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TMI Blog2018 (8) TMI 1046X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by : Shri J.D. Mistry, Sr. Counsel a/w Shri Madhur Agarwal Revenue by : Shri Anand Mohan ORDER Per Saktijit Dey, J. M. By filing this appeal assessee has called into question the validity of the order dated 28th March 2018, passed under section 263 of the Income Tax Act, 1961 (for short the Act ) by the learned Principal Commissioner of Income Tax 25, Mumbai, for the assessment year 2013 14. 2. Brief facts are, the assessee is a trust established under the Indian Trust Act, 1882, through a registered trust deed. It is also registered with the Securities and Exchange Board of India (SEBI) as a Venture Capital Fund (VCF). It is the stated factual position that the fund has been constituted to float various schemes which focused to invest primarily in entities engaged in the real estate sector. The fund is for duration of 20 years or until the expiry of the last scheme of the fund whichever is later. For the assessment year under dispute, the assessee filed its return of income on 30th July 2013, declaring total income of ₹ 8,94,65,291. Subsequently, on 29th November 2013, assessee filed a revised return of income declaring total income of ₹ 14,29,12,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuing 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. She observed, the Assessing Officer erroneously applying the amended provision has allowed exemption under section 10(23FB) of the Act. Further, learned Principal Commissioner observed, the Venture Capital Undertakings (VCU) where the assessee has made investments are dealing in real estate sector. Therefore, will not fall under any of the criteria mentioned in the definition of VCU as per SEBI (Alternative Investment Fund) Regulation, 2012. Therefore, the assessee would not be eligible for exemption under section 10(23FB) of the Act. In response to the aforesaid show cause notice, the assessee filed elaborate explanation justifying its claim of exemption under section 10(23FB) of the Act. After examining the submissions made by the assessee, the learned Principal Commissioner did not find merit in them. The reasons on the basis of which the learned Principal Commissioner concluded that the assessee is not eligible to avail exemption under section 10(23FB) of the Act and accordingly, held the assessment order to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly overlooked these aspects. She observed, the assessee did not provide the list of investors who purportedly paid the tax under section 115U of the Act. He observed, without verifying such facts, the Assessing Officer could not have given a clean chit to the assessee. The learned Principal Commissioner observed, the Assessing Officer without making proper enquiry has allowed assessee s claim of exemption under section 10(23FB) of the Act which has caused prejudice to the Revenue. Therefore, She held that the assessment order passed is erroneous and prejudicial to the interests of Revenue and set it aside with a direction to the Assessing Officer to pass a speaking order examining the eligibility of assessee to claim exemption under section 10(23FB) of the Act after providing due opportunity of being heard to the assessee. 4. Shri J.D. Mistry, learned Sr. Counsel appearing for the assessee, opened his argument challenging the validity of exercise of power under section 263 of the Act. The learned Sr. Counsel submitted, there is no dispute that the assessee is registered as a Venture Capital Fund with SEBI. In this context, he drew our attention to the registration certificate is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as Venture Capital Fund. Further, assessee was called upon to explain how it is covered under section 10(23FB) and section 115U of the Act. The Assessing Officer also asked the assessee to furnish details of TDS made on distribution of income to beneficial investors with supporting books of account, copies of report sent to SEBI for financial year 2012 13, details of fund wise and investment wise fund. He submitted, in response, the assessee filed its reply on 22nd February 2016, answering each and every query raised by the Assessing Officer with supporting evidence. In this regard, he drew our attention to the copy of reply placed at Page 466 of the paper book. He also drew our attention to the quarterly report submitted to SEBI a copy of which is at Page 471 of the paper book. He submitted, the Assessing Officer had specifically directed the assessee to furnish the details of investment made in Venture Capital Undertakings and the nature of business carried out by such Undertakings with specific emphasis on the fact whether they are in negative list as mentioned in the third schedule of SEBI (Venture Capital Funds) Regulations, 1996. He submitted, in response to the said query ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption under section 10(23FB) of the Act in the return of income, learned Sr. Counsel submitted, it is factually incorrect. Drawing our attention to the revised statement of computation of income along with its Annexures, the learned Sr. Counsel submitted, the assessee has not only claimed exemption under section 10(23FB) of the Act but has also furnished all details relating to the income earned from Venture Capital Undertaking along with explanatory note for claiming exemption under section 10(23FB) of the Act. 7. The learned Sr. Counsel taking us through the provisions of section 10(23FB) of the Act before and after its amendment by Finance Act 2012, and Finance Act 2013, submitted that the aforesaid provision was introduced to the statute by Finance Act, 2000, w.e.f. 1st April 2001. He submitted, along with the aforesaid provision section 115U of the Act was introduced which provided for taxation of the income in the hands of unitholders, meaning thereby, the income earned by a Venture Capital Fund from Venture Capital Undertaking, though, will be exempt in its hands, however, under section 115U of the Act it was made taxable at the hands of unitholders. In essence, Ventu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sr. Counsel submitted, in any case of the matter, assessee has made investments in Venture Capital Undertakings which are in real estate sector. That does not mean that the assessee itself is in real estate business of buying and selling of properties. In support of such contention, he relied upon the following decisions: i) V.A. Mohota Textiles Traders Pvt. Ltd. v/s DCIT, [2017] 397 ITR 616 (Bom.); and ii) Bhoruka Engineering Industries Ltd. v/s DCIT, [2013] 356 ITR 25 (Kar.). 8. Challenging the observation of the learned Principal Commissioner that the assessee has violated the SEBI regulations by investing in mutual funds, the learned Sr. Counsel submitted, there is no restriction imposed by the SEBI for investing in mutual fund. He submitted, SEBI itself while answering a query raised by another company has clarified that Security Exchange Board of India (Venture Capital Fund) Regulations, 1996 does not impose any condition on deployment of un invested portion of the investible fund of VCF. The SEBI has clarified that SEBI registered VCF may invest the un invested portion of their investible fund in liquid mutual fund or bank deposit, etc. In this context, he drew ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23FB) of the Act for the impugned assessment year. For such proposition, he relied upon the decision of the Hon'ble Supreme Court in Reliance Jute and Industries Ltd. v/s CIT, 122 ITR 921 (SC). 10. The learned Sr. Counsel submitted, the Assessing Officer after making comprehensive enquiry and applying his mind to the facts and material on record has allowed assessee s claim of exemption under section 10(23FB) of the Act. He submitted, the Assessing Officer has also discussed the issue in the assessment order and has provided the reasoning on the basis of which he accepted assessee s claim of exemption. That being the case, the revisional authority cannot hold the assessment order to be erroneous only because according to her the Assessing Officer should have written the order in a manner acceptable to the revisional authority. Thus, in essence, the learned Principal Commissioner by exercising revisional power is trying to substitute her view over the view of the Assessing Officer. He submitted, when the assessee has fulfilled all the statutory conditions and as per the provisions of section 10(23FB)and section 115U of the Act, the assessee is eligible for exemption and havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Ltd., [1993] 203 ITR 108 (Bom.). 11. As regards the merits of the issue, the learned Sr. Counsel submitted, when the assessee is registered as a Venture Capital Fund and the Venture Capital Undertakings, wherefrom assessee has earned the income, are not mentioned in the negative list of SEBI regulations, assessee s claim of exemption cannot be disallowed, since, all the conditions of section 10(23FB) as well as section 115U of the Act are fulfilled. 12. The learned Departmental Representative strongly relied upon the observations of the learned Principal Commissioner in the order passed under section 263 of the Act. 13. We have patiently and carefully considered rival submissions and perused the materials on record. We have also applied our mind to the decisions relied. Before we proceed to decide the issues raised in the present appeal, it is relevant and necessary to look into certain statutory provisions which will have a significant bearing on the issues involved in the present appeal. 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 Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion clause. Thus, after the aforesaid amendment, the situation changed and the entire income of a Venture Capital Fund was no longer exempt from tax but only income from investment in Venture Capital Undertaking engaged in specified business sectors was exempt from taxation in the hand of VCF. 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 as under: (b) venture capital fund means such fund (i) operating under a trust deed registered under the provisions of the Registration Act 1908 (16 of 1908) or operating as a venture capital scheme made by the Unit Trust of India established under the Unit Trust of India Act 1963 (52 of 1963); (ii) which has been granted a certificate of registration under the Securities and Exchange Board of India Act, 1992 (15 of 1992), and regulations made thereunder; (iii) which fulfils the conditions as may be specified, with the approval of the Central Government, by the Securities and Exchange Board of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registered under the provisions of the Registration Act, 1908 (16 of 1908), which- (I) has been granted a certificate of registration, before the 21st day of May, 2012, as a Venture Capital Fund and is regulated under the Venture Capital Funds Regulations; or (II) has been granted a certificate of registration as Venture Capital Fund as a sub-category of Category I Alternative Investment Fund under the Alternative Investment Funds Regulations .and which fulfils the following conditions, namely:- (i) it has invested not less than two-thirds of its investible funds in unlisted equity shares or equity linked instruments Of venture capital undertaking, (ii) it has not invested in any venture capital undertaking in which its trustee or the settler holds, either individually or collectively, equity shares in excess of fifteen per cent of the paid up equity share capital of such venture capital undertaking; and (iii) the units, if any, issued by it are not listed in any recognized stock exchange; or (B) Operating as a venture capital scheme made by the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963); 17. Whereas, Ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SEBI on 26th September 2005. Thus, as could be seen, the assessee is a Venture Capital Fund as defined under Explanation (b)(A)(i) of section 10(23FB) of the Act. Therefore, the assessee is regulated under the SEBI (Venture Capital Funds) Regulations, 1996. As per Explanation (c)(i) of section 10(23FB) of the Act, Venture Capital Undertaking means a Venture Capital Undertaking as defined in Clause (n) of section 2 of the SEBI(Venture Capital Fund) Regulation, 1996. Therefore, since the assessee is regulated by SEBI(Venture Capital Fund) Regulations, 1996, the definition of Venture Capital Undertaking as per section 2(n) of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 would be applicable to the assessee. As per section 2(n) of SEBI (Venture Capital Fund) Regulations, 1996, Venture Capital Undertaking is defined as under: [(n) venture capital undertaking means a domestic company (i) whose shares are not listed on a recognized stock exchange in India; (ii) which is engaged in the business for providing services, production or manufacture of article or things or does not include such activities or sectors which are specified in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity. In response to the said notice, assessee vide letter dated 12th March 2014 furnished the required details along with supporting documents. Subsequently, the Assessing Officer issued a notice under section 142(1) of the Act on 18th September 2015 requiring the assessee to furnish necessary details regarding its claim of exemption under section 10(23FB) of the Act. In response to the said notice, the assessee filed its submissions before the Assessing Officer on 13th October 2015 explaining in detail its eligibility to claim exemption under section 10(23FB) of the Act. A detailed working of the income derived and exemption claimed was also furnished before the Assessing Officer. After verifying such details furnished by the assessee, the Assessing Officer again vide order sheet entry dated 12th February 2016 called upon the assessee to furnish further documentary evidences like registration certificate issued by the SEBI recognising the assessee as Venture Capital Fund, books of account in soft copy, copy of all reports sent to SEBI for financial year 2012 13, details of fund wise and investment wise fund etc. The Assessing Officer also called upon the assessee to explain how i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing observations: 5. The reply of the assessee and facts of the case were examined. The assessee is a SEBI registered Venture Capital Fund (VCF). As per the provisions of the I.T. Act, 1961, as amended by the Finance Act, 2012, in section 10(23FB) and 115U of the Income Tax Act, 1961, (The Act), from April 1, 2012, the income earned by Venture Capital Fund (The Fund or The Scheme) from Venture Capital Undertakings (VCUs) will be exempt from tax in the hands of the Fund and the same will be subject to tax in the hands of the investors on accrual basis. The Fund will continue to pay tax on income other than from VCUs (such as bank interest, income from mutual funds etc.) It is also noticed that the assessee has filed the requisite Form no.64 as per Rule 12C of the Income tax Rules with then Commissioner of Income tax 21, Mumbai, who had the jurisdiction over the Venture Capital Fund. The assessee has also issued Form no.64 to respective investors of each of the Schemes. Accordingly, the contention of the assessee is found to be correct and accepted and the entire income earned from the investments made in the Venture Capital Undertakings is to be subjected to tax in the hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dule 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. 24. It is relevant to observe, the learned Principal Commissioner referring to the definition of Venture Capital Undertaking under Securities and Exchange Board of India (Alternative Investment Funds) Regulation, 2012 has observed, since, the Venture Capital Undertakings, wherein, the assessee has invested are not engaged in the business for providing services, production or manufacture of article or thing, assessee is ineligible to avail exemption. As already discussed hereinbefore, the assessee is governed by Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. In fact, learned Principal Commissioner also subscribes to such view. However, referring to the definition of Venture Capital Undertaking under section 2(aa) of Securities and Exchange Board of India (Alternative Investment Funds) Regulation, 2012 she has concluded that the assessee having not invested in Venture Capital Undertakings engaged in the business activity of providi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed has been withdrawn by SEBI nor any action has been taken against the assessee for any violation as alleged by the learned Principal Commissioner. In fact, on going through the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996, we find that as per section 8 of the said Regulations, the grant of registration certificate is subject to the condition that Venture Capital Fund shall abide by the conditions mentioned therein. There is no material on record to indicate that the assessee has violated any of the conditions of section 8 of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. Further, section 22 of the said Regulation empowers SEBI to call upon the Venture Capital Fund to file such report, as the Board may desire with regard to activities carried on by the Venture Capital Fund. Further, section 25 of the said Regulation empowers the Board to inspect or investigate the books of account, records and documents of a Venture Capital Fund through an Inspecting or Investigating Officer and on the basis of such report, the Board can take such measures against the Venture Capital Fund as per section 29 or 30 of the said Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o section 10(23FB) of the Act by Finance Act, 2012, has adopted the definition of Venture Capital Undertaking as per section 2(n) of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. As per the said definition, only those companies which are engaged in the business activities relating to a sector appearing in the negative list are not to be treated as Venture Capital Undertaking. Undisputedly, real estate sector has been removed from the negative list under Third Schedule of Securities and Exchange Board of India (Venture Capital Funds) Regulations 1996) in May 2004, which is much before the assessee came into existence in 2005. Thus, after the assessee came into existence and started investing fund in Venture Capital Undertakings, real estate sector was not in the negative list of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. That being the case, the reasoning of the learned Principal Commissioner that the assessee is not eligible for exemption under section 10(23FB) of the Act is unsustainable. In this regard, it needs to be observed, the learned Principal Commissioner has stated that the amendment to section 10( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in allowing assessee s claim of exemption under section 10(23FB) of the Act, though, may not be the only view but certainly it is a possible view. In such circumstances the assessment order cannot be held to be erroneous. In any case of the matter, the Assessing Officer after conducting thorough enquiry and applying his mind to the facts and material on record vis a vis the relevant statutory provision has concluded in a particular manner. 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. Thus, in our considered opinion, the assessment order passed cannot be considered to be erroneous. 30. Even otherwise also, as discussed earlier in this order, the legislative history of section 10(23FB) r/w section 115U of the Act, clearly demonstrate the intention of the legislature to exempt the income derived by a Venture Capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the eligibility of assessee s claim. Thus, prima facie, it appears that in the garb of exercise of power under section 263 of the Act, the learned Principal Commissioner wants to initiate a roving and fishing enquiry as the issue has already been examined by the Assessing Officer in the original assessment proceedings. In support of our aforesaid view we rely upon the decisions of the Hon ble apex court in case of Malabar Industrial Co. Ltd. and Max India Ltd. (supra) as well as the decisions of Hon ble jurisdictional high court in case of Fine Jewellery Ltd. and Gabriel India Ltd. (supra). 32. Even on merits also, the assessee has a strong case. As discussed earlier in this order, as per the provision of section 10(23FB) of the Act which is applicable for the impugned assessment year, investments in Venture Capital Undertakings which are appearing in the negative list of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 will not qualify for exemption. It is abundantly clear, the Venture Capital Undertakings, wherein, the assessee has made investments are doing business in real estate sector and real estate sector is not appearing in the negative ..... X X X X Extracts X X X X X X X X Extracts X X X X
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