2018 (1) TMI 1607 - AT - Income Tax

Short term capital gain - transfer of equity shares and such transactions as charged to Securities Transaction Tax - assessee had applied the rate of 10% based on Section 111A - HELD THAT - None of the lower authorities had addressed the issue whether the transactions of shares claimed by the assessee satisfied the conditions set out in Sec. 111A of the Act. Though the ld. AO has stated in the assessment order that assessee could not prove the actual delivery of shares to it, how he came to such a conclusion is not clear. We are therefore of the opinion that the issue requires a fresh look by the ld. Assessing Officer. We set aside the orders of the authorities below on this issue and remit it back to the ld. Assessing Officer to consider the claim afresh, in the light of the conditions specified Sec.111A Exemption u/s 10(38) - income earned by it from transactions relating to units in M/s. ICICI emerging sector fund - long term capital gains - HELD THAT - Income of a Venture Capital Fund is exempt provided it satisfied the conditions set out in clause (b) of Explanation 1. By virtue of the deeming provisions (1) of Sec. 115U of the Act income accruing to a person out of investments made in a Venture Capital Fund also gets the exemption u/s.10(23FB) of the Act. Though the grounds of the Revenue say that compliance with Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 has not been established, what we find is that form No.64 specified in Rule 12C which is to be furnished by the Venture Capital Fund was filed by the assessee. Said Form 64 by necessary implication means that at the Venture Capital Fund had complied with the conditions set out in Explanation (1) to Section 10(23FB). Assessing Officer did not find anything wrong in the said form No.64 which is the Form set out by the Rules under sub-section 2 of Section 115U of the Act. We cannot also say that the income which is exempt u/s.10(23FB) of the Act had to be considered on receipt basis and not on accrual basis since Section 115U of the act takes within its ambit accrued income also. Ld. Commissioner of Income Tax (Appeals) in our opinion was justified in allowing the claim of the assessee u/s.10(23FB) of the Act read alongwith Section 115U of the Act. Appeal of the assessee is partly allowed for statistical purposes

Summary

Issues Involved:
1. Reopening of assessment for the impugned assessment year.
2. Taxation of short-term capital gains (STCG) from the sale of shares at 30%.
3. Exemption claimed by the assessee on long-term capital gains (LTCG) from transactions relating to units in ICICI Emerging Sector Fund.

Issue-wise Detailed Analysis:

1. Reopening of Assessment:
The assessee initially contested the reopening of the assessment for the impugned year but later chose not to press this ground. Consequently, the ground was dismissed.

2. Taxation of Short-Term Capital Gains (STCG):
The core issue was whether the STCG from the sale of shares should be taxed at 10% under Section 111A of the Income Tax Act, 1961, or at the normal rate of 30%. The assessee reported STCG of ?71,85,696 and paid tax at 10%, citing Section 111A, which allows a concessional rate if the transactions are subject to Securities Transaction Tax (STT).

The Assessing Officer (AO) challenged this, arguing that the assessee's transactions through M/s. Stock Holding Corporation of India Ltd., including the purchase and sale of shares of M/s. Accel Frontline Ltd., were not adequately substantiated to qualify for the concessional rate. The AO noted that the holding period of shares was not clearly ascertainable, and some transactions occurred within a short span, raising doubts about their nature.

The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the assessee failed to provide details of actual delivery of shares.

Upon appeal, the tribunal noted that the lower authorities did not adequately address whether the transactions met the conditions of Section 111A. The tribunal found the AO's conclusion about the non-delivery of shares unclear and decided that the issue required further examination. The tribunal set aside the lower authorities' orders and remitted the matter back to the AO for reconsideration in light of Section 111A's conditions.

3. Exemption on Long-Term Capital Gains (LTCG):
The Revenue contested the exemption claimed by the assessee under Section 10(38) of the Act for LTCG amounting to ?1,36,16,621 from transactions in ICICI Emerging Sector Fund units. The AO disallowed the exemption, arguing that under Section 115U read with Section 10(23FB), the exemption was not available since the STT liability was borne by the Venture Capital Fund (VCF) and not the assessee.

The assessee argued that Section 115U deemed that income from VCF investments should be treated as if the investments were made directly by the assessee, thus qualifying for the exemption. The Commissioner of Income Tax (Appeals) agreed with the assessee, noting that the assessee followed the accrual method consistently, and the AO had accepted this in earlier years.

The tribunal upheld the Commissioner of Income Tax (Appeals)'s decision, emphasizing that Section 115U mandates treating income from VCF investments as if directly earned by the investor, thereby qualifying for the exemption under Section 10(23FB). The tribunal noted that Form 64, filed by the VCF as per Rule 12C, implied compliance with the necessary conditions. The tribunal found no error in allowing the exemption on an accrual basis and dismissed the Revenue's appeal.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, requiring further examination of the STCG issue. The Revenue's appeal was dismissed, upholding the exemption on LTCG as claimed by the assessee.