2016 (2) TMI 882 - AT - Income Tax

Entitlement to exemption u/s 10(34) - dividend income distributed as per the provisions of Sections 115-O and 115-R - Held that - 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. 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 - Decided in favour of assessee Disallowance of expense - taxing the share of appellant as interest income from VCF under the head other income on gross basis and not on net basis - Held that - 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 ₹ 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 gain, short term capital gain, dividend and other income such as interest etc - Decided in favour of assessee Taxability of assessee s share in the payment @ 22.23% - assessable in assessee s hands as income from other sources - Held that - 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 ₹ 11,97,38,454/- by subtracting the amount of ₹ 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 ₹ 5,62,61,546/- (17,60,00,000 11,97,38,454) @ 22.73% i.e. ₹ 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 - Decided in favour of assessee

Summary

Issues Involved:

1. Exemption under Section 10(34) of the Income Tax Act.
2. Disallowance of expenses under the head "Other Sources."
3. Treatment of distribution amounts as income from other sources.
4. Charging of interest under Section 234B and withdrawal of interest under Section 244A.
5. Double addition of Long Term Capital Gain under the head "Short Term Capital Gain."
6. Initiation of penalty proceedings under Section 271(1)(c).
7. Non-speaking order by the Dispute Resolution Panel (DRP).

Detailed Analysis:

1. Exemption under Section 10(34) of the Income Tax Act:
The primary issue was whether the assessee was entitled to an exemption under Section 10(34) for its share of dividend income received from SARA Fund, a venture capital fund (VCF). The Tribunal referred to Section 115U, which provides a "pass through" status to VCFs, meaning the income received by an investor from a VCF should be treated as if the investment was made directly in the venture capital undertaking. The Tribunal concluded that the assessee was entitled to the exemption under Section 10(34) since the dividend income had already been subjected to tax under Section 115-O at the level of the venture capital undertaking, and thus, the VCF was not required to pay additional income tax on the same income.

2. Disallowance of expenses under the head "Other Sources":
The assessee contended that the income from the VCF should be taxed on a net basis, i.e., after deducting expenses incurred by the VCF. The Tribunal agreed, stating that the VCF acts as a pass-through vehicle, and thus, the expenses incurred by the VCF should be considered as if incurred by the assessee directly. Consequently, the disallowance 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 was incorrect, and the expenses should be allowed.

3. Treatment of distribution amounts as income from other sources:
The issue was whether the distribution of Rs. 17,60,00,000/- (A.Y. 2006-07) and Rs. 23,10,00,000/- (A.Y. 2007-08) should be treated as income from other sources. The Tribunal referred to Section 115U and concluded that the income received by the assessee from the VCF should be treated in the same manner as if the investment was made directly in the venture capital undertaking. Therefore, the distribution should not be treated as income from other sources, and the assessee's share of Rs. 1,27,88,250/- should not be taxed as such.

4. Charging of interest under Section 234B and withdrawal of interest under Section 244A:
The Tribunal noted that the issue of charging interest under Section 234B and withdrawal of interest under Section 244A was consequential to the determination of the assessee's taxable income. Since the Tribunal ruled in favor of the assessee on the primary issues, the interest charged under Section 234B and withdrawn under Section 244A should be recalculated accordingly.

5. Double addition of Long Term Capital Gain under the head "Short Term Capital Gain":
The assessee claimed that the Assessing Officer had arbitrarily 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 per the return. The Tribunal found merit in the assessee's claim and remanded the matter to the Assessing Officer for verification and appropriate action.

6. Initiation of penalty proceedings under Section 271(1)(c):
The Tribunal noted that the issue of penalty proceedings under Section 271(1)(c) was raised prematurely and did not require adjudication at this stage.

7. Non-speaking order by the Dispute Resolution Panel (DRP):
The Tribunal did not specifically address this issue in the detailed analysis, implying that the primary focus was on the substantive tax issues raised in the appeal.

Conclusion:
The Tribunal allowed the appeals of the assessee for statistical purposes, ruling in favor of the assessee on the primary issues of exemption under Section 10(34), disallowance of expenses, and treatment of distribution amounts. The matters related to interest and capital gains were remanded to the Assessing Officer for further verification. The issue of penalty proceedings was deemed premature. The order was pronounced on 29th Jan., 2016.