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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K PRADHANShri Madhur Agarwal
By filing this appeal assessee has called into question the validity of the order dated 28th March 2018, passed under section 263 of the Income Tax Act, 1961 (for short ―the Act‖) by the learned Principal Commissioner of Income Tax–25, Mumbai, for the assessment year 2013–14.
2 Milestone Real Estate Fund
Brief facts are, the assessee is a trust established under the Indian Trust Act, 1882, through a registered trust deed. It is also registered with the Securities and Exchange Board of India (SEBI) as a Venture Capital Fund (VCF). It is the stated factual position that the fund has been constituted to float various schemes which focused to invest primarily in entities engaged in the real estate sector. The fund is for duration of 20 years or until the expiry of the last scheme of the fund whichever is later. For the assessment year under dispute, the assessee filed its return of income on 30th July 2013, declaring total income of ` 8,94,65,291. Subsequently, on 29th November 2013, assessee filed a revised return of income declaring total income of ` 14,29,12,592. The return of income filed by the assessee was selected for scrutiny. In course of the assessment proceedings, the Assessing Officer while verifying the return of income filed by the assessee noticed that in the computation of total income the assessee has claimed exemption under section 10(23FB) of the Act in respect of income earned out of investments made in Venture Capital Undertakings (VCU). The Assessing Officer after calling upon the assessee to justify its claim of exemption under section 10(23FB) of the Act and verifying the explanation of the assessee in the context of fact and material brought on record completed the assessment by allowing assessee’s claim of exemption under section 10(23FB) of the 3 Milestone Real Estate Fund Act, since, corresponding income is taxable at the hands of the investors / unitholders as per section 115U of the Act. Accordingly, he passed the assessment order on 17th March 2016.
As could be seen from the impugned order passed under section 263 of the Act, on the basis of a proposal sent by the Jt. Commissioner of Income Tax, Range–25(3) for initiating proceedings under section 263 of the Act, the learned Principal Commissioner called for and examined the assessment records of the assessee for the impugned assessment year and thereafter issued a show cause notice, purportedly, under section 263 of the Act on 6th February 2018, to show cause as to why the assessment order passed for the impugned assessment year being erroneous and prejudicial to the interest of Revenue should not be set aside. The basic premise on which the learned Principal Commissioner issued the show cause notice under section 263 of the Act is, the Assessing Officer while completing the assessment has erroneously allowed assessee’s claim of exemption under section 10(23FB) of the Act. Referring to the provisions of section 10(23FB) as well as section 115U of the Act r/w relevant rules, learned Principal Commissioner observed that a VCF registered before 21st May 2012, which was not availing exemption under section 10(23FB) of the Act as well as pass through status under section 115U of the Act, would continue to be governed under the earlier provision
4 Milestone Real Estate Fund having sectoral restrictions and the amendment brought to section 10(23FB) of the Act by Finance Act, 2012, would not apply. The learned Principal Commissioner observed, all the schemes executed by the assessee were continuing prior to assessment year 2013–14, hence, would not be covered by the amended provisions of section 10(23FB) of the Act applicable for the assessment year 2013–14. She observed, the Assessing Officer erroneously applying the amended provision has allowed exemption under section 10(23FB) of the Act. Further, learned Principal Commissioner observed, the Venture Capital Undertakings (VCU) where the assessee has made investments are dealing in real estate sector. Therefore, will not fall under any of the criteria mentioned in the definition of VCU as per SEBI (Alternative Investment Fund) Regulation, 2012. Therefore, the assessee would not be eligible for exemption under section 10(23FB) of the Act. In response to the aforesaid show cause notice, the assessee filed elaborate explanation justifying its claim of exemption under section 10(23FB) of the Act. After examining the submissions made by the assessee, the learned Principal Commissioner did not find merit in them. The reasons on the basis of which the learned Principal Commissioner concluded that the assessee is not eligible to avail exemption under section 10(23FB) of the Act and accordingly, held the 5 Milestone Real Estate Fund assessment order to be erroneous and prejudicial to the interests of Revenue broadly are; i) Section 10(23FB) of the Act recognizes Venture Capital Undertaking as defined in Clause–(n) of Regulation– 2 of the SEBI (Venture Capital Funds) Regulations,1996. She observed, as per the said definition real estate sector is mentioned in the negative list. Though, she accepted assessee’s argument that assessee’s case has to be governed by SEBI (Venture Capital Funds) Regulations and not SEBI (Alternative Investment Funds) Regulations, however, drawing an analogy between the definition of VCU under SEBI (Venture Capital Funds) Regulations, 1996 and SEBI (Alternative Investment Funds) regulations, 2012, the learned Principal Commissioner observed that the intention of the legislature is to permit exemption only to such sectors which are involved in providing services and production and manufacturing of article or thing and not for real estate activity. The learned Principal Commissioner observed, the Venture Capital Undertakings in which the assessee has made investments are not engaged in activity related to services in real estate but are doing the activity of selling and purchasing properties and exchanging real
6 Milestone Real Estate Fund estate ventures and projects from one hand to other through purchase and sale of controlling stake which is nothing less than sale and purchase of property; ii) By making investment in mutual funds which is not as per investment conditions mentioned in SEBI (Venture Capital Funds) Regulations, 1996, assessee has violated SEBI regulations, therefore, is not eligible to call itself a Venture Capital Fund as defined under section 10(23FB) of the Act. The learned Principal Commissioner observed, since, the assessee has violated the investment conditions laid down under SEBI(Venture Capital Fund) Regulations, 1996, it is not eligible for exemption under section 10(23FB) of the Act; and iii) The learned Principal Commissioner observed, since, the income in respect of which assessee claimed exemption under section 10(23FB) of the Act was earned on investments made prior to 1st April 2012, the amendment made to section 10(23FB) of the Act w.e.f. 1st April 2013, would not apply to the assessee as such amendment will be applicable to assessment year 2013–14. The learned Principal Commissioner observed, the Assessing Officer
7 Milestone Real Estate Fund while allowing assessee’s claim of exemption has completely overlooked these aspects. She observed, the assessee did not provide the list of investors who purportedly paid the tax under section 115U of the Act. He observed, without verifying such facts, the Assessing Officer could not have given a clean chit to the assessee. The learned Principal Commissioner observed, the Assessing Officer without making proper enquiry has allowed assessee’s claim of exemption under section 10(23FB) of the Act which has caused prejudice to the Revenue. Therefore, She held that the assessment order passed is erroneous and prejudicial to the interests of Revenue and set it aside with a direction to the Assessing Officer to pass a speaking order examining the eligibility of assessee to claim exemption under section 10(23FB) of the Act after providing due opportunity of being heard to the assessee.
Shri J.D. Mistry, learned Sr. Counsel appearing for the assessee, opened his argument challenging the validity of exercise of power under section 263 of the Act. The learned Sr. Counsel submitted, there is no dispute that the assessee is registered as a Venture Capital Fund with SEBI. In this context, he drew our attention to the registration certificate issued by SEBI, a copy of which is at Page–254 of the paper
8 Milestone Real Estate Fund book. He submitted, in the return of income filed for the impugned assessment year the assessee has claimed the income from Venture Capital Undertaking as exempt under section 10(23FB) of the Act, since, it is taxable at the hands of investors / unitholders as per section 115U of the Act. In this context, he drew our attention to the computation of total income, a copy of which is at Page–71 of the paper book. He submitted, so far as the interest income earned from non–venture capital undertakings is concerned, assessee offered it to tax. He submitted, in the course of assessment proceedings, the Assessing Officer while examining assessee’s claim of exemption under section 10(23FB) of the Act has made detail enquiry by calling for all relevant and necessary information and evidences. He submitted, in the revised statement of computation of total income, the assessee has not only furnished the details of income earned from Venture Capital Undertakings but has provided the reason for which such income is claimed as exempt under section 10(23FB) of the Act.
He submitted, in the course of assessment proceedings, in the enquiry conducted by the Assessing Officer the assessee furnished all the details relating to the investment made by the investors as well as the income of the assessee from Venture Capital Undertakings. Drawing our attention to notice dated 5th March 2014, issued by the Assessing Officer under section 142(1) of the Act, the learned Sr.
9 Milestone Real Estate Fund Counsel submitted, the Assessing Officer called for an explanatory note on the nature of business activity of the assessee. He submitted, in reply to the said notice the assessee vide letter dated 12th March 2014, furnished the details of its business activity with supporting evidence. He submitted, prior to that on 17th December 2013, the Assessing Officer had issued a notice under section 143(2) of the Act in response to which the assessee has furnished the details asked for. He submitted, again in response to another notice issued under section 142(1) of the Act on 18th September 2015, the assessee made detail submissions with regard to its claim of exemption under section 10(23FB) of the Act. He submitted, on 12th February 2016, the Assessing Officer called upon the assessee to furnish registration certificate issued by SEBI recognizing the assessee as Venture Capital Fund. Further, assessee was called upon to explain how it is covered under section 10(23FB) and section 115U of the Act. The Assessing Officer also asked the assessee to furnish details of TDS made on distribution of income to beneficial investors with supporting books of account, copies of report sent to SEBI for financial year 2012–13, details of fund–wise and investment–wise fund. He submitted, in response, the assessee filed its reply on 22nd February 2016, answering each and every query raised by the Assessing Officer with supporting evidence. In this regard, he drew our attention to the copy
10 Milestone Real Estate Fund of reply placed at Page–466 of the paper book. He also drew our attention to the quarterly report submitted to SEBI a copy of which is at Page–471 of the paper book. He submitted, the Assessing Officer had specifically directed the assessee to furnish the details of investment made in Venture Capital Undertakings and the nature of business carried out by such Undertakings with specific emphasis on the fact whether they are in negative list as mentioned in the third schedule of SEBI (Venture Capital Funds) Regulations, 1996. He submitted, in response to the said query the assessee submitted a detail reply on 25th February 2016, categorically stating that none of the Venture Capital Undertakings where it invested are coming within the negative list as mentioned in the third schedule of SEBI (Venture Capital Funds) Regulations, 1996. He submitted, after conducting comprehensive enquiry and examining materials brought on record, the Assessing Officer has completed the assessment by allowing assessee’s clam of exemption under section 10(23FB) of the Act. Drawing our attention to the discussions made by the Assessing Officer in the assessment order, the learned Sr. Counsel submitted, the Assessing Officer has also verified the fact that all conditions of section 10(23FB) and 115U of the Act have been complied. He submitted, not only quarterly statement in Form no.64 indicating the distribution of income to investors were examined by the Assessing Officer but he
11 Milestone Real Estate Fund also made himself sure that all information relating to the distribution of income earned from Venture Capital Undertakings to the investors were available with the Department.
The learned Sr. Counsel drawing our attention to the order passed under section 263 by the Principal Commissioner submitted, the revisional authority has held the assessment order to be erroneous and prejudicial to the interest of Revenue basically for four reasons. Firstly; the assessee has not claimed the exemption under section 10(23FB) of the Act in the return of income filed. Secondly; the investments in Venture Capital Undertakings from which the assessee had earned the income having been made prior to assessment year 2013–14, the assessee is not eligible to claim exemption as the amendment to section 10(23FB) of the Act will apply prospectively from assessment year 2013–14. Thirdly; the assessee by investing in Venture Capital Undertakings which are in real estate business has acquired shares in such undertakings, hence, the activities of the assessee amounts to sale and purchase of immovable property, therefore, it comes in the negative list as provided under SEBI(Venture Capital Fund) Regulations, 1996. Fourthly; the assessee having invested and earned income from mutual fund has violated conditions imposed by SEBI, hence, is ineligible to avail exemption under section 10(23FB) of the Act. As regards learned Principal Commissioner’s
12 Milestone Real Estate Fund allegation that the assessee has not claimed the exemption under section 10(23FB) of the Act in the return of income, learned Sr. Counsel submitted, it is factually incorrect. Drawing our attention to the revised statement of computation of income along with its Annexures, the learned Sr. Counsel submitted, the assessee has not only claimed exemption under section 10(23FB) of the Act but has also furnished all details relating to the income earned from Venture Capital Undertaking along with explanatory note for claiming exemption under section 10(23FB) of the Act.
The learned Sr. Counsel taking us through the provisions of section 10(23FB) of the Act before and after its amendment by Finance Act 2012, and Finance Act 2013, submitted that the aforesaid provision was introduced to the statute by Finance Act, 2000, w.e.f. 1st April 2001. He submitted, along with the aforesaid provision section 115U of the Act was introduced which provided for taxation of the income in the hands of unitholders, meaning thereby, the income earned by a Venture Capital Fund from Venture Capital Undertaking, though, will be exempt in its hands, however, under section 115U of the Act it was made taxable at the hands of unitholders. In essence, Venture Capital Fund was given pass through status. He submitted, section 10(23FB) of the Act underwent further amendment by Finance Act, 2004 and Finance Act, 2007. He submitted, as per the 13 Milestone Real Estate Fund amendment brought by Finance Act 2007 to the definition of Venture Capital Undertaking, income of Venture Capital Fund would be exempt only to the extent such investments are in Venture Capital Undertakings which are engaged in specified sectoral business activities. He submitted, section 10(23FB) of the Act was again amended by Finance Act, 2012, w.e.f. assessment year 2013–14 as per which the Venture Capital Undertaking was given the meaning of Venture Capital Undertaking as defined under the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. He submitted, by virtue of such amendment the restrictive meaning given earlier to venture capital undertaking under the Income Tax Act was removed. He submitted, as per the definition of Venture Capital Undertaking under section 2(n) of Securities Exchange Board of India (Venture Capital Funds) Regulations, 1996, only those companies which are engaged in activities or sectors specified in the negative list could not be treated as Venture Capital Undertaking. Drawing our attention to third schedule of Security Exchange Board of India (Venture Capital Funds) Regulations, 1996, which contains the negative list, he submitted that though earlier ‘real estate’ was coming within the negative list, however, it was excluded from the negative list w.e.f. 5th April 2004 by Security Exchange Board of India (Venture Capital Funds) (Amendment) Regulations, 2004. He submitted, since,
14 Milestone Real Estate Fund by the time the assessee was established by registered trust deed dated 18th July 2005, ‘real estate’ has already been taken out of the negative list under Security Exchange Board of India (Venture Capital Funds) Regulations, 1996, investments made by assessee in Venture Capital Undertakings engaged in real estate sector is eligible for exemption under section 10(23FB) of the Act. He submitted, this is further clarified by the VCF Quarterly Reporting Format prescribed by the SEBI, wherein, real estate is mentioned as one of the eligible sectors. Thus, he submitted, the observations of the leaned Principal Commissioner that the assessee is not eligible for exemption under section 10(23FB) of the Act on this ground is untenable. The learned Sr. Counsel submitted, in any case of the matter, assessee has made investments in Venture Capital Undertakings which are in real estate sector. That does not mean that the assessee itself is in real estate business of buying and selling of properties. In support of such contention, he relied upon the following decisions:– i) V.A. Mohota Textiles Traders Pvt. Ltd. v/s DCIT, [2017] 397 ITR 616 (Bom.); and ii) Bhoruka Engineering Industries Ltd. v/s DCIT, [2013] 356 ITR 25 (Kar.).
Challenging the observation of the learned Principal Commissioner that the assessee has violated the SEBI regulations by 15 Milestone Real Estate Fund investing in mutual funds, the learned Sr. Counsel submitted, there is no restriction imposed by the SEBI for investing in mutual fund. He submitted, SEBI itself while answering a query raised by another company has clarified that Security Exchange Board of India (Venture Capital Fund) Regulations, 1996 does not impose any condition on deployment of un invested portion of the investible fund of VCF. The SEBI has clarified that SEBI registered VCF may invest the un invested portion of their investible fund in liquid mutual fund or bank deposit, etc. In this context, he drew our attention to the letter dated 10th June 2016 of Dy. General Manager, Investment Management Department, Division of Funds–1, SEBI issued to Tata Capital Ltd., a copy of which is at Page–442 of the paper book. The learned Sr. Counsel drawing our attention to clause 2(m) and 2(l) of Security Exchange Board of India (Venture Capital Funds) Regulations, 1996 submitted that they do not prohibit investment in mutual fund. He submitted, as per section 22 of the aforesaid regulation, the Venture Capital Fund has to submit reports with regard to the activities of the fund. He submitted, the SEBI has power to not only revoke the registration of a Venture Capital Fund but can take other actions also if it finds that any provision / condition imposed under its regulations and Act have been violated by a Venture Capital Fund. He submitted, when the regulatory body with which the assessee is registered as a Venture Capital Fund
16 Milestone Real Estate Fund has not pointed out any irregularity in activity of the assessee nor pointed out any breach or violation of the conditions of Security Exchange Board of India (Venture Capital Funds) Regulations, 1996 and Security Exchange Board of India Act, 1992, the learned Principal Commissioner is incompetent to allege that the assessee has violated the conditions of SEBI regulations, hence, not eligible to avail exemption under section 10(23FB) of the Act. He submitted, in case of any violation of the SEBI regulations, it is the SEBI who is competent to take action against the assessee. For such proposition, he relied 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; iii) ITO v/s Gujarat Information Technology Fund, [2011] 45 SOT 529; and iv) DHFL Venture Capital Fund v/s ITO, [2016] 157 ITD 60.
Challenging the observations of the learned Principal Commissioner that the amended provision of section 10(23FB) of the Act is not applicable to the assessee, the learned Sr. Counsel submitted, there is no substance in the reasoning of the revisional authority as the amendment brought to section 10(23FB) of the Act by Finance Act, 2012, is effective from assessment year 2013–14 and the 17 Milestone Real Estate Fund assessee has claimed such deduction in the very same assessment year. Thus, he submitted, assessee is eligible to claim deduction under section 10(23FB) of the Act for the impugned assessment year. For such proposition, he relied upon the decision of the Hon'ble Supreme Court in Reliance Jute and Industries Ltd. v/s CIT, 122 ITR 921 (SC).
The learned Sr. Counsel submitted, the Assessing Officer after making comprehensive enquiry and applying his mind to the facts and material on record has allowed assessee’s claim of exemption under section 10(23FB) of the Act. He submitted, the Assessing Officer has also discussed the issue in the assessment order and has provided the reasoning on the basis of which he accepted assessee’s claim of exemption. That being the case, the revisional authority cannot hold the assessment order to be erroneous only because according to her the Assessing Officer should have written the order in a manner acceptable to the revisional authority. Thus, in essence, the learned Principal Commissioner by exercising revisional power is trying to substitute her view over the view of the Assessing Officer. He submitted, when the assessee has fulfilled all the statutory conditions and as per the provisions of section 10(23FB)and section 115U of the Act, the assessee is eligible for exemption and having regard to such provision if the Assessing Officer allows assessee’s claim, the assessment order cannot be held to be erroneous. The learned Sr.
18 Milestone Real Estate Fund Counsel submitted, in assessee’s own case for assessment year 2014– 15, the Assessing Officer disallowed assessee’s claim of exemption under section 10(23FB) of the Act on reasoning which are more or less identical to the reasoning of the revisional authority. He submitted, when the assessee challenged the disallowance of exemption before the first appellate authority, he allowed assessee’s claim accepting that the assessee having fulfilled all the conditions of section 10(23FB) r/w section 115U of the Act is eligible to claim exemption. He submitted, the very fact that the learned Commissioner (Appeals) has allowed assessee’s claim of exemption under section 10(23FB) of the Act in assessment year 2014–15, is suggestive of the fact that the view taken by the Assessing Officer in the impugned assessment year with regard to claim of exemption under section 10(23FB) of the Act is a possible view, hence, cannot be held as erroneous. The learned Sr. Counsel submitted, as per section 10(23FB) r/w 115U of the Act the income derived from Venture Capital Undertaking is taxable at the hands of unitholder as the assessee is only a pass through entity. He submitted, the assessee has furnished all the details including reports in Form no.64 as prescribed under rule 12C of the Income Tax Rules, 1963, before the Departmental Authorities to demonstrate that the said income has been distributed to the unitholders. He submitted, when as per the provisions of section 115U of the Act, the income is 19 Milestone Real Estate Fund taxable in the hands of investors / unitholders, there is no prejudice caused to the Revenue even if the assessee claims exemption under section 10(23FB) of the Act. Thus, he submitted, the twin conditions of section 263 of the Act in the present case are not satisfied. In support of his contention, the learned Sr. Counsel relied upon the following decisions:– i) CIT v/s Max India Ltd., [2007] 295 ITR 282 (SC); ii) Malabar Industrial Co. Ltd. v/s CIT, 243 ITR 83 (SC); iii) CIT v/s Fine Jewellery India Ltd., [2015] 372 ITR 303 (Bom.); iv) M/s. Rallies India Ltd. v/s DCIT, ITA no.3564/Mum./2016, dated 13.04.2017; v) Gehna Jewlers Pvt. Ltd. v/s PCIT, ITA no.3530/Mum./ 2017, dated 22.11.201; and vi) CIT v/s Gabriel India Ltd., [1993] 203 ITR 108 (Bom.).
As regards the merits of the issue, the learned Sr. Counsel submitted, when the assessee is registered as a Venture Capital Fund and the Venture Capital Undertakings, wherefrom assessee has earned the income, are not mentioned in the negative list of SEBI regulations, assessee’s claim of exemption cannot be disallowed, since, all the conditions of section 10(23FB) as well as section 115U of the Act are fulfilled.
20 Milestone Real Estate Fund
The learned Departmental Representative strongly relied upon the observations of the learned Principal Commissioner in the order passed under section 263 of the Act.
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 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
21 Milestone Real Estate Fund 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 Undertaking was amended by Finance Act, 2007, w.e.f. 1st April 2008.
22 Milestone Real Estate Fund 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. 1st 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; (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;‖
23 Milestone Real Estate Fund
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);‖
Corresponding amendments were also made under section 115U of the Act. The reason for bringing in the amendment to the 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.‖
24 Milestone Real Estate Fund
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 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);‖
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;‖
25 Milestone Real Estate Fund
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 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 26 Milestone Real Estate Fund 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.
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:–
27 Milestone Real Estate Fund
―[(n) ―venture capital undertaking‖ means a domestic company – (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.‖
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.
28 Milestone Real Estate Fund
(5) Any other activity which may be specified by the Board in consultation with Government of India from time to time.‖
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, 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
29 Milestone Real Estate Fund 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
30 Milestone Real Estate Fund 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 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
31 Milestone Real Estate Fund April 2004. Thus, it was submitted, the assessee is eligible to avail exemption under section 10(23FB) of the Act.
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 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.‖
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 32 Milestone Real Estate Fund 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
33 Milestone Real Estate Fund under Third Schedule of the said Regulation are not to be treated as Venture Capital Undertaking. A cursory glance of the negative list under 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.
34 Milestone Real Estate Fund 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 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.
Further, the learned Principal Commissioner has observed that the assessee has violated the conditions imposed under Securities and 35 Milestone Real Estate Fund 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)
36 Milestone Real Estate Fund 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 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 37 Milestone Real Estate Fund 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.
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.
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
38 Milestone Real Estate Fund which are in real estate sector, it cannot be said that the assessee is also engaged in real estate business of purchase 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.
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 39 Milestone Real Estate Fund 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.
In any case of the matter, the Assessing Officer in course of assessment proceedings has made thorough enquiry with regard to assessee’s claim of exemption under section 10(23FB) of the Act and has passed a well reasoned order while allowing assessee’s claim of exemption under the said provision. Therefore, the core issue which needs to be addressed in such situation is, whether the assessment order so passed can be subjected to proceedings under section 263 of the Act. It is settled legal principle, if the revisional authority on 40 Milestone Real Estate Fund examination of any record is satisfied that any order passed by an officer subordinate to him is erroneous and prejudicial to the interest of Revenue, he can revise such order under section 263 of the Act. However, it is trite law, for exercising suo motu revisional power under section 263 of the Act the twin conditions of ‘erroneous’ and ‘prejudicial to the interest of revenue’ have to be satisfied cumulatively. Keeping in view the aforesaid legal position, if we examine the facts of the instant appeal, it is evident that the Assessing Officer after due enquiry and proper application of mind has concluded that assessee’s claim of exemption under section 10(23FB) of the Act is allowable. In fact, the learned Commissioner (Appeals) while deciding identical dispute arising out of assessee’s claim of exemption under section 10(23FB) of the Act in assessment year 2014-15 has allowed assessee’s claim being satisfied with the fact that the assessee has fulfilled all the conditions of section 10(23FB) of the Act. The aforesaid decision of the learned Commissioner (Appeals) in assessee’s own case, though, has been rendered in the subsequent assessment year, however, it suggests that the view taken by the Assessing Officer in allowing assessee’s claim of exemption under section 10(23FB) of the Act, though, may not be the only view but certainly it is a possible view. In such circumstances the assessment order cannot be held to be erroneous. In any case of the matter, the Assessing Officer after
41 Milestone Real Estate Fund conducting thorough enquiry and applying his mind to the facts and material on record vis–a–vis the relevant statutory provision has concluded in a particular manner. Only because the conclusion of the Assessing Officer is not to the liking of the revisional authority or in the opinion of the revisional authority the assessment order on the disputed issue should have been framed in a manner which could have been acceptable to her, for that reason the revisional authority cannot exercise revisional jurisdiction, that too, on the basis of proposal sent by a subordinate officer. Thus, in our considered opinion, the assessment order passed cannot be considered to be erroneous.
Even otherwise also, as discussed earlier in this order, the legislative history of section 10(23FB) r/w section 115U of the Act, clearly demonstrate the intention of the legislature to exempt the income derived by a Venture Capital Fund from the investments made in Venture Capital Undertaking while providing for taxation of the same income at the hands of the unitholders on distribution as per section 115U of the Act. Further, to ensure that the income derived by a Venture Capital Fund from investments made in Venture Capital Undertaking is taxed in the hands of the appropriate person i.e., the unitholders, section 115U(2) of the Act requires a Venture Capital Fund to furnish statement in Form no.64 before the prescribed authority as per rule 12C, mentioning the details of the nature of income paid or 42 Milestone Real Estate Fund credited. Undisputedly, in compliance to the aforesaid provisions, the assessee has submitted statements in Form no.64 before the appropriate authority and there is no adverse observation by the concerned authority that the assessee has violated the conditions of section 115U of the Act. Thus, looked at from this angle, there is no prejudice caused to the Revenue as the disputed income has been subjected to tax, even though, not in the hands of the Venture Capital Fund but in the hands of the unitholders. That being the case, in real sense of the term, no prejudice is also caused to the Revenue, as the income has ultimately suffered tax. Thus, it is very much clear, the twin conditions of section 263 of the Act are not fulfilled in the present case.
Further, the impugned order passed under section 263 of the Act reveals that, though, the learned Principal Commissioner has revised the assessment order holding it to be erroneous and prejudicial to the interest of revenue, however, she has not specified what loss is caused to the revenue if the income is taxed in the hands of the unitholders. Moreover, after exercising power under section 263 of the Act, what learned Principal Commissioner has ultimately done is to set–aside the assessment order with a direction to pass a speaking order after considering the eligibility of the assessee under section 10(23FB) of the Act. When the Assessing Officer has examined assessee’s claim of 43 Milestone Real Estate Fund exemption under section 10(23FB) of the Act in course of assessment proceedings after making thorough enquiry and applying his mind to the facts and material on record vis–a–vis the relevant statutory provisions and arrived at his conclusion, it is not understood what further verification or examination is required at the end of the Assessing Officer to examine the eligibility of assessee’s claim. Thus, prima–facie, it appears that in the garb of exercise of power under section 263 of the Act, the learned Principal Commissioner wants to initiate a roving and fishing enquiry as the issue has already been examined by the Assessing Officer in the original assessment proceedings. In support of our aforesaid view we rely upon the decisions of the Hon’ble apex court in case of Malabar Industrial Co. Ltd. and Max India Ltd. (supra) as well as the decisions of Hon’ble jurisdictional high court in case of Fine Jewellery Ltd. and Gabriel India Ltd. (supra).
Even on merits also, the assessee has a strong case. As discussed earlier in this order, as per the provision of section 10(23FB) of the Act which is applicable for the impugned assessment year, investments in Venture Capital Undertakings which are appearing in the negative list of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 will not qualify for exemption. It is abundantly clear, the Venture Capital Undertakings, wherein, the 44 Milestone Real Estate Fund assessee has made investments are doing business in real estate sector and real estate sector is not appearing in the negative list under Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. Further, there is no allegation by the any of the Departmental Authorities that the assessee has not complied to the conditions of section 115U(2) of the Act. Thus, all information relating to the distribution of income amongst unitholders is available with the Department. When the relevant statutory provisions entitle a Venture Capital Fund to claim exemption under section 10(23FB) of the Act in respect of the income derived from Venture Capital Undertaking and at the same time making it taxable at the hands of unitholders under section 115U of the Act, assessee’s claim of exemption under section 10(23FB) of the Act cannot be disallowed. More so, when there is no material on record to demonstrate that the assessee has violated any condition of either section 10(23FB) or section 115U of the Act. Thus, on over all consideration of facts and material on record, we are of the considered opinion that the Assessing Officer while accepting assessee’s claim of exemption under section 10(23FB) of the Act has made extensive enquiry and applied the law correctly to the facts brought on record. Hence, the assessment order passed cannot be held to be erroneous and prejudicial to the interests of Revenue. Therefore, the assessee is bound to succeed both on the issue of 45 Milestone Real Estate Fund exercise of jurisdiction under section 263 of the Act as well as on the merits of allowability of exemption under section 10(23FB) of the Act. Consequently, the impugned order passed under section 263 of the Act is set aside and the order passed by the Assessing Officer is restored.
In the result, assessee’s appeal is allowed. Order pronounced in the open Court on 10.08.2018