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2018 (8) TMI 1046 - AT - Income TaxRevision u/s 263 - Exemption u/s 10(23FB) - income earned out of investments made in Venture Capital Undertakings (VCU) - corresponding income is taxable at the hands of the investors / unitholders as per section 115U - AO allowed the benefit of exemption - CIT found the order as erroneous and prejudicial to the interest of Revenue - The learned Principal Commissioner observed, all the schemes executed by the assessee were continuing prior to assessment year 2013 14, hence, would not be covered by the amended provisions of section 10(23FB) of the Act applicable for the assessment year 2013 14. Held that - Section 10(23FB) of the Act was introduced by Finance Act, 2000, w.e.f. 1st April 2001. The aforesaid provision provides for exemption from tax any income of a Venture Capital Company or Venture Capital Fund from investment in a Venture Capital Undertaking. - Meaning thereby, the income derived by them from venture capital undertaking, though, is exempt in their hand but would be taxable at the hands of the unitholders who have invested in Venture Capital Funds. - Subsequently, the Explanation to section 10(23FB) was amended by Finance Act (No.2), 2004, w.e.f. 1st October 2004, as per which Venture Capital Undertaking would mean a Venture Capital undertaking referred to in the SEBI (Venture Capital Funds) Regulations, 1996 made under the Security Exchange Board of India Act, 1992. Thus, the amendment to Section 10(23FB) of the Act brought by the Finance Act, 2007, made the exemption restrictive. By Finance Act, 2012, another amendment was brought to section 10(23FB) of the Act w.e.f. 1st April 2013, and as per which Venture Capital Fund was defined. Sectoral restriction was removed by the amendment to section 10(23FB) by Finance Act, 2012. A cursory glance of the negative list under the Third Schedule of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 makes it clear that the Venture Capital Undertakings in which the assessee has made investment are not appearing there. Admittedly, all the Venture Capital Undertakings, wherein, the assessee made investments are doing business in real estate sector. Real estate sector has been removed from the negative list under the third Schedule of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 w.e.f. 5th April 2004. That being the case, assessee is not ineligible from availing exemption under section 10(23FB) of the Act. A careful analysis of the legislative history of section 10(23FB) r/w section 115U of the Act clearly demonstrates that the intention of the legislature from the very inception of the provision was to allow exemption to a Venture Capital Fund in respect of income derived by it from investments made in Venture Capital Undertaking. For that reason alone, the sectoral restrictions imposed in the definition of Venture Capital Undertaking under section 10(23FB) of the Act was subsequently removed by amendment brought by Finance Act, 2012. Thus, for the aforesaid reasons, the observation of the learned Principal Commissioner that the assessee is not eligible for exemption under section 10(23FB) of the Act is untenable. In any case of the matter, the Assessing Officer in course of assessment proceedings has made thorough enquiry with regard to assessee s claim of exemption under section 10(23FB) of the Act and has passed a well reasoned order while allowing assessee s claim of exemption under the said provision. Only because the conclusion of the Assessing Officer is not to the liking of the revisional authority or in the opinion of the revisional authority the assessment order on the disputed issue should have been framed in a manner which could have been acceptable to her, for that reason the revisional authority cannot exercise revisional jurisdiction, that too, on the basis of proposal sent by a subordinate officer. Further, the impugned order passed under section 263 of the Act reveals that, though, the learned Principal Commissioner has revised the assessment order holding it to be erroneous and prejudicial to the interest of revenue, however, she has not specified what loss is caused to the revenue if the income is taxed in the hands of the unitholders. Therefore, the assessee is bound to succeed both on the issue of exercise of jurisdiction under section 263 of the Act as well as on the merits of allowability of exemption under section 10(23FB) of the Act. Decided in favor of assessee.
Issues Involved:
1. Validity of the order passed under section 263 of the Income Tax Act, 1961. 2. Eligibility of the assessee for exemption under section 10(23FB) of the Income Tax Act, 1961. 3. Alleged violation of SEBI regulations by the assessee. 4. Impact of the amendments to section 10(23FB) by Finance Act, 2012 and Finance Act, 2013. Detailed Analysis: 1. Validity of the Order Passed Under Section 263 of the Income Tax Act, 1961: The assessee challenged the validity of the order passed under section 263, arguing that the Principal Commissioner of Income Tax (PCIT) erred in holding the assessment order as erroneous and prejudicial to the interest of the Revenue. The Tribunal noted that the Assessing Officer (AO) had conducted a thorough enquiry and applied his mind to the facts and relevant statutory provisions before allowing the assessee's claim of exemption under section 10(23FB). The Tribunal concluded that the PCIT's exercise of revisional power was unwarranted as the AO's order was neither erroneous nor prejudicial to the interest of the Revenue. The Tribunal emphasized that the revisional authority cannot substitute its view over the AO's view if the latter's view is a possible one. 2. Eligibility of the Assessee for Exemption Under Section 10(23FB) of the Income Tax Act, 1961: The Tribunal examined the legislative history and amendments to section 10(23FB). It noted that the assessee, a SEBI-registered Venture Capital Fund (VCF), had made investments in Venture Capital Undertakings (VCUs) primarily engaged in the real estate sector. The Tribunal observed that real estate was removed from the negative list under the SEBI (Venture Capital Funds) Regulations, 1996, w.e.f. 5th April 2004. Therefore, the assessee's investments in VCUs in the real estate sector were eligible for exemption under section 10(23FB). The Tribunal rejected the PCIT's view that the assessee was ineligible for exemption because the VCUs were not engaged in providing services, production, or manufacturing of articles or things. 3. Alleged Violation of SEBI Regulations by the Assessee: The PCIT alleged that the assessee violated SEBI regulations by investing in mutual funds, which purportedly disqualified it from being considered a VCF. The Tribunal found no specific provision in the SEBI (Venture Capital Funds) Regulations, 1996, prohibiting such investments. Additionally, the Tribunal referred to a SEBI clarification that allowed VCFs to invest uninvested portions of their funds in liquid mutual funds or bank deposits. The Tribunal emphasized that any alleged violation of SEBI regulations should be addressed by SEBI, not the Income Tax authorities. Since SEBI had not taken any adverse action against the assessee, the Tribunal concluded that the PCIT's allegations were baseless. 4. Impact of the Amendments to Section 10(23FB) by Finance Act, 2012 and Finance Act, 2013: The Tribunal analyzed the amendments to section 10(23FB) brought by Finance Act, 2012, and Finance Act, 2013. It noted that the amendments were effective from assessment year 2013-14, the same year for which the assessee claimed the exemption. The Tribunal observed that the amendments aimed to remove sectoral restrictions on VCUs and align the definition with SEBI regulations. The Tribunal concluded that the assessee's claim for exemption under section 10(23FB) was valid as per the amended provisions applicable for the assessment year 2013-14. Conclusion: The Tribunal set aside the order passed under section 263 of the Income Tax Act, 1961, and restored the assessment order passed by the AO. The Tribunal held that the assessee was eligible for exemption under section 10(23FB) and that the AO had correctly applied the law to the facts of the case. The Tribunal emphasized that the PCIT's exercise of revisional power was unjustified as the AO's order was neither erroneous nor prejudicial to the interest of the Revenue. The Tribunal also rejected the PCIT's allegations of SEBI regulation violations, noting that SEBI had not taken any adverse action against the assessee.
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