2011 (5) TMI 572 - AT - Income Tax

Interest income earned from Bank Deposits - Whether the assessee is entitled to exemption under section 10(23FB) - Held that - 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 under section 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 under section 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 the order of the CIT(A) confirmed that interest on temporary investments and profit on sale Units of Mutual fund of is entitled to exemption under section 10(23FB). The trust deed has clearly empowered the assessee to invest surplus into the fixed deposits. Going through regulation 12(d) of SEBI Regulations it provides a target of 75% upto 5-4-2004 and 66.67% thereafter of the investible fund to be invested in specified undertaking and upto 33.33% in other avenues as per clause (ii) of regulation 12(d). Thus there is likelihood of some surplus, if 33.33% is not invested in other avenues. Such surplus or surpluses arising out of working capital of 20% of investible funds can be parked in the F.D. as provided in the trust deed. thus the investment in F.D. does not violate any of the provisions either under SEBI guidelines or of the trust-deed - Decided in favor of the assessee

Issues Involved:
1. Entitlement to exemption under section 10(23FB) of the IT Act for interest income earned from bank deposits.
2. Compliance with SEBI Regulations by the assessee.
3. Violation of the provisions of the trust deed by the assessee.
4. Applicability of the amendment to section 10(23FB) by Finance Act, 2007.

Detailed Analysis:

Issue 1: Entitlement to Exemption under Section 10(23FB)
The primary issue was whether the assessee was entitled to exemption under section 10(23FB) of the IT Act for interest income of Rs. 75.56 lacs earned from bank deposits. The AO denied the exemption, arguing that the income from bank deposits should be taxed as income from other sources since it did not conform to the requirements of a venture capital fund as per SEBI regulations and the trust deed.

The CIT(A) allowed the exemption, reasoning that the assessee met the conditions specified in section 10(23FB), including registration under the Registration Act and obtaining a certificate from SEBI. The CIT(A) noted that the SEBI regulations did not specify the life cycle of the investment and that the parking of funds in bank deposits did not violate SEBI regulations.

Issue 2: Compliance with SEBI Regulations
The AO contended that the assessee violated several SEBI regulations, including failing to invest the required percentage of funds in specified activities. The AO argued that the assessee did not meet the criteria for a venture capital fund as per SEBI regulations and thus did not qualify for the exemption.

The CIT(A) disagreed, stating that the SEBI regulations did not need to be complied with for the exemption under section 10(23FB). The CIT(A) emphasized that the conditions for the exemption were registration under the Registration Act and obtaining a certificate from SEBI, both of which the assessee had fulfilled. The CIT(A) also noted that the SEBI regulations allowed for the investment pattern to be achieved by the end of the fund's life cycle, which was 10 years in this case.

Issue 3: Violation of the Trust Deed
The AO argued that the assessee violated the trust deed by making substantial investments in bank deposits instead of in specified undertakings. The AO highlighted several clauses in the trust deed that the assessee allegedly violated.

The CIT(A) found that the trust deed allowed for the investment of surplus funds in bank deposits and that the assessee had followed the trust deed's provisions. The CIT(A) concluded that there was no violation of the trust deed.

Issue 4: Applicability of the Amendment to Section 10(23FB)
The AO argued that the amendment to section 10(23FB) by the Finance Act, 2007, which restricted the exemption to income from investment in specified undertakings, should apply to the assessee.

The CIT(A) and subsequent tribunal decisions clarified that the amendment was prospective and applied from the assessment year 2008-09 onwards. For the assessment years in question (2003-04 to 2005-06), the exemption applied to any income of the venture capital fund, including interest income from bank deposits.

Conclusion:
The tribunal upheld the CIT(A)'s decision, granting the exemption under section 10(23FB) for the interest income earned from bank deposits. The tribunal concluded that the assessee met the conditions for the exemption, there was no violation of SEBI regulations or the trust deed, and the amendment to section 10(23FB) was not applicable to the assessment years in question. The appeals filed by the Revenue were dismissed.

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