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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
O R D E R PER MAHAVIR SINGH, JM:
These five appeals, three by the Revenue and two by the assessee are arising out of the different orders of CIT(A)-25, Mumbai, in appeal Nos. CIT(A)- 25/IT-210/14(1)/11-12, CIT(A)-25/IT-174,175/AC14(1)/12-13, CIT(A)-25/IT- , 4137, 3259, 7636, 2898/Mum/2014 M/s CIG Reality Fund; A.Ys. 07-08, 08-09, 09-10, 10-11 126/AC14(1)/13-14 dated 27-02-2014, 06-03-2014, 21-10-2014. The Assessments were framed by ACIT Circle-14(1), Mumbai for the A.Ys. 2009-10, 2008-09, 2007-08, 2010-11 vide order dated 19-12-2011, 19-02-2013, 26-02- 2013, 26-03-2013 u/s 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The first common issue in all these three appeals of Revenue is against the order of CIT deleting the addition made by AO by holding that the income earned by assessee on account of interest income on fixed deposits and short term capital gain on investments in mutual funds is exempt under section 10(23FB) of the Act. For this Revenue has raised following three grounds in AY 2007-08: -
“1. The Ld. CIT(A) has erred in law as well as on fact by holding that income earned by the assessee on account of interest income earned from Fixed Deposit and STCG arising on investment in Mutual fund is exempt under section 10(23FB) as the same is not earned from Business activity.
2. On the facts and in the circumstances of the case and in the law the Ld. CIT(A) has erred in allowing exemption u/s 10(23FB) as the assessee has not earned any income from venture capital undertaking.
3. The Ld. CIT(A) erred in law as well as on fact by applying the Hon'ble ITAT Mumbai 'A' Bench decision in the case of Kshitij Venture Capital Fund [2011] 10 taxman.com 204 (Mum) wherein the facts are entirety different from the case under consideration.”
Briefly stated facts are that the assessee, a venture capital fund, is a private trust registered under registration Act 1908. The trust was established to , 4137, 3259, 7636, 2898/Mum/2014 M/s CIG Reality Fund; A.Ys. 07-08, 08-09, 09-10, 10-11 exploit investment opportunities for capital appreciation and returns by making privately negotiated equity, equity related and other permitted investments in India. The intention of the trust was to invest in entities engaged in the real estate and development. During the year under consideration the assessee earned interest on fixed deposits invested out of surplus funds at Rs. 66,07,975/- and short term capital gain from sale of mutual funds at Rs. 1,45,85,081/-. The assessee also incurred business loss. The assessee claimed that the interest income and gain on sale of mutual funds being short term capital gain in the hands of ventured capital fund during AY 2007-08 is not taxable in view of the provision of Section 10(23FB) and claimed exempt. The AO, in view of the assessment framed in assessee’s case for AY 2009-10, noted that the loss claimed by assessee being not forming a part of total income, since the same is covered under section 10(23FB) of the Act. The above interest income and short term capital gain is not allowed to be set off against the said business loss exempted under section 10(23FB) of the Act. Accordingly, the AO reopened the assessment and disallowed the claim of deduction by observing as under: -
“ As per the provisions of- section 10 (23 FB), exemption is available only in respect of income of a (venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking. Thus in order to be eligible for exemption u/s 10(23FB), the assesse ought to be fulfilling the following conditions:
(i) The assessee should be a Venture Capital Company or a Venture Capital Fund
(ii) It should he set up to raise funds. ii) The utilization of the funds should be for the purpose of investment in a Venture Capital Undertaking.
, 4137, 3259, 7636, 2898/Mum/2014 M/s CIG Reality Fund; A.Ys. 07-08, 08-09, 09-10, 10-11
Investment in any bank or Liquid Mutual Fund by no stretch of imagination can be termed as carrying on business of a venture capital undertaking. The interest income and gain on sale of Mutual fund units referred to above is not as a consequence of funds invested in a Venture Capital Undertaking within the meaning of explanation 1(c) to section 10(23 FB). This is further reinforced by Finance Act 2007 which substituted the wordings "from investment" in place of "set up to raise funds for investment". As such the income of the assessee to the extent not arising from investment in a Venture Capital Undertaking is thus not eligible for exemption u/s 1 0(23FB) which in the instant case is the income of the assessee declared as interest amounting to Rs 66,07,975/- which is to be disallowed from exemption under section 10(23FB) and brought it to tax tinder the head "Income from other sources. On similar grounds profit on sale of mutual fund units amounting to Rs 1,45,84,010/- was unable to denied exemption under section 10(23DB) and brought to tax under the head short term capital gain.”
Accordingly, the AO disallowed the claim of deduction on interest income of Rs. 66,07,965/- and profit on sale of mutual fund being short term capital gain being Rs. 1,45,84,087/-. Aggrieved, assessee preferred the appeal before CIT(A).
The CIT(A) following the decision of Mumbai Bench of this Tribunal in the case of ITO vs. Kshitij Venture Capital Fund [2011] 10 taxman.com 204 (Mum) and also the Ahmedabad Bench decision of this Tribunal in ITO vs. Gujarat information Technology Fund (2011) 45 SOT 529 (Ahd) allowed the claim of the assessee and deleted the addition of interest income of Rs. , 4137, 3259, 7636, 2898/Mum/2014 M/s CIG Reality Fund; A.Ys. 07-08, 08-09, 09-10, 10-11 66,07,975/- and short term capital gain on mutual funds of Rs. 1,45,84,081/-. Aggrieved, now Revenue is in appeal before us.
Before the learned Sr. DR heavily relied on the assessment order. On the other hand, the learned Counsel for the assessee first of all drew our attention to the bare provisions of section 10(23FB) of the Act as applicable in AY 2007-08, she referred to the provision as under: -
“Section 10 (23FB)
Any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking.”
In view of this provision, the learned Counsel for the assessee argued that section 10(23FB) is broaden to claim the exemption base and does not specify or restricted the exemption to any particular nature or source of income. She argued that it exempts income of a venture capital fund which fulfills the conditions relating to the purpose for which it is set up i.e. raising of funds for investment in venture capital undertakings. The learned Counsel for the assessee drew our attention to the intention of the legislation in the case of section 10(23FB) of the Act was to extend the exemption to entire income of ventured capital fund which is set up to raise funds for investment in venture capital undertakings. She referred to the speech of the Finance Minister as reproduced in 243 ITR 46 (statues) and according to her, in view of the above, the entire income of the ventured capital funds is exempted from tax under section 10(23FB) of the Act irrespective of its nature. She argued that instead tax the same in the hands of the investors at the time of the distribution under section 115U on a pass through basis else it would amount to double taxation once it is taxed in the hands of the venture capital fund and then again in the hands of the investor.
We have heard the rival contentions and gone through the facts and circumstances of the case. We have gone through the provision of section 10(23FB) of the Act and notice that the same starts with ‘any income of a , 4137, 3259, 7636, 2898/Mum/2014 M/s CIG Reality Fund; A.Ys. 07-08, 08-09, 09-10, 10-11 venture capital company or venture capital fund’ means the assessee is entitled to claim exemption on any nature of income of a venture capital fund, which fulfill the conditions relating to the purpose for which it is set up i.e. raising of funds for investment in venture capital undertakings. Even this view of ours is supported by the Finance Minister speech in the Lok Sabha while moving Finance Bill for the year 2000-01and which states as under: -
“Venture Capital Fund shall enjoy a complete pas through status. There will be no tax on distributed or undistributed income of such funds. The income distributed by the funds will only be taxed in the hands of investors at the rates applicable to the nature of income.”
In the light of the above, we are of the view that the intention of the legislature is clear to treat any income of venture capital fund as exempt from tax u/s 10(23FB) of the Act irrespective of its nature. There is a reason for this that this income will be taxed in the hands of investors at the time of distribution u/s 115U of the Act on a pass through basis. Accordingly, we are of the view that the CIT(A) rightly deleted the addition. For this we are also relying on the co- ordinate Bench decision of Kshitij Venture Capital Fund (Supra) of Mumbai Tribunal. Accordingly, the appeal of Revenue for AY 2007-08 is dismissed.
As regards to the appeals of Revenue for AY 2008-09 and 2009-10 in & 3259/Mum/2014, the learned Counsel for the assessee argued that in AY 2008-09 the assessee has earned the following income: -
Short Term Capital Gain Rs. 2,87,93,761 Other sources (Interest income) Rs.1,06,92,460/- Business loss (-)Rs.23,37,10,742 Similarly, in AY 2009-10 also the assessee has earned the following income: -
Short Term Capital Loss (-)Rs. 19,36,82,780 Other sources (Interest income) Rs.1,53,95,292/- Business loss (-)Rs.17,06,17,779/- , 4137, 3259, 7636, 2898/Mum/2014 M/s CIG Reality Fund; A.Ys. 07-08, 08-09, 09-10, 10-11 In view of the above facts, the learned Counsel for the assessee stated that with effect from 01-04-2008 there is an ammendment and the word ‘from investment’ is substituted for ‘setup to raise funds for investment’ by the Finance Act 2007. She referred to the following: -
“Section 10(23FB) any income of a venture capital company or venture capital fund from investment in a venture capital undertaking”
She argued that by the The Finance Act, 2007 has, with effect from the A.Y. 2008-2009 provided a new definition of venture capital undertaking, where the investment of a Venture Capital Company or Venture Capital Fund would be exempt from tax. Thus, “venture capital undertaking” means such domestic company whose shares are not listed in a recognized stock exchange in India and which is engaged in the following businesses: -
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; or (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, operation and maintaining any infrastructure facility as defined in Section 80 IA(4).
2. Dairy or poultry industry.
, 4137, 3259, 7636, 2898/Mum/2014 M/s CIG Reality Fund; A.Ys. 07-08, 08-09, 09-10, 10-11 In view of this provision she argued that the assessee is engaged in the business of real estate and invest its funds into real estate companies and accordingly the assessee is not eligible for claim of exemption u/s 10(23FB) of the Act and is governed by the normal provision of the Act. She argued that therefore, according to the normal provisions of law should be applied to the assessee’s case for and from AY 2008-09 and therefore, business loss has to be set of against income from other sources and capital gains.
We have heard rival contentions and gone through the facts and circumstance of the case. In view of the above given facts that there is an ammendment in section 10(23FB) of the Act and there are certain specified business eligible for exemption under this provision. Assessee’s case does not fall under exemption category and hence, out of the purview of this provision of section 10(23FB) of the Act. Therefore, the assessee has to be assessed under normal provisions of law and hence, the business loss has to be set off against the other incomes. We find no infirmity in the orders of CIT(A) for both the years and hence the same are confirmed. This common issue of Revenue’s appeal is dismissed.
10. Coming to assessee’s appeal in & 7636/MUM/2014 for AY 2009-10 and 2010-11, the only common issue in these two appeals of assessee is as regards to the disallowance made by AO of expenses relatable to exempt income by invoking the provision of section 14A of the Act read with section Rule 8D of the IT Rules, 1962 (hereinafter the ‘Rules’).
Brief facts are that in AY 2009-10, the assessee has earned dividend income of Rs. 18,80,102/- and voluntarily disallowed the expenses relatable to exempt income at Rs. 18,80,102/- i.e. the entire exempt income under section 14A of the Act read with Rule 8D of the Rules. Similarly, in AY 2010-11, the assessee has earned tax fee dividend income of Rs. 16,421/- and voluntarily disallowed the expenses relatable to this exempted income at Rs. 16,421/- equivalent to exempt income. The AO in AY 2009-10 disallowed under section 14A of the Act read with Rule 8D of the Rules at Rs. 6,09,82,348/- and in AY , 4137, 3259, 7636, 2898/Mum/2014 M/s CIG Reality Fund; A.Ys. 07-08, 08-09, 09-10, 10-11 2010-11 a sum of Rs. 3,14,86,290/- being estimated expenses relatable to exempted income in both the years. The learned Counsel for the assessee before us argued that no further disallowance is called for and she relied on the proposition settled by Hon’ble Delhi High Court in the case of Joint Investment Pvt. Ltd vs. CIT (2015) 372 ITR 694 (del), wherein it is held as under : -
“7.During the course of hearing, counsel for the petitioner had relied upon a decision of this Court in Commissioner of Income Tax VI v. Taikisha Engineering India Ltd., (ITA 115/2014, decided on 25.11.2014). The court had, in that judgment, highlighted the necessity in view of the peculiar wording of Section 14A (2) that computation or disallowance of the assessee, or claim that no expenditure was incurred for earning exempt income should be examined with reference to the accounts and only if the assessee’s explanation is unsatisfactory, can the AO proceed further.
8. The Court in Taikisha Engineering (supra) pertinently observed: -“Thus, Section 14A(2) of the Act and Rule 8D(1) in unison and affirmatively record that the computation or disallowance made by the assessee or claim that no expenditure was incurred to earn exempt income must be examined with reference to the accounts, and only and when the explanation/claim of the assessee is not satisfactory, computation under sub Rule (2) to Rule 8D of the Rules is to be made.
13. We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules until and unless the Assessing Officer has first recorded the satisfaction, which is mandated by sub Section (2) to Section 14A of the Act and sub Rule (1) to Rule 8D of the Rules.”
, 4137, 3259, 7636, 2898/Mum/2014 M/s CIG Reality Fund; A.Ys. 07-08, 08-09, 09-10, 10-11
9. In the present case, the AO has not firstly disclosed why the appellant/assessee’s claim for attributing `2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee’s claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is `48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., 52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.
For the above reasons, the impugned order of the ITAT is set aside. The question of law is answered in favour of the assessee. Consequently, order of the AO is set aside. The initiation of penalty proceedings also is set aside. The matter is remitted to the AO for fresh consideration in accordance with the above directions. The appeal is partly allowed.”
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that this issue is covered by the decision of the Hon’ble Delhi High Court in the case of Joint Investment (supra). Page 10 of 11 , 4137, 3259, 7636, 2898/Mum/2014 M/s CIG Reality Fund; A.Ys. 07-08, 08-09, 09-10, 10-11 Respectfully following the same, we delete the addition made by AO and confirmed by CIT(A). This common issue in both the appeals of assessee is allowed.
In the result, all the appeals of Revenue are dismissed and appeals of assessee are allowed. Order pronounced in the open court on 26-05-2017.