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2011 (3) TMI 387 - AT - Income TaxDisallowance - Exemption u/s. 10(23FB) - Interest on temporary investments and profit on sale Units of Mutual fund - Since 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 amendment to 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 in 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).
Issues Involved:
1. Eligibility of interest on temporary investments for exemption under Section 10(23FB). 2. Eligibility of profit on sale of mutual fund units for exemption under Section 10(23FB). Issue-wise Detailed Analysis: 1. Eligibility of Interest on Temporary Investments for Exemption under Section 10(23FB): The core issue is whether the interest income of Rs. 16,09,900/- earned from temporary investments qualifies for exemption under Section 10(23FB) of the Income Tax Act, 1961. The Assessing Officer (AO) argued that the interest income did not arise from investments in Venture Capital Undertakings (VCUs) and thus, is not exempt under Section 10(23FB). The AO's interpretation was based on the explanation that any income not arising from investment in a VCU is not eligible for exemption. However, the assessee contended that Section 10(23FB) exempts "any income" of a Venture Capital Fund (VCF) without restricting it to specific sources or types of income. The CIT(A) supported this view, highlighting that the section's language prior to the amendment by the Finance Act, 2007, which took effect from 1st April 2008, did not restrict the exemption to income derived solely from VCUs. The CIT(A) referred to judicial precedents, including the Mumbai Tribunal's decision in Marigold Mezzanine Investment Funds and India Value Fund, which upheld that interest income on fixed deposits earned by a VCF is eligible for exemption under Section 10(23FB). The Tribunal agreed with the CIT(A), emphasizing that the amendment restricting the exemption to income from investments in VCUs was prospective and applicable from the Assessment Year 2008-09 onwards. Therefore, for the year under appeal (A.Y. 2006-07), any income of the VCF, including interest on temporary investments, is entitled to exemption under Section 10(23FB). 2. Eligibility of Profit on Sale of Mutual Fund Units for Exemption under Section 10(23FB): The second issue pertains to whether the profit of Rs. 1,00,91,000/- from the sale of mutual fund units is exempt under Section 10(23FB). The AO denied the exemption, arguing that the mutual fund investments were not surplus funds but were systematically invested, and thus, the profit should be taxed as business income. The assessee argued that Section 10(23FB) does not restrict the exemption to specific types of income and that the profit from mutual fund units should be exempt as "any income" of the VCF. The CIT(A) concurred, noting that the section's language prior to the amendment did not impose such restrictions and that judicial precedents supported the broader interpretation of "any income." The Tribunal upheld the CIT(A)'s decision, reaffirming that for the relevant assessment year, the exemption under Section 10(23FB) applied to any income of the VCF, including profits from the sale of mutual fund units. The amendment introduced by the Finance Act, 2007, which limited the exemption to income from investments in VCUs, was not applicable retrospectively. Conclusion: The Tribunal concluded that for the Assessment Year 2006-07, the interest on temporary investments and the profit on the sale of mutual fund units are entitled to exemption under Section 10(23FB) of the Income Tax Act, 1961. The appeal filed by the Revenue was dismissed, and the order of the CIT(A) was upheld. The judgment emphasized that the amendments to Section 10(23FB) by the Finance Act, 2007, were prospective and did not apply to the assessment year in question.
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