ASSISTANT COMMISSIONER OF INCOME TAX CORPORATE CIRCLE 1(1), NUNGAMBAKKAM vs. IDFC LIMITED, TEYNAMPET

per Rule 8D(2)(iii) disallowed Rs.12.42 crores being 0.5% of the total

average investment of Rs.2484.45 crores. Thus, the expenditure incurred

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 7 :: relatable to exempt income earned by assessee was determined by the AO

at Rs.61.12 crores (refer computation at para 6 of the assessment order).

Aggrieved, assessee preferred an appeal before the Ld.CIT(A), who

deleted the disallowance made under Rule 8D(2)(ii) to the tune of Rs.48.70

crores and followed the decision of this Tribunal on this issue in assessee’s

own case for earlier assessment years (refer decision in ITA Nos.2065 &

2066/CHNY/2011, 99 to 101/CHNY/2012 for earlier AYs).

has followed the Tribunal’s order in assessee’s own case for earlier

assessment year and directed that the disallowance of expenditure under

Rule 8D(2)(iii) be computed at the rate of 3% of exempt income and held

as under:-

“4.1.4 Now coming to the second issue regarding computation of administrative expenditure in accordance with Rule 8D(2)(iii), the appellant has claimed that it has suo-moto disallowed expenses of Rs.2.35 crores in the revised return of income for the AY 2011-12. Here it is worthwhile to note that the Hon’ble ITAT in appellant’s own case for earlier years (supra) has directed that the disallowance for administrative expense be restricted to 3% of the exempt dividend income. As far as the appellant’s request for deduction of disallowance already made by it against the disallowance of administrative expenditure computed @3% of exempt income, the AO must verify what is the nature of expenses disallowed by the appellant. If the disallowance made by the appellant is on account of administrative expenditure, deduction for the same must be given from the disallowance

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 8 :: @ 3% of exempt income. If the disallowance is made on a ground other than administrative expenses, no such deduction is required to be given in the disallowance computed as per the above direction.”

Aggrieved, by the aforesaid action of the Ld.CIT(A), the Revenue is before

us.

relevant year, the assessee has shown dividend income of

Rs.82,35,65,475/- and has suo-moto disallowed direct expenses to the

tune of Rs.2,34,55,545/-. The Ld.CIT(A) has deleted the disallowance

made by the AO as per Rule 8D(2)(ii) to the tune of Rs.48.70 crores by

following the order of the Tribunal in earlier year supra. The Revenue has

challenged this action of Ld.CIT(A) and in this respect, we note that from

balance-sheet of the assessee that it had own funds available to the tune of

Rs.4300.60 crores and had shown to have made total investments to earn

exempt income only to the tune of Rs.2502.62 crores and in the year under

consideration, in addition it has only invested Rs.32.11 crores. And the

assessee’s profit for the AY 2010-11 was to the tune of Rs.1012.84 crores.

Considering the aforesaid relevant facts, we find that assessee was in

possession of mixed funds which includes its own funds in sufficient

quantity. Therefore, a presumption is to be drawn that its own funds were

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 9 :: utilized for the investments which yielded exempt income (refer decision of

Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities &

Power Ltd., reported in 313 ITR 340). Therefore, we confirm action of the

Ld.CIT(A) deleting disallowance made by AO under Rule 8D(2)(ii).

that the AO has disallowed 0.5% of the total average investments of

Rs.2,484.45 crores i.e., Rs.12.42 crores and the Ld. CIT(A) has restricted

the same at 3% of the exempt income. We do not countenance such an

action of the Ld.CIT(A) and is of the opinion that 0.5% of the dividend

yielding investments need to be made as per the Special Bench decision of

this Tribunal in the case of ACIT vs. Vireet Investments P. Ltd., in ITA

No.502/Del/2012, which action has been approved by Hon’ble Bombay

High Court. Therefore, we direct the AO to compute the disallowance of

0.5% of the dividend yielding investment after hearing the assessee.

action of Ld.CIT(A) allowing the provision for standard asset as deduction

u/s.36(1)(viia)(c) of the Act.

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 10 :: 13. Brief facts as noted by the Ld.CIT(A) is that the assessee claimed

deduction u/s.36(1)(viia)(c) of the Act to the tune of Rs.68,97,06,150/-

being 5% of the total income. The assessee claimed before the AO that

though provision for standard assets and provision for contingencies were

debited to P & L account at Rs.96,75,00,000/- and Rs.51,72,75,667/-

respectively in accordance with the RBI guidelines, deduction

u/s.36(1)(viia)(c) of the Act was restricted by the assessee itself to 5% of

the total income at Rs.68,97,06,150/-. The Ld. CIT(A) after reproducing the

submission of the assessee from paras 4.2.2 to 4.2.24 from pages 10 to 15

of the impugned Appellate Order, has allowed the claim by following the

decision of this Tribunal in assessee’s own case for AY 2007-08, dated

09.08.2023 (ITA No.751/CHNY/2018 & 676/CHNY/2020). The Ld. CIT(A)

has allowed the issue by holding as under:-

“4.2.5 I have perused the facts of the case, submissions of the appellant and judicial pronouncements on the said issue. The Hon’ble Tribunal in appellant’s own case in ITA No.751/CHNY/2018 and 676/CHNY/2020 for AY 2007-08, after making a detailed discussion of its earlier orders in appellant’s case and taking note of decision of other Tribunal’s on the same issue, vide its recent order dated 9.08.2023 has held that the standard assets for which the provision is made in accordance with the policy and prudential RBI norms which permits one time restructuring of infrastructure loans is allowable as a deduction u/s 36(1)(viia)(c) of the Act. Since the issue involved in the instant case is similar, following the judicial discipline, it is held that the appellant is eligible to claim deduction u/s 36(1)(viia)(c) on standard assets subject to the ceiling limit prescribed under the said section which is @5% of the total income

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 11 :: (computed before making any deduction under this clause and under Chapter VI-A). The ground of appeal raised is allowed.”

assessee’s own case for AY 2007-08 in ITA No.751/CHNY/2018 &

676/CHNY/2020, wherein the very same issue had come up for the

consideration of the Tribunal i.e., assessee’s claim of deduction of

provision for standard assets u/s.36(1)(viia)(c) of the Act, wherein the

Tribunal has decided the grounds of appeal as under:-

2.1 The learned CIT(A) has erred in not considering the fact that the provisions of Rs. 49,85,00,000/- made towards the standard assets is as per provisioning policy of the Appellant in respect of stressed and doubtful assets and is eligible for deduction under section 36(1)(viia) (c) of the Act. 2.2 The learned CIT(A) has erred in stating that deduction under section 36(1)(via) of the Act is not applicable to Appellant, being Non-Banking Financial Company, without appreciating the fact that the Appellant is a Public Financial Institution under section 4A of the Companies Act, 1956.

And as noted, this Tribunal was pleased to hold in favour of assessee by

holding as under:-

“13.2 We noted that there is unanimity in the judicial precedents that as principle, the standard assets for which the provision is made as per policy and prudential norms of RBI, which permits onetime restructuring

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 12 :: of infrastructure loans, the same is allowable u/s.36(1)(viia)(c) of the Act. Hence, we are of the view that authorities below erred in not allowing the claim of assessee and hence, we allow the claim of assessee. This issue of assessee’s appeal is allowed.”

Since the Department could not point out any change in fact or law, with

that of the AY 2007-08 as noted supra, we are inclined to follow the order

of this Tribunal and confirm the action of the Ld. CIT(A).

against the action of Ld. CIT(A) allowing the claim of assessee for credit of

tax by Venture Capital Funds (VCFs) as representative assessee.

investment made in various Venture Capital Fund (‘VCFs’). The assessee

is noted to have appropriated the different species of income under

different heads of income which aggregated to Rs.1,26,94,525/-. The

assessee thereafter contended that these VCFs had filed returns of income

and paid taxes therein, which according to the assessee, was on its behalf.

The assessee tabulated the details of the income-taxes paid by these

VCFs in the form of advance tax, TDS etc. aggregating to Rs.6,81,79,230/-

and claimed its credit in the return of income. The AO however noted that

the income returned by these VCFs and the taxes paid thereon were the

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 13 :: income derived in their own proprietary capacity and that the income qua

the venture capital undertakings were reported as exempt u/s 10(23FB) of

the Act since it was taxable in the hands of the beneficiaries / investors in

terms of Section 115U of the Act. The AO accordingly observed that, the

credit for the taxes paid by these VCFs in their respective returns of income

which have been claimed by way of credit by the assessee was factually

misplaced and therefore denied the same. Being aggrieved by this order of

the AO, the assessee preferred appeal before the Ld. CIT(A). On appeal

the Ld. CIT(A) is noted to have set aside the issue to the AO for factual

verification and thereafter allow credit for the taxes. Aggrieved by the order

of the Ld. CIT(A), the Revenue is now in appeal before us.

assessee had derived aggregate income of Rs.1,26,94,525/- from the

VCFs. Against this income, the assessee had claimed credit of taxes of

Rs.6,81,79,230/-, which according to assessee, was paid by the VCFs in

their returns of income on behalf of him. Prima facie the payment of taxes

of Rs.6,81,79,230/- by the VCFs against aggregate income of

Rs.1,26,94,525/- seems skewed and unreasonable. Before adverting to the

facts of the case, let us first have a look at the relevant provisions of the Act

which governs taxation of income from VCFs. It is noted that the taxability

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 14 :: of income from VCFs are set out in Section 115U of the Act and the VCFs

are defined in the Explanation to the said Section as the same meaning as

ascribed in Section 10(23FB) of the Act. We first take note of Section

10(23FB) of the Act which 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 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 unit-holders

who have made investment in the Venture Capital Fund, as if, the income

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 15 :: received by the Venture Capital fund from Venture Capital Undertaking is

directly received by the unit-holders from Venture Capital Undertaking.

Further in terms ofSection115U(3) of the Act, the income credited by the

Venture Capital Fund shall be deemed to be of the same nature and in the

same proportion in the hands of the investor, as it had been received or

accrued to the Venture Capital Fund. Most importantly, Section 115U(2)

provides that, the VCF shall furnish a statement in the prescribed form to

the investor giving details of the nature of the income paid during the

previous year and such other relevant details as may be prescribed. It is

noted that the statement is prescribed in Form No. 64 under Rule 12C of

the Income-tax Rules, 1962. Hence, the law is abundantly clear that the

income reported by the VCF in Form No. 64 shall be included under the

respective heads of income of the assessee-investor. Section 115U(4) of

the Act further makes it clear that the VCFs are not required to withhold tax

in terms of Chapter XVII-B prior to making payment to the assessee-

investor. 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 unit-holders who have invested in Venture Capital Funds.

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 16 :: 18. 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 AY 2007-08, all

income of a Venture Capital Fund was exempt from Taxation. At the same

time, it was taxable at the hands of unit-holder 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 in terms of 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.

From AY 2008-09 and onwards, the VCFs would have two broad

categories of income viz., (a) income from the investment in Venture

Capital Undertaking for which it enjoyed pass through status and

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 17 :: accordingly it was exempt in their hands u/s 10(23FB) and taxable in hands

of investors under Section 115U of the Act and (b) income from other

businesses/activities which would be ordinarily taxable in the hands of

VCF.

AY impugned before us is AY 2011-12 and therefore the VCFs in question

would have enjoyed the restrictive exemption, as discussed in the

foregoing. Accordingly, only the income derived from investment in Venture

Capital Undertaking, as rightly noted by the AO, would have been claimed

as exempt u/s 10(23FB) by the VCFs in their returns of income and income

from other businesses/activities would have been ordinarily offered to tax.

Correspondingly, under Section 115U of the Act, the assessee was

mandatorily required to offer the income which was claimed as exempt u/s

10(23FB) by the VCFs as their income of the same nature and in the same

proportion, as it had been received by the Venture Capital Fund. For this,

the assessee was required to rely on the Form No. 64 issued by the VCFs

in terms of Rule 12C of the I T Rules, 1962. Since the income offered to tax

by the assessee under Section 115U of the Act, was correspondingly

declared as exempt by the VCFs under Section 10(23FB) of the Act, there

was no question of any payment of any taxes on such exempt income by

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 18 :: the VCFs in their respective returns of income. Further, Section 115U(4)

also makes it amply clear that VCFs are not required to deduct TDS while

distributing the income from venture capital undertaking to the unit-holders.

Hence, on overall conspectus of the provisions, we note that, qua the

income derived by VCF from investment in venture capital undertaking, it

enjoys pass through status in as much as the income itself is exempt from

tax in their hands and they are also not required to deduct or pay any taxes

on behalf of the unit-holders upon distribution of the same and that the unit-

holders are required to include and offer the income in the same proportion

and like manner in their respective hands under Section 115U of the Act.

we are in agreement with the AO that, apart from the income derived by

VCF from investment in venture capital undertaking, the VCFs would be

earning other streams of income from other business sectors/activities,

which is not exempt u/s 10(23FB) and is therefore offered to tax by the

VCFs in their returns of income in its own capacity. The taxes so paid by

these VCFs in their returns of income thus represented the taxes paid on

their own accord for the income derived by them and was in no manner

relatable to the income claimed as exempt u/s 10(23FB), which is being

correspondingly offered to tax by the assessee-unit-holder under Section

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 19 :: 115U of the Act. We find merit in the AO’s findings and observe that, it

would indeed be a travesty for the VCFs to pay taxes, particularly advance

tax, on the income which was exempt u/s 10(23FB), being fully aware that

it was liable to be taxed in the hands of the assessee-unit holder. Hence,

we are in agreement with the AO that, the taxes paid by the VCFs in their

returns of income would be qua the income derived by them in their own

accord (other than income qualifying for exemption u/s 10(23FB)) and

therefore the taxes paid on such income cannot be claimed by way of credit

by the assessee contending that it was paid on his behalf. For the above

reasons, we thus per se do not find any infirmity in the rationale and

observations set out by the AO in the impugned order.

had indeed paid by the VCFs qua the assessee’s income in their respective

returns of income and therefore urged that the credit ought to be allowed,

as otherwise it would result in taxation of same sum twice. Although as

discussed above, this claim is not tenable but at the same time, it is also

not verifiable. If that be so, then the VCFs and the assessee were required

to comply with the provisions laid down in Section 199 read with Rule

37BA(2) of the Income-tax Rules, 1962 and the assessee ought to file the

declaration obtained from the VCFs that the taxes paid in their PAN

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 20 :: belonged to the assessee and that they shall not be claiming credit for the

same. However, no such evidence was brought on record. The Ld. AR

alternatively argued that the income of Rs.1,26,94,525/- offered by the

assessee under Section 115U had been included by the VCFs as their

taxable income in their returns of income and therefore the income was

being doubly taxed. The Ld. AR accordingly contended that, in the

alternate, the income offered to tax under Section 115U ought to be

excluded. However, no evidence in support of the same was furnished by

the Ld. AR. Moreover, as observed in the foregoing, the law is abundantly

clear that, the income from VCFs has to be offered to tax by the unit-holder

alone under Section 115U of the Act. For this, we gainfully refer to the

decision of Hon’ble Supreme Court in the case of ITO v. Ch. Atchaiah (218

ITR 239) wherein it was laid down that Assessing Officer should tax the

income in the hands of the right person.

considered by the lower authorities and thus, in all fairness and in the

interests of justice and in light of the above observations, we remit the

matter back to the file of the AO to consider these alternative arguments of

the assessee afresh, make suitable enquiries from the VCFs and thereafter

pass appropriate order in this regard.

ITA Nos.1263/Chny/2023 & 817/Chny/2024 (AY 2011-12) IDFC Limited :: 21 ::

Order pronounced on 04th December, 2024 at Chennai.

Sd/- Sd/- (अिमताभ शु�ा) (एबी टी. वक�) (ABY T. VARKEY) (AMITABH SHUKLA) लेखा सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 04th December, 2024. Vm/- आदेश की +ितिलिप अ3ेिषत/Copy to: 1. . िनधा(-रती /Assessee 2. राज0 /Revenue 3. आयकर आयु7/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय +ितिनिध/DR & 5. गाड( फाईल/GF.