DCIT -23(1), MUMBAI, MUMBAI vs. BUSINESS EXCELLANCE TRUST, IL AND FS TRUST COMPANY

At the time of hearing, the Ld. A.R submitted that the assessee does not want to pursue the cross objection filed by it.

The facts relating to the case are discussed in brief. It is established as a trust through a trust deed dated May 12, 2006 and registered under the Registration Act, 1908. Though the assessee applied for “VCF” status to the SEBI on 18th May, 2006, yet it got the Certificate of registration only on 10th October, 2008.Thus the assessee became a Venture Capital Fund (VCF) as per the Securities and Exchange Board (Venture Capital Funds) Regulations, 1996 (SEBI Regulations). 5. The Venture Capital Funds are entitled to invest in “Venture Capital Undertakings” (VCU) as per SEBI Regulations. The assessee identified a VCU, viz., M/s Dixon Technologies Limited (earlier M/s Dixon Technologies Private Limited), which was an unlisted company then. The assessee made investments in the above said VCU by subscribing to its shares over a period of time. The aggregate investments made by the assessee can be categorized as under:- Investments made prior to getting Certificate of Registration on 10th October, 2008 - 2,40,838 shares Investment made after granting of Certificate of Registration (From Nov. 2008 to Sep, 2016) - 9,14,892 shares ------------- 11,55,730 shares =========== All the above shares were sold by the assessee from September, 2017 to November, 2017. There is no dispute that all the shares qualify as Long term capital asset. Consequently, the assessee earned Long Term Capital Gain (LTCG) of Rs.247.67 crores during the year relevant to assessment year 2018-19, i.e., the year under consideration.

Later, the Assessing officer took up the return of income filed by the assessee for scrutiny. The AO took the view that the assessee is not eligible for exemption of LTCG u/s 10(23FB) of the Act. Hence, the assessee made an alternative plea that the LTCG should be exempted u/s 10(38) of the Act. The above mentioned alternative contention was also rejected by the AO on the reasoning that the assessee is a VCF and hence the investors only are entitled to claim exemption u/s 10(38) of the Act. The AO also observed that the assessee did not pay STT at the acquisition of shares. Accordingly, he held that the assessee is not eligible for exemption u/s 10(38) of the Act. Accordingly, he completed the assessment by assessing the LTCG and dividend income as income of the assessee, i.e., the AO rejected the claim for exemption of LTCG u/s 10(23FB) &10(38) and also rejected the claim for exemption of dividend income of Rs.3,97,300/- u/s 10(35) of the Act.

In the appellate proceedings, the Ld CIT(A) upheld the view of the AO that the assessee is not eligible for exemption u/s 10(23FB) of the Act. However, he accepted the alternative plea of the assessee and accordingly held that the assessee is eligible to claim exemption of LTCG u/s 10(38) of the Act. The Ld CIT(A) also allowed exemption of dividend income of Rs.3,97,300/- u/s 10(35) of the Act, following the decision rendered by the Tribunal in the case of Aditya Birla Real Estate Fund (ITA No.7504/Mum/2019 dated 13th August 2021).

Aggrieved by the order passed by Ld CIT(A), the revenue has filed this appeal challenging the exemption granted by Ld CIT(A) u/s 10(38) of the Act in respect of LTCG and u/s 10(35) of the Act in respect of dividend income. The revenue has raised 10 grounds. Out of them, Ground no.9 and 10 are general in nature and hence they do not require adjudication.

Ground No.8 relates to the exemption granted by Ld CIT(A) in respect of dividend income. We noticed earlier that the assessee had claimed exemption of dividend income of Rs.3,97,300/- u/s 10(35) of the Act in the return of income and the same was rejected by the CPC while processing the return of income u/s 143(1)(a) of the Act. The assessee has also fairly admitted that it did not challenge the above disallowance made by the CPC before Ld CIT(A), meaning thereby, the disallowance so made by CPC has attained finality. In the impugned assessment order passed u/s 143(3) of the Act, the AO has only repeated the disallowance already made while processing the return of income u/s 143(1)(a) of the Act. Hence, the cause of action in respect of denial of exemption u/s 10(35) of the Act would lie only in challenging the intimation issued u/s 143(1)(a) of the Act. Admittedly, the assessee has failed to challenge the same. Hence the Ld CIT(A) could not have granted relief in the appeal filed against the assessment order passed u/s 143(3) of the Act, when the addition made u/s 143(1)(a) remained unchallenged. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the addition made by the AO on this issue.

We noticed earlier that the assessee had claimed exemption u/s 10(23FB) of the Act claiming itself to be a Venture Capital Undertaking. However, the said claim has been rejected by the AO and Ld CIT(A). We notice that the assessee has not challenged the rejection of exemption u/s 10(23FB) of the Act confirmed by Ld CIT(A). Hence, this issue has attained finality for this year.

In ground No.1 to 4, the revenue is contending that the Ld CIT(A) was not justified in granting exemption u/s 10(38) of the Act, since the alternative claim made by the assessee was a fresh claim, which has been made without filing return of income. We notice that the assessee has put forth the alternative claim before the assessing officer itself. We noticed that the assessee had already claimed exemption u/s 10(23FB) of the Act in the return of income and since the AO expressed the view that the assessee is not entitled to claim said exemption, the assessee has made alternative claim before him. Hence, in our view, it is only a case of change of section under which the exemption has been claimed by the assessee and it may not fall under the category of “Fresh claim”. Accordingly, we reject the grounds no.1 to 4 raised by the revenue.

In ground no.5, the revenue is contending that the exemption u/s 10(38) of the Act has been allowed by the Ld CIT(A) without considering the fact that the assessee has acquired shares from the off market without paying Securities Transaction Tax (STT).

Admittedly, the acquisition of shares by the assessee did not suffer STT. It is the case of the assessee that its case is covered by the notification issued by the Central Government as per the third proviso to sec. 10(38) of the Act and hence, even if the assessee did not pay STT at the time of acquisition of shares, still it is eligible for exemption u/s 10(38) of the Act. We may examine the above said contention of the assessee. In this connection, we may refer to section 10(38) of the Act, as applicable to the year under consideration, which reads as under:-

In order to ascertain as to whether the assessee is eligible for exemption u/s 10(38) of the Act, the highlighted portion of sec. 10(38), viz., Clause (a), Clause (b) and the third proviso are relevant. There is no dispute with regard to the following facts:- (i) The long term capital asset transferred by the assessee consisted of equity shares in a company. (ii) The sale of shares has taken place after 2004. (iii) The sale transaction was charged to Securities Transaction Tax. Thus, the conditions prescribed in clause (a) and (b) of sec. 10(38) of the Act are fulfilled in the instant case. The contentions urged by the revenue is related to the third proviso, which is highlighted above and which prescribes one more condition that the “transaction of acquisition of shares” should have also suffered the Securities Transaction Tax.

We notice that the third proviso to sec.10(38) of the Act empowers the Central Government to issue notification and the acquisition of shares falling under the said notification need not have suffered STT for the purpose of availing exemption u/s 10(38) of the Act. Hence sale of such kinds of shares are eligible for exemption u/s 10(38) of the Act.

Hence, it is necessary to examine the notification issued by the Central Government, viz., Notification no. SO 1789(E) (No. 43/2017 (F No.

The Ld CIT(A) has referred to the above said notification issued under sec. 10(38) of the Act and has taken the view that the assessee would be covered by the exemption provided in clause (b)(i) of the Notification and hence the LTCG earned by the assessee is eligible for exemption u/s 10(38) of the Act. The decision rendered by Ld CIT(A) on this issue are extracted below:- “From the above, to put everything in perspective, in order to claim exemption under section 10(38) of the Act, the Appellant Trust must satisfy the following conditions:

The Ld A.R, however, submitted that even though the Ld CIT(A) has granted relief to the assessee, yet the fact would remain that the Ld CIT(A) has given relief by relying on wrong clauses of the Notification. The Ld A.R submitted that the above said notification can be divided into three parts, viz., (A) All transactions of acquisition of equity shares entered on or after the 1st day of October, 2004 which are not chargeable to Securities transaction tax under Chapter VII of the Finance (No.2) Act, 2004 (23 of 2004)” shall be covered by the Notification. (B) Those cases covered by Clause (a), Clause (b) and Clause (c) are not eligible for exemption if the STT was not paid. (C) Certain exceptions are given under Clause (a) and Clause (b), meaning thereby, those cases shall be eligible for exemption u/s 10(38) of the Act. The Ld A.R submitted that both clause (a) and clause (b) shall apply to only to the cases of “acquisition of existing listed equity share”.

The Ld A.R submitted that the assessee has purchased “Unlisted” shares of Venture Capital undertaking and the said purchase is not chargeable to Securities Transaction Tax at the time of purchase. The Ld A.R submitted that the STT was payable at the relevant point of time (i.e., at the time of acquisition of shares by the assessee), only in respect of 14 ITA 2879/Mum/2023 & CO 15/Mum/2024 Business Excellence Trust transactions entered into through recognized stock exchange. Since the assessee has acquired „unlisted” shares, the transaction of acquisition could not have taken place through recognized stock exchange. Hence the assessee was not liable to pay STT at all on its acquisition of shares. Accordingly, the Ld A.R submitted that the case of the assessee would be covered by the main part of notification, viz., “all transactions of acquisition of equity shares entered on or after the 1st day of October, 2004 which are not chargeable to Securities transaction tax under Chapter VII of the Finance (No.2) Act, 2004 (23 of 2004)”

In our considered view, the above said submission of Ld A.R merits acceptance. The clauses (a) and (b) of the Notification deal with “existing listed equity shares”. Clause (c) deals with the case of acquisition of shares of a company which has been delisted from a recognized stock exchange. Hence all the three clauses, viz., clause (a), Clause (b) and Clause (c) are not applicable to the facts of the present case, since the assessee herein has purchased unlisted shares. Accordingly, the Ld A.R was right in mentioning that the main part of the Notification will only be applicable to the facts of the present case. Hence the shares acquired by the assessee would be covered by the main part of the notification and hence, even if the STT was not paid at the time of acquisition, the assessee would be entitled to claim exemption of LTCG u/s 10(38) of the Act. Accordingly, we confirm the final decision taken by Ld CIT(A) on the above said reasoning.

In Grounds No.6 and 7 , the revenue is contending that the assessee, being a Venture Capital Fund, is a pass through entity and hence the exemption u/s 10(38) of the Act could be claimed only by the investors as per sec.115U of the Act and not by the assessee.

We heard the parties on this issue. We noticed that the assessee was formed as a Trust under the Registration Act. Hence, as such, it is a “Person” under the Income tax Act. The assessee got registration as 15 ITA 2879/Mum/2023 & CO 15/Mum/2024 Business Excellence Trust “Venture Capital Fund”. The Ld A.R submitted that a Venture Capital Fund will acquire the character of “Pass through entity”, only if it is granted exemption in terms of sec. 10(23FB) of the Act. As per the provisions of sec.10(23FB) of the Act, the income earned by VCF on the investments made in the Venture Capital Undertaking is exempt and if the said exemption is given, then the income is liable to be assessed in the hands of investors in terms of sec.115U of the Act. However, in the instant case, the assessee‟s claim for exemption u/s 10(23FB) has been rejected by the tax authorities, meaning thereby, the status of the assessee as a “pass through entity” has not been accepted by the tax authorities in this year. Hence the question of applying the provisions of sec.115U will not arise in this year.

As noticed earlier, the assessee, being a trust is legal entity and would fall under the definition of “person” under the Income tax Act. Hence it is assessable under the Act for the income earned by it and consequently, it is entitled to avail all types of eligible exemption provided under the Act. Accordingly, the assessee would be entitled to claim exemption of long term capital gain u/s 10(38) of the Act. In the preceding paragraphs, we have upheld the decision of Ld CIT(A) in holding that the assessee is eligible for exemption u/s 10(38) of the Act.

In the result, the appeal filed by the Revenue is partly allowed and the cross objection of the assessee is dismissed.