ASSISTANT COMMISSIONER OF INCOME TAX, DELHI vs. VIREET INVESTMENTS PRIVATE LIMITED, DELHI

3.1 The Revenue’s appeal is delay by 20 days. Condonation application was duly considered by us. Keeping in view decisions of the Hon’ble Supreme Court in cases of Collector, Land Acquisition, Anantnag & Anr. Vs Mst. Katiji and others (1987) 2 SCC 107 and N. Balakrishnan Vs M. Krishnamurthy 1998 (7) SCC 123 and the decision of Hon’ble Delhi High Court in the case of HL Malhotra & Company Pvt. Ltd. (ITA No. 211/2020 & CM Appeals 32045- 32047/2020 dated 22nd December, 2020), the delay is condoned and the appeal is being decided on merit.

Disallowance of claim of exemption under section 10(38) of the Act

[Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under section 115JB] Explanation. - For the purposes of this clause, "equity oriented fund" means a fund- (i) where the investible funds are invested by way of equity shares in domestic companies to the extent of more than [sixty-five] per cent of the total proceeds of such fund; and (ii) which has been set up under a scheme of a Mutual Fund specified under clause (23D): Provided that the percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;]" 6.3 Provisions of this section require Mutual Funds to be an "Equity Oriented Fund". The assessee had also been asked to furnish details of its dividend income during the course of assessment proceedings. These were submitted by the assessee vide their letter dated 21-08-2009 in Annexure- G. Details as per this annexure includes dividend received funds under PMS and Other than PMS. From a perusal of details of the dividend income of the assessee a large part of the Mutual Fund are Debt funds or Liquid Funds. Therefore, they do not seem to be Equity Oriented Funds. 6.4 In this regard, it is pertinent to mention that vide letter dated 11-12- 2009 the assessee had been asked to furnish its response and details as below: "(5). In respect of dividend received by the assessee company and claimed as exempt at Rs 5,05,36,760/-. Please give details of the subsequent sale / redemption of such shares and mutual funds and show cause as to why provisions of section 94 of the I. T. Act are not attracted." 6.5 In response to this, the assessee vide their letter dated 15-12-2009 had submitted details of its dividend income (Both PMS & Other than PMS). From a perusal of these details it is seen that most of the mutual fund transactions are within 7 to 8 days of its purchase. As such it appears that the dividend income claimed exempt pertains to funds other than Equity

Oriented Funds as per stipulation in Provision of section 10(38) of the I. T. Act, 1961. 6.6 In the absence of evidence to prove that the Long-Term Capital Gains claimed exempt u/s 10(38) is only from transfer of "an equity shares in a company or a unit of an equity-oriented fund" the amount of Rs. 8,90,66,252/- is to be assessed as the income of the assessee from Other Sources. (Addition of Rs. 8,90,66,252/-) 5. Aggrieved with the assessment order, the assessee filed appeal before the Ld. CIT(A) and git relief on the above mentioned two issues. Before the Ld. CIT(A), the assessee submitted following submission challenging both issues: -

“4. The fourth ground of appeal is in respect of disallowance of exemption of Long Term Capital Gains on Equity Shares & Equity Oriented Mutual Funds exempt u/s 10(38) of Rs.8,90,66,252/-, where the Learned Assessing Officer has erred in not allowing the exemption of Rs.8,90,66,252/- as claimed exempted by assessee being long term capital gains on securities on which STT was paid. During the period appellant company earned long term capital gain on equity shares (STT) and equity oriented Mutual Funds (STT) of Rs.8,90,66,252/- and a loss of Rs.7,64,406/- on debt oriented Mutual funds (without STT) resulting into a net Long term capital gain of Rs. 8,83,01,846/-. Following is the summary of same- Particular Amount Long term capital gain on Equity Shares and 8,90,66,252/- Equity oriented Mutual funds (STT) (Less)- Long term Capital Loss on Debt (7,64,406) oriented Mutual funds (Without STT) Net Long term Capital Gain 8,83,01,846/- 4.1 The Learned Assessing Officer misunderstood the fact of the case and has erroneously stated at point no.6.6 (Page No.15) of the assessment order that "In the absence of evidence to prove that the Long Term Capital Gains claimed exempt u/s 10(38) is only from transfer of "an equity shares in a company or a unit of an equity oriented mutual funds" the amount of Rs.8, 90,66,252/- is to be assessed as the income of the assessee from other sources." 4.2 In this regard, it is submitted before your Honour that at no time during the assessment proceedings, the Learned Assessing Officer had asked specifically to provide evidence that the Long Term Capital Gains is from the transfer of a Equity shares of a company or from unit of a Equity oriented mutual funds. 4.3 While on the above, it is further submitted that the details provided for Capital Gains at the time of filing the Income Tax Return clearly stated Long term Gains on securities — STT. (Please refer page no.102 to page no. 125 of the paper book). Thus, it was very clear that Securities Transactions Tax (SU) has been paid on the securities. STT is payable only on equity shares or equity oriented mutual funds. 4.4 Without prejudice to above, even during assessment proceedings the Learned AO had asked for details of exempt income and while giving the details of exempts income, it had again been shown clearly that mutual funds / shares were subject to STT. (Please refer to page no. 126 to page no 127of the paper book). 4.5 Further, the details submitted on November 6, 2009 for Capital Gains suggested individual names of the shares/all the funds which clearly reflected that they were equity shares or equity oriented mutual funds. (Please refer to page no.128 to page no 167 of the paper book). 4.6 The gains on shares and Equity oriented mutual funds had separately been dealt by the assessee himself as is apparent from the return of income filed. 4.7 Without prejudice to above, it is further submitted that to verify the correctness of the claim of the assessee, the Assessing Officer had asked for the broker's contract notes for sale & purchase of shares and the same was done on Test Check Basis. The contract notes clearly provided that the shares were traded on stock exchange and the assessee is entitled for exemption for Long term Capital Gains u/s 10(38) of the Income Tax Act, 1961. 4.8 The details of Long term Capital Gains along with one contract note for each script as well as the statement of equity oriented mutual funds along with their offer document had been submitted earlier during the course of physical hearing. The same are attached herewith on sample basis to avoid repetition from Page no. 128 to 167of the paper book. 4.9 Further Ld. Assessing officer has also stated that the assessee has received the dividend from 7 to 8 days of purchase of funds and therefore Section 94 should be invoked. 4.10 In this regard we wish to submit that provisions of Section 94(7) can only be applicable on the short term capital loss. However, the issue we are dealing is of long term capital gains, therefore, provisions of section 94(7) cannot be invoked here and further the Ld. Assessing officer has specifically made an addition of Rs.3,18,320/- u/s 94(7) which the appellant has accepted and has not appealed against the same. 4.11 Your honour is hereby requested to delete the addition as made by the Learned Assessing Officer and provide justice to the assessee.” [Emphasis supplied]

6. The issue of disallowance of exemption under section 10(38) of the Act was decided by the Ld. CIT(A) in favour of the assessee as under: -

“5.4 I have carefully considered the appellant submissions and Assessment Order. It is a fact on the record that Ld. Assessing Officer has made the addition of Rs.8,90,66,252/- under the head income from other sources as the assessee has failed to prove that the Long Term Capital Gain claimed as exempt under section 10(38) of the Income Tax Act is only from transfer of “an equity share in a company or unit of an equity oriented mutual fund”. In this regard, the appellant has contended that on facts and consideration of the case and in law, the Learned Assessing Officer had erred in not allowing the exemption of a sum of Rs.8,90,66,252/- being the income exempt u/s 10(38) of the Income Tax Act, 1961.

5.4.1 In this regard, the appellant has contended that at no time during the assessment proceedings, the Learned Assessing Officer had asked specifically to provide evidence that the Long Term Capital Gains is from the transfer of an Equity shares of a company or from unit of a Equity oriented mutual funds and further while on the above, it is further submitted that the details provided for Capital Gains at the time of filing the Income Tax Return clearly stated Long term Gains on securities -STT. 5.4.2 In the same way, the appellant has contended that without prejudice to above, even during assessment proceedings the Learned AO had asked for details of exempt income and while giving the details of exempts income, it had again been shown clearly that mutual funds / shares were subject to STT. Further, the details submitted on November 6, 2009 for Capital Gains suggested individual names of the shares / all the funds which clearly reflected that they were equity shares or equity oriented mutual funds. 5.4.3 Further, the appellant has contended that without prejudice to above, it is further submitted that to verify the correctness of the claim of the assessee, the Assessing Officer had asked for the broker's contract notes for sale & purchase of shares and the same was done on Test Check Basis. The contract notes clearly provided that the shares were traded on stock exchange and the assessee is entitled for exemption for Long term Capital Gains u/s 10(38) of the Income Tax Act, 1961. 5.4.4 Further, the appellant has contended that the details of Long term Capital Gains along with one contract note for each script as well as the statement of equity oriented mutual funds along with their offer document had been submitted earlier during the course of physical hearing. The same are attached herewith on sample basis to avoid repetition. 5.4.5 Further, in remand report dated 19-01-2012 submitted by the Ld. AO and in this regard, the Ld. Assessing Officer has contended that in this case an addition of Rs.8,90,66,252/- was made u/s 10(38) in the absence of the assessee to prove the long term capital gain in only from transfer of equity shares in a company or a unit of an equity oriented fund. The Ld. Assessing officer has further contended that as the dividend income is received mostly within seven to eight days of purchase and is mostly received to funds other than equity oriented funds, hence as per provision of section 10(38) was rightly taxed as income from other sources.

Analysis with regard to the Long Term Capital Gain claimed as exempt under section 10(38) of the Income Tax Act: 5.4.6 In this case, the appellant has filed relevant details with respect to Long term Capital Gain from transfer of an equity share in a company or unit of an equity oriented mutual fund in the shape of a statement showing calculation of Long Term Capital Gain on transfer of an equity share in a company or unit of an equity oriented mutual fund and Contract note of Brokers and statement of account of Equity Oriented mutual funds. On the perusal of the documentary evidence, it is found that in case of transfer of Share, Security Transaction Tax (STT) has been paid on sale of share and in case of transfer of Units, the said units are covered under the Equity Oriented mutual funds. Therefore, the appellant has rightly claimed the exemption under section 10(38) of the Income Tax Act, 1961 and contention of the appellant is found tenable. 5.4.7 The appellant has furnished following statement in the tabular form showing the details of Long term capital gain of Rs.8,90,66,254/- alongwith relevant supporting documents: …………………………………. 5.4.8 Further, provisions of section 10(38) of the Income Tax Act, 1961 are reproduced as under: “Section10 (38) any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund [or a unit of a business trust] where— (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:” 5.4.9 In the instant case, Long term capital gain has been generated on transfer/sale of equity share or a unit of equity oriented funds and the appellant has paid securities transaction tax (STT) on such transfer/sale.

Therefore, the appellant has fulfilled both conditions as mentioned in the provision of Section 10(38) of the Income Tax Act, 1961 and hence, the appellant company has correctly shown Long term capital gain as exempt under section 10(38) of the Act. Analysis with regard to provisions of Section 94(7) of the Income Tax Act, 1961: 5.4.10 In this regard, the appellant has filed rebuttal and contended that Ld. Assessing officer has also stated that the assessee has received the dividend from 7 to 8 days of purchase of funds and therefore Section 94 should be invoked. In this regard, the appellant has contended that provisions of Section 94(7) can only be applicable on the short term capital loss However, the issue we are dealing is of long term capital gain, therefore, provisions of section 94(7) cannot be invoked here and further the Ld. Assessing officer has already made specific addition of Rs.3,18,320/- u/s 94(7) which the appellant has accepted and has not appealed against the same. Therefore, the contention of the Ld. Assessing Officer is not found tenable. 5.4.11 Therefore, after careful consideration of the above narrated facts, circumstances of the case, the submissions of the Appellant, containing direct and cogent evidence conveying that condition under section 10(38) of the Income Tax Act,1961 with regard to equity share and equity oriented mutual funds hence the addition of Rs.8,90,66,252/- under the head income from other sources is hereby deleted and Ld. Assessing Officer is directed to treat the income under the head Long Term Capital Gain as exempt under section 10(38) of the Income Tax Act, 1961 and accordingly ground of the appellant company is allowed.” [Emphasis supplied] 7. Before us, the Ld. CIT(DR) placed reliance on the assessment order and prayed for upholding the finding of the AO as far as taxability of Rs.8,90,66,252/- is concerned.

The Ld. AR submitted that the revenue had not brought any material to contradict the specific finding of the Ld. CIT(A) that the said shares and units of mutual fund were not equity shares and units of equity oriented mutual fund. The Ld. AR contended that the period of holding had not been disputed only the nature of share whether equity preferential or otherwise had been disputed. The documentary evidences submitted before the Ld. CIT(A) clearly demonstrated that the entire investment made in share and mutual fund where in equity shares and units of equity oriented mutual fund. Hence, he prayed for dismissal of this ground.

i. STT is paid on all transactions resulting LTCG of Rs.8,90,66,252/- and ii. Samples of contract notes produced before him show that the share and units are equity shares and units of equity oriented mutual funds.

Addition of Notional Income of Rs.10,49,768/-:

“5. The explanation of the assessee is not acceptable since the assessee has failed to prove or furnish any evidence in support of its contention that the entities / persons to whom these loans have been given are subsidiaries. Secondly, as discussed above the assessee being an NBFC Company, the main objectives of the company is to advanced loans. As stated by the assessee itself these advances / loans are considered good and therefore not considered doubtful. CBDT circular dated 28-06- 1978 and the decision of the Hon'ble Kerla High Court in the case of State Bank of Travancore Vs. CIT 110 ITR pg. 336 (Kerala) support the stand that interest on loan is taxable in the case of the assessee which is engaged in the business of money lending. In the aforesaid case, in respect of the assessee, a banking company, did not credit in its accounts the interest that had accrued on sticky advances because the assessee felt that the interest may not be paid. It credited the interest to a separate account known as "Interest Suspense Account". On reference it was held on the facts, that there was an accrual income liable to Income Tax and the assessee was not justified in not crediting the interest accrued on such sticky advances in its accounts.

Order pronounced in open Court on 14th November, 2025