Japan International Co- Operation Agency, New Delhi V. DDIT, New Delhi

ITA 3284/DEL/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7045 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 17-11-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 27-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANUJ ARORA
• Assessee Lawyers: R KHANNA AV
• Keywords: Opportunity of being heard; Non-deduction of tax; Non passing of speaking order
• Section: 143(3); 244A; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH D, NEW DELHI BEFORE SHRI J. S. REDDY, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER I.T.A. NO.3284/DEL/2012 (ASSESSMENT YEAR 2006-07) JAPAN INTERNATIONAL COOPERATION AGENCY, VS. DDIT, I NTERNATIONAL 2 ND FLOOR, DR. GOPAL DAS BHAWAN, TAXATION, CIRCLE 3( 1), 28, BARAKHAMBHA ROAD, NEW DELHI CONNAUGHT PLACE, NEW DELHI GIR / PAN :AAAAJ1961C I.T.A.NO. 5705/DEL/2010 (ASSESSMENT YEAR 2007-08) JAPAN INTERNATIONAL COOPERATION AGENCY, VS. ADIT, C IRCLE 3(1), 2 ND FLOOR, DR. GOPAL DAS BHAWAN, INTERNATIONAL TAXAT ION, 28, BARAKHAMBHA ROAD, NEW DELHI CONNAUGHT PLACE, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY :SHRI DEEPAK CHOPRA, ADV. SHRI ADITYA GUPTA, MS. NEHA SINGH AND SHRI R. KHANNA, AV. RESPONDENT BY :SHRI ANUJ ARORA, CIT DR DATE OF HEARING: 17.11.2015 DATE OF PRONOUNCEMENT: 29.01.2016 ORDER PER KULDIP SINGH, JM: SINCE COMMON QUESTIONS TO BE DETERMINED HAVE BEEN RAISED IN BOTH THE AFORESAID APPEALS EXCEPT AMOUNTS INVOLVED, THE SAME ARE TAKEN UP TOGETHER TO BE DISPOSED OF BY WAY OF CONSOLIDATED O RDER. 2 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 2. THE APPELLANT, M/S. JAPAN INTERNATIONAL COOPERAT ION AGENCY, (HEREINAFTER REFERRED TO AS THE ASSESSEE), BY FIL ING THE PRESENT APPEALS SOUGHT TO SET ASIDE THE IMPUGNED ORDERS DATED 27.04 .2012 BY WAY OF I.T.A.NO. 3284/DEL/2012 QUA THE ASSESSMENT YEAR 200 6-07 PASSED BY LD. CIT(A) VIII, NEW DELHI AND ORDER DATED 08.10.2010 P ASSED BY ASSESSING OFFICER IN CONSONANCE WITH THE ORDER DATED 30.09.20 10 OF DRP BY WAY OF I.T.A.NO. 5705/DEL/2010 QUA ASSESSMENT YEAR 2007-08 ON THE GROUNDS INTER ALIA THAT: A. I.T.A.NO.3284/DEL/2012: GROUND NO.1: (I) BASED ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT ALLOWING THE EXEMPTION UNDER SECTION 10(34) OF THE ACT CLAIMED B Y THE APPELLANT ON ITS SHARE OF DIVIDEND INCOME OF RS. 43,48,571 OU T OF DIVIDEND INCOME RECEIVED BY SARA FUND (VENTURE CAPITAL FUND - VCF). (II) BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN FAI LING TO APPRECIATE THAT THE COMPANIES FROM WHICH SARA FUND HAD EARNED DIVIDEND HAD ALREADY PAID ADDITIONAL INCOME-TAX AS REQUIRED UNDER SECTION 115-O OF THE ACT AND SARA FUND WAS NOT REQU IRED TO PAY ADDITIONAL INCOME-TAX FOR THE SECOND TIME ON THE SA ME INCOME. GROUND NO.2 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS, IN DISALLOWIN G EXPENSES OF RS. 1, L3,11,955 BY TAXING THE SHARE OF THE APPELLANT I N INTEREST INCOME FROM VCF UNDER THE HEAD 'OTHER SOURCES' ON GROSS BA SIS AND NOT ON NET BASIS IN DISREGARD OF THE FACT THAT INCOME O F A VCF CAN BE PASSED ON TO ITS INVESTORS ONLY AFTER ADJUSTING THE EXPENSES IT INCURRED OUT OF THE FUNDS PROVIDED BY THE INVESTORS , TO EARN SUCH INCOME. 3 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 GROUND NO.3 (I) BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLDING THA T OUT OF A TOTAL DISTRIBUTION OF RS. 176,000,000 DURING THE YEAR, ON LY RS. 119,738,454 WAS OUT OF INCOME OF THE VCF WHILE THE INCOME COMPONENT OF THE DISTRIBUTION WAS THE AMOUNT OF RS. 142, L34,265. (II) BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS AND HA S FAILED TO APPRECIATE THAT OUT OF THE TOTAL DISTRIBUTION MADE IN THE PREVIOUS YEAR THE INCOME COMPONENT IN ACCORDANCE WITH THE ST ATUTORY DECLARATION U/S 115U(2) MADE BY SARA FUND WAS ALONE ASSESSABLE IN THE HANDS OF THE APPELLANT. (III) BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOL DING THAT THE APPELLANT'S SHARE IN THE PAYMENT OF RS. 56,261,546 [176,000,000- 119,738,454] @22.73% I.E. RS. 12,788,250/ WAS ASSES SABLE IN THE APPELLANT'S HANDS AS 'INCOME FROM OTHER SOURCES'. (IV) BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN IGN ORING THE FACTS, MATERIAL AND EVIDENCE PLACED ON RECORD I.E. NOTES T O THE COMPUTATION OF INCOME, FORM 64 AND AUDITED FINANCIA L STATEMENTS OF SARA FUND AND SUBMISSIONS FILED. (V) BASED ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT IN TERMS OF THE PROVISIONS OF SECTION 115U(2) OF THE ACT, THE APPELLANT COULD NOT PROVIDE OR FURNISH INFORMATION DIFFERENT FROM AND/OR CONFLICTING WITH THE STATUTORY DECLARATION I N FORM 64 FURNISHED TO THE INCOME-TAX AUTHORITY BY THE VENTUR E CAPITAL FUND (SARA FUND) AND WAS BOUND BY THE STAND ADOPTED BY S ARA FUND. (VI) BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT NO COMPUTATION MECHANISM HAS BEEN PROVIDED BY THE ACT FOR OFFERING THE INCOME CHARGEABLE TO TAX UNDER THE PRO VISIONS OF SECTION 115U OF THE ACT. 4 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 GROUND NO.4 : BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CHARGING IN TEREST AMOUNTING TO RS 3,090,221 UNDER SECTION 234B AND IN TEREST WITHDRAWN U/S 244A OF THE ACT. B. I.T.A. NO.5705/DEL/2010: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED ASSESSING OFFICER (' AO') HAS ERRED IN PASSING THE ASSESSMENT ORDER U/S 143(3) R.W.S 144C OF THE INCOME TAX ACT, 1961 ( 'THE ACT') AND THEREBY APPROVED BY THE HON'BLE DISPUTE RESOLUTION PANEL (DRP). EACH OF THE GROUND IS REFERRED TO SEPARATELY, WHICH MAY KINDLY BE CONSIDERED INDEPENDENT OF EACH OTHER. GROUND NO.1 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN NOT ALLOWING THE EXEMPTION UNDER SECTION 10(34) OF THE ACT CLAIMED B Y THE ASSESSEE ON THE DIVIDEND INCOME OF RS. 30,39,471 RECEIVED BY THE ASSESSEE AS ITS SHARE FROM SARA FUND, A VENTURE CAPITAL FUND (V CF) OUT OF THE DIVIDEND INCOME OF THE NATURE REFERRED TO IN SECTIO N 10(34) OF THE ACT. GROUND 0.2 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS, IN DISALLOWING EXPENSES OF RS.37,94,980 BY TAXING THE SHARE OF THE ASSESSEE IN INTEREST INCOME FROM VCF UNDER THE HEAD 'OTHER SOUR CES' ON GROSS BASIS AND NOT ON NET BASIS IN DISREGARD OF THE FACT THAT INCOME OF A VCF CAN BE PASSED ON TO ITS INVESTORS ONLY AFTER AD JUSTING THE EXPENSES IT INCURRED OUT OF THE FUNDS PROVIDED BY T HE INVESTORS, TO EARN SUCH INCOME. GROUND NO.3 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS, IN HOLDING THAT THE 5 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 ASSESSEE'S SHARE IN THE AMOUNT OF RS. 51,60,098 [23 1,000,000- 225,839,902] @22.73% I.E. RS. 11,72,890/ WAS ASSESS ABLE IN THE ASSESSEE'S HANDS AS 'INCOME FROM OTHER SOURCES' GROUND NO.4 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LEARNED ASSESSING OFFICER HAS ERRED IN FACTS IN DOUBLY ADDI NG LONG TERM CAPITAL GAIN OF RS. 2,44,02, 106/- UNDER THE HEAD ' SHORT TERM CAPITAL GAIN' WHEREAS THE SHORT TERM CAPITAL GAIN A MOUNTED TO RS. 14,029,045/- AS PER RETURN. GROUND. NO.5 BASED ON THE FACTS AND CIRCUMSTANCES OFTHE CASE, TH E LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS. IN LEVYING INTEREST UNDER SECTION 234B OF THE ACT. GROUND 0.6 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN INITIATING PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT AGAINST THE AS SESSEE FOR FURNISHING INACCURATE PARTICULARS OF INCOME. GROUND NO.7 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE HON'BLE DISPUTE RESOLUTION PANEL HAS ERRED IN LAW AND ON FA CTS IN PASSING A NON SPEAKING ORDER. 2. BRIEFLY STATED, FACTS OF THESE CASES ARE: DURIN G THE PROCESSING OF RETURN OF INCOME FILED BY THE ASSESSEE QUA THE ASSE SSMENT YEARS 2006-07 AN 2007-08, THE CASES WERE SUBJECTED TO SCRUTINY AN D SUBSEQUENTLY, NOTICE U/S 143(2) WERE SERVED UPON THE ASSESSEE AND IN RES PONSE THERETO, SHRI AMIT NAYYAR, SHRI ABHISHEK CHAWLA, MS. PREETI GOEL AND SH. RAHUL KOHLI CA AND ARS APPEARED AND FILED REQUISITE DETAI LS. 6 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 3. THE ASSESSEE IS A GOVERNMENT FINANCIAL INSTITUTI ON INCORPORATED IN JAPAN HAVING ITS REPRESENTATIVE OFFICE IN INDIA HAV ING STATUTORY MANDATE TO CARRY ON LENDING AND OTHER OPERATIONS FOR THE PROMO TION OF JAPAN EXPORT IMPORT AND ECONOMIC ACTIVITIES OVERSEAS. THE ASSES SEE IS ACTING AS COORDINATOR BETWEEN VARIOUS GOVERNMENT OF INDIA PUB LIC SECTOR UNDERTAKINGS. THE ASSESSEE HAS MADE INVESTMENTS IN SOUTH ASIAN REGIONAL APEX (SARA) FUND, WHICH IS A SEBI REGISTER ED VENTURE CAPITAL FUND (VCF) AS PER SEBI VENTURE CAPITAL FUND REGULAT IONS 1996 HAVING ITS OBJECTS TO PROVIDE EQUITY ASSISTANCE TO VENTURE CAPITAL UNDERTAKINGS IN INDIA. IT IS A MATTER OF RECORD THAT THE TOTAL PAI D UP CAPITAL OF SARA FUND AS ON 31.03.2006 WITH RS.1100 MILLION CONSISTING 2, 20,000 UNITS EACH OF RS.5,000/- OUT OF WHICH THE ASSESSEE HAS 50,000 UNI TS MAKING ITS TOTAL INVESTMENT TO RS.25,00,00,000/-. THE INCOME OF SAR A FUND IS EXEMPT AS PER THE PROVISIONS OF SECTION 10(23FV) OF THE ACT A ND IT ENJOYS PASS THROUGH STATUS OF THE INCOME EARNED BY IT WHICH IS TAXABLE IN THE HANDS OF INVESTOR IN THE FUNDS U/S 115U OF THE ACT. 4. SECTION 10(23FB) OF THE ACT ALLOWS EXEMPTION TO THE INCOME OF VENTURE CAPITAL COMPANY (VCC) / VENTURE CAPITAL FUN D (VCF) SET UP TO RAISE FUND TO BE INVESTED IN A VENTURE CAPITAL UNDE RTAKING AND BOTH THE VCC AND VCL ARE NOT CHARGEABLE TO TAX IN ITS OWN HA NDS BUT WILL PASS THROUGH ITS INCOME TO THE SHAREHOLDERS / INVESTORS FOR BEING SUBJECTED TO TAX AT THE RATES APPLICABLE TO THEM. STATUTE ENSUR ES THAT THE BURDEN OF TAX FALLS ON THE ULTIMATE BENEFICIARY. STATUTORY PROVI SIONS ALSO CONFER PASS THROUGH STATUS ON THE VCC AND VCL. DURING ASSESSME NT PROCEEDINGS, ASSESSEE AFTER OBTAINING NUMEROUS OPPORTUNITIES, FI LED WRITTEN SUBMISSIONS ALONG WITH MATHEMATICAL CHART TO THE QUERIES RAISED BY THE A.O. VIDE PARA 7 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 4.1, 4.2 AND 4.3 OF THE ASSESSMENT ORDER. THE LD. A.R. ALSO SUBMITTED THAT IN EACH OF THE YEAR IN WHICH THE SARA FUND MADE DIS TRIBUTION ITS INCOME AND PROFITS WERE LESS THAN THE AMOUNT ACTUALLY DIST RIBUTED AND AS SUCH, THE ASSESSEE IN THIS SITUATION AND IN VIEW OF THE PROVI SIONS CONTAINED IN SECTION 115U OFFERED ONLY PROPORTIONATE AMOUNT OF M ONEY RECEIVED ON DISTRIBUTION FOR TAX AND THE REMAINING AMOUNT WAS O UT OF THE CAPITAL OF VCF AND AS SUCH, SHOULD BE TREATED AS RETURN OF PAR T CAPITAL. 5. HOWEVER, THE A.O. CAME TO THE CONCLUSION THAT TH E QUERIES RAISED BY HIM REMAINED UNANSWERED. LD. A.R. HOWEVER, EXPLAIN ED THE MODUS OPERANDI OF DISTRIBUTION OF INCOME AND TREATMENT TH EREOF VERBALLY BUT NOTHING WAS PLACED ON RECORD IN WRITING TO SUPPORT ITS CONTENTION. HOWEVER, FROM THE RETURN OF INCOME, ANNEXURE TO THE RETURN AND THE CHART FILED ON 19 TH DEC., 2008, THE A.O. DRAWN THE FOLLOWING CONCLUSIO N REGARDING THE STATUS OF AFFAIR OF THE ASSESSEE: 4.7.1 DURING THE RELEVANT YEAR, SARA FUND DISTRIB UTED TOTAL AMOUNT OF RS.176,000,000 AMONGST ITS BENEFICIARIES. TOTAL RESERVE AVAILABLE FOR DISTRIBUTION BY SARA FUND WAS RS. 272 ,680,023, WHILE TOTAL INCOME TILL DATE OF SARA FUND WAS RS. 2 20,211,220. 4.7.2 THE RATIO OF TOTAL INCOME TO TOTAL RESERVE AVAILABLE, AS ON MARCH 31, 2008 WAS 80.76%. THE ASSESSEE ARGUE D THAT FOR EVERY 100 RS. DISTRIBUTED BY THE ASSESSEE, ONLY 80. 76 CORRESPOND TO INCOME, BALANCE BEING DISTRIBUTED OUT OF CAPITAL S UMS. 4.7.3 SARA FUND, AS PER ITS AUDITED ACCOUNTS INCU RRED ADMINISTRATIVE & OPERATIVE EXPENSES OF RS. 31,438, 256 OUT OF WHICH IT, IN THE FORM 64ISSUED, BOOKED AN AMOUNT OF RS. (25,083,999) UNDER THE HEAD 'OTHER INCOME'. IN THIS LOSS, THE ASSESSEE'S SHARE, BEING 22.73% SHARE HOLDER, COMES OUT TO BE RS. 5,700,909. HOWEVER, IN ITS RETURN, THE ASSESSEE CLA IMED THAT THE 'LOSS DISTRIBUTED BY VCCNCF BEING OTHER INCOME ON N ON-.VCU 8 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 UNITS' AS RS. 11,311,955. FURTHER, THE LOSS SHOWN U NDER THE HEAD 'OTHER INCOME' IS NOTHING BUT CLAIM OF EXPENSES INC URRED BY THE VCF. 4.7.4 THE ASSESSEE ALSO CLAIMED IN ITS RETURN THA T THE INCOME BY WAY OF DIVIDEND OF RS. 4,348,571 IS EXEMPT UNDER SECTION 10(34) OF THE ACT. 6. THE ASSESSEE VIDE LETTER DATED 26.12.2008 WAS AS KED TO EXPLAIN THE OTHER INCOME TO WHICH HE FILED REPLY VIDE LETTER DA TED 29.12.2008. SINCE THE ASSESSEE HAS FAILED TO PROVIDE THE DETAILS FOR ALLOWABILITY OF EXPENSES UNDER THE HEAD OTHER INCOME, HE WAS FURTHER GIVEN TIME TILL 30 TH DEC., 2008 TO FILE THE ADMISSIBLE DETAILS AS DETAILED IN PARA 5.6 OF THE ASSESSMENT ORDER. 7. DURING THE YEAR SARA FUND MADE TOTAL DISTRIBUTIO N OF RS.17,60,00,000/-. THE ASSESSEE CLAIMED THAT OUT O F THIS ONLY AMOUNT OF RS.11,97,38,454/- WAS OUT OF THE INCOME OF VCF AND REST WAS PAID OUT OF ITS OWN CAPITAL. FINDING THE SUBMISSIONS MADE BY T HE ASSESSEE NOT TENABLE, THE AMOUNT RECEIVED BY THE ASSESSEE FOUND TO BE FULLY TAXABLE. THE ASSESSEE CLAIMED AN AMOUNT OF RS.56,26,1546/- ( RS.176000000 199738454) TO BE OF CAPITAL NATURE OUT OF TOTAL DIS TRIBUTION OF SARA FUNDS OUT OF WHICH THE ASSESSEES SHARE AT 22.73% MADE OU T TO BE AT RS.12788250/- WHICH IS TAXED IN THE HANDS OF ASSESS EE AS INCOME FROM OTHER SOURCES. 8. THE ASSESSEE IN COMPUTATION SHOWED DIVIDEND INCO ME OF RS.43,48,571/- WHICH WAS CLAIMED EXEMPT U/S 10(34) OF THE ACT, WHICH WAS EXAMINED IN THE LIGHT OF THE PROVISIONS CONTAIN ED U/S 10(30), 115-O AN 115U(4) OF THE ACT. THE A.O. CAME TO THE CONCLU SION THAT WHILE 9 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 DISTRIBUTING THE AFORESAID DIVIDEND THE VCF WAS NOT OBLIGED TO DEDUCT DIVIDEND DISTRIBUTION TAX AS SECTION 115U(4) CLEARL Y SHOWS THAT THE CHARACTER OF SUCH DISTRIBUTION BY THE VCF IS INDEED DIVIDEND BUT FOR EXEMPTION PROVIDED U/S 155U(4), THE VCF WOULD HAVE TO DEDUCT DIVIDEND DISTRIBUTION TAX ON SUCH DISTRIBUTION. THE A.O. DI SALLOWED THE CLAIM OF ASSESSEE SEEKING EXEMPTION U/S 10(34) OF THE ACT ON DIVIDEND INCOME OF RS.434857/- AND TAXED THE ENTIRE INCOME OF RS.43485 7/- U/S 56 OF THE ACT. 9. REGARDING CLAIM OF LOSS OF RS.1,13,11,955/- UNDE R THE HEAD OTHER INCOME, A.O. EXAMINED THE SUBMISSIONS MADE BY THE ASSESSEE IN THE LIGHT OF THE PROVISIONS CONTAINED U/S 115U(1) AND CAME TO THE CONCLUSION THAT THE ASSESSEES CASE DOES NOT FALL U/S 115U OF THE A CT. THE A.O., ALSO CAME TO THE CONCLUSION THAT NO RIGHT MINDED PERSON WOULD SPEND AN AMOUNT OF MORE THAN RS.3,00,00,000/- ON EARNING INTEREST INCO ME OF RS.24145/- ONLY AND SARA FUND IS NO EXCEPTION AND AS SUCH THE EXPEN SES DEBITED IN THE P & L ACCOUNT BY SARA FUND ARE NOT ALLOWABLE AGAINST THE INCOME EARNED FROM AND INDEPENDENTLY EXAMINED THE ALLOWABILITY IN THE HANDS OF VCF. SO, CONSEQUENTLY, THE A.O. DISALLOWED THE EXPENSE O F RS.11311955/- UNDER THE HEAD OTHER INCOME U/S 57 OF THE ACT. 10. THE ASSESSEE CARRIED THE MATTER BEFORE LD. CIT( A) WHO HAS ENDORSED THE VIEW TAKEN BY THE A.O. AND DISMISSED T HE APPEAL OF THE ASSESSEE. FEELING AGGRIEVED, THE ASSESSEE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 11. LD. A.R. FOR THE ASSESSEE CONTENDED THAT SO FAR AS THE APPLICABILITY OF SECTION 115-O IS CONCERNED, THE ISSUE IS COVERED ONE AS PER CBDT CIRCULAR NO.794 DATED 09.08.2000 AND HAS RELIED UPO N THE ORDER PASSED BY 10 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 ITAT IN CASE ENTITLED SCOPE PVT. LTD. VS DCIT (2013 ) 33 TAXMAN.COM 167 (MUMBAI TRIBUNAL). 12. HOWEVER, ON THE OTHER HAND, LD. D.R. REPELLED T HE ARGUMENTS ADDRESSED BY LD. A.R. BY CONTENDING INTER ALIA THAT EXCEPT THAT CAPITAL OF SARA FUND REMAINED CONSISTENT AND IT IS CASE OF DIS TRIBUTION OF INCOME AND NOT A CASE OF DISTRIBUTION OF CAPITAL; THAT THE CONTENTION OF THE ASSESSEE THAT HE IS BOUND BY FORM 64 IS NOT TENABLE, WHICH A LONE CANNOT ABSOLVE THE ASSESSEE FROM ITS LIABILITY NOR THE REVENUE CAN SHUT ITS EYES TO APPLY SECTION 57 OF THE ACT, BECAUSE ASSESSEE IS TO EXPEN D TO EARN ONLY THAT MUCH INCOME; THAT THE EXEMPTION TO THE ASSESSEE IS AVAILABLE ON THE DIVIDEND COVERED U/S 115-O OF THE ACT ONLY; THAT TH E ASSESSEE RECEIVED THE DIVIDEND SO DEDUCTION OF DIVIDEND TAX AND EXEMPTION U/S 10(34) IS NOT AVAILABLE TO THE ASSESSEE; THAT LOSS CLAIMED ON ACC OUNT OF OTHER INCOME, SHOULD BE DISTRIBUTED IN THE SAME PROPORTION. 13. WE HAVE HEARD BOTH THE LD. AUTHORIZED REPRESENT ATIVES AND GONE THROUGH THE MATERIAL PLACED ON RECORD IN THE LIGHT OF FACTS AND CIRCUMSTANCES OF THE CASE AND ORDERS OF TAX AUTHORI TIES. 14. GROUND NO.1(I) AND 1(II) OF I.T.A.NO. 3284/DEL/2012 AND GROUND NO.1 OF I.T.A.NO. 5705/DEL/2010: NOW, THE FIRST QUESTION ARISES FOR DETERMINATION I N THIS CASE IS, AS TO WHETHER THE ASSESSEE IS ENTITLED FOR EXEMPTION U /S 10(34) OF THE ACT AND THE SHARE OF DIVIDEND INCOME OF RS.434857/- OUT OF DIVIDEND INCOME RECEIVED BY SARA FUND BY VENTURE CAPITAL FUND (VCF) . 11 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 14.1 TO DECIDE THE CONTROVERSY AT HAND, NEWLY ADDED PROVISIONS CONTAINED U/S 115U OF THE ACT VIDE CBDT RULE NO.794 DATED 09.08.2000 ARE REPRODUCED S UNDER FOR READY REFERENCE: 13.8. SECTION 115U OF THIS CHAPTER PROVIDES THAT, (I) ANY INCOME RECEIVED BY A PERSON OUT OF INVESTMENTS MADE IN A V ENTURE CAPITAL COMPANY OR A VENTURE CAPITAL FUND SHALL BE CHARGEAB LE TO INCOME- TAX AS IF IT WERE THE INCOME RECEIVED BY SUCH PERSO N FROM INVESTMENTS MADE DIRECTLY IN THE VENTURE CAPITAL UN DERTAKING ; (II) THE PERSON RESPONSIBLE FOR MAKING PAYMENT OF T HE INCOME ON BEHALF OF A VENTURE CAPITAL COMPANY OR A VENTURE CA PITAL FUND AND THE VENTURE CAPITAL COMPANY OR THE VENTURE CAPITAL FUND WILL BE REQUIRED TO FURNISH WITHIN THE PRESCRIBED TIME A ST ATEMENT IN THE PRESCRIBED FORM AND VERIFIED IN THE PRESCRIBED MANN ER GIVING DETAILS OF THE NATURE OF INCOME DISTRIBUTED DURING THE PREVIOUS YEAR. THIS STATEMENT IS TO BE FURNISHED TO THE PERSON REC EIVING SUCH INCOME AND TO THE PRESCRIBED INCOME-TAX AUTHORITY ; (III) THE INCOME PAID BY THE VENTURE CAPITAL COMPAN Y AND THE VENTURE CAPITAL FUND SHALL BE DEEMED TO BE OF THE S AME NATURE AND IN THE SAME PROPORTION IN THE HANDS OF THE PERSON R ECEIVING' SUCH INCOME AS IT HAD BEEN RECEIVED BY OR ACCRUED TO THE VENTURE CAPITAL COMPANY OR THE VENTURE CAPITAL FUND, AS THE CASE MA Y BE DURING THE PREVIOUS YEAR; . (IV) THE PROVISIONS OF CHAPTER XII-D OR XII-II; OR XVII-B SHALL NOT APPLY TO THE INCOME PAID BY A VENTURE CAPITAL COMPA NY OR VENTURE CAPITAL FUND UNDER THIS CHAPTER IS MEANS THAT NO TA X SHALL BE PAYABLE UNDER SECTION 115-O AND SECTION 115-R AND N O TAX DEDUCTION AT SOURCE SHALL BE MADE UNDER THE PROVISI ONS CONTAINED IN CHAPTER XVII-B FROM INCOME PAID BY VENTURE CAPIT AL COMPANY OR A VENTURE CAPITAL FUND TO AN INVESTOR. 14.2 UNDISPUTEDLY, ASSESSEE COMPANY HAS INVESTED IN SARA FUND, A SEBI REGISTERED VCF AS PER SEBI VENTURE CAPITAL REG ULATIONS 1996. LD. A.R. FOR THE ASSESSEE CONTENDED THAT SECTION 115U P ROVIDES PASS THROUGH STATUS TO THE VCF WHICH QUALIFIES CONDITIONS LAID DOWN U/S 10(23FB) AND 12 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 A SUCH ANY INCOME RECEIVED BY THE INVESTOR FOR THE VCF SHALL BE CHARGEABLE TO INCOME TAX IN THE SAME MANNER AS IF I T WAS THE INCOME EARNED FROM THE INVESTMENT MADE BY INVESTOR DIRECTL Y INTO THE VENTURE CAPITAL UNDERTAKING (VCU) AND CONSEQUENTLY, THE ASS ESSEE HAS ISSUED A STATEMENT IN FORM 64 READ WITH RULE 12C EXPLAINING THE NATURE OF EXPLANATION OF INCOME EARNED BY THE FUND. THE ISSU E IN CONTROVERSY HAS CROPPED UP BEFORE ITAT MUMBAI BENCH E IN CASE CIT ED AS SCOPE PVT. LTD. VS DCIT 33 TAXMAN.COM 167 . THE COORDINATE BENCH DECIDED THE ISSUE IN CONTROVERSY AS UNDER: 10.1 THE DISPUTE BEFORE US IS REGARDING TAXABILITY OF THE RECEIPT/INCOME OF THE ASSESSEE AS RECEIVED FROM IVF IN THE SHAPE OF SHARES OF BIOCON AND SHORT TERM CAPITAL LOSS ON SAL E OF SHARES BY IVF ITSELF. THE TREATMENT OF SUCH INCOME HAS BEEN P ROVIDED UNDER SEC. 115U. FOR THE SAKE OF READY REFERENCE, WE QUOT E SECTION 115U: AS EXIST AT THE RELEVANT TIME: '115U: (1) NOTWITHSTANDING ANYTHING CONTAINED IN AN Y OTHER PROVISIONS OF THIS ACT, ANY INCOME RECEIVED BY A PE RSON OUT OF INVESTMENTS MADE IN A VENTURE CAPITAL COMPANY OR VE NTURE CAPITAL FUND SHALL BE CHARGEABLE TO INCOME-TAX IN THE SAME MANNER AS IF IT WERE THE INCOME RECEIVED BY SUCH PERSON HAD HE MADE INVESTMENTS DIRECTLY IN THE VENTURE CAPITAL UNDERTAKING. (2) THE PERSON RESPONSIBLE FOR MAKING PAYMENT OF TH E INCOME ON BEHALF OF A VENTURE CAPITAL COMPANY OR A VENTURE CA PITAL FUND AND THE VENTURE CAPITAL COMPANY OR VENTURE CAPITAL FUND SHALL FURNISH, WITHIN SUCH TIME AS MAY BE PRESCRIBED, TO THE PERSO N RECEIVING SUCH INCOME AND TO THE PRESCRIBED INCOME TAX AUTHORITY, A STATEMENT IN THE PRESCRIBED FORM AND VERIFIED IN THE PRESCRIBED MANNER, GIVING DETAILS OF THE NATURE OF THE INCOME PAID DURING THE PREVIOUS YEAR AND SUCH OTHER RELEVANT DETAILS AS MAY BE PRESCRIBE D. (3) THE INCOME PAID BY THE VENTURE CAPITAL COMPANY AND THE VENTURE CAPITAL FUND SHALL BE DEEMED TO BE OF THE S AME NATURE AND IN THE SAME PROPORTION IN THE HANDS OF THE PERSON R ECEIVING SUCH 13 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 INCOME AS IT HAD BEEN RECEIVED BY, OR HAD ACCRUED T O, THE VENTURE CAPITAL COMPANY OR THE VENTURE CAPITAL FUND, AS THE CASE MAY BE, DURING THE PREVIOUS YEAR. (4) THE PROVISIONS OF CHAPTER XII-D OR CHAPTER XII- E OR CHAPTER XVII-B SHALL NOT APPLY TO THE INCOME PAID BY A VENT URE CAPITAL COMPANY OR VENTURE CAPITAL FUND UNDER THIS CHAPTER. ' EXPLANATION: FOR THE PURPOSE OF THIS CHAPTER, 'VENT URE CAPITAL COMPANY' 'VENTURE CAPITAL FUND' AND 'VENTURE CAPITA L UNDERTAKING' SHALL HAVE THE MEANINGS RESPECTIVELY ASSIGNED TO TH EM IN CLAUSE 23(FB} OF SEC. 10).' 10.2 AS IT IS MANIFEST FROM THE PROVISIONS OF SEE 115 U THAT ANY INCOME ACCRUING OR ARISING OR TO RECEIVE BY A PERSO N OUT OF INVESTMENT MADE IN VENTURE CAPITAL COMPANY OR VENTU RE CAPITAL FUND SHALL BE CHARGEABLE TO TAX IN THE SAME MANNER AS IF SUCH PERSON HAD MADE INVESTMENT DIRECTLY IN THE VENTURE CAPITAL UND ERTAKING. THUS, AS PER SECTION 1 15U, TRUSTEE VENTURE CAPITAL COMPA NY OR VENTURE CAPITAL FUND IS GIVEN THE STATUS OF PASS THROUGH VE HICLE FOR THE PURPOSE OF THE TREATMENT OF THE INCOME RECEIVED ON ACCOUNT OF INVESTMENT MADE IN THE VENTURE CAPITAL UNDERTAKING. MEANING THEREBY, A PERSON WHO MAKES INVESTMENT IN THE VENTU RE CAPITAL COMPANY OR VENTURE CAPITAL FUND AND EARNED THE INCO ME OUT OF SUCH INVESTMENT, SUCH INCOME SHALL BE TREATED AS IF THE INVESTMENT WAS DIRECTLY IN THE VENTURE CAPITAL UNDERTAKING AND VEN TURE CAPITAL FUND OR VENTURE CAPITAL COMPANY, IS ONLY A PASS THROUGH VEHICLE. 11. CHAPTER XII-F AND SECTION 115U HAVE BEEN INTROD UCED IN THE STATUTE VIDE FINANCE ACT 2000 FOR MAKING VCFNCC AS A PASS THROUGH VEHICLE AND TAXING INVESTORS AS IF THEY HAD RECEIVED INCOME DIRECTLY FROM THE VENTURE CAPITAL UNDERTAKING. THIS SECTION HAS BEEN INTRODUCED CORRESPONDING TO THE INSERTION OF N EW CLAUSE (23FB) IN SECTION 10 BEING AN ENABLING PROVISION FO R TAXING INVESTORS, WHO RECEIVES THE INCOME FROM VCCNCF BECA USE, AS PER THE PROVISIONS OF SECTION 10(23FB) ANY INCOME OF VC C OR VCF IS EXEMPT. SEC. 115U IS INTENDED TO GRANT TAX CONCESSI ON TO THE RECIPIENT OF INCOME FROM A VCC/VCF AND SUCH INCOME IN THE HANDS OF THE INVESTOR SHALL BE CHARGEABLE TO TAX AS IF IT WERE INCOME FROM INVESTMENT IN VENTURE CAPITAL UNDERTAKING MADE DIRE CTLY BY SUCH 14 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 PERSON. THUS, SECTION 115U STIPULATES THAT THE INCO ME RECEIVED BY A PERSON FROM VCCNCF SHALL BE DEEMED TO BE OF SAME NA TURE AND THE SAME PROPORTION ACCRUING TO THE VCFNCF. HOWEVER , THE CONCESSION IN TAX IS IN THE SHAPE THAT THE PROVISIO NS OF CHAPTER XII- D OR XII-E OR XVII-B SHALL NOT APPLY TO THE INCOME PAID BY THE VCC OR VCF. THIS MEAN THAT NO TAX SHALL BE PAYABLE U/S 115-0 OR SECTION 115R AND NO TAX DEDUCTION AT SOURCE SHALL BE MADE U NDER THE PROVISIONS CONTAINED IN CHAPTER XVII-B FROM THE INC OME PAID BY THE VCC OR VCF TO AN INVESTOR. 11.1 AS PER SUB.-SEC (2) OF SECTION 115U, IT IS MAN DATORY ON THE PART OF THE VCC OR VCF TO FURNISH A STATEMENT IN THE PRE SCRIBED FORM AND VERIFY IN THE PRESCRIBED MANNER GIVING THE DETA ILS OF NATURE OF INCOME PAID DURING THE PREVIOUS YEAR. FORM 64 IS PR OVIDED FOR MAKING THE STATEMENT OF INCOME DISTRIBUTED BY VCC O R VCF TO BE FURNISHED U/S 115U OF THE IT ACT. IT MAKES CLEAR TH AT VCC OR VCF HAS TO FURNISH THE DETAILS OF THE NATURE OF INCOME RECEIVED BY THE INVESTOR FROM VCC OR VCF. THE DETAILS SPECIFICALLY REQUIRES ABOUT THE INCOME/AMOUNT PAID UNDER LONG TERM CAPITAL GAIN S, SHORT TERM CAPITAL GAINS, DIVIDEND OR OTHER INCOME SUCH AS INT EREST ETC. THUS, SECTION MANDATES THAT THE NATURE OF INCOME WHICH IS RECEIVED BY THE VCC OR VCF FROM THE VENTURE CAPITAL UNDERTAKING AND FURTHER DISTRIBUTED TO THE INVESTOR SHALL BE TAXABLE IN THE HANDS OF THE INVESTOR BY TREATING THE SAME NATURE OF INCOME LIKE LONG TERM CAPITAL GAIN SHORT TERM CAPITAL GAINS, DIVIDEND OR OTHER INCOME SUCH AS INTEREST ETC., 'AND ACCORDINGLY BE TAXED AS PER THE PROVISIONS AS APPLICABLE UNDER DIFFERENT HEADS OF THE INCOME. HEN CE, SECTION 115U PRESCRIBES THE PRINCIPLE OF PASS THROUGH BY TR EATING THE VCC OR VCF AS A PASS THROUGH VEHICLE AND FURTHER, GRANT S SOME CONCESSION IN THE SHAPE OF NON-APPLICABILITY OF PRO VISIONS OF CHAPTER XIV -D, XII E OR XVII B; BUT DOES NOT PROVI DE THAT THE INCOME RECEIVED BY THE INVESTOR FROM VCC OR VCF IS EXEMPT. 11.1.1 EVEN OTHERWISE, IF THE OBJECTIVE OF INTRODUC TION OF SEC. 115U IS TO EXEMPT THE INCOME RECEIVED BY INVESTOR FROM V CC OR VCP, THEN THE PROVISIONS SHOULD HAVE FOUND PLACE U/S 10 IN A SIMILAR MANNER AS PROVIDED UNDER CLAUSE 23FB OF SECTION 10. 12. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT THE INCOME RECEIVED BY THE ASSESSEE FR OM IVF IS 15 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 TAXABLE IN THE MANNER AS PRESCRIBED U/S 115U AND DI SCUSSED ABOVE. SINCE THE ASSESSING OFFICER HAS ASSESSED THE INCOME AS SHORT TERM CAPITAL GAIN; THEREFORE, THE CLAIM OF THE ASSE SSEE AS SHORT TERM CAPITAL LOSS HAS TO BE ALLOWED. ACCORDINGLY, WE FIN D MERIT AND SUBSTANCE IN THE ALTERNATIVE PLEA OF THE LD AR REGA RDING THE CLAIM OF SHORT TERM CAPITAL LOSS AGAINST THE SHORT TERM CAPI TAL GAINS. 14.3 THE ASSESSEE IN ORDER TO AVAIL THE PASS THROUG H STATUS AS VENTURE CAPITAL FUND BY QUALIFYING THE CONDITIONS LAID DOWN U/S 10(23FB) ISSUED THE STATEMENT IN FORM 64 READ WITH RULE 12C EXPLAIN ING THE NATURE OF EXPLANATION OF INCOME EARNED BY THE FUND LYING AT P AGES 57-59 IN THE PAPER BOOK FOR THE YEAR 2006-07. 14.4 FROM THE PROVISIONS CONTAINED U/S 115U AND THE FINDINGS RETURNED BY THE COORDINATE BENCH IN THE CASE SCOPE (P) LTD ( SUPRA), IT HAS BECOME APPARENTLY CLEAR THAT THE NATURE OF INCOME RECEIVED BY VCC OR VCF FOR VENTURE CAPITAL UNDERTAKING (VCU) AND FURTHER DISTR IBUTED TO THE INVESTORS SHOULD BE TAXABLE IN THE HANDS OF INVESTO RS BY TREATING THE SAME IN THE NATURE OF INCOME LIKE LONG TERM CAPITAL GAIN , SHORT TERM CAPITAL GAIN, DIVIDEND INCOME OR OTHER INCOME SUCH AS INTEREST AN D IS TO BE TAXED AS PER THE PROVISIONS APPLICABLE UNDER DIFFERENT HEADS OF INCOME. SO, IT IS PROVED THAT THE ASSESSEE COMPANY HAS INVESTED IN SARA FUND , A SEBI REGISTERED VCF, A PASS THROUGH ENTITY AND INCOME RECEIVED FROM SARA FUND BY THE ASSESSEE COMPANY BEING INVESTOR, SHALL BE TAXABLE B Y TREATING THE SAME NATURE OF INCOME LIKE LTCG, STCG, DIVIDEND AND OTHE R INCOME SUCH AS INTEREST ETC. AND AS SUCH, TO BE TAXED AS PER THE P ROVISIONS AS APPLICABLE UNDER DIFFERENT HEADS OF INCOME. SECTION 115U PROV IDES FOR PASS THROUGH STATUS BY TREATING THE VCC AND VCF A PASS THROUGH V EHICLE AND FURTHER GUARANTEE SOME CONCESSION IN THE SHAPE OF NON APPLI CABILITY OF PROVISIONS 16 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 OF CHAPTER 14D, 12E AND 17B BUT NEVER PROVIDE THAT THE INCOME RECEIVED BY THE INVESTOR FROM VCC AND VCF IS EXEMPT. 14.5 LD. CIT(A) ENDORSING THE FINDINGS RETURNED BY THE A.O., CAME TO THE CONCLUSION AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT FINDINGS OF THE AO AND THE FACTS ON RECORD. AFTER' EXAMINING THE VA RIOUS PROVISIONS OF LAW IT IS CLEAR THAT THE NATURE OF PAYMENT BY SA RA FUND TO THE APPELLANT IS IN THE NATURE OF DIVIDEND/INCOME FROM MUTUAL FUND. THE EXEMPTION FROM LEVYING ADDITIONAL TAX ON DIVIDENDS ALLOWED U/S 115U(4) WOULD NOT CHANGE THE NATURE OF THE INCOME I N THE HAND OF THE APPELLANT. ON THE OTHER HAND UNLESS ADDITIONAL TAX HAS BEEN PAID AS PER THE PROVISIONS OF SECTION 1150 AND 115R , THE APPELLANT CANNOT ENJOY TAX FREE INCOME U/S 10(34) AND 10(35) OF THE IT ACT. IN VIEW OF THE DISCUSSIONS ABOVE IT IS HELD THAT EX EMPTION CLAIMED U/S 10(34)/10(35) IS TO BE ALLOWED ONLY TO THE DIVI DEND/INCOME DISTRIBUTED AS PER THE PROVISIONS OF SECTION 1150/ 115R AND THEREFORE, THIS GROUND OF APPEAL IS DISMISSED. 14.6 HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT TH E A.O. AS WELL AS LD. CIT(A) HAVE TAKEN A WRONG VIEW BY HOLDING THAT THE ASSESSEE CANNOT GROW TAX FREE INCOME U/SS 10(34) AND 10(35) OF THE ACTS UNLESS ADDITIONAL TAX HAS BEEN PAID AS PER THE PROVISIONS OF SECTIONS 115 -O AND 115-R OF THE ACT AND AS SUCH THE EXEMPTION CLAIMED U/SS 10(34) A ND 10(35) IS TO BE ALLOWED ONLY IF THE DIVIDEND INCOME DISTRIBUTED AS PER THE PROVISIONS OF SECTIONS 115-O AND 115-R WHEREAS, THE CONDITIONS LA ID DOWN U/S 115-O TO AVAIL THE EXEMPTION U/S 10(34), IS TO BE COMPLIED W ITH AT THE LEVEL OF VENTURE CAPITAL UNDERTAKING AND NOT AT THE STAGE WH EN THE INVESTOR, THE ASSESSEE IN THIS CASE, RECEIVED THE DIVIDEND INCOME FROM VCF. SO, THE ASSESSEE IS ENTITLED FOR EXEMPTION U/S 10(34) OF TH E ACT AND ITS SHARE OF DIVIDEND INCOME IS OUT OF DIVIDEND INCOME RECEIVED BY SARA FUND. 17 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 WHEN THE COMPANY WITH WHICH SARA FUND HAS BEEN INVE STED, HAD ALREADY PAID ADDITIONAL INCOME TAX ON THE EARNED DI VIDEND AS REQUIRED U/S 115-O OF THE ACT, SARA FUND WAS NOT REQUIRED TO P AY ADDITIONAL INCOME TAX SECOND TIME ON THE SAME INCOME. CONSEQUENTLY, GROUNDS NO.1(I) AND 1(II) OF I.T.A. NO. 3284/DEL/2012 AND GROUND NO.1 O F I.T.A. NO. 5705/DEL/2010 ARE DETERMINED IN FAVOUR OF THE ASSES SEE. 15. GROUND NO.2 OF I.T.A.NO. 3284/DEL/2012 AND GROUND N O.2 OF I.T.A.NO. 5705/DEL/2010: NOW, THE NEXT QUESTION ARISES FOR DETERMINATION IS , AS TO WHETHER THE A.O. AS WELL AS LD. CIT(A) HAVE ERRED IN DISALL OWING THE EXPENSE OF RS.1,13,11,955/- IN I.T.A.NO.3284/DEL/2012 AND RS.3 7,94,980/- IN I.T.A.NO.5705/DEL/2010, BY TAXING THE SHARE OF APPE LLANT AS INTEREST INCOME FROM VCF UNDER THE HEAD OTHER INCOME ON GR OSS BASIS AND NOT ON NET BASIS IN DISREGARD OF THE FACT THAT THE INCO ME OF VCF CAN BE PASSED ON TO ITS INVESTORS ONLY AFTER ADJUSTING THE EXPENS ES TO INCUR OUT OF FUNDS PROVIDED BY THE INVESTORS EARNING SUCH INCOME. 15.1 THE A.O. DISALLOWED THE EXPENSES OF RS.1131195 5/- REPRESENTING THE ASSESSEES SHARE OF EXPENSES INCURRED BY SARA F UND EARNING INCOME UNDER VARIOUS HEADS ON THE GROUND THAT THE AFORESAI D CLAIM OF EXPENSES WERE INCURRED BY SARA FUND DURING THE COURSE OF ITS BUSINESS AND NOT BY THE APPELLANT AND AS SUCH COULD NOT BE CLAIMED AS D EDUCTION BY THE ASSESSEE. 15.2 LD. A.R. CONTENDED THAT WHEN THE FUND IS REQUI RED TO DISTRIBUTE ONLY NET INCOME IT MUST TAKE INTO CONSIDERATION THE EARL IER YEAR AND CURRENT YEAR LOSSES AND ALSO EXPENSES INCURRED TO RUN THE FUND I N EARLIER YEAR AND CURRENT YEAR WHILE DETERMINING THE QUANTUM OF DISTR IBUTION. 18 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 15.3 ON THE OTHER HAND, LD. CIT(A) ALSO ARRIVED AT THE DECISION THAT SUCH TAXABLE ENTITY IS TO BE TAXED ON ITS NET INCOME I.E . GROSS INCOME LESS EXPENSES INCURRED FOR EARNING SUCH INCOME. IN THE INSTANT CASE, THE SARA FUND WHICH HAS EARNED INCOME INTER ALIA FROM ENTERI NG INTO MUTUAL FUND AND THAT ITS ENTIRE BOOK EXPENSES INCURRED BY IT AN D DISTRIBUTED THE BALANCE TO THE BENEFICIARY, SINCE THE ASSESSEE IS CLAIMING EXPENDITURE INCURRED BY SARA FUND AS LOSS UNDER THE HEAD OTHER INCOME, TH E SAME ARE NOT ALLOWABLE. 15.4 THE ISSUE IN CONTROVERSY IS AGAIN REQUIRED TO BE DETERMINED IN CONSONANCE WITH THE PROVISIONS CONTAINED U/S 115U D ISCUSSED IN THE PRECEDING PARAGRAPHS WHICH MANDATES THAT VENTURE CA PITAL COMPANY AND VENTURE CAPITAL FUND IS GIVEN THE STATUS OF PASS TH ROUGH VEHICLE FOR THE PURPOSE OF TREATMENT OF INCOME RECEIVED ON ACCOUNT OF INVESTMENT MADE IN THE VENTURE CAPITAL UNDERTAKING. A PERSON WHO MA KES INVESTMENT IN THE VENTURE CAPITAL COMPANY OR VENTURE CAPITAL FUND, TH E ASSESSEE IN THIS CASE, EARNED THE INCOME OUT OF SUCH INVESTMENT WHICH INCO ME SHALL BE TREATED FIRSTLY AS INVESTMENT DIRECTLY IN THE VENTURE CAPIT AL UNDERTAKING AND VENTURE CAPITAL FUND OR VENTURE CAPITAL COMPANY IS ONLY A PASS THROUGH VEHICLE. SO, IN THESE CIRCUMSTANCES, THE ASSESSEE COMPANY IS ENTITLED TO BOOK EXPENDITURE INCURRED BY SARA FUND AS IF THE SA ME HAS BEEN INCURRED BY THE ASSESSEE DIRECTLY IN THE VENTURE CAPITAL FUN D. SO, WE ARE OF THE VIEW THAT THE EXPENSES OF RS.1,13,11,955/- DISALLOWED BY LD. CIT(A) BY TAKING THE SHARES OF THE ASSESSEE IN INTEREST INCOME FROM VCF UNDER THE HEAD OTHER SOURCES ON GROSS BASIS AND NOT THE NET BASIS, WHICH REQUIRES TO BE DETERMINED BY TREATING THE SAME NATURE OF INCOME LI KE LONG TERM CAPITAL 19 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 GAIN, SHORT TERM CAPITAL GAIN, DIVIDEND AND OTHER I NCOME SUCH AS INTEREST ETC. SO, GROUNDS NO.2 OF BOTH THE APPEALS ARE DETE RMINED IN FAVOUR OF THE ASSESSEE. 16. GROUND NO.3 OF I.T.A.NO. 3284/DEL/2012 AND GROUND N O.3 OF I.T.A.NO. 5705/DEL/2010: NOW, THE NEXT QUESTION ARISES FOR DETERMINATION IS , AS TO WHETHER LD. CIT(A) AND ASSESSING OFFICER QUA THE ASSESSMENT YEARS 2006-07 AN 2007-08 RESPECTIVELY ERRED IN HOLDING THAT THE ASSE SSEES SHARE IN THE PAYMENT @ 22.23% WAS ASSESSABLE IN ASSESSEES HANDS AS INCOME FROM OTHER SOURCES. 16.1 UNDISPUTEDLY, OUT OF THE TOTAL DISTRIBUTION OF RS.17,60,00,000/- DURING THE ASSESSMENT YEAR 2006-07, ONLY RS.11,97,3 8,454/- WAS OUT OF THE INCOME OF VCF AND SIMILARLY, OUT OF TOTAL DISTR IBUTION OF RS.23,10,00,000/- IN A.Y. 2007-08, ONLY RS.22,58,39 ,902/- WAS OUT OF THE INCOME OF VCF AND THE REST WAS PAID OUT OF ITS CAPI TAL . AGAIN, THIS ISSUE IS REQUIRED TO BE DETERMINED IN THE LIGHT OF THE PR OVISIONS CONTAINED U/S 115U, WHICH DETERMINES THE TAXABILITY OF THE INCOME IN THE HANDS OF INVESTOR UPON ITS RECEIPT. 16.2 LD. A.R. CONTENDED THAT ANY INCOME RECEIVED BY A PERSON FROM THE INVESTMENT MADE IN THE VCF SHALL BE CHARGEABLE TO T AX U/S 115U IN THE SAME MANNER AS IF IT WAS THE INCOME RECEIVED FROM S UCH PERSON HAD HE MADE INVESTMENT DIRECTLY IN VENTURE CAPITAL UNDERTA KING (VCU) AND RELIED UPON FORM 64 LYING AT PAGES 57-59 OF THE PAPER BOOK FOR ASSESSMENT YEAR 2006-07 AND AT PAGES 2 -4 OF THE PAPER BOOK FOR ASS ESSMENT YEAR 2007- 08 EXPLAINING THE BIFURCATION OF INCOME UNDER VARIO US HEADS IN THE SAME 20 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 PROPORTION AS THE INCOME RECEIVED BY THE FUND UNDER VARIOUS HEADS ON BEHALF OF ALL THE BENEFICIARIES. 16.3 FROM THE PERUSAL OF FORM 64 AND BALANCE SHEET / REVENUE ACCOUNT OF SARA FUND, IT IS PROVED THAT DISTRIBUTION OF RS.17, 60,00,000/- QUA A.Y. 2006-07 AND RS.11,72,890/- QUA A.Y. 2007-08 WAS MAD E TO ITS BENEFICIARIES AS PER THE NUMBER OF UNITS PURCHASED BY EACH BENEFICIARY, WHICH FACT IS EXPLAINED IN THE FOOT NOTE 3 OF FORM 64 AND IT ALSO APPEARS IN THE BALANCE SHEET / REVENUE ACCOUNT OF SARA FUND AN D THE ASSESSEE HAS RIGHTLY DISCLOSED THE INCOME AT RS.119738454/- BY S UBTRACTING THE AMOUNT OF RS.56261546/- WHICH IS THE AMOUNT OF CAPITAL NAT URE AND AS SUCH NOT TAXABLE IN THE HANDS OF INVESTOR BY TREATING THE SA ME NATURE OF INCOME LIKE LTCG, STCG, DIVIDEND AND OTHER INCOME SUCH AS INTER EST ETC. AND AS SUCH TO BE TAXED AS PER THE PROVISIONS AS APPLICABL E UNDER DIFFERENT HEADS OF INCOME MEANING THEREBY A PERSON WHO MAKES INVEST MENT IN THE VCC AND VCF, THE ASSESSEE IN THIS CASE, EARNED THE INCO ME OUT OF SUCH INVESTMENT, WHICH INCOME SHALL BE TREATED AS IF THE INVESTMENT WAS DIRECTLY IN THE VCU AND VCF AND VCC IS ONLY A PASS THROUGH VEHICLE. SO, THE ASSESSEE HAS RIGHTLY TAKEN THE NET INCOME F OR TAX AT RS.11,97,38,454/- BY SUBTRACTING THE AMOUNT OF RS.5 ,62,61,546/- AND THE ASSESSEE IS LIABLE TO BE TAXED ACCORDINGLY. SO, LD . CIT(A) HAS ERRED IN HOLDING THAT THE APPELLANTS SHARE IN THE PAYMENT O F RS.5,62,61,546/- (17,60,00,000 11,97,38,454) @ 22.73% I.E. RS.1,27 ,88,250/- AS INCOME FROM OTHER SOURCES IN THE HANDS OF ASSESSEE, WHICH IS REQUIRED TO BE ASSESSED IN VIEW OF THE PROVISIONS CONTAINED U/S 11 5U OF THE ACT. SO, WE DETERMINE THE GROUNDS NO.3 OF BOTH THE APPEALS IN F AVOUR OF THE ASSESSEE. 21 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 17. GROUND NO.4 OF I.T.A.NO. 3284/DEL/2012 AND GROUND N O.5 OF I.T.A.NO. 5705/DEL/2010: NOW, THE NEXT QUESTION ARISE FOR DETERMINATION IN THIS CASE IS, AS TO WHETHER LD. CIT(A) HAS ERRED IN LAW AND IN CHARGIN G INTEREST AMOUNTING TO RS.3090221/- U/S 234B AND INTEREST WITHDRAWN U/S 244A OF THE ACT. SINCE THIS GROUND IS CONSEQUENTIAL, THE SAME IS REQ UIRED TO BE DECIDED IN FAVOUR OF ASSESSEE IN VIEW OF THE FINDINGS ON GROUN DS NO.1, 2 & 3 TO THE EXTENT ASSESSEES INCOME IS TO BE TAXED IN THE LIGH T OF THE PROVISIONS CONTAINED U/S 115U OF THE ACT. 18. GROUND NO.4 OF I.T.A.NO. 5705/DEL/2010: THE ASSESSEES CLAIM IN THIS GROUND IS, THE ASSESSI NG OFFICER WITHOUT ANY VERIFICATION, HAS ARBITRARILY DOUBLY AD DED LONG TERM CAPITAL GAIN OF RS.2,44,02,106/- UNDER THE HEAD SHORT TERM CAPITAL GAIN WHEREAS THE SHORT TERM CAPITAL GAIN AMOUNTED TO RS.1,40,29, 045/- AS CLAIMED IN THE RETURN. BARE PERUSAL OF PARA 8 OF THE ASSESSMENT O RDER GOES TO PROVE THAT THE ASSESSING OFFICER HAS ADDED LONG TERM CAPITAL G AIN AT RS.2,44,02,106/- AND AT THE SAME TIME ADDED SHORT TERM CAPITAL GAIN TO THE TUNE OF RS.3,84,31,891/- WITHOUT RECORDING THE FINDINGS THA T HE HAS VERIFIED THE SAID CLAIM OF THE ASSESSEE BY GOING THROUGH THE REC ORDS. SO, WE ARE OF THE CONSIDERED VIEW THAT THIS GROUND RAISED BY THE ASSE SSEE IS LIABLE TO BE ALLOWED AND THE MATTER IS ORDERED TO BE RESTORED TO THE ASSESSING OFFICER FOR VERIFICATION AND THEN PROCEED ACCORDINGLY BY PR OVIDING OPPORTUNITY OF BEING HEARD TO THE PARTIES. 22 I.T.A.NOS.3284/DEL/2012 I.T.A.NO.5705/DEL/2010 19. GROUND NO.6 OF I.T.A.NO. 5705/DEL/2010: SO FAR AS THE QUESTION OF PENALTY PROCEEDINGS U/S 2 71(1)(C) OF THE ACT IS CONCERNED, THIS ISSUE HAS BEEN PREMATURELY R AISED BY THE APPELLANT, HENCE NEEDS NO ADJUDICATION AT THIS JUNCTURE. 20. NO OTHER ARGUMENT / ISSUE HAS BEEN RAISED BY EI THER OF THE AUTHORIZED REPRESENTATIVES OF THE PARTIES. 21. IN VIEW OF ABOVE DISCUSSION, WE HEREBY ALLOW B OTH THE AFORESAID APPEALS OF THE ASSESSEE FOR STATISTICAL PURPOSES. 22. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH JAN., 2016. SD./- SD./- (J. S. REDDY) (KULDIP SI NGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 29.01. 2016 SP. COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. BY ORDER (ITAT, NEW DELHI) S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 12,14,18,30/1 SR. PS/ PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS 29/1/16 SR . PS/PS 6 KEPT FOR PRONOUNCEMENT 29/1 SR. PS/PS 7 FILE SENT TO BENCH CLERK 8/2 SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER