2021 (8) TMI 1205 - AT - Income Tax

Exemption u/s 10(23FB) - Assessee has made investment in VCUs (Venture Capital Undertakings) - as per AO said VCU is not engaged in carrying out any real estate business during the financial year 2015-16 as there was no financials maintained by the company and as the directors of the said entity were in custody for making defaults -Amrapali Smart City Developers Pvt. Ltd. (ASCD) - HELD THAT - CIT(A) has accepted the claim which has also been reiterated by the assessee that interest income accruing from the said concern had been allocated to various investors who would have included the same in their return for income tax and paid the due tax in terms of section 115U and taxing the said income in the hands of the assessee would result in double taxation. In this regard we note that learned Counsel of the assessee has made further submissions before us that in the subsequent financial year the assessee has reversed the interest entries from this concern on the ground that receipt was extremely doubtful - As pointed out that the assessee has not claimed deduction of the said reversion in financial accounts. In this view of the matter, in our considered opinion order of CIT(A) on this issue is cogent and does not need any interference in our part. Disallowance made with respect to CSN Estates Pvt. Ltd - CIT(A) is correct in holding that CSN is engaged in the development of the project. That it has purchased and provided land for the project, obtained necessary approvals and sanctions and has entered into development agreement with Lemon Tree for development and construction. Hence, in our considered opinion disallowance made by the Assessing Officer has been rightly deleted by learned CIT(A) Whether income of VCF shall be exempt only to the extent it is from the investment in venture capital undertaking ? - CIT- A deleted the addition - HELD THAT - Observation of the AO that, VCF was eligible for deduction under a specific section 10(23FB) and therefore it cannot claim deduction under another section 10(35) of the Act is totally inapplicable in the facts and circumstances of the case. Exemption under section 10(23FB) and exemption under section 10(25) of the Act operates in different fields. CIT(A) is correct in holding that operations of these sections are independent. Assessee s income in VCU is exempt under section 10(23FB) of the Act and the dividend income is exempt under section 10(35) of the Act. Hence, there is no infirmity in the assessee s claim of exemption on dividend income under section 10(35) - Decided against revenue.

Summary

Issues Involved:

1. Deletion of addition made by the AO and allowing exemption u/s 10(23FB) of ? 63,43,60,000/-.
2. Status of three investee companies as Non-VCU.
3. Allowing exemption u/s 10(35) of ? 6,64,92,670/- earned from mutual funds.

Detailed Analysis:

Issue 1: Deletion of Addition and Allowing Exemption u/s 10(23FB) of ? 63,43,60,000/-

The assessee, a trust registered with SEBI as a Venture Capital Fund (VCF), filed its return of income declaring total income of ? 49,13,700/-. The AO questioned the exemption claimed by the assessee under section 10(23FB) for income derived from investments in Venture Capital Undertakings (VCUs) and observed that three entities did not qualify as VCUs:

1. Amrapali Smart City Developers Pvt. Ltd. (ASCD): The AO denied the exemption on the income of ? 40,34,20,000/- as the company was not carrying out any real estate business during FY 2015-16. However, the CIT(A) found that the investment was made in 2013 when the company qualified as a VCU, and the business failure during FY 2015-16 did not disqualify it retroactively. The CIT(A) also noted that taxing this income would result in double taxation since the income was already taxed in the hands of investors.

2. CSN Estate Private Ltd.: The AO denied the exemption on ? 23,09,40,000/- as the company acted as a pass-through entity by lending the investment to another company. The CIT(A) found that CSN was engaged in real estate development through a joint venture and had fulfilled its responsibilities, thus qualifying as a VCU.

3. Starteck Infraprojects Pvt. Ltd.: No income was derived from this investment, so no disallowance was made.

The CIT(A) deleted the addition of ? 63,43,60,000/- as the assessee met the conditions for exemption under section 10(23FB).

Issue 2: Status of Three Investee Companies as Non-VCU

The AO argued that ASCD and CSN did not qualify as VCUs during FY 2015-16. The CIT(A) found that:

1. ASCD: The investment was made when ASCD was developing a real estate project, and the business failure in FY 2015-16 did not change its status as a VCU.
2. CSN: CSN was involved in a real estate project through a joint venture and had obtained necessary approvals, thus qualifying as a VCU.

The CIT(A) upheld the status of these companies as VCUs, allowing the exemption under section 10(23FB).

Issue 3: Allowing Exemption u/s 10(35) of ? 6,64,92,670/- Earned from Mutual Funds

The AO disallowed the exemption claimed under section 10(35) for dividend income from mutual funds, arguing that the assessee, as a VCF, could only claim exemption under section 10(23FB). The CIT(A) found that:

1. The assessee, registered as a VCF, was also entitled to exemption under section 10(35) for dividend income from mutual funds.
2. The operations of sections 10(23FB) and 10(35) are independent, and the assessee's claim for exemption under section 10(35) was valid.

The CIT(A) deleted the disallowance of ? 6,64,92,670/-, allowing the exemption under section 10(35).

Conclusion:

The ITAT upheld the CIT(A)'s decision on all issues, finding no merit in the Revenue's appeal. The appeal by the Revenue was dismissed, and the CIT(A)'s order allowing exemptions under sections 10(23FB) and 10(35) was upheld.