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2016 (2) TMI 269 - AT - Income TaxClaim of exemption u/s 10(23FB) - Held that - In the instant case, there is no dispute with regard to the fact that the Registration granted to the assessee as Venture Capital Fund has not been withdrawn by the SEBI. Further, there is no material to show that the SEBI has alleged or stated that the assessee has not fulfilled any of the prescribed conditions. Hence, we are of the view that the tax authorities are not justified in rejecting the claim for exemption u/s 10(23FB) of the Act. The amendment brought into section 10(23FB) by the Finance Act, 2007 with effect from 1.4.2008 shall have prospective operation. In our view, it may not be appropriate to examine the scope or effect of amendment brought in the above secion w.e.f. 1.4.2008. Suffice to say that the interest income of the assessee shall also be entitled to exemption u/s 10(23FB) of the Act for the year under consideration. Hence any income of the venture capital fund set up to raise funds for investments shall be exempt for the year under consideration. Thus the assessee cannot be denied exemption u/s 10(23FB) - Decided in favour of assessee
Issues Involved:
1. Rejection of exemption claim under Section 10(23FB) of the Income Tax Act, 1961. 2. Interpretation of the term "corpus fund" under SEBI guidelines. 3. Eligibility of interest income from bank deposits for exemption under Section 10(23FB). Issue-wise Detailed Analysis: 1. Rejection of exemption claim under Section 10(23FB): The assessee, a venture capital fund registered with SEBI, challenged the order confirming the AO's rejection of its claim for exemption under Section 10(23FB) of the Income Tax Act, 1961. The AO denied the exemption on the grounds that the assessee violated Clause 12(b) of the SEBI (Venture Capital Fund) Regulations, 1996, which restricts investment in a single venture capital undertaking to 25% of the corpus fund. The assessee argued that "corpus fund" should be interpreted as the amount committed by investors, not the actual contributions made. The AO, however, interpreted "corpus" as the actual funds collected. The Tribunal, referencing the new SEBI (Alternative Investment Funds) Regulations, 2012, which define "corpus" as the total amount of funds committed by investors, agreed with the assessee's interpretation. The Tribunal concluded that the committed amount of Rs. 101.02 crores should be considered as the corpus, thus the investments did not exceed the 25% limit, and the assessee did not violate SEBI regulations. 2. Interpretation of the term "corpus fund": The Tribunal examined the definition of "corpus" under the new SEBI regulations, which replaced the old regulations. The new definition considers "corpus" as the total amount of funds committed by investors. The Tribunal applied this definition retroactively, concluding that the committed funds, rather than actual contributions, should be considered as the corpus. This interpretation aligned with the practical needs of venture capital undertakings, which require phased funding. The Tribunal determined that the assessee's investments did not exceed the 25% limit of the committed corpus, thereby rejecting the AO's contention of a violation. 3. Eligibility of interest income from bank deposits for exemption: The AO argued that interest income from bank deposits did not qualify for exemption under Section 10(23FB) because banks are not venture capital undertakings. However, the Tribunal, referencing the pre-amendment version of Section 10(23FB), which exempted "any income" of a venture capital fund, held that the interest income was also exempt. The Tribunal cited previous decisions by the Mumbai and Ahmedabad Benches, which supported the view that the exemption applied to all income of a venture capital fund before the amendment by the Finance Act, 2007, which restricted the exemption to income from investments in venture capital undertakings, effective from 1.4.2008. Conclusion: The Tribunal concluded that the assessee was entitled to exemption under Section 10(23FB) for the entire income, including interest income from bank deposits, for the assessment year 2007-08. The order of the CIT(A) was set aside, and the AO was directed to grant the exemption. The appeal filed by the assessee was allowed.
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