on the last day of the year is merely

1.2% of the capital contribution of the assessee. Further, the total

income from investments in mutual funds is 0.89% of the total income

for assessment year 2015-16. As per the provisions of Act, the assessee

has provided Form 64, containing, interalia the share of income under

each head of income with regards to each investor. The income earned

by the investor, has been disclosed in their respective returns of income.

The assessing officer denied the exemptions claim by assessee under 5

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

section 10(23FB) of the Act and taxed the entire income under the head

‘Income from Other Sources’. The assessing officer treated the

investment made by assessee in mutual funds as a violation of SEBI

(VCF) Regulations. The assessing officer while denying the exemption

under section 10(23 FB) took his view that the assessee has violated the

object clause of the trust deed. The learned Commissioner (Appeals)

confirmed the action of assessing officer. 4. The learned Sr. Counsel for assessee submits that in order to claim

exemption under section 10(23FB), the assessee (VCF) needs to comply

three conditions i.e. (i) the Venture Capital Fund is operating under the

trust deed registered under the provisions of Registration Act, (ii) a

certificate of registration should be granted to the funds by the Security and Exchange Board of India (SEBI) before 21st May 2012, and (iii) the

funds should be regulated under the SEBI (VSF) Regulations. The

learned Sr. Counsel submits that once these three conditions are satisfied

by the assessee, there is no basis for denying the exemption under

section 10(23 FB) of the Act. The assessee is operating under the trust

deed which is registered under the provisions of Registration Act. A

certificate of registration has been granted to the assessee by SEBI. A

certificate of registration granted to the assessee is still in force and has

not been revoked. Further, no questions/enquiry has been made on the

assessee by SEBI. The assessee is regulated under the SEBI (VSF) 6

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Regulations. Since all the conditions are fulfilled by the assessee, the

exemption under section 10(23FB) should have been granted to the

assessee. The learned Senior Counsel submits that the assessing officer

is not require to go beyond the conditions required to be full as per the

definition of VCF. Therefore, the assessing officer cannot enquire into

the alleged violation of condition of trust deed, SEBI (VSF) Regulations

etc. The learned Sr. Counsel further submits that the role of assessing

officer is limited to verify whether the assessee has a valid certificate of

registration by SEBI. It was further submitted that the overall

supervisory and regulatory authority in order to govern VCF vests with

SEBI. Regulations 22 of said SEBI regulations empower SEBI to call

upon the VCF to file such report, as SEBI may desire with regard to the

activities carried out on by the VCF. Further regulation 25 of the said

SEBI regulations empowers the SEBI to inspect or investigate the

books of account, records and documents of VCF, through an inspecting

or investigating officer and on the basis of such report, the SEBI can

take such measures against the VCF as per Regulation 29 or 30 of the

said SEBI Regulations. The assessee has provided the registration

certificate, and the condition provided in section 10(23FB) of the Act is

fulfilled, the assessing officer cannot deny the exemption. It was

submitted that Chapter III of SEBI (VCF) Regulation specifies the

investment conditions and restriction for VCF does not any restriction 7

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on investment in mutual funds. The learned Senior Counsel for assessee

submits that the coordinate bench of the Ahmadabad Tribunal in ITO

Versus Gujarat Information Technology fund (45 SOT 529 Ahmadabad

Tribunal) has taken the similar view. 5. The learned Senior Counsel for the assessee submits that the power to

govern the VCF is with the SEBI and not with the Income tax

Authorities and in absence of any allegation or action by SEBI against

the assessee toward violation of SEBI regulations or withdrawal of the

certificate of registration as a VCF, the assessing officer cannot make

such allegation only for the purpose of denying assessee’s claim for

exemptions under section 10(23 FB) of the Act. To buttress his

submission the learned Sr Advocate of the assessee relied upon the

following decisions: (a) Milestone Real Estate Fund Versus ACIT (ITA No. 2509 /Mum/2018), (b) DHFL capital fund Versus ITO [2016] 157 ITD 60 (Mumbai Tribunal), (c) G.V.K. Bioscience Private limited Vs ACIT[2014] 67 SOT 163 (Hyderabad Tribunal), (d) ACIT Versus Small is Beautiful (2013) 60 SOT153 (Hyderabad Tribunal), (e) ITO Versus Gujarat Information technology fund (supra).

Mumbai Tribunal in a recent decision in HDFC Property Fund versus ITO (ITA No.7472/Mum/2017) while considering the similar

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disallowances/ denial of exemption under section 10 (23FB) held that

investment made by assessee in mutual funds in line with SEBI (VCF)

Regulation and the same is not a non-compliance of SEBI (VCF)

Regulation, therefore, assessee is entitled for exemption. The learned

Senior Counsel submits that the grounds of appeal raised by assessee in

the present appeal are in fact squarely covered by the decision of HDFC

Property Fund (supra). 7. The learned SR Counsel for assessee invited our attention to the clause

2.1 of the object clause of assessee trust deed, which provides that

assessee will carry on the activities of the Venture Capital Fund as

permitted within the SEBI (VCF) Regulation. Accordingly the learned

Counsel would submit that the assessee carried on the activities of a

venture capital fund as permitted under the SEBI (VCF) Regulations.

Even the investment in a mutual fund is in accordance with SEBI (VCF)

Regulations. Further clause 2.3 of the object of the trust deed of the

assessee state that assessee can invest, in accordance with the provision

of this indenture and its respective Private Placement Memorandum

(PPM). The PPM of the fund permits the assessee to invest in money

market instruments, Banks deposits, Government securities, treasury

bills, corporate bonds and deposits, short terms securities and units of

mutual fund. The learned Sr. Advocate submits that relevant extract of

PPM is placed on record. Further the distribution clause of PPM permits 9

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

the trust to invest in money market instruments, bank deposit government securities, treasury bills, corporate bonds and projects, short term securities and units of mutual fund. The learned counsel would

submit that from a transaction reading of the trusted along with the PPM in assessee’s case, it is permissible for the assessee to invest in unit of mutual funds. Therefore, the assessing officer erred in holding that

assessee is in violation of trust deed by investing in mutual funds. 8. The assessee has placed on record the following documents: a. Copy of SEBI (Venture Capital Funds) Regulations, 1996 b. Extract of SEBI (intermediary) Regulations, 2006 c. Copy of Registration certificate issued to the Appellant under SEBI (Venture Capital Funds) Regulations, 1996 d. Copy of registered trust deed e. Extract of Private Placement Memorandum f. Copy of interpretive letter dated 10 June 2006 issued by SEBI in case of TATA Capital g. Copy of legal opinion obtained from the lawyer h. Breakup of investment made in portfolio companies i. Breakup of investment made in mutual fund j. CBDT Circular No. 157F. No. 228/8/73-IT(A-II) dated December 26, 1974 k. Financial Statements for the year ended March 31, 2015 l. Return of Income for Assessment Year 2015-16 m. And copy of various written submissions filed before the Assessing Officer as well as before the ld. Commissioner (Appeals).

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order of lower authorities. The learned DR for the revenue submits that

the Assessing Officer identified four focal point i.e. (i) the assessee

made investment in debt instruments of non-portfolio companies (Non-

Venture Capital Undertaking) “J.M. Financial Mutual Fund” and

violated objectives of the trust-deed, (ii) Clause 8 of Venture Capital

Fund Regulations was violated by assessee which prescribed that

certificate granted under Regulation 7 shall subject to main condition

that the VCF shall not carry on any other activity than that of a VCF (iii)

Sub-clause (c) of Clause-12 of VCF Regulations stated that VCF shall

not invest in an associated company and (iv) the assessee also claimed

exempt dividend income under section 10(34) & 10(35). The income of

assessee cannot split taking the income partly for computation under

section 10(23FB) and partly for computation/exemption under section

10(34) and 10(35) in effect allowing and granting two status for same

year. It was further submitted by ld. DR for the revenue that ld.

Commissioner (Appeals) in para 6.8 of his order clearly held that clause

8(b) of SEBI (VCF) Regulations is mandatory and prohibits by putting

an embargo for carrying out any other activities other than VCF. The

assessee has not carried out its activities in accordance with the trust-

deed as per the guidelines of SEBI. The Assessing Officer has power to

examine if the assessee has complied the condition laid down under the 11

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

provisions of Income-tax Act and his power is not limited in any

manner, particularly to the verification of the registration under SEBI

(VCF) Regulations. The ld. DR further submits that ratio of decision in

Milestone Real Estate Fund vs. ACIT (supra) and HDFC Property Fund

are not applicable, as there was no issue in those cases of investment in

associated companies. The assessee is a big corporate entity and was

duty bound to provide the complete details and evidences of taxes

payable by each of the beneficiaries. The assessee has not discharged

the onus lied upon it. 10. We have considered the rival submission of the learned representatives

of the parties. We have also deliberated on various case laws relied by

lower authorities as well as by ld. representatives of the parties and gone

through the orders of authorities below. During the assessment the

assessing officer denied the exemption under section 10 (23CF), holding

that the assessee made investment in mutual funds and violated SEBI

(VCF) Regulations and also violated the objects of clause of the trust

deed. The learned Commissioner (Appeals) confirmed the action of

assessing officer on similar line. We have also gone through the various

documentary evidences placed on record by the assessee, which include the trust deed dated 18th March 2006, registration of assessee under registration Act and certificate of registration dated 13th October 2006

granted by SEBI (VCF) Regulations. Before discussing the issue 12

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

involved in the present appeal, we may refer the relevant provisions of

section 10(23FB) and section 115U of the Act.

"(23FB) any income of a venture capital company or venture capital fund from investment in a venture capital undertaking.

Explanation.--For the purposes of this clause,--

(a) "venture capital company" means a company which—

(A) has been granted a certificate of registration, before the 21st day of May, 2012, as a Venture Capital Fund and is regulated under the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 (hereinafter referred to as the Venture Capital Funds Regulations) made under the Securities and Exchange Board of India Act, 1992 (15 of 1992); or

(B) has been granted a certificate of registration as Venture Capital Fund as a sub-category of Category I Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (hereinafter referred to as the Alternative Investment Funds Regulations) made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), and which fulfils the following conditions, namely:--

(i) it is not listed on a recognized stock exchange;

(ii)it has invested not less than two-thirds of its investible funds in unlisted equity shares or equity linked instruments of venture capital undertaking; and

(iii) it has not invested in any venture capital undertaking in which its director or a substantial shareholder (being a beneficial owner of equity shares exceeding ten per cent

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

of its equity share capital) 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;

(b) "venture capital fund" means a fund--

(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 and is regulated under the Venture Capital Funds Regulations; or (II) has been granted a certificate of registration as Venture Capital Fund as a sub-category of Category I Alternative Investment Fund under the Alternative Investment Funds Regulations and which fulfils the following conditions, namely:--

(i) it has invested not less than two-thirds of its investible funds in unlisted equity shares or equity linked instruments of venture capital undertaking;

(ii) it has not invested in any venture capital undertaking in which its trustee or the settler holds, either individually or collectively, equity shares in excess of fifteen per cent of the paid-up equity share capital of such venture capital undertaking; and

(iii) the units, if any, issued by it are not listed in any 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);

(c) "venture capital undertaking" means-- 14

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(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;"

"115U.(1) Notwithstanding anything contained in any other provisions of this Act, any income accruing or arising to or received by a person out of investments made in a venture capital company or venture capital fund shall be chargeable to income-tax in the same manner as if it were the income accruing or arising to or received by such person had he made investments directly in the venture capital undertaking.

(2) The person responsible for crediting or making payment of the income on behalf of a venture capital company or a venture capital fund and the venture capital company or venture capital fund shall furnish, within such time as may be prescribed, to the person who is liable to tax in respect of such income and to the prescribed income- tax authority, a statement in the prescribed form and verified in the prescribed manner, giving details of the nature of the income paid or credited during the previous year and such other relevant details as may be prescribed.

(3) The income paid or credited by the venture capital company and the venture capital fund shall be deemed to be of the same nature and in the same proportion in the hands of the person referred to in sub-section (1) as it had been received by, or had accrued or arisen to, the venture capital company or the venture capital fund, as the case may be, during the previous year.

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(4) The provisions of Chapter XII-D or Chapter XII-E or Chapter XVII-B shall not apply to the income paid by a venture capital company or venture capital fund under this Chapter.

(5) the income accruing or arising to or received by the venture capital company or venture capital fund, during a previous year, from investments made in venture capital undertaking if not paid or credited to the person referred to in sub-section (1), shall be deemed to have been credited to the account of the said person on the last day of the previous year in the same proportion in which such person would have been entitled to receive the income had it been paid in the previous year.

Explanation 1.--For the purposes of this Chapter, "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (23FB) of section 10.

Explanation 2.--For the removal of doubts, it is hereby declared that any income which has been included in total income of the person referred to in sub-section (1) in a previous year, on account of it having accrued or arisen in the said previous year, shall not be included in the total income of such person in the previous year in which such income is actually paid to him by the venture capital company or the venture capital fund."

Chapter III of the Act, prescribed the exclusion of the income prescribed

therein from the total income of an assessee subject to tax. Pertinently, it

prescribes for exemption from tax in respect of income of a Venture

Capital Company or a VCF registered with SEBI. Since, the assessee

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

before us is a Venture Capital Fund, shorn of other details; we requires

to examine the provisions of Section 10(23FB) of the Act alone.

Explanation (b) of section 10(23FB) gives the meaning of “Venture

Capital Fund” to be a Fund which (i) operates under a trust deed

registered under the provisions of Registration Act, 1908; (ii) has been

granted certificate of registration as a VCF before 21st May, 2012; and,

(iii) is regulated by SEBI (Venture Capital Funds) Regulations, 1996. 12. Further, a careful perusal of section 115U prescribes that the income

accruing or arising to the unit holders of VCF out of investments made

in Venture Capital Undertakings is taxable in the hands of such unit

holders in the manner as if it were the income accruing or arising to or

received by such unit holders, had such unit holders made investments

directly in the VCUs. Thus, so far as the assessment year under

consideration is concerned, the relevant legal position can be

summarised as follows. That any income of a VCF earned from

investments in VCUs is exempt in the hands of the VCF, subject of

course, to the conditions prescribed in section 10(23BF) of the Act; that

such income would be taxable in the hands of the unit holders of the

VCF; that such income is taxable in the hands of the unit holders in the

manner as if it were the incomes accruing or arising to or received by

such unit holders had the unit holders made the investments directly in

the VCUs; and, that so far as the income of VCFs earned from 17

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

investments other than the investments in VCUs is concerned, the same

would be taxable in the hands of VCF itself.

the exemption under section 10(23FB) to the assessee by holding that

holding that the assessee made investment in mutual funds and violated

SEBI (VCF) Regulation and also violated the objects of clause of the

trust deed. The assessing officer has not disputed that the trust deed of

the assessee is registered under the provisions of registration Act. Further a registration is granted to the assessee by SEBI before 21st May

2012, which is still in force. The Assessing Officer has not brought any

material on record by making investigation from SEBI, if the funds are

not regulated in accordance with SEBI (VCF) Regulations.

Information Technology Fund (supra) while considering the ground/

issue whether the assessing officer can look into whether venture capital

fund fulfils conditions laid down in SEBI (Venture Capital Funds)

Regulations, passed the following order:

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

to look into the matter and take action under the provisions of the concerned statute under which certificates are granted. In this regard the observations of the Hon. Supreme Court in the case of Gestetner Duplicators (P.) Ltd. (supra) are very relevant. In that case the Commissioner had granted recognition to the P.F. as far back as 1937. The assessee a private limited company paid to sales-men a fixed monthly salary and commission at fixed percentage of turnover and also paid employer's contribution to the P.F. on the basis of monthly salary as well as commission and credited them into individual account of these sales-men in P.F. maintained and recognized by the Commissioner. A part of such commission and consequently provident fund on such commission was sought to be disallowed. The matter went up to the Hon. Supreme Court. It observed as under :- "It would be conducive to judicial discipline and the maintaining of certainty and uniformity in administering the law that the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the provident fund satisfies all the conditions under rule 4 of Part A of the Fourth Schedule to the Act, and not sit in judgment over it." Thus it was held that it was not open to the AO to take the view contrary to the registration already granted by the CIT and therefore disallow a part of the contribution. It was pointed out that when recognition continues in operation it would be implied that the conditions laid down there-under are satisfied and any part of disallowance would tantamount to questioning the recognition. In other words entries made in the register of independent body should be accepted as true and they should not be questioned while deciding the issue relating to the matters concluded by the entries made in such registers. From this it follows that if assessee trust is registered with SEBI as per certificate granted under Regulation 7(3) then it should be accepted that such certificate is granted after ensuring that conditions laid down before granting of such certificate are fulfilled. In other words conditions laid down in sub- clause (i) and sub-clause (ii) are deemed to be fulfilled under explanation-1(b) to section 10(23FB), the moment relevant certificates 19

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

are produced before the AO. Therefore, he is not required to go into violation of conditions, if any, pertaining to the matters of grant of such certificates. 25. So far as condition laid down in sub-clause (iii) of clause (b) under Explanation 1 is concerned what we consider appropriate for the AO is to find out whether any action for default has been taken by SEBI under regulation -30 as referred to above for default committed by the assessee trust. So far as any violation of investment pattern as laid down in regulation 12(d) is concerned it is also covered under clause (a) of regulation-30 which shows that assessee trust can be penalized for contravention of any provision of this Act or these regulations. Thus, if assessee trust contravenes regulation-12(d) then SEBI is competent to penalize assessee trust within the powers given under regulation 30. So long as SEBI does not find any default of any contravention of the provisions of the SEBI Act or SEBI (VCF) Regulation 1996 then it can be inferred that assessee trust fulfils the conditions laid down under these regulations. The AO, however, can look into the issue whether assessee trust fulfils such conditions as laid down in regulation 12(d) (and not under regulation-8) and report the matter to SEBI taking a protective view under I.T. Act, 1961. If finally SEBI does not find any default on the part of the assessee trust then view of the AO that there is violation cannot survive. In other words fulfillment of condition under sub-clause (iii) is subject to the final finding by SEBI authorities. Their final view on the alleged contravention by the assessee trust will prevail over the view of AO. Thus in our view role of the AO in examining the issue about fulfillment of conditions laid down in clause (b) is limited to the extent as described above. 15. Further the coordinate bench of Mumbai Tribunal in DHFL Capital

Fund Vs ITO (supra) held that, so far as SEBI does not find any default

of any contravention of the provisions of the SEBI Act or SEVI (VCF)

Regulation 1996, then it can be inferred that the assessee-trust fulfils the

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

conditions laid down under these regulations. The Tribunal further

expressed the view that the Assessing Officer may report the matter of

violations, if any, to the SEBI and if finally SEBI does not find any

default, then the view of the Assessing Officer that there is violation

cannot survive. Thus, it is the SEBI, which has final authority to

determine about the violation of the conditions, as it is the authority

competent to deal with the same. It was also held that the Assessing

Officer has made his own interpretation of the term 'corpus', which was

found to be incorrect as per the definition given in the new regulation

which is not sustainable.

Property Fund Versus ITO (supra) on similar set of facts on similar

denial of exemption under section 10(23FB) passed the following order:

“12. We have carefully considered the rival submissions. Ostensibly, as our discussion in the earlier paras show, the sum and substance of the stand of Assessing Officer revolves around the manner in which assessee has made certain investments; firstly, in the units of Mutual funds; and, secondly, towards Debenture application monies. The first objection of the Assessing Officer is that such investments are not permitted in terms of the Trust Deed itself. In this context, we find that the appellant has been constituted in terms of the Trust Deed dated 06.11.2004 settled by Housing Development Finance Corporation Ltd. It has been constituted to pool together resources, both institutional and other investors, for making investment in high growth sectors including real estate sector in India. The objects of the Trust are contained in clause 6, a copy of which is placed in the Paper Book. 21

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

Though we are not reproducing the contents of the Trust Deed, its perusal shows that the investments by the appellant are required to be made in compliance with the requirements of VCF Regulations of SEBI. In terms of clause 4.1.27, the Trust Deed also envisages temporary investments which have been defined to mean, inter- alia, money market instruments, units of money market liquid mutual funds or other similar debt instruments. The said clause also brings out that the temporary investments are also to be understood as referring to short term securities issued on guarantee by the Indian Government, or its agencies or instrumentalities, overnight and short term instruments, like- bank deposits, etc. Though we are presently concerned with investments made in liquid mutual fund schemes, we are enumerating the other aspects of the expression „temporary investments‟ stated in the Trust Deed only to bring out that the Trust is entitled to make such-like investments of its available funds, awaiting regular investment in the stated purposes. In fact, clause 11.1 of the Trust Deed dealing with „Investment of Trust fund‟ specifically prescribes that the trust may invest the available contributions awaiting investment or realised funds awaiting distribution in temporary investments. The aforesaid clearly brings out that the appellant is empowered by its Trust Deed to make temporary investments which, inter-alia, would include within its purview the investments in question. Apart therefrom, we find enough potency in the pleadings of the appellant that there is an industry and trade practice whereby Venture Capital Funds retain certain amounts with them, pending regular investments in Venture Capital Undertakings for certain purposes, like disbursement of expenses, distribution to unit-holders, etc. Till such time the funds are not utilised for the main purposes, advisably the Venture Capital Fund would make temporary investments to earn monies. The course adopted by the assessee in this regard was by investing in units of mutual funds or even by way of fixed deposits with banks. Insofar as the objection of the Assessing Officer regarding non-compliance with the VCF Regulations of SEBI is concerned, here also we do not find any support for the stand taken 22

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

by the Assessing Officer. In fact, our attention was drawn to SEBI (Informal Guidance) Scheme, 2003 issued by SEBI with regard to VCF Regulations where the temporary deployment of funds by a Venture Capital Fund in liquid mutual funds or bank deposits or other liquid assets of high quality such as treasury bills, etc. were permissible. Moreover, we cannot lose sight of the fact that the Certificate of Registration as a Venture Capital Fund issued by SEBI continues to subsist during the period under consideration, which clearly belies the assertion of the Assessing Officer that there has been a violation of VCF Regulations of SEBI. Thus, on an overall analysis of the situation, we find that the temporary investment made in the units of mutual funds is within the ambit of appellant‟s Trust Deed and also within the ambit of VCF Regulations of SEBI.

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

time and again reiterated by the assessee before the lower authorities as well as before us and we find that in neither of the orders of the authorities below there is any negation to the same. So far as VCF Regulations of SEBI are concerned, we are in agreement with the assessee that it does envisage investments in Convertible Debenture application money as being investments which can be said to be linked to investment in equity shares. Thus, on account of the aforesaid discussion, we find that the assessee fulfils the requirements of claiming exemption under Section 10(23FB) of the Act so far as it is relatable to the year under consideration.

Registration of assessee in the capacity of a VCF with SEBI is still

continues to subsist; that there is no adverse report brought by assessing

officer taken or likely to be taken by SEBI for violation of any VCF

Regulations; that the targeted investment in VCUs is within the purview

of VCF Regulations of SEBI; wherein the assessee is permitted by its Trust Deed dated 18th March 2006 as well as by the VCF Regulations of

SEBI to deploy the funds in units of mutual funds. Therefore, in our 24

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

view, the denial of exemption prescribed under Section 10(23FB) of the

Act was not warranted, we hold so. 18. The submission of ld. DR for the revenue is not acceptable to us as the

co-ordinate bench of Tribunal in HDFC Property Fund (supra) and in

Gujarat Information Technology Fund (supra) has held that a VCF

(assessee) operating in terms of trust-deed and has been granted a

certificate of registration as VCF by SEBI which continued to subsist;

and there is no adverse action contemplated or initiated by SEBI for

violation of any VCF Regulations, the assessee is entitled for exemption

envisaged under section 10(23FB). In Gujarat Information Technology

Fund (supra) it was clearly held that role of Assessing Officer is limited

to verify whether the assessee has a valid registration certificate by

SEBI and condition prescribed under section 10(23FB) are fulfilled. In

the result the ground No. 1 & 8 of the appeal is allowed. 19. Ground No. 2 relates to treating the income as ‘income from other

sources’. Considering the fact that we have allowed the exemption to the

assessee under section 10(23CF) therefore, the discussion on this ground

of appeal has become academic. 20. Ground No. 3 relates to taxing the income which is already considered

in the return of income of the beneficiary. Considering our finding on

ground No. 1 in granting full relief to the assessee for exemption under

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

section 10(23CF), therefore discussion on this ground of appeal has also

become academic. 21. Ground No. 4 and 5 relates to denial of exemption under section 10(34)

and section 10(35) of the Act. The learned Senior Counsel for the

assessee submits that during the year the assessee earned dividend

income of Rs. 85.38 lakhs from investments made in portfolio

companies, which are qualifying as venture capital undertaking under

the SEBI (VCF) Regulations. The assessee claimed the exemption on

such dividend income under section 34 of the Act on the income earned

by assessee is a dividend from the investment made in venture capital

undertaking to list of the assessee also on income of Rs. 1.06 crore from

distributions from unit held in mutual funds. The assessee claimed

exemption under section 10(35) of the act on the income earned from

such investment in units of mutual funds. The assessing officer denied

the exemptions under section 10(34) and section 10(35) on the ground

that the assessee does not qualify as VSL under the provisions of section

10(23FB) of the act. While denying the exemption the assessing officer

held that the assessee is not a person as defined under section 231 of the

Act and therefore, not eligible to claim exemption under section 10 of

the as exemptions under section 10 is allowed to any person. The

assessing officer applied the principle of doctrine of generally especially

labour’s known dialogue and held that section 10(23FB) of the Act is 26

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

more specific Visa with section 10(34) and 10(35) of the Act. The

assessing officer held the assessee is not qualified as a BSF under the

provisions of subsection 10(23FB) of the act and that it cannot be

granted exemption under section 10(34) and 10(35) of the Act. 22. The learned senior counsel for the assessee further submits that the

exemption under section 10(34) and section 10(35) was denied to the

assessee on the ground that assessee is not eligible for exemption under

section 10(23 FB) of the Act. The learned senior counsel would further

submit that in case the assessee is held as eligible for claim of

exemption under section 10(23FB), then the basis on which the

exemption under section 10(34) and section 10(35) was denied itself

would not subsist. In alternative submission the learned senior counsel

would submit that there are no conditions attached with section 1034

and section 10(35) or under section 10(23 FB), which is a specific over

the other. Therefore the treatment made by assessing officer is

absolutely misplaced. There is no applicability of doctrine of generally

especially clear bus known dialogue went. In another alternative

submission will learned senior counsel would submit that the exemption

claim under section 10(34) and 10(35) are not linked to section

10(23FB) as the amount claimed as exempt under section 10(23FB) is

not claimed as exempt under section 10(34) and 10(35) of the Act. The

exemption claimed under section 10(23FB) is with respect to the 27

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

investment in VCU, whereas exemption claimed under section 10(35) of

the act or not investment in VCU, therefore there is no basis for denying

exemption to the assessee. In support of his submission the learned

senior counsel relied upon the decision of Bombay High Court in the

ITE vs. Jassal by foundation [2015] 374 ITR 315 (Bombay), wherein it

was held that while analysing the interplay between section 11 of the

Act that there is nothing in the language of two provisions as to how

when certain income is not to be included in computing total income of

the previous year of any person, then, that which is excluded from

section 10 could be included in the total income of the previous year of

the assessee. 23. On the other hand the learned AR for the revenue while supporting the

denial of exemption under section 10(23FB), supported the denial under

section 10(34) and section 10(35) of the Act. 24. We have considered the rival submission about the parties and find that

we have already allowed exemption to the assessee under section

10(23FB) of the Act, which was the basis for denying further exemption

under section 10(34) and section 10(35). Considering the fact that we

have already allowed relief to the assessee on the exemption under

section 10(23FB) therefore, the basis on which the assessee was denied

exemption under section 10(34) and section 10(35) has already been set

aside therefore the discussion on the merit of these grounds of appeal 28

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

have become academic, resultantly, they assessee is also allowed

exemption under section 10(34) and 10(35) of the Act. 25. Ground No. 6 relates to the status of a person under section 2(31) of the

act and ground No. 8 relates to status of assessee as an AOP.

Considering the fact that we have already allowed full relief to the

assessee, so far as exemption under section 10(23 CF) and section

10(34) and 10(35) are concerned therefore the discussion on these

grounds of appeal have also become academic. Ground No. 9 relates to

levy of interest under section 234B of the Act. The learned Senior

Counsel for the assessee submits that provision of section 234B of the

Act are only applicable in case where in a financial year the assessee

who is liable to pay advance tax under section 208 of the Act, has failed

to pay such tax or has paid advance tax less than the prescribed

percentage. The income earned by assessee are exempt under section

10(23FB) of the Act, 10(34) and 10(35) of the Act respectively. The

assessee is not liable to pay advance tax under section 208 of the Act,

accordingly the provision of section 234B of the Act should not apply to

the assessee and no interest can be levied. 26. On the other the learned DR for the revenue supported the order of

lower authorities. 27. We have considered the submission of the parties and have gone

through the orders of assessing officer. Considering the fact that we 29

ITA No. 277 Mum 2019-JM Financial India Fund-Scheme B.

have already held that assessee is entitled for exemption under section

10(23FB), 10(34) and section 10(35) of the Act, therefore, we are in

agreement with the submission of learned Senior Counsel for the

assessee that provision of section 234B of the Act are only applicable in

case where in the financial year the assessee who is liable to pay

advance tax under section 208 of the Act has failed to pay such tax or

has paid advance tax lesser than the prescribed percentage, is only liable

to pay levy of interest. Considering the fact that entire income of the

assessee is held as exempt income, therefore, the assessee is not liable to

pay interest under section 234 of the act. Therefore, we direct the

assessing officer not to levy interest under section 234B of the Act. In

the result this ground of appeal is allowed.

Order pronounced in the open court on 20/08/2019.

Sd/- Sd/- G.S. PANNU PAWAN SINGH VICE-PRESIDENT JUDICIAL MEMBER Mumbai, Date: 20.08.2019 SK Copy of the Order forwarded to : 1. Assessee 2. Respondent 3. The concerned CIT(A) 4.The concerned CIT 5. DR “F” Bench, ITAT, Mumbai 6. Guard File BY ORDER, Dy./Asst. Registrar ITAT, Mumbai