SUBHASH E. DHARGAVE, MUMBAI vs. MILESTONE REAL ESTATE FUNDS, MUMBAI

The ld. AR submitted that the Co-ordinate Bench in assessee's own case has been consistently holding that the assessee is entitled for exemption u/s 10(23FB) & 10(35) of the Act and in this regard placed reliance on the decisions in assessee's own case for AY 2013-14 to AY 2015-16 and AY 2017-18 to AY 2018-19. Accordingly, the ld. AR argued that the facts for year under consideration being identical the issues are covered by the decisions of the Co-ordinate Bench.

We heard the parties and perused the material on record. We notice that the Co-ordinate Bench while considering the similar issue of denial of exemption under section 10(23FB) & 10(35) of the Act for the AY 2015-16 (ITA No. 368/Mum/2024 dated 10.09.2024). The coordinate bench while considering the issue of exemption under section 10(23FB) has held that “12. We note that Section 10(23FB) was introduced by the Finance Act, 2000 with effect from 01/04/2001. As originally enacted, Section 10(23FB) of the Act provided exemption in respect of „any income‟ of Venture Capital Fund set-up to raise funds for investment in „Venture Capital Undertaking‟ being a domestic company whose shares are not listed on a recognized stock exchange and which was engaged in business of service/production/manufacture of article/things [excluding activities/sectors to be specified by the SEBI with the approval of Central Government]. Section 10(23FB) as originally enacted read as under: “10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included (23FB) any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking. Explanation. For the purposes of this clause, xx xx (c) venture capital undertaking means a domestic company (i) whose shares are not listed in a recognized stock exchange in India; (ii) which is engaged in the business for providing services, production or manufacture of an article or thing but does not include such activities or sectors which are 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” (Emphasis Supplied) 13. By way of Notification, dated 28/09/2004, bearing number S.O. 1060 (E) [No.249 (F.NO.142/27/2004-TPL)], in exercise of the powers conferred by Clause (c) of Explanation to Section 10(23FB) of the Act, the Central Board of Direct Taxes (CBDT) notified a domestic company, being a Venture Capital Undertaking referred to in Clause (n) of Regulation 2 of SEBI (Venture Capital Funds) Regulations, 1996 as Venture Capital Undertaking for the purpose of Section 10(23FB) of the Act.

However, as per the subsequent amendment brought by the Finance Act, 2007 (with effect from 01/04/2008), the definition of Venture Capital Undertaking, as contained in Explanation (c) to Section 10(23FB) of the Act, was substituted and Venture Capital Undertaking was defined to mean a domestic company (whose shares are not listed on a recognized stock exchange) engaged in specified business or activity. The new/substituted clause (c) of Explanation to Section 10(23FB) of the Act read as under: (c) "venture capital undertaking" means such domestic company whose shares are not listed in a recognised stock exchange in India and which is engaged in the: (i) business of: (A) nanotechnology; (B) information technology relating to hardware and software development; (C) seed research and development; (D) bio-technology; (E) research and development of new chemical entities in the pharmaceutical sector; (F) production of bio-fuels; (G) building and operating composite hotel-cum-convention centre with seating capacity of more than three thousand; or (H) developing or operating and maintaining or developing, operating and maintaining any infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA; or (ii) dairy or poultry industry”

In relation to the above amendment, Circular No. 3 of 2008, dated 12/03/2008, was issued by the CBDT which provided Explanatory Notes to provisions relating to direct taxes contained in the Finance Act, 2007 wherein it was stated as under: “14. Exemption for certain income of a venture capital company or venture capital fund 14.1 Clause (23FB) of section 10 provides exemption in respect of any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking. Such "venture capital undertaking" has been defined in clause (c) of Explanation 1 to clause (23FB) to mean 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 and notified as such in the Official Gazette by the Board for the purposes of the clause. 14.2 With a view to make the tax benefit more focused and to channelise existing as well as future investments in key, risk-prone thrust areas, clause (23FB) has been amended whereby such exemption will now be available only in respect of income of a venture capital company or venture capital fund from investment in a venture capital undertaking. For this purpose, the said clause (c) of Explanation 1 has also been amended to define "venture capital undertaking" as such domestic company whose shares are not listed in a recognised stock exchange in India and which is engaged in the……..”

In this regard, the Memorandum on provisions on Direct Taxes contained in the Finance Bill, 2012 stated as under: “PROVISIONS RELATING TO VENTURE CAPITAL FUND (VCF) OR VENTURE CAPITAL 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 10(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. The provisions of section 115U currently allow an opportunity of indefinite deferral of taxation in the hands of investor. With a view to rationalize the above position and to align it with the true intent of a pass-through status, it is proposed to amend section 10(23FB) and section 115U to provide that: (i) The venture Capital undertaking shall have same meaning as provided in relevant SEBI regulations and there would be no sectoral restriction. (ii) Income accruing to VCF/VCC shall be taxable in the hands of investor on accrual basis with no deferral. (iii) The exemption from applicability of TDS provisions on income credited or paid by VCF/VCC to investors shall be withdrawn. These amendments will take effect from 1st April, 2013, and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent years. [Clauses 5, 54]” (Emphasis Supplied) 19. On perusal of the above, it become clear that as per the definition of Venture Capital Undertaking, as substituted by the Finance Act, 2012, read with the definition of „Venture Capital Undertaking‟ contained in Regulation 2(n) of the SEBI (Venture Capital Funds) Regulation, 1996, a domestic company which is engaged in activities or sectors [other than those specified in the „Negative List‟ contained in „Third Schedule‟ to SEBI (Venture Capital Funds) Regulations, 1996] was to be regarded as Venture Capital Undertaking provided other conditions specified in Regulation 2(n)(i) were fulfilled. We find that the „Negative contained in Third Schedule to SEBI (Venture Capital Funds) Regulations, 1996 initially included „Real Estate‟ Sector at Sl. No.

However, the same was deleted from the „Negative List‟ with effect from 05/04/2004 by way of SEBI (Venture Capital Fund) (Amendment), Regulation, 2004. Thus, with effect from 05/04/2004, the „Negative List‟ contained in „Third Schedule‟ to SEBI (Venture Capital Funds) Regulations, 1996 read as under: “THIRD SCHEDULE Securities and Exchange Board of India (Venture Capital Funds) Regulation, 1996 NEGATIVE LIST (1)** ** ** (2) Non-banking financial services [excluding those Non-Banking Financial Companies which are registered with Reserve Bank of India and have been categorized as Equipment Leasing or Hire Purchase Companies.]. (3) gold financing [excluding those companies which are engaged in gold financing for jewellery.]. (4) Activities not permitted under industrial policy of Government of India (5) Any other activity which may be specified by the Board in consultation with Government of India from time to time."

Subsequently, with effect from 21/05/2012, the SEBI (Venture Capital Fund) Regulations, 1996 was replaced by the SEBI (Alternative Investment Funds) Regulations, 2012, and corresponding changes were made in Section 10(23FB) of the Act.

Thus, Section 10(23B) of the Act as applicable for the relevant assessment year(s) read as under: “10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included xx xx (23FB) any income of a venture capital company or venture capital fund from investment in a venture capital undertaking. Following proviso shall be inserted to clause (23FB) of section 10 by the Finance Act, 2015, w.e.f. 1-4-2016: Provided that nothing contained in this clause shall apply in respect of any income of a venture capital company or venture capital fund, being an investment fund specified in clause (a) of the Explanation 1 to section 115UB, of the previous year relevant to the assessment year beginning on or after the 1st day of April, 2016. [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 recognised 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 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:

We note that identical views were expressed by the Mumbai Bench of the Tribunal while allowing Assessee‟s appeal challenging order of revision passed by the Learned Principal Commission of Income Tax under Section 263 of the Act for the Assessment Year 2013-2014. The aforesaid order dated, 10/08/2018, passed by the Mumbai Bench of the Tribunal in was relied upon by the CIT(A) while granting relief to the Appellant in appeal preferred against the assessment order for the relevant assessment year. During the course of hearing the Learned Authorised Representative for the Appellant had also placed on record the common order, dated 22/09/2020, passed by the Tribunal in the case of the Assessee whereby the Tribunal had decided identical issues raised in appeal preferred by the Assessee in pertaining to the Assessment Year 2014-15 in favor of the assessee by following the aforesaid decision of the Tribunal for the Assessment Year 2013-14. In view of the aforesaid Ground No. 1 to 5 raised by the Revenue are dismissed.”

We further notice that the Co-ordinate Bench while considering the issue of assessee being entitled to claim exemption u/s 10(35) of the Act has held that “24. We note that even the contention raised by the Revenue regarding investments made by the Assessee in the units of mutual fund leading to violation of the terms of trust deed and the terms/condition on which registration as Venture Capital Fund was granted to the Assessee by SEBI were considered and rejected by the Mumbai Bench of the Tribunal in the above decision for the Assessment Year 2013-14 [ITA No. 2509/Mum/2018, dated 10/08/2018] holding as under: “25. Further, the learned Principal Commissioner has observed that the assessee has violated the conditions imposed under Securities and Exchange Board of India Act and Regulations by investing in mutual fund. However, the learned Principal Commissioner has not specified which provisions of SEBI Act or Regulations have been violated by the assessee by investing in mutual fund. On carefully going through the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996, we were unable to locate any restriction/condition imposed therein prohibiting the assessee from investing in mutual fund. On the contrary, the learned Sr. Counsel has brought to our notice a clarification issued by SEBI, wherein, it has been specifically stated that there is no prohibition in investing surplus fund available with Venture Capital Fund in short term liquid mutual fund. In any case of the matter, the allegation of breach/violation of SEBI Regulation has originated from the Principal Commissioner, whereas, there is no such allegation of violation of SEBI Regulations by the competent authority i.e., SEBI. Undisputedly, SEBI has issued registration certificate to the assessee registering it as a Venture Capital Fund in the year 2005. Therefore, the competent authority which can look into any violation is the SEBI. Neither the registration certificate granted has been withdrawn by SEBI nor any action has been taken against the assessee for any violation as alleged by the learned Principal Commissioner. In fact, on going through the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996, we find that as per section 8 of the said Regulations, the grant of registration certificate is subject to the condition that Venture Capital Fund shall abide by the conditions mentioned therein. There is no material on record to indicate that the assessee has violated any of the conditions of section 8 of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. Further, section 22 of the said Regulation empowers SEBI to call upon the Venture Capital Fund to file such report, as the Board may desire with regard to activities carried on by the Venture Capital Fund. Further, section 25 of the said Regulation empowers the Board to inspect or investigate the books of account, records and documents of a Venture Capital Fund through an Inspecting or Investigating Officer and on the basis of such report, the Board can take such measures against the Venture Capital Fund as per section 29 or 30 of the said Regulation. Undisputedly, in case of the present assessee there is no such allegation or action by the SEBI which could demonstrate violation of any conditions imposed by SEBI. At least, no material has been brought before us by the learned Departmental Representative to demonstrate such fact. Thus, in the absence of any allegation or action by the SEBI against the assessee towards violation of SEBI Regulations, the learned Principal Commissioner cannot make such allegation only for the purpose of denying assessee's claim of exemption under section 10(23FB) of the Act. In this context, we may rely upon the following decisions: (i) G.V.K. Biosciences (P.) Ltd. (supra); (ii) Small Is Beautiful case (supra); and (iii) Gujarat Information Technology Fund case supra).

In the background of aforesaid discussion and precedent we do not find any infirmity in the order of learned CIT(A). In this view of the matter we uphold the order of learned CIT(A). Ground No.2.

Brief facts are that the AO stated in his order that the income of VCF shall be exempt only to the extent it is from the investment in venture capital undertaking. All other incomes would be taxable. On perusal of computation of income filed by 'the assessee, the AO noticed that the assessee has made investments in the units of Mutual Fund 'Birla Sun Life Cash Manager' to the tune of Rs. 74,04,81,089/- on which it has received dividend income of Rs.6,64,92,670/- and claimed exemption u/s. 10(35). The AO has disallowed the said claim of deduction u/s. 10(35) of the Act for the following reasons: i) the assessee Fund which was created to function as a VCF was eligible for deduction under a specific section 10(23FB) and therefore it cannot claim deduction under another section of 10(35) on a part of its income. After the amendment in the provision of section 10(23FB) w.e.f. 1.04.2008, the exemption was made more restrictive and income' other than the income from investment in VCUs would be taxable. ii) The A.O relied on the following decisions: a) Hon'ble ITAT, Mumbai in the case of ITO19(2)(3) vs. M/s. Khitij Venture Capital Fund. b) Hon'ble ITAT, Ahmedabad Bench in, the case of ITO, Ward 10(20 Vs. Gujarat Information Technology Fund. ii) the assessee, which is a VCF, is not covered by the definition of a 'person' as defined under section 2(31) of the Act, since it is a trust which enjoys a special 'status' for the specific purpose of only exemption u/s 10(23FB) of the Act.

Against the above order Revenue is in appeal before us.

We have heard both the parties and perused the records. Learned Departmental Representative relied upon the order of the Assessing Officer. However, he could not point out as to why assessee shall not be allowed exemption under section 10(35) of the Act with respect to dividend income.

Respectfully following the above decisions of the Tribunal, we hold that in the facts and circumstances of the present case the Assessee was entitled to claim exemption under Section 10(35) of the Act in respect of dividend income received from investment in units of mutual fund as the same were neither shown to be in violation of terms of the trust deed or any SEBI regulations. Accordingly, Ground No. 6 raised by the Revenue is dismissed.

We do not find any infirmity in the order passed by the CIT(A) as the CIT(A) has granted relief to the Assessee by following the binding decision of the Tribunal.”

The facts for the year under consideration being similar, respectfully following above decision of the coordinate bench in assessee's own case, we see no reason to interfere with the decision of the CIT(A) in deleting the disallowance / addition made by the AO with respect to exemption under section 10(23FB) and section 10(35) of the Act.

In the result, the appeal of the Revenue is dismissed.