2012 (8) TMI 494 - AT - Income Tax

Denial of entitlement of u/s.10(23FB) - assessee is engaged in the business of providing venture capital by way of investment in equity capital - Held that - Condensing the assessee s chart in its submission where it is shown that when the management and administration expenses are reduced from the corpus figure then the eligible investments in Venture Capital Undertakings have achieved the stipulated minimum percentage of 66.67% in two other years apart from the current Assessment Year i.e., during F.Y. 2006- 2007 and 2007-2008. Under the circumstances, the appellant s contention that the stipulated condition under SEBI Regulation 12(d) for being eligible to exemption under 10 (23FB) of the Income Tax Act have been fulfilled, is acceptable, and the assessee is entitled to exemption u/s.10 (23FB). AO s reliance on CIT (A) s order for AY 2004-05 is erroneous to the extent that the term investible funds has not been examined and wrongly considered to mean the corpus, whereas, in fact the term investible funds have been defined under SEBI regulations in regulation (hh) as investible funds means corpus of the fund net of expenditure for administration and management of the fund; and taking into consideration the same if the working is made as has been done herein above, it can be seen that the assessee had already achieved the conditions prescribed - Following this decision of CIT (A)-II for the Assessment Year 2004-2005, it is held that the exemption u/s.10 (23FB) is available to any income of the assessee, be it interest, dividend, etc. - in favour of assessee.

Issues Involved:
1. Entitlement to exemption under Section 10(23FB) of the Income Tax Act.
2. Compliance with SEBI Regulations, particularly Regulation 12(d)(i) regarding investment in unlisted equity shares.
3. Calculation of "investible funds" as per SEBI Regulation 2(hh).
4. Treatment of interest income from bank deposits under Section 10(23FB).

Detailed Analysis:

1. Entitlement to Exemption under Section 10(23FB):

The primary issue in the appeal was whether the assessee was entitled to exemption under Section 10(23FB) of the Income Tax Act for the assessment year 2004-05. The assessee, engaged in providing venture capital by investing in equity capital, claimed exemption on the net income of Rs.69,95,950/- after deducting business loss from the interest earned on bank deposits.

2. Compliance with SEBI Regulations:

The Assessing Officer (AO) denied the exemption, arguing that the assessee did not fulfill the condition under SEBI Regulation 12(d)(i), which requires at least 66.67% of the investible funds to be invested in unlisted companies. The AO found that the assessee's investment in listed securities was below the specified limit.

3. Calculation of "Investible Funds":

The ITAT had previously remitted the matter to the CIT(A) to verify the investment pattern vis-`a-vis the investible funds, defined under SEBI Regulation 2(hh) as the corpus net of expenses for administration and management. The CIT(A) was directed to compute the investible funds correctly and ascertain compliance with SEBI guidelines.

4. Treatment of Interest Income:

The CIT(A) observed that the assessee achieved the required investment percentage of 66.67% in the financial year 2005-06, within the life cycle of the Venture Capital Fund. The CIT(A) accepted the assessee's position that the term "investible funds" should exclude administrative and management expenses, leading to a compliant investment percentage.

In the set-aside proceedings, the assessee presented a detailed chart showing the investible funds and investments made, demonstrating compliance with the stipulated percentage over the years. The CIT(A) noted that this position was accepted in the assessee's appeals for the assessment years 2005-06 and 2006-07.

The CIT(A) concluded that the assessee fulfilled the conditions laid down under Regulation 12(d)(i) of the SEBI Regulations by achieving the prescribed investment percentage within the life cycle. Consequently, the assessee was entitled to exemption under Section 10(23FB) for the interest income earned.

The ITAT upheld the CIT(A)'s decision, noting that the AO was not justified in denying the exemption for the interest income. The appeal filed by the revenue was dismissed, affirming the assessee's entitlement to the claimed exemption.

Conclusion:

The ITAT, Pune, concluded that the assessee met the conditions for exemption under Section 10(23FB) by achieving the required investment percentage as per SEBI guidelines within the fund's life cycle. The appeal by the revenue was dismissed, and the CIT(A)'s direction to grant exemption for the interest income was upheld. The decision was pronounced in the open court on 29.06.2012.

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