2020 (4) TMI 295 - AT - Income Tax

Exemption u/s 10(23FB) - income earned on investments from VCUs venture capital undertaking - HELD THAT - there is merit in the contentions of the assessee that the condition prescribed to the effect that the shares of venture capital undertaking should not have been listed in a recognized stock exchange shall apply only at the time of making investment. - the VCF Regulations do not prohibit cases where the initial investments made in unlisted shares of Venture Capital undertaking becomes listed shares due to corporate actions. Such kind of corporate actions are usually undertaken on commercial expediency, business exigencies and for the future welfare of the company. The income from Capital gains is not a period cost/income like interest income. Only period cost/income are amenable for split up on the basis of time period. Capital gains arises only on sale of shares and hence, the question of splitting up the same on the basis of time period cannot be made. Though the provisions of sec.61 to 63 and the provisions of sec.10(23FB) operate in different manner, yet the conclusion is that the assessee should not subjected to tax to capital gains and interest income. We also notice that the beneficiaries have offered their respective share of income in their hands, meaning thereby, the assessee also seeks to avail the benefits of sec. 61 to 63 of the Act. The assessee has also submitted that it is a pass through entity, meaning that the income from investments is taxable in the hands of beneficiaries. It is pertinent to note that the revenue has not challenged the observations of Ld CIT(A) in holding that the assessee cannot be assessed to tax the very same income which has been offered by the beneficiaries in their respective hands. This observation of Ld CIT(A) were, apparently, based on the fact that the assessee is a revocable trust and alternatively it is a pass through entity. Since we have held in the preceding paragraphs, that the assessee cannot be subjected to tax for capital gains, there was no necessity to examine the question of applicability of provisions of sec.10(38) of the Act to the capital gains earned by the assessee on sale of shares. Assessment of accrued interest on the loan given - The loan transactions are governed by the terms and conditions entered between the parties. The assessee has stated in its annual report that there was dispute between the parties with regard to the interpretation of terms and conditions and accordingly it has stated that interest income was not recognized. AO did not accept the above said reasoning and accordingly proceeded to compute notional interest. However, in our view, the AO is not entitled to give different treatment to the notional interest so computed by him, i.e., he has to give very same treatment that was given to the interest income earned from loans given to other Venture Capital Undertakings. The AO has allowed exemption to the interest income earned from other VCU, in which case, the notional interest income computed by him should also enjoy very same exemption. We order accordingly. Whether CIT(A) has exceeded his jurisdiction by making observation that income from capital gains out of investment in shares and interest income from Venture Capital Undertakings earned by the assessee need to be examined in the hands of ultimate beneficiaries? - We notice that the Ld CIT(A) has not given any directions and has only made observations, impliedly in support of his decision that the above said incomes are not taxable in the hands of the assessee.

Summary

Issues Involved:
1. Exemption under Section 10(23FB) of the Income Tax Act.
2. Exemption under Section 10(38) of the Income Tax Act.
3. Assessment of notional interest on loans.

Issue-wise Detailed Analysis:

1. Exemption under Section 10(23FB) of the Income Tax Act:
The primary contention was whether the assessee, a Venture Capital Fund (VCF), was eligible for exemption under Section 10(23FB) for the capital gains arising from the sale of shares of Mahendra CIE Automotive Ltd. The shares were initially unlisted and later became listed due to amalgamation. The Assessing Officer (AO) denied the exemption, arguing that the shares were listed at the time of sale, violating the conditions of Section 10(23FB). However, the CIT(A) and the Tribunal held that the exemption should be granted as the initial investment was in unlisted shares, fulfilling the conditions at the time of investment. The Tribunal emphasized that subsequent listing due to corporate actions should not affect the exemption eligibility. The Tribunal modified the CIT(A)'s order, asserting that the entire capital gains should be exempt under Section 10(23FB) without splitting based on the time period.

2. Exemption under Section 10(38) of the Income Tax Act:
The AO contended that the assessee was not eligible for exemption under Section 10(38) as the shares were not held as listed shares for the requisite period of 12 months. The CIT(A) deemed this issue academic since the income was held exempt under Section 10(23FB). The Tribunal agreed, stating that once the exemption under Section 10(23FB) was granted, the question of Section 10(38) became irrelevant.

3. Assessment of Notional Interest on Loans:
The AO assessed notional interest on a loan given to Innovative B2B Logistics Solutions Ltd., which the assessee had not recognized due to a dispute over terms. The AO computed notional interest at 15%, treating it as income. The CIT(A) and the Tribunal held that if the AO allowed exemption for actual interest income from other Venture Capital Undertakings (VCUs), the notional interest should receive the same treatment. The Tribunal ordered that the notional interest should also be exempt under Section 10(23FB).

Additional Observations:
The Tribunal noted that the assessee was a contributory trust, and its income was taxable in the hands of the beneficiaries under Sections 61 to 63. The CIT(A) accepted this position, observing that the beneficiaries had offered their share of income for tax. The Tribunal upheld this view, confirming that the assessee, as a pass-through entity, should not be taxed on the same income already taxed in the hands of the beneficiaries.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, affirming that the assessee's income from capital gains and notional interest was exempt under Section 10(23FB). The Tribunal also upheld the CIT(A)'s observations regarding the taxability of income in the hands of the ultimate beneficiaries.