2023 (11) TMI 117 - AT - Income Tax

Exemption u/s 10(38) - LTCG derived from sale of mutual fund through venture capital fund assessee is invested in Alternative Investment Fund (AIF) - as per revenue gain derived from sale of any investments by said venture capital fund is not exempt u/s. 10(38) - HELD THAT - AIF has sold shares of Capacit'e Infra projects Limited, after a period of 12 months and also paid necessary Security Transaction Tax (STT). As gain received by the assessee from transfer of shares by AIF is a long-term capital asset and income from said sale is taxable under the head long-term capital gains. As per provisions of section 115UB of the Act, Alternative Investment Fund is a pass through entity for investors and whatever gain or loss derived by such fund is assessable in the hands of unit holders. To this effect, the assessee has furnished Form no. 64C issued by the AIF in terms of Rule 12CB(1)(i) of the I.T. Rules, 1962 and also Form no. 16A in deducting applicable TDS as per the provisions of law. From the details, it is very clear that income distributed by venture capital fund to unit holders is assessable in the hands of unit holders as per the provisions of Income Tax Act, 1961. In the present case, the assessee received long-term capital gains from AIF, which is exempt from tax u/s. 10(38) of the Act, if such shares is suffered STT. AO and CIT(A) were completely erred in taxing income distributed by AIF to the assessee by rejecting exemption u/s. 10(38). The reason is given by the CIT(A) to sustain additions made by the AO is completely irrational and devoid of merits, because as per the provisions of section 10(38) of the Act, any long-term capital gain derived from shares and securities which suffered STT is exempted, whether such fund is invested in equity funds or real estate funds. But what is required to seen is whether the gain derived by the assessee is from transfer of equity shares, which has suffered Security Transaction Tax or not. Since, the long-term capital gains derived by the assessee from mutual fund is out of sale of equity share, which suffered Security Transaction Tax, in our considered view capital gain derived by the assessee is exempt under section 10(38) - Decided in favour of assessee.

Summary

Issues involved:
The judgment involves the interpretation of provisions under Section 10(38) of the Income Tax Act regarding the exemption of income generated from mutual funds investing in various categories. The main issue revolves around whether the income derived by the assessee from the sale of mutual funds through a venture capital fund is exempt under Section 10(38) of the Act.

Issue 1:
The first ground of appeal challenges the conclusion of the Commissioner of Income Tax (Appeals) regarding the investment by the appellant in Category II funds and the tax treatment of income generated from such investments. The contention is that the income should be exempt under Section 10(38) of the Income Tax Act for Conventional Tax Workings.

Details:
The appellant invested in mutual funds through a venture capital fund, and the income derived from the sale of these investments was claimed as exempt under Section 10(38) of the Act. However, the CIT(A) concluded that the exemption under Section 10(38) is not applicable in this case due to the nature of the investments made by the appellant.

Issue 2:
The second ground of appeal challenges the CIT(A)'s conclusion regarding the availability of exemption under Section 10(38) for income generated by mutual funds investing directly in equity on the stock exchange.

Details:
The appellant argued that the exemption under Section 10(38) should apply to the income derived from mutual funds investing directly in equity on the stock exchange. However, the CIT(A) held a different view on the interpretation of the provisions under Section 10(38) in this context.

Issue 3:
The third ground of appeal pertains to the submission of Form 64C filed by Paragon Partners Growth Fund, showing the Statement of Income distributed to the Unit holder, and the appellant's claim for exemption of Long-Term Capital Gains under Section 10(38).

Details:
The appellant sought the allowance of Long-Term Capital Gains amounting to Rs. 43,09,447/-, claiming that the income distributed by the venture capital fund should be exempt under Section 10(38) as it pertains to the sale of equity shares that have suffered Security Transaction Tax.

Judgment Summary:
The Appellate Tribunal, after considering the arguments presented by both parties and reviewing the relevant provisions of the Income Tax Act, ruled in favor of the assessee. The Tribunal found that the income derived by the assessee from the sale of shares by the Alternative Investment Fund (AIF) through a venture capital fund qualifies as long-term capital gains and is exempt under Section 10(38) of the Act if the shares have suffered Security Transaction Tax (STT).

The Tribunal highlighted that the AIF is a pass-through entity for investors, and any gain or loss derived by the fund is assessable in the hands of unit holders. Therefore, the Tribunal concluded that the Assessing Officer and CIT(A) erred in taxing the income distributed by the AIF to the assessee and rejecting the exemption under Section 10(38) of the Act.

In light of the provisions of Section 10(38) and the nature of the investments made by the appellant, the Tribunal directed the Assessing Officer to delete the additions made towards long-term capital gains derived from the income distributed by the AIF. As a result, the appeal filed by the assessee was allowed, and the judgment was pronounced in Chennai on 30th August 2023.