2020 (7) TMI 521 - AT - Income Tax

Exemption u/s 10(34) - dividend income received by SARA fund - exemption claimed by the appellant on its share of dividend income of dividend income received by SARA Fund (venture capital Fund - (VCF) - 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 115-0 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 115-0 of the Act, SARA fund was not required to pay additional income tax second time on the same income. - Decided in favour of the assessee. Disallowing expenses by taxing the share of the appellant in interest income from VCF under the head Other Sources on gross basis and not on net basis in disregard of the fact that income of a VCF - HELD THAT - 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 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. Grounds determined in favour of the assessee. Income from other sources - HELD THAT - In the balance sheet / revenue account of SARA fund and the assessee has rightly disclosed the income by subtracting the amount which is the amount of capital nature and as such not taxable in the hands of investor by treating the same nature of income like LTCG, STCG, Dividend and other income such as interest etc. and as such to be taxed as per the provisions as applicable under different heads of income meaning thereby a person who makes investment in the VCC and VCF - 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. 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 the assessee.

Summary

Issues:
- Appeals against assessment orders for Assessment Years 2008-09 and 2010-11
- Allowance of exemption under Section 10(34) of the Act
- Disallowance of expenses and taxation of income from VCF
- Assessment of income from other sources

Analysis:
1. The appeals were filed against assessment orders for two separate years, but since the issues were common, they were heard together. The counsel for the assessee argued that similar issues had been decided in favor of the assessee in previous years, and the Revenue had not challenged those decisions.

2. The first issue pertained to the exemption under Section 10(34) of the Act on the share of dividend income from a Venture Capital Fund (VCF). The Tribunal found in favor of the assessee, stating that the exemption should be allowed at the level of the venture capital undertaking, not at the investor level.

3. The second issue involved the disallowance of expenses and taxation of income from the VCF. The Tribunal ruled in favor of the assessee, stating that the income should be treated as if the investment was made directly in the VCF, allowing for the deduction of expenses incurred by the VCF.

4. The third issue concerned the assessment of income from other sources. The Tribunal held that the income distributed by the VCF should be assessed in the hands of the assessee after deducting the capital component, following the provisions of Section 115U of the Act.

5. The Tribunal referred to previous decisions and upheld the findings in favor of the assessee, emphasizing that the income should be taxed based on the nature of the income and the pass-through status of the VCF. The Tribunal allowed the appeals of the assessee and directed the Assessing Officer to consider the charging of interest under Section 234B as per the law.