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2019 (3) TMI 1027 - AT - Income TaxExemption u/s 10(23FB) - assessee is a Venture Capital Fund VCF - investments in Convertible Debenture application money - violation of SEBI (Venture Capital Fund) Regulations - dividend income earned from the units of Mutual Funds as well as on equity shares of a VCUs Venture Capital Undertakings - HELD THAT - So far as VCF Regulations of SEBI are concerned, we are in agreement with the assessee that it does envisage investments in Convertible Debenture application money as being investments which can be said to be linked to investment in equity shares. Thus, on account of the aforesaid discussion, we find that the assessee fulfils the requirements of claiming exemption under Section 10(23FB) of the Act so far as it is relatable to the year under consideration. Assessee is a VCF operating in terms of a Trust Deed registered under the provisions of the Registration Act, 1908; that it has been granted a Certificate of Registration as VCF by SEBI which continues to subsist; that there is no adverse action taken or contemplated by SEBI for violation of any VCF Regulations; that the targeted investment in VCUs is within the purview of VCF Regulations of SEBI; that assessee is permitted by its Trust Deed as well as by the VCF Regulations of SEBI to temporarily deploy funds in units of mutual funds as well as in Convertible Debenture application money. Thus, in our view, assessee is entitled to exemption envisaged under Section 10(23FB) of the Act. - Decided in favour of assessee.
Issues Involved:
1. Denial of exemption under Section 10(23FB) of the Income Tax Act, 1961. 2. Alleged violation of the Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996. 3. Temporary investments in mutual funds and debenture application money. 4. Double taxation concerns. 5. Classification of income under the appropriate head. Detailed Analysis: 1. Denial of Exemption under Section 10(23FB) of the Income Tax Act, 1961: The primary grievance of the assessee was against the denial of exemption under Section 10(23FB) of the Act. The assessee, a Venture Capital Fund (VCF), claimed exemption for income earned from investments in Venture Capital Undertakings (VCUs). The Assessing Officer (AO) denied this exemption, asserting that the investments in mutual funds and debenture application money did not qualify as investments in VCUs and hence violated the trust deed and SEBI regulations. 2. Alleged Violation of SEBI (Venture Capital Fund) Regulations, 1996: The CIT(A) and AO argued that the assessee violated SEBI VCF Regulations by investing in mutual funds and debenture application money. However, the assessee contended that SEBI had not taken any adverse action against them, and the certificate of registration as a VCF continued to subsist. The Tribunal found merit in the assessee's argument, noting that the AO's assumption of violation was unfounded in the absence of any action by SEBI. 3. Temporary Investments in Mutual Funds and Debenture Application Money: The assessee justified the temporary deployment of funds in mutual funds and debenture application money as a common industry practice, permissible under its trust deed and SEBI regulations. The Tribunal agreed, citing SEBI's informal guidance which allowed VCFs to invest idle funds in liquid assets temporarily. The Tribunal concluded that these temporary investments did not violate the trust deed or SEBI regulations. 4. Double Taxation Concerns: The assessee argued that taxing the income in their hands would lead to double taxation since the beneficiaries (investors) had already included this income in their individual returns. The Tribunal did not specifically address this issue as it ruled in favor of the assessee on the primary ground of exemption under Section 10(23FB). 5. Classification of Income under the Appropriate Head: The assessee contended that if the exemption under Section 10(23FB) was denied, the income should be computed under the appropriate provisions of the Act and not under "Income from other sources." The Tribunal did not delve into this issue, as it upheld the assessee's primary claim for exemption. Conclusion: The Tribunal allowed the appeal, ruling that the assessee was entitled to the exemption under Section 10(23FB) of the Act. It concluded that the temporary investments in mutual funds and debenture application money were within the scope of the trust deed and SEBI regulations. Consequently, the other issues raised were rendered academic and were not adjudicated. The order was pronounced on 28th February, 2019.
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