DHFL VENTURE CAPITAL FUND,MUMBAI vs. ITO WD 19(3)(4), MUMBAI

स्थामी रेखा सं./जीआइआय सं./PAN. :AAATD8633 अपीऱाथी की ओर से / Appellant by : Shri Vijay Mehta प्रत्यथी की ओर से/ Respondent by : Shri Uday B Jakke सुनवाई की तारीख / Date of Hearing : 10.12.2015 घोषणा की तारीख /Date of Pronouncement : 08.01.2016 O R D E R

PER B.R.BASKARAN,AM:

S.No. Venture Capital Amount invested % of available Undertaking corpus funds M/s J S T Reality Pvt Ltd. 40.96% 1 25,25,00,000 2. Proficient Reality Pvt Ltd. 3,01,00,000 4.88% 3 Blue Star Realtors Pvt.Ltd 24,99,66,470 40.55% Total 53,25,66,470 Since the assessee had invested more than 25% of the contributions in the above said Venture Capital Undertaking, the AO held that the assessee has violated the provisions of Clause 12(b) of SEBI Guidelines (Venture Capital Fund) Regulations, 1996. The assessee contended before the AO that the term “corpus fund” should be taken as the amount committed by the investors and not actual contribution made by them. However, the AO took the view that “corpus” literally means collection and in financial terms, it means collection of funds. He further held that “Collection” means what you are having in your possession at the moment and not something which you are expecting to get in future. Accordingly he did not agree with the contention of the assessee that the “Corpus” would mean the amount committed by the investors. It is pertinent to note that gross amount committed by the investors was Rs.101.02 crores as on 31.3.2007, even though the amount actually contributed by them was Rs.61.64 crores as on 31.3.2007. Accordingly, the assessee contended that the investment made in each of the above said Venture Capital undertaking does not exceed 25% of the „committed corpus fund‟. The same was not acceptable to the AO and accordingly he denied the claim of the assessee for exemption u/s 10(23FB) of the Act. The assessee had also claimed exemption on the interest income earned from Bank deposits. The AO took the view that the exemption u/s 10(23FB) shall be available only in respect of income earned from investments made in a Venture capital undertaking. Since the banks in which the assessee had made deposits cannot be considered as “Venture capital undertakings” and since the interest income is required to be assessed under the head Income from other sources, the AO held that the assessee cannot claim exemption u/s 10(23FB) of the Act on the interest income. Accordingly, the AO assessed the entire income of the assessee by determining the total income at Rs.1.10 cr. The ld. CIT(A) also confirmed the same. Hence, the assessee has filed this appeal before us.

Alternative Investment Fund by way of a written contract or any such document as on a particular date.”

The ld. AR submitted that, as per the above said definition of the term “Corpus” would mean the total amount of funds committed by investors to the Alternative Investment Fund and not the actual contribution made by the investors. He submitted that the venture capital undertakings would also require funds in a phased manner in accordance with the pace of execution of projects and hence the contributions shall also be collected in a phased manner from the investors. Hence, the new Regulations have provided the definition of the term “Corpus” as the total amount of funds committed by investors, keeping in view the practicalities of the situation discussed above.

12(b) of SEBI (Venture Capital Funds) Regulation, 1996.

SEBI Act. In this regard, the Ld A.R drew support from the decision dated 27.5.2011 rendered by the Ahmedabad Bench of the Tribunal in the case of ITO V/s Gujarat Information Technology Fund in (AY-2003-04), wherein the Tribunal held that the AO was not required to go into the violation of conditions, if any, pertaining to matters of grant of such certificate of Registration. The ld. AR further submitted that the Hyderabad Bench of the Tribunal has also considered an identical issue in the case of ACIT V/s Small is Beautiful in ITA No.1004 and 1005/Hyd/2012 (AY-2006-07 and 2007-08) order dated 4.7.2013, wherein it has followed the decision of Ahmedabad Bench of the Tribunal rendered in the case of Gujarat Information Technology Fund (supra).

“(5) `Whether AO can look into whether venture capital fund fulfills conditions laid down in SEBI (Venture Capital Funds) Regulations, 1996.

Gestetner Duplicators (P.) Ltd. (supra) are very relevant. In that case the Commissioner had granted recognition to the P.F. as far back as 1937. The assessee a private limited company paid to sales- men a fixed monthly salary and commission at fixed percentage of turnover and also paid employer's contribution to the P.F. on the basis of monthly salary as well as commission and credited them into individual account of these sales-men in P.F. maintained and recognized by the Commissioner. A part of such commission and consequently provident fund on such commission was sought to be disallowed. The matter went up to the Hon. Supreme Court. It observed as under:- "It would be conducive to judicial discipline and the maintaining of certainty and uniformity in administering the law that the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the provident fund satisfies all the conditions under rule 4 of Part A of the Fourth Schedule to the Act, and not sit in judgment over it." Thus it was held that it was not open to the AO to take the view contrary to the registration already granted by the CIT and therefore disallow a part of the contribution. It was pointed out that when recognition continues in operation it would be implied that the conditions laid down there-under are satisfied and any part of disallowance would tantamount to questioning the recognition. In other words entries made in the register of independent body should be accepted as true and they should not be questioned while deciding the issue relating to the matters concluded by the entries made in such registers. From this it follows that if assessee trust is registered with SEBI as per certificate granted under Regulation 7(3) then it should be accepted that such certificate is granted after ensuring that conditions laid down before granting of such certificate are fulfilled. In other words conditions laid down in sub-clause (i ) and sub-clause (ii) are deemed to be fulfilled under explanation-1(b) to section 10(23FB), the moment relevant certificates are produced before the AO. Therefore, he is not required to go into violation of conditions, if any, pertaining to the matters of grant of such certificates.” The Ahmedabad bench of Tribunal further observed that, so long as SEBI does not find any default of any contravention of the provisions of the SEBI Act or SEVI (VCF) Regulation 1996 then it can be inferred that the assessee trust fulfills the conditions laid down under these regulations.

The Tribunal further expressed the view that the AO may report the matter of violations, if any, to the SEBI and if finally SEBI does not find any default, then the view of the AO that there is violation cannot survive. We agree with the view taken by the Ahmedabad bench of Tribunal in the case cited above. It is the SEBI, which has final say to determine about the violation of the conditions, as it is the authority competent to deal with the same. In the instant case, the AO has made his own interpretation of the term “corpus”, which we have found to be incorrect as per the definition given in the new regulation.

The words in bold letters were replaced by the words “from investment” by Finance Act, 2007 w.e.f. 1.4.2008. The scope of exemption available under this section as well as the date of applicability of amendment brought into the above section by Finance Act, 2007 were examined by the co-ordinate Mumbai bench of Tribunal in the case of ITO Vs. M/s Kshitij Venture Capital Fund in its order dated 9th March, 2011 passed in relaing to assessment year 2006-07. The relevant observations made by the Mumbai bench of Tribunal are extracted by the Hyderabad bench of Tribunal in the case of Small is Beautiful (supra) as under:-

“12. The ITAT Ahmedabad Bench in the said case of Gujrat Information Technology Fund (supra) followed the decision of ITAT Mumbai 'A' Bench in the case of ITAO vs. M/s Kshitij Venture Capital Fund in Asst. Year 2006-07 pronounced on 9thMarch, 2011 wherein on similar facts held as under :- "13. We heard both the parties. The issue is whether interest on temporary investments of Rs. 16,09,900/- and profit on sale Units of Mutual fund of Rs 1,00,91,000/- is entitled to exemption u/s. 10(23FB). Section 10(23FB) as applicable to the year under appeal is as under: 'Any income of venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking.' 14. Thus the exemption in the case of Venture Capital Fund was in respect of any income. There is no restriction or requirement regarding the source of income for grant of exemption u/s. 10(23FB). It is only by Finance Act, 2007, w.e.f.1st April, 2008, an amendment to section 10(23FB) was brought about restricting the exemption under that section to income from Investment by the Venture Capital Fund in a venture capital undertaking. For this purpose, the said clause (c) of Explanation 1 has also been amended to define "Venture Capital Undertaking". This amendment was made effective from 1.4.2008. By no stretch of imagination can this amendment can be considered as clarificatory applicable to earlier Assessment Year. The memorandum explaining the Finance Bill, 2007 as well as the CBDT circular explaining the provisions of the Finance Act, 2007 clarify that the amendment proposed to section 10(23FB) was to restrict the scope of income for which exemption under that section was available. Hence this amendment cannot be considered as clarificatory but must be considered as prospective in effect. It is not inITA Nos. 1004 & 1005/Hyd/12 Small is Beautiful dispute that the assessee is otherwise eligible for exemption u/s.10(23FB). Hence for the year under appeal, as per the provisions of section 10(23FB) as applicable to the assessment year, any income of the venture capital Fund is exempt. Hence we confirm the order of the CIT(A) and uphold his direction that that interest on temporary investments of Rs. 16,09,900/- and profit on sale Units of Mutual fund of Rs 1,00,91,000/- is entitled to exemption u/s.10(23FB).

14.3 Applicability : This amendment will take effect from the 1st day of April, 2008, and will accordingly apply in relation to the assessment year 2008-09 and subsequent assessment year”.

13. In view of the foregoing discussions, we are of the view that the assessee cannot be denied exemption u/s 10(23FB) of the Act and further the entire income of the assessee shall be exempt under that section. Accordingly, we set aside the order of ld.CIT(A) and direct the AO to grant exemption u/s 10(23FB) of the Act.

Sd sd (संदीप गोसधई/SANDEEP GOSAIN) ( बी.आर.बधस्करि/ B.R.BASKARAN) न्यधनयक सदस्य/Judicial Member ऱेखध सदस्य /Accountant Member मुंबई Mumbai; ददनांक Dated.. 8th, Jan 2016 व.नि.स./ SRL, Sr. PS