ITO 19(2)(3), MUMBAI V. KSHITIJ VENTURE CAPITAL FUND, MUMBAI

ITA 2147/MUM/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8286 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 18-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SRAVAN KUMAR
• Assessee Lawyers: SHRISANJIV M SHAH
• Keywords: Business income
• Section: 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A MUMBAI BEFORE SHRI R.S. SYAL (AM) AND SMT ASHA VIJAYARAGHA VAN (JM) ITA NO.2147/MUM/2010 (ASSESSMENT YEAR-2006-07) THE ITO-19(2)(3), PIRAMAL CHAMBER, LALBAUG, MUMBAI-400 012 VS. M/S. KSHITIJ VENTURE CAPITAL FUND, KAIPAYATU SYNERGY, OPP. GRAND HYATT, VAKOLA, SANTACRUZ(E(, MUMBAI -400 055 PAN -AAATK 8614L (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SRAVAN KUMAR RESPONDENT BY: SHRISANJIV M. SHAH O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF THE LD. CIT(A)- 30, MUMBAI DATED 29.1.2010 FOR THE A.Y. 2006-07. 2. THE ONLY GROUND OF APPEAL BY THE REVENUE IS AGAI NST CIT(A) HOLDING THAT INTEREST ON TEMPORARY INVESTMENTS OF RS. 16,0 9,900/- AND PROFIT ON SALE UNITS OF MUTUAL FUND OF RS 1,00,91,000/- IS EN TITLED TO EXEMPTION U/S 10(23FB) AND DELETING THE DISALLOWANCE MADE BY AO. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A VENTURE CAPITAL FUND, IS A TRUST FORMED UNDER INDIAN TRUST ACT, 188 2. THE ASSESSEE IS ALSO REGISTERED WITH SECURITIES & EXCHANGE BOARD OF INDI A (SEBI) AS A VENTURE CAPITAL FUND (VCF) UNDER THE SEBI (VENTURE CAPITAL FUND) REGULATION ACT, 1996 (THE SEBI VCM REGULATION) . SINCE THE ASSESSEE BEING VCM DULY REGISTERED WITH SEBI, IT IS ENTITLED TO EXEMPTIONS OF ITS INCOME IN ACCORDANCE WITH PROVISIONS OF SECTION 10(23FB) OF THE I.T. ACT 1961. THE ASSESSEE IS ESTABLISHED TO GENERATE HIGH LEVEL RETURN BY MAKING PRIVATELY NEGOTIATED EQUITY, EQUITY/RELATED AND OTHER PERMITTED INSTRUME NTS OF VENTURE CAPITAL FUND. THE MAIN OBJECT OF THE ASSESSEE TRUST IS TO C ARRY ON THE ACTIVITY OF ITA NO. 2147/M/2010 2 VENTURE CAPITAL FUND WHICH INTER ALIA INCLUDES MAKE INVESTMENT IN ENTITIES ENGAGED IN REAL ESTATE SECTOR. IN PURSUANCE OF THE OBJECT FOR WHICH IT IS ESTABLISHED AND SET UP THE ASSESSEE HAS BEEN RAISIN G FUNDS FROM VARIOUS INVESTORS UNDER VARIOUS SCHEMES BY COMPLYING VARIOU S GUIDELINES ISSUED BY SEBI BEING VCM REGULATIONS. 3.1 THE ASSESSEE HAS FILED THEIR RETURN OF INCOME F OR A.Y. 2006-07 ON 31.7.2006 DECLARING NIL INCOME BY CLAIMING EXEMPTIO N U/S 10(23FB) OF THE ACT. THE ASSESSING OFFICER HELD THAT AS PER THE PR OVISIONS OF SECTION 10(23FB) EXEMPTION IS AVAILABLE ONLY IN RESPECT OF INCOME OF A VENTURE CAPITAL COMPANY OR VENTURE CAPITAL FUND SET UP TO R AISE FUNDS FOR INVESTMENT IN A VENTURE CAPITAL UNDERTAKING. THUS IN ORDER TO BE ELIGIBLE FOR EXEMPTION U/S 10(23FB), THE ASSESSEE OUGHT TO BE FULFILLING T HE FOLLOWING CONDITIONS: (I) THE ASSESSEE SHOULD BE A VENTURE CAPITAL COMPANY O R A VENTURE CAPITAL FUND. (II) IT SHOULD BE SET UP TO RAISE FUNDS. (III) THE UTILIZATION OF THE FUNDS SHOULD BE FOR THE PURP OSE OF INVESTMENT IN A VENTURE CAPITAL UNDERTAKING. ASSESSEE FULFILLING THE ABOVE THREE CONDITIONS, ITS INCOME IS ELIGIBLE FOR EXEMPTION U/S 10(23FB) OF THE ACT. IN THE INSTANT CASE, THE ASSESSEE OUT OF TOTAL CORPUS FUND OF RS 161.49 CROR ES HAVE UTILIZED A SUM OF RS 79.61 CRORES FOR INVESTING IN VENTURE CAP ITAL UNDERTAKINGS. RS 15.25 CRORES IN SAVINGS AND FIXED DEPOSITS WITH BANKS AND RS 52.73 CRORES IS INVESTED IN MUTUAL FUNDS, AS ON 31.3.06. AO HELD THAT ANY BANK, BY NO STRETCH OF IMAGINATION CAN BE TERMED AS VENTURE CAPITAL UNDERTAKING. THE INTEREST INCOME REFERRED TO ABOVE IS NOT AS A CONSEQUENCE OF FUNDS INVESTED IN A VENTURE CAPITAL UNDERTAKING WITHIN THE MEANING OF EXPLANATION 1(C) TO SECTION 10(23FB) . THIS IS FURTHER REINFORCED BY EXPLANATION 2 TO SECTION 10(23FB) AS SUCH THE INCOME OF THE ASSESSEE TO THE EXTENT NOT ARISING FROM INVESTM ENT IN A VENTURE CAPITAL UNDERTAKING IS THIS NOT ELIGIBLE FOR EXEMPT ION U/S 10(23FB) WHICH IN THE INSTANT CASE IS THE INCOME OF THE ASSE SSEE DECLARED AS INTEREST AMOUNTING TO RS 16,09,000/- AO DISALLOWED EXEMPTION UNDER SECTION 10(23FB) ON THIS INCOME AND BROUGHT IT TO T AX UNDER THE HEAD INCOME FROM OTHER SOURCES. ON SIMILAR GROUNDS PRO FIT ON SALE OF MUTUAL FUND UNITS AMOUNTING TO RS 1,00,91,000/- WAS DENIED EXEMPTION U/S 10(23FB) AND BROUGHT TO TAX UNDER THE HEAD BUSINESS INCOME AS THE FUNDS HAVE BEEN OBTAINED WITH THE SOLE INTENTION IN VESTMENT IN MUTUAL ITA NO. 2147/M/2010 3 FUND AND THE INVESTMENT ARE NOT OF SURPLUS FUND OF THE TRUST. MOREOVER, THE ASSESSEE IS CARRYING ON THE ACTIVITIES IN A SYS TEMATIC MANNER. 4. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE CIT(A) AND SUBMITTED AS UNDER: SECTION 10(23F) AND SECTION 10(23FA) SPECIFICALLY E XEMPTED ONLY DIVIDENDS AND LONG TERM CAPITAL GAINS (LTCG) OF A V CF FROM INVESTMENTS MADE BY WAY OF EQUITY SHARES IN A VCU. BOTH THOSE SECTIONS SPECIFIED A SPECIAL NATURE OF INCOME SOUGHT TO BE EXEMPTED VIZ. , DIVIDENDS AND LTCG AND THE SOURCE OF SUCH INCOME VIZ., INVESTMENTS MAD E IN VCUS.HOWEVER, SECTION 10(23FB) HAS BROADENED THE EXEMPTION BASE A ND DOES NOT SPECIFY OR RESTRICT THE EXEMPTION TO ANY PARTICULAR NATURE OR SOURCE OF INCOME. IT EXEMPTS ANY INCOME OF A VCF, WHICH VCF FULFILS TH E CONDITIONS RELATING TO THE PURPOSE FOR WHICH IT IS SET UP VIZ., RAISING FU NDS FOR INVESTMENT IN VCUS. THUS THERE IS A CLEAR DISTINCTION IN THE PRO VISIONS OF BOTH THESE SECTIONS, WE WISH TO RESPECTFULLY SUBMIT THAT SECTI ON 10(23FB) HAS ENLARGED THE SCOPE OF EXEMPTION OF INCOME OF A VCF. HOWEVER EVEN IF ONE SEEKS TO GO BY THE INTENTION O F THE LEGISLATURE IN CASE OF SECTION 10(23FB) THE INTENTION OF THE LEGIS LATURE WAS TO EXTEND THE EXEMPTION TO THE ENTIRE INCOME OF A VGF WHICH S SET UP TO RAISE FUNDS FOR INVESTMENT IN VGUS AS IS EVIDENT FROM THE FINANCE M INISTERS SPEACH (243 ITR 46 STATUTES) (PAGE 24 & 25 OF PAPER BOOK) IN TH E LOK. SABHA DATED MAY 3, 2000 WHILE MOVING THE FINANCE BILL 2000-01 FOR CONSIDERATION OF THE HOUSE, WHICH STATES AS UNDER: VENTURE CAPITAL FUND SHALL ENJOY A COMPLETE PASS T HROUGH STATUS. THERE WILL BE NO TAX ON DISTRIBUTED OR UNDISTRIBUTE D INCOME OF SUCH FUNDS. THE INCOME DISTRIBUTED BY THE FUNDS WILL ON LY BE TAXED IN THE HANDS OF INVESTORS AT THE RATES APPLICABLE TO THE N ATURE OF INCOME. IN LIGHT OF THE ABOVE, IT IS CLEAR THAT THE INTENTI ON OF THE LEGISLATURE IS TO TREAT THE ENTIRE INCOME OF VCFS AS EXEMPT FRO M TAX UNDER SECTION 10(23FB) IRRESPECTIVE OF ITS NATURE, AND INSTEAD T AX THE SAME IN THE HANDS OF ITS INVESTORS AT THE TIME OF DISTRIBUTION UNDER SECTION 115U ON A PASS THROUGH BASIS ELSE IT WOULD AMOUNT TO DOUBLE TAXATION ONCE IN THE HANDS OF VCF AND THEN AGAIN IN THE HANDS OF THE INVESTOR. SINCE THE PURPOSE OF EXISTENCE OF KVCF IS NOT IN DI SPUTE AND CONSEQUENTLY ITS ELIGIBILITY TO CLAIM EXEMPTION UND ER SECTION 10(23FB) ALL INCOME FROM ANY SOURCE RECEIVED BY KVCF IS EXEMPT. AMENDMENT OF SECTION 1A (3FB) BY THE FINANCE ACT 20 07. THE FINANCE ACT 2007 HAS PROSPECTIVELY AMENDED THE PROVISIONS OF SECTION 10(23FB) OF THE ACT. PRIOR TO AMENDMENT THE PROVISIONS WERE AS UNDER: ITA NO. 2147/M/2010 4 ANY INCOME OF A VENTURE CAPITAL COMPANY OR A VENTU RE CAPITAL FUND SET UP A RAISE FUNDS FOR INVESTMENT IN A VENTURE CAPITA L UNDERTAKING. PURSUANT TO THE AMENDMENT THE WORDS SET UP TO RAIS E FUNDS FOR INVESTMENTS WERE REPLACED BY THE WORDS FROM INVEST MENT AND THE SO AMENDED SECTION W.E.F. AY 2008-09 READS AS UNDER: ANY INCOME OF A VENTURE CAPITAL COMPANY OR A VENTU RE CAPITAL FUND FROM INVESTMENT IN A VENTURE CAPITAL UNDERTAKING. THUS THE OBJECTIVE OF THE AMENDMENT IS TO NOW I.E. W.E.F. AY 2008-09 RESTRICT THE EXEMPTION TO THE INCOME OF A V CF ONLY FROM THE VCUS WHICH PRIOR TO AMENDMENT WAS AVAILABLE TO ANY INCOME OF A VCF INSPECTIVE WHETHER IT IS FROM VCU OR NOT. MEMORAND UM EXPLAINING THE PROVISIONS OF THE FINANCE ACT WHICH ALSO SUPPORTS T HE ABOVE VIEW IS REPRODUCED BELOW: UNDER THE EXISTING PROVISIONS OF CLAUSE (2GFB) OF SECTION 10, ANY INCOME OF A VENTURE CAPITAL COMPANY OR VENTURE CAP ITAL FUND SET UP TO RAISE FUNDS FOR INVESTMENT IN A VENTURE CAPITAL UN DERTAKING IS EXEMPT FROM TAX..... IT IS PROPOSED TO AMEND THE SAID CLAUSE SO AS TO PR OVIDE THAT SUCH EXEMPTION WILL NOW BE AVAILABLE ONLY IN RESPECT OF INCOME OF A VENTURE CAPITAL COMPANY OR VENTURE CAPITAL FUND FROM INVEST MENT IN A VENTURE CAPITAL UNDERTAKING ENGAGED IN SPECIFIED BUSINESS O R INDUSTRIES.. .... THIS AMENDMENT WILLL TAKE EFFECT FROM 1 ST APRIL 2008, AND ACCORDINGLY APPLY IN RELATION FOR THE ASSESSMENT YE AR 2008-09 AND SUBSEQUENT YEARS. THUS IT CAN BE SEEN FROM THE ABOVE THAT THE INTENTI ON OF THE LEGISLATION PRIOR THIS AMENDMENT WAS ALWAYS TO PROVIDE EXEMPTION TO ANY INCOME OF A VCF AND THE AMENDMENT IS NOT CLARIFICATORY IN NATURE. 5. THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY OBSERVING AS UNDER: ITA NO. 2147/M/2010 5 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF TH E AR OF THE APPELLANT PERUSED THE ORDER OF THE AO AND THE FACTS OF THE CASE. THE APPELLANT IS A TRUST FORMED UNDER INDIAN TRUST ACT AND ALSO REGISTERED AS VENTURE CAPITAL FUND (VCF) WITH THE SECURITIES A ND EXCHANGE BOARD OF INDIA UNDER THE SEBI (VENTURE CAPITAL FUND) REGU LATIONS 1996 (THE SEBI VCF REGULATION) THE OBJECT OF THE TRUST IS TO CARRY ON THE ACTIVITIES OF VENTURE CAPITAL FUND BY MAKING INVESTMENT IN ENT ITIES ENGAGED IN THE REAL ESTATE, IN THE ASSESSMENT FOR THE YEAR UNDER C ONSIDERATION THE APPELLANT HAS CLAIMED EXEMPTION U/S 10(23FB) OF THE ACT IN RESPECT OF PROFIT ON SALE OF MUTUAL FUND UNITS AND INTEREST ON BANK DEPOSIT AMOUNTING TO RS 1,00,91,000/- AND RS. 16,09,000/- R ESPECTIVELY UNDER THE HEAD INCOME FROM BUSINESS AND PROFESSION AND IN COME FROM OTHER SOURCES. THE AR OF THE APPELLANT HAS RELIED UPON TH E VARIOUS JUDICIAL PRONOUNCEMENTS IN THE PAPER BOOK SUBMITTED AND HAS ALSO RELIED ON THE JUDGEMENT OF MUMBAI TRIBUNAL F BENCH IN APPEA L NO. ITA 3912 & 4095/M/2006 IN THE CASE OF ITO, VS MARIGOLD MEZZANI NE INVESTMENT FUNDS AND ITA NO. 7157/MUM/2005 DATED 5.11.2009 IN THE CASE OF M/S INDIA VALUE FUND VS ACIT-ITAT MUMBAI E BENCH . IN THE SAID JUDGEMENTS AFTER DISSECTING THE PROVISIONS CONTAINE D IN SECTION 10(23FB) THE HONBLE ITAT HAS HELD THAT THE INTERES T INCOME ON FIXED DEPOSIT EARNED BY VCF WOULD FALL UNDER THE RELEVANT PROVISIONS OF SECTION 10(23FB) OF THE ACT AND HENCE ELIGIBLE FOR EXEMPTION U/S 10(23FB) OF THE ACT. THE BARE PERUSAL OF SECTION 1 0(23FB) REFERS TO ANY INCOME OF THE VENTURE CAPITAL FUND ELIGIBLE FOR EX EMPTION U/S 10(23FB) OF THE ACT AND ANY INCOME REFERRED TO IN THE SAID S ECTION WHICH WOULD INCLUDE INTEREST ON FIXED DEPOSIT AS WELL AS PROFIT ON SALE OF MUTUAL FUND UNITS EARNED BY THE APPELLANT. THE SUBSEQUENT AMEN DMENT OF SECTION 10923FB) BY FINANCE BILL 2007 IS EFFECTIVE FROM 1.4 .2008 RESTRICTING THE EXEMPTION AVAILABLE U/S 10(23FB) TO ONLY INCOME OF VENTURE CAPITAL FUND FROM AN INVESTMENT IN VENTURE CAPITAL UNDERTAKING . IN THE AFORESAID CASE OF M/S INDIA VALUE FUND VS ACIT MUMBAI IT HAS BEEN HELD THAT THE SAID AMENDMENT IS NOT RETROSPECTIVE. THEREFORE, IN MY CONSIDERED VIEW, RESPECTFULLY FOLLOWING THE DECISION OF MUMBAI TRIBU NAL F BENCH IN APPEAL NO. ITA NO. 3912 & 4095/M/2006 IN THE CASE O F ITO VS MARIGOLD MEZZANINE INVESTMENT FUNDS AND ITA NO. 7157/MUM/200 5 DATED 5.11.2009 IN THE CASE OF M/S INDIA VALUE FUND VS ACIT-ITAT MUMBAI E BENCH AND RELEVANT PROVISIONS OF 10(23FB) AS PR EVAILING FOR THE YEAR UNDER CONSIDERATION, EXEMPTION IN RESPECT OF INCOME EARNED BY THE APPELLANT ON ACCOUNT OF PROFIT ON SALE OF MUTUAL FU ND UNITS AND INTEREST ON BANK DEPOSITS IS ALLOWED TO THE APPELLANT AND AD DITION MADE TO THE RETURNED INCOME OF THE APPELLANT BY THE AO OF RS 1, 00,91,000/- AND RS 16,09,000/- ON ACCOUNT OF PROFIT ON SALE OF MUTUAL FUND UNITS AND BANK DEPOSITS RESPECTIVELY ARE HEREBY DELETED. THE GROUN DS OF APPEAL ARE ALLOWED. 6. AGGRIEVED, REVENUE IS IN APPEAL BEFORE US. THE LD. COUNSEL FOR THE ASSESSEE SHRI SANJIV M. SHAH MADE THE FOLLOWING SUB MISSIONS BEFORE THE TRIBUNAL: ITA NO. 2147/M/2010 6 7. THE WORDS SET UP TO RAISE FUNDS FOR INVESTMENT H AVE BEEN SUBSTITUTED BY THE WORDS FROM INVESTMENT BY THE FINANCE ACT 200 7 W.E.F. 1 ST APRIL 2008. BY THIS SUBSTITUTION THE INFERENCE WOULD BE THAT AN Y INCOME OF A VENTURE CAPITAL COMPANY OR VENTURE CAPITAL FUND WOULD BE EX EMPT ONLY IF IT IS GENERATED FROM INVESTMENT IN VENTURE CAPITAL UNDERT AKINGS. BUT THIS RESTRICTION CANNOT BE READ IN THE EARLIER PROVISION WHERE THE EXPRESSION USED WAS SET UP TO RAISE FUNDS FOR INVESTMENT, WHENEVER THE LEGISLATURE WANTED TO MAKE PARTICULAR ITEMS OF INCOME OR SOURCES OF INCOM E TO BE EXEMPT THEN IT HAS BEEN CLEARLY PROVIDED IN VARIOUS PROVISIONS. IN THIS REGARD THE READING OF SEC 10(20) 10(21) 10(22) 10(23) 10(23FA) AND 10(29) WOULD MAKE THINGS CLEAR. THE READING OF THESE PROVISIONS WOULD MAKE IT CLEAR THAT THE LEGISLATURE HAS EITHER MENTIONED VARIOUS INCOMES WH ICH ARE EXEMPT FOR EXAMPLE IN THE CASE OF SEC 10(20) INCOME FROM HOUSE PROPERTY CAPITAL GAINS INCOME FROM OTHER SOURCES AND INCOME FROM TRADE OR BUSINESS IS EXEMPT. ALTERNATIVELY THE LEGISLATURE HAS GIVEN A BLANK EXE MPTION. FOR EXAMPLE IN THE CASE OF SEC 10(22) WHERE ANY INCOME IN CASE OF A UN IVERSITY ETC., WAS MADE FULLY EXEMPT. IN SOME CASES RESTRICTIVE EXPRESSION HAS BEEN USED , FOR EXAMPLE IN CASE OF SEC 10(29) THE INCOME OF AN AUTH ORITY FOR MARKETING COMMODITIES ONLY INCOME DERIVED FROM THE LETTING OF GODOWNS OR WAREHOUSES FOR STORAGE ETC., HAS BEEN PROVIDED TO BE EXEMPT. THUS THE LEGISLATURE IN ITS OWN WISDOM HAS PROVIDED EXEMPTION IN VARIOUS FORMAT S AND IN SOME CASES EITHER WHOLE OF THE INCOME IS PROVIDED TO BE EXEMP T OR INCOME FROM PARTICULAR SOURCES IS PROVIDED TO BE EXEMPT OR INCO ME DERIVED FROM PARTICULAR ACTIVITY IS PROVIDED TO BE EXEMPT. 8. THUS UNDER SEC 10(23BF) EXEMPTION IS AVAILABLE ON ANY INCOME TO A VENTURE CAPITAL FUND OR VENTURE CAPITAL COMPANY WHI CH HAS BEEN SET UP TO RAISE FUNDS FOR INVESTMENT IN VENTURE CAPITAL UNDER TAKINGS. THE LEGISLATURE HAS ITSELF NOTED THE SITUATION THAT THERE MAY BE CI RCUMSTANCES WHERE INCOME MAY BE EARNED FROM OTHER ACTIVITIES FOR EXAMPLE INC OME FROM INTEREST AND THEREFORE LEGISLATURE HAS INCORPORATED THE RESTRICT ED EXPRESSION BY SUBSTITUTING THE WORDS SET UP TO RAISE FUNDS FOR IN VESTMENT BY THE WORDS ITA NO. 2147/M/2010 7 FROM INVESTMENT W.E.F. ASST. YEAR 2008-09 WHICH ME ANS FROM THAT YEAR THE EXEMPTION WOULD BE AVAILABLE ONLY FROM INCOME GENER ATED FROM SUCH INVESTMENTS IN THE VENTURE CAPITAL UNDERTAKINGS CI T VS SREE NARAYANA CHANDRIKA TRUST (1995) 123 CTR (KER) 233 (1995) 212 ITR 456(KER) RELIED ON. 9. IN THE CASE OF INDIA VALUE FUND VS ACIT (129 TTJ (MUM)611, IT HAS BEEN HELD AS FOLLOWS: THE CONTRIBUTION AND THE INVESTMENT CANNOT BE MATC HED TO A PARTICULAR DATE. THE VENTURE CAPITAL FUND MAY IDENTIFY A PARTI CULAR INVESTMENT AND THEN HE WOULD ISSUE DRAW DOWN NOTICE ON CONTRIBUTOR S WHO HAVE AGREED TO CONTRIBUTE BUT SUCH CONTRIBUTION MAY COME IN STAGGE RED FASHION AND COME ON VARIOUS DATES. IN THE INTERVENING PERIOD IF SUC H MONIES ARE KEPT TEMPORARILY IN THE FDRS NO FAULT CAN BE FOUND. NO INVESTOR WOULD GIVE MONEY TO THE VENTURE CAPITAL FUND FOR JUST MAKING I NVESTMENT IN FDRS BECAUSE ULTIMATELY EVEN IF SUCH INTEREST IS DISTRIB UTED TO SUCH INVESTORS THEN PASSED THROUGH CONCEPT WOULD BE APPLICABLE AN D SUCH INCOME BECOMES TAXABLE IN THE HANDS OF INVESTOR. MERELY BE CAUSE FDRS ARE MADE FOR SHORT DURATION OF FEW MONTHS THAT TOO, TO MATCH CONTRIBUTIONS WITH THE INVESTMENT IN THE INTERVENING PERIOD CANNOT BE LEAD TO THE CONCLUSION THAT ASSESSEE VENTURE CAPITAL FUND WAS MAINLY ENGAGED IN THE BUSINESS OF INVESTING FUND IN FDRS. CONCLUSION: WORDS FROM INVESTMENT HAVING BEEN SUBS TITUTED IN SEC 10(23FB) FOR THE WORDS SET UP TO RAISE FUNDS FOR I NVESTMENT BY THE FINANCE ACT 2007, W.E.F. 1 ST APRIL 2008, CANNOT BE READ IN THE EARLIER PROVISI ON AND THEREFORE INTEREST INCOME IN RESPECT OF FDRS WAS EX EMPT FOR ASST. YEAR 2002-03. 10. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMIT TED AS FOLLOWS: EXEMPTION FOR CERTAIN INCOMES OF A VENTURE CAPI TAL COMPANY OR VENTURE CAPITAL FUND FROM SPECIFIED BUSINESSES OR I NDUSTRIES UNDER THE EXISTING PROVISIONS OF CLAUSE (23FB) OF S ECTION 10, ANY INCOME OF A VENTURE CAPITAL COMPANY OR VENTURE CAPITAL FU ND SET UP TO RAISE FUNDS FOR INVESTMENT IN A VENTURE CAPITAL UNDERTAKI NG IS EXEMPT FROM TAX. THE EXISTING DEFINITION OF A VENTURE CAPITAL UNDERTAKING AS PROVIDED IN CLAUSE (C) OF EXPLANATION 1 TO CLAUSE (23FB) MEA NS A VENTURE CAPITAL UNDERTAKING REFERRED TO IN THE SECURITIES AND EXCHA NGE BOARD OF INDIA (VENTURE CAPITAL FUNDS) REGULATIONS 1996 MADE UNDER THE SECURITIES ITA NO. 2147/M/2010 8 AND EXCHANGE BOARD OF INDIA ACT, 1992 AND NOTIFIED AS SUCH IN THE OFFICIAL GAZETTE BY THE BOARD. IT IS PROPOSED TO AMEND THE SAID CLAUSE SO AS TO PR OVIDE THAT SUCH EXEMPTION WILL NOW BE AVAILABLE ONLY IN RESPECT OF INCOME OF A VENTURE CAPITAL COMPANY OR VENTURE CAPITAL FUND FROM INVEST MENT IN A VENTURE CAPITAL UNDERTAKING ENGAGED IN CERTAIN SPECIFIED BU SINESSES OR INDUSTRIES. FOR THIS PURPOSE IT IS ALSO PROPOSED TO AMEND THE AFORESAID DEFINITION OF VENTURE CAPITAL UNDERTAKING TO MEAN S UCH DOMESTIC COMPANY WHOSE SHARES ARE NOT LISTED IN A RECOGNISED STOCK EXCHANGE IN INDIA AND WHICH IS ENGAGED IN THE BUSINESS OF NANOT ECHNOLOGY INFORMATION TECHNOLOGY RELATING TO HARDWARE AND SO FTWARE DEVELOPMENT SEED RESEARCH AND DEVELOPMENT, BIO TECHNOLOGY, RESE ARCH AND DEVELOPMENT OF NEW CHEMICAL ENTITIES IN THE PHARMAC EUTICAL SECTOR, PRODUCTION OF BIO FUELS OR BUILDING AND OPERATING C OMPOSITE HOTEL CUM CONVENTION CENTRE WITH SEATING CAPACITY OF MORE THA N THREE THOUSAND, OR ENGAGED IN THE DAIRY INDUSTRY OR POULTRY INDUSTRY. THIS AMENDMENT WILL TAKE EFFECT FROM 1 ST APRIL 2008, AND WILL ACCORDINGLY APPLY IN RELATION TO THE ASSESSMENT YEA R 2008-09 AND SUBSEQUENT YEARS. 11. THE LD. COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT IN THE CBDT CIRCULAR NO.3 OF 2008 THIS CASE HAS BEEN CLARIFIED. EXEMPTION FOR CERTAIN INCOME OF A VENTURE CAPITAL C OMPANY OR VENTURE CAPITAL FUND. 14.2 CLAUSE (23FB) OF SECTION 10 PROVIDES EXEMPTION IN RESPECT OF ANY INCOME OF A VENTURE CAPITAL COMPANY OR VENTURE CAPI TAL FUND SET UP TO RAISE FUNDS FOR INVESTMENT IN A VENTURE CAPITAL UN DERTAKING. SUCH VENTURE CAPITAL UNDERTAKING HAS BEEN DEFINED IN CLA USE(C) OF EXPLANATION 1 TO CLAUSE (23FB) TO MEAN A VENTURE CA PITAL UNDERTAKING REFERRED TO IN THE SECURITIES AND EXCHANGE BOARD OF INDIA (VENTURE CAPITAL FUNDS) REGULATIONS 1996, MADE UNDER THE SEC URITIES AND EXCHANGE BOARD OF INDIA ACT, 1992, AND NOTIFIED AS SUCH IN THE OFFICIAL GAZETTE BY THE BOARD FOR THE PURPOSES OF THE CLAUSE . WITH A VIEW TO MAKE THE TAX BENEFIT MORE FOCUSED AND TO CHANNELIZE EXISTING AS WELL AS FUTURE INVESTMENTS I N KEY, RISK PRONE ITA NO. 2147/M/2010 9 THRUST AREAS CLAUSE (23FB) HAS BEEN AMENDED WHEREB Y SUCH EXEMPTION WILL NOW BE AVAILABLE ONLY IN RESPECT OF INCOME OF A VENTURE CAPITAL COMPANY OR VENTURE CAPITAL FUND FROM INVEST MENT IN A VENTURE CAPITAL UNDERTAKING. FOR THIS PURPOSE, THE SAID CLA USE (C) OF EXPLANATION 1 HAS ALSO BEEN AMENDED TO DEFINE VENT URE CAPITAL UNDERTAKING AS SUCH DOMESTIC COMPANY WHOSE SHARES ARE NOT LISTED IN A RECOGNISED STOCK EXCHANGE IN INDIA AND WHICH I S ENGAGED IN THE _ (I)BUSINESS OF A. NANOTECHNOLOGY B. INFORMATION TECHNOLOGY RELATING TO HARDWARE AND S OFTWARE DEVELOPMENT C. SEED RESEARCH AND DEVELOPMENT D. BIO TECHNOLOGY E. RESEARCH AND DEVELOPMENT OF NEW CHEMICAL ENTITIES I N THE PHARMACEUTICAL SECTOR; F. PRODUCTION OF BIO FUELS G. BUILDING AND OPERATING COMPOSITE HOTEL CUM CONVENTI ON CENTRE WITH SEATING CAPACITY OF MORE THAN THREE THOUSAND OR H. DEVELOPING OR OPERATING AND MAINTAINING OR DEVELOPI NG OPERATING AND MAINTAINING ANY INFRASTRUCTURE FACILITY AS DEFI NED IN THE EXPLANATION TO CLAUSE (I) OF SUB SECTION (4) OF SEC TION 80IA OR I. DAIRY OR POULTRY INDUSTRY. 14.3. APPLICABILITY : THIS AMENDMENT WILL TAKE EFFECT FROM THE 1 ST DAY OF APRIL, 2008, AND WILL ACCORDINGLY APPLY IN R ELATION TO THE ASSESSMENT YEAR 2008-09 AND SUBSEQUENT ASSESSMENT Y EARS. 12. THE MUMBAI TRIBUNAL F BENCH IN THE CASE OF M ARIGOLD MEZZANINE INVESTMENT FUND VS ITO IN ITA NO. 3912 & 4095/M/06 HAVE HELD AS FOLLOWS: WE HAVE CAREFULLY PERUSED AND CONSIDERED THE RIVA L SUBMISSIONS. THE CIRCULAR NO.3./2008 DATED 12.3.08 RELIED UPON BY TH E LD. AR CLEARLY ITA NO. 2147/M/2010 10 SPEAKS IN PARA 14.2 THAT EXEMPTION WILL NOW BE AVA ILABLE ONLY IN RESPECT OF INCOME OF A VENTURE CAPITAL COMPANY OR VENTURE TOTAL FUND FROM INVESTMENT IN A VENTURE CAPITAL UNDERTAKING AN D THE NEW INSERTED EXPRESSION WOULD BE APPLICABLE FROM THE AY 2008-09. THE CONTENTION OF LD. AR THAT EXPRESSION DERIVED FROM DOES NOT APPEA R IN THE RELEVANT PROVISIONS OF SEC 10(23FB) IS CORRECT. THEREFORE T HE DECISION RELIED UPON BY THE LD CIT(A) WHEREIN THE ISSUE HAS BEEN DECIDED BY JUDICIALLY DEFINING THE TERM DERIVED FROM WOULD NOT BE APPLICA BLE TO THE INSTANT CASE. IN VIEW OF THIS THE RATIO OF THE DECISION IS NOT APPLICABLE TO THE FACT SITUATION OF THE PRESENT CASE AND THE RELEVANT PROV ISIONS OF SEC 10(23FB) OF THE ACT. FOR THE PURPOSE OF PROPER APPRECIATION OF RELEVANT PROVISION OF SEC 10(23FB) THE SAME IS REPRODUCED HEREUNDER. INCOMES NOT INCLUDED IN TOTAL INCOME ANY INCOME O F VENTURE CAPITAL COMPANY OR VENTURE CAPITAL FUND SET UP TO RAISE FUNDS FOR INVESTMENT IN A VENTURE CAPITAL UNDERTAKI NG. A BARE PERUSAL OF THE ABOVE REPRODUCED STATUTORY PR OVISIONS CLEARLY REFERS TO ANY INCOME OF THE VENTURE CAPIT AL COMPANY AND THE EXPRESSIONS DERIVED FROM OR ATTRIBUTABLE TO ARE NOT APPEARING IN THE ABOVE EXTRACTED PROVISIONS OF THE ACT, THEREFORE P LAIN AND UNAMBIGUOUS LANGUAGE OF THE STATUTORY PROVISIONS D ESERVES TO BE GIVEN FULL EFFECT. THE AO REFERRED TO THE LEGISLATIVE INT ENT IN PARA 6,3,2, OF THE ASSESSMENT ORDER, BUT FAILED TO EXPLAIN THE FOUNDAT ION OF SUCH INTENTION. CONSEQUENTLY ON THE BASIS SUPPOSED LEGISLATURE INTE NT ADDITION CANNOT BE MADE BY THE QUASI JUDICIAL AUTHORITY LIKE THE A. O. HAVING REGARD TO ABOVE LEGAL AND FACTUAL DISCUSSION S AND CONSIDERING THE SUBMISSIONS MADE IN THE COURSE OF A PPELLATE PROCEEDINGS. THE INTEREST INCOME UNDER CONSIDERATI ON WOULD FALL UNDER THE RELEVANT PROVISIONS OF SECTION 10(23FB) OF THE ACT. THEREFORE THE GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE ASSESS EE. 13. WE HEARD BOTH THE PARTIES. THE ISSUE IS WHETHER INTEREST ON TEMPORARY INVESTMENTS OF RS. 16,09,900/- AND PROFIT ON SALE UNITS OF MUTUAL FUND OF RS 1,00,91,000/- IS ENTITLED TO EXEMPTION U /S 10(23FB). SEC 10(23FB) AS APPLICABLE TO THE YEAR UNDER APPEAL IS AS UNDER: ANY INCOME OF VENTURE CAPITAL COMPANY OR VENTURE CA PITAL FUND SET UP TO RAISE FUNDS FOR INVESTMENT IN A VENTURE CAPITAL UNDERTAKING. 14. THUS THE EXEMPTION IN THE CASE OF VENTURE CAPIT AL FUND WAS IN RESPECT OF ANY INCOME. THERE IS NO RESTRICTION OR R EQUIREMENT REGARDING THE ITA NO. 2147/M/2010 11 SOURCE OF INCOME FOR GRANT OF EXEMPTION U/S 10(23FB ). IT IS ONLY BY FINANCE ACT 2007, W.E.F. 1 ST APRIL 2008, AN AMENDMENT TO SEC 10(23FB) WAS BROU GHT ABOUT RESTRICTING THE EXEMPTION UNDER THAT SECTION TO INCOME FROM INVESTMENT BY THE VENTURE CAPITAL FUND IN A VENTURE CAPITAL UNDERTAKING. FOR THIS PURPOSE, THE SAID CLAUSE (C) OF EXPLANATIO N 1 HAS ALSO BEEN AMENDED TO DEFINE VENTURE CAPITAL UNDERTAKING. TH IS AMENDMENT WAS MADE EFFECTIVE FROM 1.4.2008. BY NO STRETCH OF IMAG INATION CAN THIS AMENDMENT CAN BE CONSIDERED AS CLARIFICATORY APPLIC ABLE TO EARLIER ASSESSMENT YEAR. THE MEMORANDUM EXPLAINING THE AMEN DMENT TO THE FINANCE BILL 2007 AS WELL AS THE CBDT CIRCULAR EXPL AINING THE PROVISIONS OF THE FINANCE ACT 2007 CLARIFY THAT THE AMENDMENT PRO POSED TO SEC 10(23FB) WAS TO RESTRICT THE SCOPE OF INCOME FOR WHICH EXEMP TION UNDER THAT SECTION WAS AVAILABLE. HENCE THIS AMENDMENT CANNOT BE CONSI DERED AS CLARIFICATORY BUT MUST BE CONSIDERED AS PROSPECTIVE IN EFFECT. IT IS NOT IN DISPUTE THAT THE ASSESSEE IS OTHERWISE ELIGIBLE FOR EXEMPTION U/S 10 (23FB). HENCE FOR THE YEAR UNDER APPEAL, AS PER THE PROVISIONS OF SEC 10(23FB) AS APPLICABLE TO THE ASSESSMENT YEAR, ANY INCOME OF THE VENTURE CAPITAL FUND IS EXEMPT. HENCE WE CONFIRM THE ORDER OF THE CIT(A) AND UPHOLD HIS D IRECTION THAT THAT INTEREST ON TEMPORARY INVESTMENTS OF RS 16,09,900/- AND PROF IT ON SALE UNITS OF MUTUAL FUND OF RS 1,00,91,000/- IS ENTITLED TO EXEM PTION U/S 10(23FB). 15. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 9 TH DAY OF MARCH, 2011 SD/- SD/- (R.S. SYAL) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL M EMBER MUMBAI, DATED 9 TH MARCH, 2011. RJ FIT FOR PUBLICATION AM JM ITA NO. 2147/M/2010 12 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CENTRAL - I CONCERNED 5. THE DR A BENCH TRUE COPY BY ORDER ASST. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 2147/M/2010 13 DATE INITIALS 1 DRAFT DICTATED ON: 3.03.2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 4.03.2011 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: ______ 9 DATE ON WHICH FILE GOES TO THE AR 10. DATE OF DISPATCH OF ORDER: ______