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Income Tax Appellate Tribunal, DELHI BENCH ‘D’, NEW DELHI
Before: SHRI J. S. REDDY & SHRI KULDIP SINGH
ORDER PER KULDIP SINGH, JM: Since common questions to be determined have been raised in both the aforesaid appeals except amounts involved, the same are taken up together to be disposed of by way of consolidated order.
2 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010
2. The appellant, M/s. Japan International Cooperation Agency, (hereinafter referred to as ‘the assessee’), by filing the present appeals sought to set aside the impugned orders dated 27.04.2012 by way of I.T.A.No. 3284/del/2012 qua the Assessment Year 2006-07 passed by Ld. CIT(A) VIII, New Delhi and order dated 08.10.2010 passed by Assessing Officer in consonance with the order dated 30.09.2010 of DRP by way of I.T.A.No. 5705/Del/2010 qua Assessment Year 2007-08 on the grounds inter alia that:
A. I.T.A.No.3284/Del/2012:
“Ground No.1: (i) Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in not allowing the exemption under Section 10(34) of the Act claimed by the appellant on its share of dividend income of Rs. 43,48,571 out of dividend income received by SARA Fund (venture capital Fund - VCF). (ii) Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in failing to appreciate that the companies from which SARA Fund had earned dividend had already paid additional income-tax as required under Section 115-O of the Act and SARA Fund was not required to pay additional income-tax for the second time on the same income. Ground No.2 Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts, in disallowing expenses of Rs. 1, l3,11,955 by taxing the share of the appellant in interest income from VCF under the head "Other Sources" on gross basis and not on net basis in disregard of the fact that income of a VCF can be passed on to its investors only after adjusting the expenses it incurred out of the funds provided by the investors, to earn such income.
3 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010
Ground No.3 (i) Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in holding that out of a total distribution of Rs. 176,000,000 during the year, only Rs. 119,738,454 was out of income of the VCF while the income component of the distribution was the amount of Rs. 142, l34,265. (ii) Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts and has failed to appreciate that out of the total distribution made in the previous year the income component in accordance with the statutory declaration u/s 115U(2) made by SARA Fund was alone assessable in the hands of the appellant. (iii) Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in holding that the appellant's share in the payment of Rs. 56,261,546 [176,000,000- 119,738,454] @22.73% i.e. Rs. 12,788,250/ was assessable in the appellant's hands as "Income from other sources". (iv) Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in ignoring the facts, material and evidence placed on record i.e. notes to the computation of income, Form 64 and audited Financial Statements of SARA Fund and submissions filed. (v) Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in not appreciating that in terms of the provisions of Section 115U(2) of the Act, the appellant could not provide or furnish information different from and/or conflicting with the statutory declaration in Form 64 furnished to the income-tax authority by the venture capital fund (SARA Fund) and was bound by the stand adopted by SARA Fund. (vi) Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in not appreciating that no computation mechanism has been provided by the Act for offering the income chargeable to tax under the provisions of Section 115U of the Act.
4 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010
Ground No.4 : Based on the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in charging interest amounting to Rs 3,090,221 under Section 234B and interest withdrawn u/s 244A of the Act. B. On the facts and circumstances of the case and in law, the Learned Assessing Officer (' AO') has erred in passing the assessment order u/s 143(3) r.w.s 144C of the Income Tax Act, 1961 ('the Act') and thereby approved by the Hon'ble Dispute Resolution Panel (DRP). Each of the ground is referred to separately, which may kindly be considered independent of each other. Ground No.1 Based on the facts and circumstances of the case, the learned Assessing Officer has erred in law and on facts in not allowing the exemption under Section 10(34) of the Act claimed by the assessee on the dividend income of Rs. 30,39,471 received by the assessee as its share from SARA Fund, a venture capital Fund (VCF) out of the dividend income of the nature referred to in Section 10(34) of the Act. Ground 0.2 Based on the facts and circumstances of the case, the learned Assessing Officer has erred in law and on facts, in disallowing expenses of Rs.37,94,980 by taxing the share of the assessee in interest income from VCF under the head "Other Sources" on gross basis and not on net basis in disregard of the fact that income of a VCF can be passed on to its investors only after adjusting the expenses it incurred out of the funds provided by the investors, to earn such income. Ground No.3 Based on the facts and circumstances of the case, the learned Assessing Officer has erred in law and on facts, in holding that the 5 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 assessee's share in the amount of Rs. 51,60,098 [231,000,000- 225,839,902] @22.73% i.e. Rs. 11,72,890/ was assessable in the assessee's hands as "Income from other sources" Ground No.4 Based on the facts and circumstances of the case, the learned Assessing Officer has erred in facts in doubly adding Long Term Capital Gain of Rs. 2,44,02, 106/- under the head "Short Term Capital Gain" whereas the Short Term Capital Gain amounted to Rs. 14,029,045/- as per return. Ground. No.5 Based on the facts and circumstances ofthe case, the learned Assessing Officer has erred in law and on facts. in levying interest under Section 234B of the Act. Ground 0.6 Based on the facts and circumstances of the case, the learned Assessing Officer has erred in law and on facts in initiating penalty proceedings u/s 271(1)(c) of the Act against the assessee for furnishing inaccurate particulars of income. Ground No.7 Based on the facts and circumstances of the case, the Hon'ble Dispute Resolution Panel has erred in law and on facts in passing a non speaking order.”
Briefly stated, facts of these cases are: during the processing of return of income filed by the assessee qua the Assessment Years 2006-07 an 2007-08, the cases were subjected to scrutiny and subsequently, notice u/s 143(2) were served upon the assessee and in response thereto, Shri Amit Nayyar, Shri Abhishek Chawla, Ms. Preeti Goel and Sh. Rahul Kohli CA and ARs appeared and filed requisite details.
6 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010
The assessee is a Government financial institution incorporated in Japan having its representative office in India having statutory mandate to carry on lending and other operations for the promotion of Japan Export Import and economic activities overseas. The assessee is acting as coordinator between various Government of India public sector undertakings. The assessee has made investments in South Asian Regional Apex (SARA) Fund, which is a SEBI registered venture capital fund (VCF) as per SEBI Venture Capital Fund Regulations 1996 having its objects to provide equity assistance to venture capital undertakings in India. It is a matter of record that the total paid up capital of SARA Fund as on 31.03.2006 with Rs.1100 million consisting 2,20,000 units each of Rs.5,000/- out of which the assessee has 50,000 units making its total investment to Rs.25,00,00,000/-. The income of SARA fund is exempt as per the provisions of Section 10(23FV) of the Act and it enjoys pass through status of the income earned by it which is taxable in the hands of investor in the funds u/s 115U of the Act.
Section 10(23FB) of the Act allows exemption to the income of venture capital company (VCC) / venture capital fund (VCF) set up to raise fund to be invested in a venture capital undertaking and both the VCC and VCL are not chargeable to tax in its own hands but will pass through its income to the shareholders / investors for being subjected to tax at the rates applicable to them. Statute ensures that the burden of tax falls on the ultimate beneficiary. Statutory provisions also confer pass through status on the VCC and VCL. During assessment proceedings, assessee after obtaining numerous opportunities, filed written submissions along with mathematical chart to the queries raised by the A.O. vide para
7 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 4.1, 4.2 and 4.3 of the assessment order. The Ld. A.R. also submitted that in each of the year in which the SARA fund made distribution its income and profits were less than the amount actually distributed and as such, the assessee in this situation and in view of the provisions contained in Section 115U offered only proportionate amount of money received on distribution for tax and the remaining amount was out of the capital of VCF and as such, should be treated as return of part capital.
However, the A.O. came to the conclusion that the queries raised by him remained unanswered. Ld. A.R. however, explained the modus operandi of distribution of income and treatment thereof verbally but nothing was placed on record in writing to support its contention. However, from the return of income, Annexure to the return and the chart filed on 19th Dec., 2008, the A.O. drawn the following conclusion regarding the status of affair of the assessee:
“4.7.1 During the relevant year, SARA Fund distributed total amount of Rs.176,000,000 amongst its beneficiaries. Total Reserve available for distribution by SARA Fund was Rs. 272,680,023, while total income till date of SARA Fund was Rs. 220,211,220. 4.7.2 The ratio of Total Income to Total Reserve available, as on March 31, 2008 was 80.76%. The assessee argued that for every 100 Rs. distributed by the assessee, only 80.76 correspond to Income, balance being distributed out of capital sums. 4.7.3 SARA Fund, as per its audited accounts incurred Administrative & Operative Expenses of Rs. 31,438,256 out of which it, in the Form 64issued, booked an amount of Rs. (25,083,999) under the head 'Other Income'. In this loss, the assessee's share, being 22.73% share holder, comes out to be Rs. 5,700,909. However, in its Return, the assessee claimed that the 'loss distributed by VCCNCF being Other Income on non-.VCU
8 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 units' as Rs. 11,311,955. Further, the loss shown under the head 'Other Income' is nothing but claim of expenses incurred by the VCF. 4.7.4 The assessee also claimed in its Return that the Income by way of Dividend of Rs. 4,348,571 is exempt under section 10(34) of the Act.”
The assessee vide letter dated 26.12.2008 was asked to explain the other income to which he filed reply vide letter dated 29.12.2008. Since the assessee has failed to provide the details for allowability of expenses under the head ‘other income’, he was further given time till 30th Dec., 2008 to file the admissible details as detailed in para 5.6 of the assessment order.
During the year SARA fund made total distribution of Rs.17,60,00,000/-. The assessee claimed that out of this only amount of Rs.11,97,38,454/- was out of the income of VCF and rest was paid out of its own capital. Finding the submissions made by the assessee not tenable, the amount received by the assessee found to be fully taxable. The assessee claimed an amount of Rs.56,26,1546/- (Rs.176000000 – 199738454) to be of capital nature out of total distribution of SARA funds out of which the assessee’s share at 22.73% made out to be at Rs.12788250/- which is taxed in the hands of assessee as income from other sources.
The assessee in computation showed dividend income of Rs.43,48,571/- which was claimed exempt u/s 10(34) of the Act, which was examined in the light of the provisions contained u/s 10(30), 115-O an 115U(4) of the Act. The A.O. came to the conclusion that while
9 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 distributing the aforesaid dividend the VCF was not obliged to deduct dividend distribution tax as Section 115U(4) clearly shows that the character of such distribution by the VCF is indeed dividend but for exemption provided u/s 155U(4), the VCF would have to deduct dividend distribution tax on such distribution. The A.O. disallowed the claim of assessee seeking exemption u/s 10(34) of the Act on dividend income of Rs.434857/- and taxed the entire income of Rs.434857/- u/s 56 of the Act.
Regarding claim of loss of Rs.1,13,11,955/- under the head ‘other income’, A.O. examined the submissions made by the assessee in the light of the provisions contained u/s 115U(1) and came to the conclusion that the assessee’s case does not fall u/s 115U of the Act. The A.O., also came to the conclusion that no right minded person would spend an amount of more than Rs.3,00,00,000/- on earning interest income of Rs.24145/- only and SARA fund is no exception and as such the expenses debited in the P & L account by SARA fund are not allowable against the income earned from and independently examined the allowability in the hands of VCF. So, consequently, the A.O. disallowed the expense of Rs.11311955/- under the head other income u/s 57 of the Act.
The assessee carried the matter before Ld. CIT(A) who has endorsed the view taken by the A.O. and dismissed the appeal of the assessee. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.
11. Ld. A.R. for the assessee contended that so far as the applicability of Section 115-O is concerned, the issue is covered one as per CBDT Circular No.794 dated 09.08.2000 and has relied upon the order passed by 10 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 ITAT in case entitled Scope Pvt. Ltd. Vs DCIT (2013) 33 Taxman.com 167 (Mumbai Tribunal).
However, on the other hand, Ld. D.R. repelled the arguments addressed by Ld. A.R. by contending inter alia that except that capital of SARA fund remained consistent and it is case of distribution of income and not a case of distribution of capital; that the contention of the assessee that he is bound by Form 64 is not tenable, which alone cannot absolve the assessee from its liability nor the Revenue can shut its eyes to apply Section 57 of the Act, because assessee is to expend to earn only that much income; that the exemption to the assessee is available on the dividend covered u/s 115-O of the Act only; that the assessee received the dividend so deduction of dividend tax and exemption u/s 10(34) is not available to the assessee; that loss claimed on account of other income, should be distributed in the same proportion.
We have heard both the Ld. Authorized representatives and gone through the material placed on record in the light of facts and circumstances of the case and orders of tax authorities.
Ground No.1(i) and 1(ii) of I.T.A.No. 3284/Del/2012 and 14. Ground No.1 of I.T.A.No. 5705/Del/2010:
Now, the first question arises for determination in this case is, “as to whether the assessee is entitled for exemption u/s 10(34) of the Act and the share of dividend income of Rs.434857/- out of dividend income received by SARA fund by venture capital fund (VCF)”.
11 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 14.1 To decide the controversy at hand, newly added provisions contained u/s 115U of the Act vide CBDT Rule No.794 dated 09.08.2000 are reproduced s under for ready reference:
“13.8. Section 115U of this Chapter provides that, (i) any income received by a person out of investments made in a venture capital company or a venture capital fund shall be chargeable to Income- tax as if it were the income received by such person from investments made directly in the venture capital undertaking ; (ii) 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 the venture capital fund will be required to furnish within the prescribed time a statement in the prescribed form and verified in the prescribed manner giving details of the nature of income distributed during the previous year. This statement is to be furnished to the person receiving such income and to the prescribed income-tax authority ; (iii) 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 accrued to the venture capital company or the venture capital fund, as the case may be during the previous year; . (iv) the provisions of Chapter XII-D or XII-Ii; or XVII-B shall not apply to the income paid by a venture capital company or venture capital fund under this Chapter is means that no tax shall be payable under section 115-O and section 115-R and no tax deduction at source shall be made under the provisions contained in Chapter XVII-B from income paid by venture capital company or a venture capital fund to an investor.” 14.2 Undisputedly, Assessee Company has invested in SARA fund, a SEBI registered VCF as per SEBI Venture Capital Regulations 1996. Ld. A.R. for the assessee contended that Section 115U provides ‘pass through status’ to the VCF which qualifies conditions laid down u/s 10(23FB) and 12 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 a such any income received by the investor for the VCF shall be chargeable to income tax in the same manner as if it was the income earned from the investment made by investor directly into the venture capital undertaking (VCU) and consequently, the assessee has issued a statement in Form 64 read with Rule 12C explaining the nature of explanation of income earned by the fund. The issue in controversy has cropped up before ITAT Mumbai Bench ‘E’ in case cited as Scope Pvt. Ltd. Vs DCIT 33 Taxman.com 167. The Coordinate bench decided the issue in controversy as under:
“10.1 The dispute before us is regarding taxability of the receipt/income of the assessee as received from IVF in the shape of shares of Biocon and short term capital loss on sale of shares by IVF itself. The treatment of such income has been provided under sec. 115U. For the sake of ready reference, we quote section 115U: as exist at the relevant time: "115U: (1) Notwithstanding anything contained in any other provisions of this Act, any income received by a person out of investments made in a 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 13 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 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 paid by a venture capital company or venture capital fund under this Chapter." Explanation: for the purpose of this Chapter, 'Venture capital company' "venture capital fund' and 'venture capital undertaking' shall have the meanings respectively assigned to them in clause 23(FB} of sec. 10)." 10.2 As it is manifest from the provisions of see 115 U that any income accruing or arising or to receive by a person out of investment made in venture capital company or venture capital fund shall be chargeable to tax in the same manner as if such person had made investment directly in the venture capital undertaking. Thus, as per section 1 15U, trustee venture capital Company or venture capital fund is given the status of pass through vehicle for the purpose of the treatment of the income received on account of investment made in the venture capital undertaking. Meaning thereby, a person who makes investment in the Venture Capital Company or venture capital fund and earned the income out of such investment, such income shall be treated as if the investment was directly in the venture capital undertaking and venture capital fund or Venture Capital Company, is only a pass through vehicle.
Chapter XII-F and section 115U have been introduced in the statute vide Finance Act 2000 for making VCFNCC as a pass through vehicle and taxing investors as if they had received income directly from the Venture Capital undertaking. This section has been introduced corresponding to the insertion of new clause (23FB) in section 10 being an enabling provision for taxing investors, who receives the income from VCCNCF because, as per the provisions of section 10(23FB) any income of VCC or VCF is exempt. Sec. 115U is intended to grant tax concession to the recipient of income from a VCC/VCF and such income in the hands of the investor shall be chargeable to tax as if it were income from investment in Venture Capital undertaking made directly by such 14 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 person. Thus, section 115U stipulates that the income received by a person from VCCNCF shall be deemed to be of same nature and the same proportion accruing to the VCFNCF. However, the concession in tax is in the shape that the provisions of Chapter XII- D or XII-E or XVII-B shall not apply to the income paid by the VCC or VCF. This mean that no tax shall be payable u/s 115-0 or section 115R and no tax deduction at source shall be made under the provisions contained in Chapter XVII-B from the income paid by the VCC or VCF to an investor. 11.1 As per sub.-sec (2) of section 115U, it is mandatory on the part of the VCC or VCF to furnish a statement in the prescribed form and verify in the prescribed manner giving the details of nature of income paid during the previous year. Form 64 is provided for making the statement of income distributed by VCC or VCF to be furnished u/s 115U of the IT Act. It makes clear that VCC or VCF has to furnish the details of the nature of income received by the investor from VCC or VCF. The details specifically requires about the income/amount paid under long term capital gains, short term capital gains, dividend or other income such as interest etc. Thus, section mandates that the nature of income which is received by the VCC or VCF from the Venture Capital undertaking and further distributed to the investor shall be taxable in the hands of the investor by treating the same nature of income like long term capital gain short term capital gains, dividend or other income such as interest etc., 'and accordingly be taxed as per the provisions as applicable under different heads of the income. Hence, section 115U prescribes the principle of pass through by treating the VCC or VCF as a pass through vehicle and further, grants some concession in the shape of non-applicability of provisions of Chapter XIV -D, XII E or XVII B; but does not provide that the income received by the investor from VCC or VCF is exempt. 11.1.1 Even otherwise, if the objective of introduction of sec. 115U is to exempt the income received by investor from VCC or VCP, then the provisions should have found place u/s 10 in a similar manner as provided under clause 23FB of section 10.
12. In view of the above discussion, we are of the considered opinion that the income received by the assessee from IVF is 15 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010
taxable in the manner as prescribed U/S 115U and discussed above. Since the Assessing Officer has assessed the income as short term capital gain; therefore, the claim of the assessee as short term capital loss has to be allowed. Accordingly, we find merit and substance in the alternative plea of the ld AR regarding the claim of short term capital loss against the short term capital gains.” 14.3 The assessee in order to avail the pass through status as venture capital fund by qualifying the conditions laid down u/s 10(23FB) issued the statement in Form 64 read with Rule 12C explaining the nature of explanation of income earned by the fund lying at pages 57-59 in the paper book for the year 2006-07.
14.4 From the provisions contained u/s 115U and the findings returned by the Coordinate Bench in the case Scope (P) Ltd (supra), it has become apparently clear that the nature of income received by VCC or VCF for Venture Capital Undertaking (VCU) and further distributed to the investors should be taxable in the hands of investors by treating the same in the nature of income like long term capital gain, short term capital gain, dividend income or other income such as interest and is to be taxed as per the provisions applicable under different heads of income. So, it is proved that the assessee company has invested in SARA fund, a SEBI registered VCF, a pass through entity and income received from SARA fund by the assessee company being investor, shall be taxable by treating the same nature of income like LTCG, STCG, Dividend and other income such as interest etc. and as such, to be taxed as per the provisions as applicable under different heads of income. Section 115U provides for pass through status by treating the VCC and VCF a pass through vehicle and further guarantee some concession in the shape of non applicability of provisions
16 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 of Chapter 14D, 12E and 17B but never provide that the income received by the investor from VCC and VCF is exempt.
14.5 Ld. CIT(A) endorsing the findings returned by the A.O., came to the conclusion as under:
“I have considered the submissions of the appellant findings of the AO and the facts on record. After' examining the various provisions of law it is clear that the nature of payment by SARA fund to the appellant is in the nature of dividend/income from mutual fund. The exemption from levying additional tax on dividends allowed u/s 115U(4) would not change the nature of the income in the hand of the appellant. On the other hand unless additional tax has been paid as per the provisions of section 1150 and 115R, the appellant cannot enjoy tax free income U/S 10(34) and 10(35) of the IT Act. In view of the discussions above it is held that exemption claimed u/s 10(34)/10(35) is to be allowed only to the dividend/income distributed as per the provisions of section 1150/115R and therefore, this ground of appeal is dismissed.” 14.6 However, we are of the considered view that the A.O. as well as Ld. CIT(A) have taken a wrong view by holding that the assessee cannot grow tax free income u/ss 10(34) and 10(35) of the Acts unless additional tax has been paid as per the provisions of Sections 115-O and 115-R of the Act and as such the exemption claimed u/ss 10(34) and 10(35) is to be allowed only if the dividend income distributed as per the provisions of Sections 115-O and 115-R whereas, the conditions laid down u/s 115-O to avail the exemption u/s 10(34), is to be complied with at the level of venture capital undertaking and not at the stage when the investor, the assessee in this case, received the dividend income from VCF. So, the assessee is entitled for exemption u/s 10(34) of the Act and its share of dividend income is out of dividend income received by SARA fund.
17 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 When the company with which SARA Fund has been invested, had already paid additional income tax on the earned dividend as required u/s 115-O of the Act, SARA fund was not required to pay additional income tax second time on the same income. Consequently, grounds No.1(I) and 1(II) of Ground No.1 of are determined in favour of the assessee.
Ground No.2 of I.T.A.No. 3284/Del/2012 and Ground No.2 of I.T.A.No. 5705/Del/2010: Now, the next question arises for determination is, “as to whether the A.O. as well as Ld. CIT(A) have erred in disallowing the expense of Rs.1,13,11,955/- in I.T.A.No.3284/Del/2012 and Rs.37,94,980/- in I.T.A.No.5705/Del/2010, by taxing the share of appellant as interest income from VCF under the head ‘other income’ on gross basis and not on net basis in disregard of the fact that the income of VCF can be passed on to its investors only after adjusting the expenses to incur out of funds provided by the investors earning such income.”
15.1 The A.O. disallowed the expenses of Rs.11311955/- representing the assessee’s share of expenses incurred by SARA fund earning income under various heads on the ground that the aforesaid claim of expenses were incurred by SARA fund during the course of its business and not by the appellant and as such could not be claimed as deduction by the assessee. 15.2 Ld. A.R. contended that when the fund is required to distribute only net income it must take into consideration the earlier year and current year losses and also expenses incurred to run the fund in earlier year and current year while determining the quantum of distribution.
18 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 15.3 On the other hand, Ld. CIT(A) also arrived at the decision that such taxable entity is to be taxed on its net income i.e. gross income less expenses incurred for earning such income. In the instant case, the SARA fund which has earned income inter alia from entering into mutual fund and that its entire book expenses incurred by it and distributed the balance to the beneficiary, since the assessee is claiming expenditure incurred by SARA fund as loss under the head ‘other income’, the same are not allowable.
15.4 The issue in controversy is again required to be determined in consonance with the provisions contained u/s 115U discussed in the preceding paragraphs which mandates that venture capital company and venture capital fund is given the status of pass through vehicle for the purpose of treatment of income received on account of investment made in the venture capital undertaking. A person who makes investment in the venture capital company or venture capital fund, the assessee in this case, earned the income out of such investment which income shall be treated firstly as investment directly in the venture capital undertaking and venture capital fund or venture capital company is only a pass through vehicle. So, in these circumstances, the assessee company is entitled to book expenditure incurred by SARA fund as if the same has been incurred by the assessee directly in the venture capital fund. So, we are of the view that the expenses of Rs.1,13,11,955/- disallowed by Ld. CIT(A) by taking the shares of the assessee in interest income from VCF under the head other sources on gross basis and not the net basis, which requires to be determined by treating the same nature of income like long term capital
19 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 gain, short term capital gain, dividend and other income such as interest etc. So, Grounds No.2 of both the appeals are determined in favour of the assessee. Ground No.3 of I.T.A.No. 3284/Del/2012 and Ground No.3 of 16. I.T.A.No. 5705/Del/2010: Now, the next question arises for determination is, as to whether Ld. CIT(A) and Assessing Officer qua the Assessment Years 2006-07 an 2007-08 respectively erred in holding that the assessee’s share in the payment @ 22.23% was assessable in assessee’s hands as ‘income from other sources’. 16.1 Undisputedly, out of the total distribution of Rs.17,60,00,000/- during the Assessment Year 2006-07, only Rs.11,97,38,454/- was out of the income of VCF and similarly, out of total distribution of Rs.23,10,00,000/- in A.Y. 2007-08, only Rs.22,58,39,902/- was out of the income of VCF and the rest was paid out of its capital . Again, this issue is required to be determined in the light of the provisions contained u/s 115U, which determines the taxability of the income in the hands of investor upon its receipt. 16.2 Ld. A.R. contended that any income received by a person from the investment made in the VCF shall be chargeable to tax u/s 115U in the same manner as if it was the income received from such person had he made investment directly in venture capital undertaking (VCU) and relied upon form 64 lying at pages 57-59 of the paper book for Assessment Year 2006-07 and at pages 2 -4 of the Paper Book for Assessment Year 2007- 08 explaining the bifurcation of income under various heads in the same
20 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010 proportion as the income received by the fund under various heads on behalf of all the beneficiaries. 16.3 From the perusal of Form 64 and balance sheet / revenue account of SARA fund, it is proved that distribution of Rs.17,60,00,000/- qua A.Y. 2006-07 and Rs.11,72,890/- qua A.Y. 2007-08 was made to its beneficiaries as per the number of units purchased by each beneficiary, which fact is explained in the foot note 3 of Form 64 and it also appears in the balance sheet / revenue account of SARA fund and the assessee has rightly disclosed the income at Rs.119738454/- by subtracting the amount of Rs.56261546/- which is the amount of capital nature and as such not taxable in the hands of investor by treating the same nature of income like LTCG, STCG, Dividend and other income such as interest etc. and as such to be taxed as per the provisions as applicable under different heads of income meaning thereby a person who makes investment in the VCC and VCF, the assessee in this case, earned the income out of such investment, which income shall be treated as if the investment was directly in the VCU and VCF and VCC is only a pass through vehicle. So, the assessee has rightly taken the net income for tax at Rs.11,97,38,454/- by subtracting the amount of Rs.5,62,61,546/- and the assessee is liable to be taxed accordingly. So, Ld. CIT(A) has erred in holding that the appellant’s share in the payment of Rs.5,62,61,546/- (17,60,00,000 – 11,97,38,454) @ 22.73% i.e. Rs.1,27,88,250/- as income from other sources in the hands of assessee, which is required to be assessed in view of the provisions contained u/s 115U of the Act. So, we determine the grounds No.3 of both the appeals in favour of the assessee.
21 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010
Ground No.4 of I.T.A.No. 3284/Del/2012 and Ground No.5 of I.T.A.No. 5705/Del/2010: Now, the next question arise for determination in this case is, “as to whether Ld. CIT(A) has erred in law and in charging interest amounting to Rs.3090221/- u/s 234B and interest withdrawn u/s 244A of the Act.” Since this ground is consequential, the same is required to be decided in favour of assessee in view of the findings on grounds No.1, 2 & 3 to the extent assessee’s income is to be taxed in the light of the provisions contained u/s 115U of the Act.
Ground No.4 of I.T.A.No. 5705/Del/2010: 18. The assessee’s claim in this ground is, the Assessing Officer without any verification, has arbitrarily doubly added long term capital gain of Rs.2,44,02,106/- under the head ‘short term capital gain’ whereas the short term capital gain amounted to Rs.1,40,29,045/- as claimed in the return. Bare perusal of para 8 of the assessment order goes to prove that the Assessing Officer has added long term capital gain at Rs.2,44,02,106/- and at the same time added short term capital gain to the tune of Rs.3,84,31,891/- without recording the findings that he has verified the said claim of the assessee by going through the records. So, we are of the considered view that this ground raised by the assessee is liable to be allowed and the matter is ordered to be restored to the Assessing Officer for verification and then proceed accordingly by providing opportunity of being heard to the parties.
22 I.T.A.Nos.3284/Del/2012 I.T.A.No.5705/Del/2010
Ground No.6 of I.T.A.No. 5705/Del/2010: So far as the question of penalty proceedings u/s 271(1)(c) of the Act is concerned, this issue has been prematurely raised by the appellant, hence needs no adjudication at this juncture.
No other argument / issue has been raised by either of the Authorized Representatives of the parties. 21. In view of above discussion, we hereby allow both the aforesaid appeals of the assessee for statistical purposes. Order pronounced in the open court on 29th Jan., 2016. 22.