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2024 (7) TMI 1432 - AT - Income TaxExemption of dividend income u/s 10(35) - claim was rejected by the CPC while processing the return of income u/s 143(1)(a) - HELD THAT - Assessee has fairly admitted that it did not challenge the above disallowance made by the CPC before Ld CIT(A), meaning thereby, the disallowance so made by CPC has attained finality. In the impugned assessment order passed u/s 143(3) of the Act, the AO has only repeated the disallowance already made while processing the return of income u/s 143(1)(a) of the Act. Hence, the cause of action in respect of denial of exemption u/s 10(35) of the Act would lie only in challenging the intimation issued u/s 143(1)(a) of the Act. Admittedly, the assessee has failed to challenge the same. Hence the Ld CIT(A) could not have granted relief in the appeal filed against the assessment order passed u/s 143(3) of the Act, when the addition made u/s 143(1)(a) remained unchallenged. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the addition made by the AO on this issue. Exemption u/s 10(23FB) claiming itself to be a Venture Capital Undertaking - As the said claim has been rejected by the AO and Ld CIT(A). We notice that the assessee has not challenged the rejection of exemption u/s 10(23FB) of the Act confirmed by Ld CIT(A). Hence, this issue has attained finality for this year. Alternative/fresh claim made by the assessee without filing return of income - Exemption u/s 10(38) - Long term capital gains earned by the assessee on sale of shares of venture capital - HELD THAT - We notice that the assessee has put forth the alternative claim before the assessing officer itself - assessee had already claimed exemption u/s 10(23FB) in the return of income and since the AO expressed the view that the assessee is not entitled to claim said exemption, the assessee has made alternative claim before him. Hence, in our view, it is only a case of change of section under which the exemption has been claimed by the assessee and it may not fall under the category of Fresh claim . Accordingly, we reject the grounds no.1 to 4 raised by the revenue. Exemption u/s 10(38) been allowed by the Ld CIT(A) without considering the fact that the assessee has acquired shares from the off market without paying Securities Transaction Tax (STT) - Conditions prescribed in clause (a) and (b) of sec. 10(38) of the Act are fulfilled in the instant case. The contentions urged by the revenue is related to the third proviso, which is highlighted above and which prescribes one more condition that the transaction of acquisition of shares should have also suffered the Securities Transaction Tax. The third proviso to sec. 10(38) of the Act empowers the Central Government to issue notification and the acquisition of shares falling under the said notification need not have suffered STT for the purpose of availing exemption u/s 10(38) of the Act. Hence sale of such kinds of shares are eligible for exemption u/s 10(38) of the Act. The clauses (a) and (b) of the Notification deal with existing listed equity shares . Clause (c) deals with the case of acquisition of shares of a company which has been delisted from a recognized stock exchange. Hence all the three clauses, viz., clause (a), Clause (b) and Clause (c) are not applicable to the facts of the present case, since the assessee herein has purchased unlisted shares. Accordingly, the Ld A.R was right in mentioning that the main part of the Notification will only be applicable to the facts of the present case. Hence the shares acquired by the assessee would be covered by the main part of the notification and hence, even if the STT was not paid at the time of acquisition, the assessee would be entitled to claim exemption of LTCG u/s 10(38) of the Act. Accordingly, we confirm the final decision taken by Ld CIT(A) on the above said reasoning. Assessee, being a Venture Capital Fund, is a pass through entity and hence the exemption u/s 10(38) could be claimed only by the investors as per sec. 115U of the Act and not by the assessee - A.R submitted that a Venture Capital Fund will acquire the character of Pass through entity , only if it is granted exemption in terms of sec. 10(23FB) - HELD THAT - As per the provisions of sec. 10(23FB) of the Act, the income earned by VCF on the investments made in the Venture Capital Undertaking is exempt and if the said exemption is given, then the income is liable to be assessed in the hands of investors in terms of sec. 115U of the Act. However, in the instant case, the assessee s claim for exemption u/s 10(23FB) has been rejected by the tax authorities, meaning thereby, the status of the assessee as a pass through entity has not been accepted by the tax authorities in this year. Hence the question of applying the provisions of sec. 115U will not arise in this year. As noticed earlier, the assessee, being a trust is legal entity and would fall under the definition of person under the Income tax Act. Hence it is assessable under the Act for the income earned by it and consequently, it is entitled to avail all types of eligible exemption provided under the Act. Accordingly, the assessee would be entitled to claim exemption of long term capital gain u/s 10(38) of the Act. In the preceding paragraphs, we have upheld the decision of Ld CIT(A) in holding that the assessee is eligible for exemption u/s 10(38) of the Act.
Issues Involved:
1. Exemption under Section 10(38) of the Income Tax Act. 2. Exemption under Section 10(23FB) of the Income Tax Act. 3. Exemption under Section 10(35) of the Income Tax Act. 4. Applicability of Securities Transaction Tax (STT) on acquisition of shares. 5. Status of Venture Capital Fund (VCF) as a pass-through entity under Section 115U of the Income Tax Act. Detailed Analysis: 1. Exemption under Section 10(38) of the Income Tax Act: The primary issue was whether the assessee was entitled to claim exemption under Section 10(38) for Long Term Capital Gains (LTCG) despite not claiming it in the original return of income. The Revenue contended that the exemption was a fresh claim and should have been filed through a revised return. The Tribunal held that the assessee's alternative claim was merely a change of the section under which the exemption was claimed, not a fresh claim. Therefore, the Tribunal rejected the Revenue's grounds on this issue. 2. Exemption under Section 10(23FB) of the Income Tax Act: The assessee initially claimed exemption under Section 10(23FB) but was denied by both the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal noted that the assessee did not challenge this denial, and thus, this issue attained finality for the assessment year in question. 3. Exemption under Section 10(35) of the Income Tax Act: The assessee claimed exemption for dividend income under Section 10(35), which was initially denied by the Centralized Processing Centre (CPC) and not challenged by the assessee. The CIT(A) allowed this exemption, but the Tribunal found that since the disallowance by CPC was not challenged, the CIT(A) should not have granted relief. Consequently, the Tribunal set aside the CIT(A)'s order on this issue and restored the AO's addition. 4. Applicability of Securities Transaction Tax (STT) on Acquisition of Shares: The Revenue argued that the assessee was not eligible for exemption under Section 10(38) because the shares were acquired off-market without paying STT. The Tribunal examined the third proviso to Section 10(38) and the relevant Central Government notification, concluding that the assessee's acquisition of unlisted shares was covered by the notification. Therefore, the Tribunal upheld the CIT(A)'s decision that the assessee was eligible for exemption under Section 10(38), even though STT was not paid at acquisition. 5. Status of Venture Capital Fund (VCF) as a Pass-Through Entity under Section 115U: The Revenue contended that the assessee, being a VCF, was a pass-through entity, and only investors could claim exemption under Section 10(38). The Tribunal clarified that a VCF becomes a pass-through entity only if it is granted exemption under Section 10(23FB). Since the assessee's claim under Section 10(23FB) was denied, it did not attain pass-through status for this year. Therefore, the assessee, as a legal entity, was entitled to claim exemption under Section 10(38). Conclusion: The Tribunal partly allowed the Revenue's appeal by restoring the AO's addition concerning the exemption under Section 10(35) and upheld the CIT(A)'s decision on the exemption under Section 10(38). The cross-objection filed by the assessee was dismissed. The order was pronounced in the open court on 26th July, 2024.
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