GOPAL SRINIVASAN,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:

These are cross appeals filed by the assessee and Revenue

respectively directed against an order dated 10.02.2016 of ld.

Commissioner of Income Tax (Appeals)-15, Chennai.

ITA No.948 & 1423/Mds/2016 :- 2 -:

Appeal of the assessee is taken up first for disposal. 2.

Assessee has taken two grounds of which first ground assails

reopening done for the impugned assessment year. Ld. Authorised

Representative for the assessee submitted that he was not pressing

this ground. Accordingly, ground No.1 of the assessee is dismissed.

taxing of short term capital gains out of sale of shares at 30%. Ld.

Authorised Representative in support of this ground submitted that

assessee had returned short term capital gains of �71,85,696/- on

which he paid tax at the rate of 10%. It seems assessee had applied

the rate of 10% based on Section 111A of the Income Tax Act, 1961

(in short ‘’the Act’’). However, ld. Assessing Officer was of the opinion

that transaction statement of M/s. Stock Holding Corporation of India

Ltd, furnished by the assessee, reflected purchase and sale of shares

in one M/s. Accel Frontline Ltd on 19.04.2007, 20.04.2007, 24.04.2007

and 25.04.2007. As per the ld. Assessing Officer, assessee had certain

other share transactions also done, through Rolling Market Lot and

Inter Depository Transfers. Ld. Assessing Officer noted that some of

these transactions had taken place on the very same day or within a

short span of three to four days. According to him, assessee’s claim

of STCG could be considered only if the period of holding of shares

ITA No.948 & 1423/Mds/2016 :- 3 -:

was ascertainable. Further according to him, assessee could not show

that the sum of �71,85,696/- shown by it as short term capital gains

was correct. As per the ld. Assessing Officer, whether the transactions

giving rise to the surplus related to any investments required

verification. He thus held that assessee could not claim concessional

tax of 10% on the amount of �71,85,696/-. He held that assessee

was liable to pay tax at the normal rate of 30% on such amount.

Commissioner of Income Tax (Appeals). However this did not meet

with any success. According to ld. Commissioner of Income Tax

(Appeals), assessee did not give any details regarding actual delivery

of the shares which were sold by it giving rise to the claim of short

term capital gains.

assailing the orders of the lower authorities submitted that the sale of

the shares which gave rise to short term capital gains arose out of

transactions which were charged to Securities Transaction Tax (SET).

According to him, Sec. 111A of the Act clearly applied for such

transactions and assessee was eligible for lower rate of tax of 10% on

the capital gains arising from transfer of such shares. Further,

ITA No.948 & 1423/Mds/2016 :- 4 -:

according to him, none of the lower authorities had found the claim to

be wrong but had went by mere surmises.

Per contra, ld. Departmental Representative strongly supporting 6.

the orders of the authorities below submitted that assessee could not

show the genuineness of the claim of short term capital gains.

We have considered the rival contentions and perused the 7.

orders of the authorities below. Claim of the assessee is that short

term capital gains arose on account of transfer of equity shares and

such transactions were charged to Securities Transaction Tax. In

other words, as per the assessee, the transactions giving rise to short

term capital gains were done through recognized stock exchange and

Securities Transaction Tax were paid on such transactions. Section

111A of the Act is reproduced hereunder:-

(1) Where the total income of an assessee includes any income chargeable under the head "Capital gains", arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund and- (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force ; and (b) such transaction is chargeable to securities transaction tax under that Chapter,

ITA No.948 & 1423/Mds/2016 :- 5 -:

the tax payable by the assessee on the total income shall be the aggregate of- (i) the amount of income-tax calculated on such short-term capital gains at the rate of fifteen per cent. ; and (ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee : Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such short-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short-term capital gains shall be computed at the rate of ten per cent. (2) Where the gross total income of an assessee includes any short-term capital gains referred to in sub-section (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains. (3) Where the total income of an assessee includes any short-term capital gains referred to in sub-section (1), the rebate under section 88 shall be allowed from the income-tax on the total income as reduced by such capital gains’’’.

We find that none of the lower authorities had addressed the issue

whether the transactions of shares claimed by the assessee satisfied

the conditions set out in Sec. 111A of the Act. Though the ld.

Assessing Officer has stated in the assessment order that assessee

could not prove the actual delivery of shares to it, how he came to

such a conclusion is not clear. We are therefore of the opinion that

the issue requires a fresh look by the ld. Assessing Officer. We set

ITA No.948 & 1423/Mds/2016 :- 6 -:

aside the orders of the authorities below on this issue and remit it

back to the ld. Assessing Officer to consider the claim afresh, in the

light of the conditions specified Sec.111A of the Act. Ground No.2 is

allowed for statistical purpose.

Grievance of the Revenue is that ld. Commissioner of Income 9.

Tax (Appeals) allowed the exemption claimed by the assessee on the

income earned by it from transactions relating to units in M/s. ICICI

emerging sector fund.

Facts apropos are that assessee had claimed exemption 10.

u/s.10(38) of the Act in respect of long term capital gains amounting

to �1,36,16,621/-. As per the assessee the gains were on purchase

and sale of units in ICICI emerging sector fund and in accordance

with Form 64 issued by the fund manager. Contention of the

assessee was that the transactions giving rise to the LTCG had

suffered Securities Transaction Tax. However, ld. Assessing Officer

was of the opinion that under Section 115U r.w.s. 10(23FB) of the Act,

no exemption was available for such long term capital gains.

According to him, Securities Transaction Tax liability was borne by

concerned Venture Capital Fund and not by the assessee. Further,

according to him, Sec. 115U of the Act only supplemented Sec.

ITA No.948 & 1423/Mds/2016 :- 7 -:

10(23FB) of the Act. As per the ld. Assessing Officer, Sec. 10(23FB) of

the Act was a specific provision concerning Venture Fund whereas Sec.

10(38) of the Act was a general provision. Claim of exemption from

long term capital gains was disallowed. An addition of �1,36,16,621/-

was made.

Commissioner of Income Tax (Appeals). Argument of the assessee was

that by virtue of Sec. 115U of the Act, investments made by the

assessee in Venture Capital Fund, had to be treated as though it were

investments directly made by the assessee. According to the assessee,

Venture Capital Fund authority, through Form No.64 issued by them, in

accordance with Rule 12C of Income Tax Rules, 1962, had advised

what was the share of income of the assessee, which accrued during

the relevant previous year. Thus, according to him, assessee was

eligible for the claim on accrual basis as certified by the Venture

Capital Fund. Ld. Commissioner of Income Tax (Appeals), agreed with

the above contentions of the assessee. According to him, assessee was

justified in showing the income from its investment through Venture

Capital Fund on accrual basis since assessee was all along following

such accounting method in earlier years and ld. Assessing Officer had

ITA No.948 & 1423/Mds/2016 :- 8 -:

accepted such method. Ld. Commissioner of Income Tax (Appeals)

directed the ld. Assessing Officer to allow the claim of the assessee.

assailing the order of the ld. Commissioner of Income Tax (Appeals)

submitted that Sec. 115U r.w.s.10(23FB) of the Act was introduced

on 01.04.2001 prior to the introduction of Sec.10(38) of the Act which

came into statute only on 01.04.2005. As per the ld. Departmental

Representative from 01.04.2005 there was no exemption available for

such transactions, since Securities Transaction Tax liability was borne

by the Venture Capital Fund and not by the assessee. Further,

according to him, whether investments were made by the Venture

Capital Fund in accordance with SEBI regulations and whether they

had excluded the investments in listed securities had to be verified

before allowing the claim. As per the ld. Departmental Representative,

ld. Commissioner of Income Tax (Appeals) fell in error in allowing the

claim.

Per contra, ld. Authorised Representative strongly supported 13.

the orders of the authorities below.

We have considered the rival contentions and perused the 14.

orders of the authorities below. It is not disputed that long term

ITA No.948 & 1423/Mds/2016 :- 9 -:

capital gains of �1,36,16,621/-, on which assessee had claimed

exemption, arose from its investments in a Venture Capital Fund called

ICICI Emerging Sector Fund. Sec. 115U of the Act which deals with

income accruing or arising or received by a person out of investments

made in a Venture Capital Fund is reproduced hereunder:-

Section 115U:-

‘’1) Notwithstanding anything contained in any other provisions of this Act, any income received by a person out of investment made in venture capital company or venture capital fund shall be chargeable to income-tax in the same manner as if it were the income received by such person had he made investments directly in the venture capital undertaking. (2) The person responsible for 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 receiving 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 during the previous year and such other relevant details as may be prescribed. (3) The income paid 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 receiving such income as it had been received by, or had accrued to, the venture capital company or the venture capital fund, as the case may be, during the previous year. (4) The provisions of Chapter XII-D or Chapter XII- E or Chapter XVII-B shall not apply to the income

ITA No.948 & 1423/Mds/2016 :- 10 -:

paid by a venture capital company or venture capital fund under this chapter.

The case of the Revenue is that assessee could not have accounted

income on accrual basis and income of Venture Capital Fund could

be considered u/s.10(23FB) of the Act only if such Venture Capital

Fund was granted a registration and regulated under Securities and

Exchange Board of India (Venture Capital Funds) Regulations, 1996.

clearly indicate that income accruing or arising or received by any

person out of investments made by him in a Venture Capital Fund

has to be treated on par with investments directly made by such

Venture capital undertaking. Once the deeming provision comes into

play, in our opinion it has to be given full effect. Section 10(23FB) of

the Act gives exemption for income of a Venture Capital Fund if certain

conditions are satisfied. Said Section reproduced hereunder:-

‘’ 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:-

(1).................

(2)...............

(3).................

ITA No.948 & 1423/Mds/2016 :- 11 -:

23(FB) any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking. Explanation 1.— For the purposes of this clause, (a) venture capital company means such company (i) which has been granted a certificate of registration under the Securities and Exchange Board of India Act, 1992 (15 of 1992), and regulations made thereunder ; (ii) 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 ; (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 ; and (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

ITA No.948 & 1423/Mds/2016 :- 12 -:

(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 ;

By virtue of the above, income of a Venture Capital Fund is exempt

provided it satisfied the conditions set out in clause (b) of Explanation

income accruing to a person out of investments made in a Venture

Capital Fund also gets the exemption u/s.10(23FB) of the Act.

Though the grounds of the Revenue say that compliance with

Securities and Exchange Board of India (Venture Capital Funds)

Regulations, 1996 has not been established, what we find is that form

No.64 specified in Rule 12C which is to be furnished by the Venture

Capital Fund was filed by the assessee. Said Form 64 by necessary

implication means that at the Venture Capital Fund had complied with

the conditions set out in Explanation (1) to Section 10(23FB). Ld.

Assessing Officer did not find anything wrong in the said form No.64

which is the Form set out by the Rules under sub-section 2 of Section

115U of the Act. We cannot also say that the income which is exempt

u/s.10(23FB) of the Act had to be considered on receipt basis and not

on accrual basis since Section 115U of the act takes within its ambit

accrued income also. Ld. Commissioner of Income Tax (Appeals) in

ITA No.948 & 1423/Mds/2016 :- 13 -:

our opinion was justified in allowing the claim of the assessee u/s.10(23FB) of the Act read alongwith Section 115U of the Act. We do not find any reason to interfere with the order of the ld. Commissioner of Income Tax (Appeals).

In the result, appeal of the assessee is partly allowed for 16. statistical purposes, whereas that of Revenue is dismissed.

Order pronounced on Thursday, the 11th day of January, 2018, at Chennai.

Sd/- Sd/- (जॉज� माथन) (अ�ाहम पी. जॉज�) (GEORGE MATHAN) (ABRAHAM P. GEORGE) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated:11th January, 2018. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF