2017 (6) TMI 286 - AT - Income Tax

Eligibility to exemption u/s 10(23FB) - Interest income earned from Fixed Deposit and STCG arising on investment in Mutual fund - whether the assessee has not earned any income from venture capital undertaking? - CIT-A deleted the addition - Held that - assessee is entitled to claim exemption on any nature of income of a venture capital fund, which fulfill the conditions relating to the purpose for which it is set up i.e. raising of funds for investment in venture capital undertakings - The intention of the legislature is clear to treat any income of venture capital fund as exempt from tax u/s 10(23FB) of the Act irrespective of its nature. There is a reason for this that this income will be taxed in the hands of investors at the time of distribution u/s 115U of the Act on a pass through basis. Accordingly, we are of the view that the CIT(A) rightly deleted the addition. For this we are also relying on the co-ordinate Bench decision of Kshitij Venture Capital Fund (2011 (3) TMI 387 - ITAT, Mumbai). Accordingly, the appeal of Revenue for AY 2007-08 is dismissed. For AY 2008-09 and 2009-10 there is an ammendment in section 10(23FB) of the Act and there are certain specified business eligible for exemption under this provision. Assessee s case does not fall under exemption category and hence, out of the purview of this provision of section 10(23FB) of the Act. Therefore, the assessee has to be assessed under normal provisions of law and hence, the business loss has to be set off against the other incomes. We find no infirmity in the orders of CIT(A) for both the years and hence the same are confirmed. - Decided against revenue Addition u/s 14A r.w.r. 8D - Held that - We find that this issue is covered by the decision of the Hon ble Delhi High Court in the case of Joint Investment 2015 (3) TMI 155 - DELHI HIGH COURT as held that by no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income . This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. - Decided against revenue

Summary

Issues involved:
1. Exemption of interest income and short-term capital gains under Section 10(23FB) of the Income Tax Act.
2. Applicability of Section 14A of the Income Tax Act for disallowance of expenses related to exempt income.

Detailed Analysis:

1. Exemption of Interest Income and Short-Term Capital Gains under Section 10(23FB):

The Revenue challenged the CIT(A)'s order that exempted the assessee's interest income from fixed deposits and short-term capital gains on mutual funds under Section 10(23FB) of the Income Tax Act. The core argument from the Revenue was that the income was not derived from investments in venture capital undertakings, thus not qualifying for the exemption.

The assessee, a venture capital fund, claimed exemption on ?66,07,975/- (interest income) and ?1,45,85,081/- (short-term capital gains) under Section 10(23FB). The AO disallowed the exemption, asserting that the income did not arise from venture capital investments, but from bank deposits and mutual funds, which do not qualify as venture capital undertakings.

CIT(A) allowed the exemption, referencing the ITAT Mumbai decision in the case of Kshitij Venture Capital Fund and the Ahmedabad Bench decision in ITO vs. Gujarat Information Technology Fund, which supported the broader interpretation of Section 10(23FB) to include any income of a venture capital fund.

The Tribunal upheld CIT(A)'s decision, emphasizing that Section 10(23FB) exempts "any income" of a venture capital fund, irrespective of its source, as long as the fund is set up for investing in venture capital undertakings. The Tribunal also noted the legislative intent to provide pass-through status to venture capital funds, thereby avoiding double taxation.

For AY 2008-09 and 2009-10, the Tribunal noted an amendment to Section 10(23FB) effective from 01-04-2008, which restricted the exemption to income from investments in specified venture capital undertakings. Since the assessee's activities did not fall under the specified categories, the Tribunal ruled that the assessee was not eligible for the exemption and must be assessed under normal provisions, allowing the set-off of business losses against other incomes.

2. Applicability of Section 14A for Disallowance of Expenses Related to Exempt Income:

For AY 2009-10 and 2010-11, the AO disallowed expenses under Section 14A read with Rule 8D, estimating expenses related to exempt income (dividends). The assessee had voluntarily disallowed expenses equivalent to the exempt income, but the AO made a higher disallowance.

The Tribunal referred to the Delhi High Court's decision in Joint Investment Pvt. Ltd vs. CIT, which mandates that the AO must first examine the assessee's accounts and provide reasons for rejecting the assessee's disallowance before invoking Rule 8D. The Tribunal found that the AO had not followed this procedure and that the disallowance exceeded the exempt income, which is not permissible.

Consequently, the Tribunal deleted the additional disallowance made by the AO, aligning with the principle that disallowance under Section 14A should not exceed the exempt income.

Conclusion:

The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions for AY 2007-08 and confirming the assessee's eligibility for exemption under Section 10(23FB) for that year. For AY 2008-09 and 2009-10, the Tribunal ruled that the amended provisions applied, and the assessee was not eligible for the exemption, thus confirming the CIT(A)'s orders. The Tribunal allowed the assessee's appeals for AY 2009-10 and 2010-11, deleting the disallowance under Section 14A made by the AO.