Income Tax Officer Ward-1(2)(1), Bangalore V. M/s True North Fund IIIA , Bangalore

ITA 486/BANG/2019

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 7221 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 12-03-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Maximum Marginal Rate; Advance ruling; Difference of opinion; Notional interest; Revocable transfer; Commercial expediency; Revised return; Capital Gains
• Section: 63; 43; 13; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI B.R BASKARAN , ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA NO.486/BANG/2019 ASSESSMENT YEAR : 2015-16 THE INCOME-TAX OFFICER, WARD-1(2)(1), BENGALURU. VS. M/S TRUE NORTH FUND IIIA (FORMERLY KNOWN AS INDIA VALUE FUND IIIA) NO.9/2, ROCKLINE HOUSE, M.G ROAD, BENGALURU-560 001. PAN AAAIT 6015 M APPELL ANT RESPONDENT CO NO.50/BANG/2019 ASSESSMENT YEAR : 2015-16 M/S TRUE NORTH FUND IIIA (FORMERLY KNOWN AS INDIA VALUE FUND IIIA) NO.9/2, ROCKLINE HOUSE, M.G ROAD, BENGALURU-560 001. PAN AAAIT 6015 M VS. THE INCOME-TAX OFFICER, WARD-1(2)(1), BENGALURU. APPELLANT RESPONDENT REVENUE BY : SHRI PRADEEP KUMAR, CIT (DR) ASSESSEE BY : SHRI MANISH MALIK, ADVOCATE DATE OF HEARING : 09.12.2019 DATE OF PRONOUNCEMENT : 29.01.2020 ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 2 OF 46 O R D E R PER B.R BASKARAN, ACCOUNTANT MEMBER : THE APPEAL FILED BY THE REVENUE AND THE CROSS OBJE CTION FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATE D 12/12/2018 PASSED BY LD CIT(A)-1, BENGALURU AND IT RELATE TO T HE ASST. YEAR 2015-16. 2. THE GROUNDS OF APPEAL URGED BY THE REVENUE ARE A S UNDER:- 1. THE ORDER OF THE LEARNED CIT (APPEALS), IN SO F AR AS IT IS PREJUDICIAL TO THE INTEREST OF REVENUE, IS OPPOS ED TO LAW AND THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT THE ASSESSEE, IN RESPECT OF THE LONG TERM CAPI TAL GAIN ACCRUED, HAD CLAIMED DEDUCTION U/S 10(38) OF T HE ACT IN BOTH THE ORIGINAL RETURN OF INCOME FILED ON 31.08.2015 AND THE REVISED RETURN OF INCOME FILED O N 27.09.2016. LATER, THE ASSESSEE, VIDE LETTER DATED 25.10.2016, HAD MADE CLAIM FOR EXEMPTION U/S 10(23F B) OF THE ACT IN RESPECT OF THE SAID LONG TERM CAPITAL GAIN ACCRUED. THEREFORE, THE ASSESSEE ITSELF WAS NOT CER TAIN REGARDING THE PROVISIONS OF THE IT ACT, I.E. EITHER SEC. 10(38) OR SEC. 10(23FB) OF THE ACT, UNDER WHICH IT HAD TO CLAIM THE EXEMPTION IN RESPECT OF THE SAID LONG TER M CAPITAL GAIN ACCRUED. ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 3 OF 46 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT THE ASSESSEE, BEING A VCF, REQUIRED TO ADHERE TO THE PROVISIONS OF SEC. 10(23FB) OF THE ACT IN ORDER TO BECOME ELIGIBLE TO CLAIM EXEMPTION ON ANY INCOME EARNED ON INVESTMENTS FROM VCUS. THE ASSESSEE HAS SOLD LISTED SHARES OF NON VCU AND THUS, THE ASSESSEE'S CLAIM FO R EXEMPTION U/S 10(23FB) OF THE ACT HAS BEEN RIGHTLY DISALLOWED BY THE AO. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT THE ASSESSEE DID NOT HOLD THE LISTED EQUITY SH ARES FOR A MINIMUM PERIOD OF 12 MONTHS TO CONSIDER THE S AID SHARES AS LONG TERM CAPITAL ASSET AS PER THE PROVIS IONS OF SEC. 2(42A) OF THE ACT AND THUS, THE ASSESSEE'S CLAIM FOR EXEMPTION U/S 10(38) OF THE ACT HAS BEEN RIGHTL Y DISALLOWED BY THE AO. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT THE ASSESSEE DID NOT SELL THE UNLISTED SHARES OF VCU TO CLAIM EXEMPTION 10(23FB) OF THE ACT. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT THOUGH THE ASSESSEE IS MAINTAINING THE BOOKS O F ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 4 OF 46 ACCOUNTS IN MERCANTILE SYSTEM OF ACCOUNTING, IT HAS FAILED TO OFFER THE ACCRUED INTEREST INCOME FOR INC OME TAX. 7. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URG ED AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT TH E ORDER OF THE LD. CIT (A) BE REVERSED AND THAT OF THE ASSE SSING OFFICER BE RESTORED. 8. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, TO AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT T HE TIME OF HEARING OF APPEAL. 3. IN THE CROSS-OBJECTION, THE ASSESSEE HAS RAISED FOLLOWING GROUNDS: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED CIT(APPEALS) OUGHT TO HAVE ADJUDICATED THAT AS PER EXPLANATION 1(I)(C) TO SECT ION 2(42A) READ WITH SECTION 47(VII) OF THE ACT SHARES IN MAHINDRA CIE AUTOMOTIVE LIMITED ARE LONG-TERM CAPITAL ASSETS 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED CIT(APPEALS) OUGHT TO HAVE ADJUDICATED AND GRANTED, ON MERITS, THE RESPONDENT' S CLAIM OF EXEMPTION UNDER SECTION 10(38) OF THE ACT. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED CIT(APPEALS) OUGHT TO HAVE ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 5 OF 46 ADJUDICATED, ON MERITS, THAT NO INTEREST HAS ACCRUE D, OR ARISEN TO OR HAS BEEN RECEIVED BY THE RESPONDENT ON LOANS GIVEN TO INNOVATIVE B2B LOGISTICS SOLUTION S PRIVATE LIMITED AND AS SUCH NO INTEREST WAS TAXABLE . 4. WITHOUT PREJUDICE TO OBJECTION NO. 3, ON THE FAC TS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED CIT(APPEALS) OUGHT TO HAVE QUASHED THE ASSESSING OFFICER'S ORDER OF APPLYING 15% NOTIONAL RATE OF INTEREST ON LOANS GIVEN TO INNOVATIVE B2B LOGIST ICS SOLUTIONS PRIVATE LIMITED. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED CIT(APPEALS) ERRED IN EXCEEDING HI S JURISDICTION AND MAKING AN OBSERVATION THAT, INCOME FROM CAPITAL GAINS OUT OF INVESTMENT IN SHARES AND INTEREST INCOME FROM VENTURE CAPITAL UNDERTAKINGS EARNED BY THE RESPONDENT NEED TO BE EXAMINED IN THE HANDS OF THE ULTIMATE BENEFICIARIES. 4. THE ASSESSEE HEREIN IS A VENTURE CAPITAL FUND. I T FILED ITS RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION D ECLARING NIL INCOME ON 31/8/2015. SUBSEQUENTLY THE ASSESSEE FIL ED REVISED RETURN OF INCOME ON 27/9/2016 DECLARING AGAIN NIL I NCOME. THERE ARE 20 BENEFICIARIES UNDER THIS FUND, OUT OF WHICH 91.3% IS HELD BY AN INVESTOR NAMED INDIUM III MAURITIUS LTD. BEFO RE THE AO, THE ASSESSEE CLAIMED THAT IT IS ELIGIBLE FOR EXEMPTION U/S 10(23FB) OF ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 6 OF 46 THE ACT IN RESPECT OF INCOME FROM INVESTMENTS MADE IN A VENTURE CAPITAL UNDERTAKING. 5. THE AO HAS MADE TWO ADDITIONS, VIZ., THE CAP ITAL GAINS EARNED BY THE ASSESSEE AND NOTIONAL INTEREST INCOME ON A L OAN GIVEN BY THE ASSESSEE. THE FACTS RELATING TO BOTH THE ADDITIONS ARE DISCUSSED IN BRIEF. THE ASSESSEE HAD INVESTED ITS FUNDS IN A VE NTURE CAPITAL UNDERTAKING NAMED M/S MAHINDRA HINODAY INDUSTRIES LTD (EARLIER KNOWN AS MAHINDRA CASTINGS P LTD) DURING THE FINAN CIAL YEARS 2007-08 TO 2011-12 AS DETAILED BELOW:- AT THE TIME OF MAKING ABOVE SAID INVESTMENTS, THE A BOVE SAID M/S MAHENDRA HINODAY INDUSTRIES LTD., WAS AN ELIGIBLE V ENTURE CAPITAL UNDERTAKING, IN WHICH THE ASSESSEE COULD MAKE INVES TMENTS. THE SHARES WERE ALSO NOT LISTED IN ANY STOCK EXCHANGE. SUBSEQUENTLY, DURING DECEMBER 2014, THE ABOVE SAID M/S MAHENDRA H INODAY INDUSTRIES LTD., GOT AMALGAMATED WITH M/S MAHENDRA CIE AUTOMOTIVE LTD.. HOWEVER, MAHENDRA CIE AUTOMATIVE LTD WAS A ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 7 OF 46 LISTED COMPANY AND ITS SHARES WERE TRADED IN STOCK EXCHANGES. CONSEQUENT TO AMALGAMATION, THE ASSESSEE RECEIVED 1 ,79,19,704 EQUITY SHARES IN MAHENDRA CIE AUTOMATIVE LTD IN EXC HANGE OF SHARES HELD BY IT IN M/S MAHENDRA HINODAY INDUSTRIE S LTD. IT IS PERTINENT TO NOTE THAT THE SHARES OF M/S MAHENDRA C IE AUTOMOTIVE LTD,. WERE LISTED IN STOCK EXCHANGE AT THE TIME OF AMALGAMATION. HENCE, THE ASSESSEE SOLD SHARES OF M/S MAHENDRA CIE AUTOMOTIVE LTD., IN THE MONTH OF JAN 2015 IN VARIOUS TRANCHES AND EARNED CAPITAL GAIN OF RS.246.50 CRORE. 6. IN THE ORIGINAL RETURN OF INCOME, THE ASSESSE E CLAIMED THE CAPITAL GAIN AS EXEMPT U/S 10(38) OF THE ACT. HOWE VER, IN THE NOTES ATTACHED TO RETURN OF INCOME, THE ASSESSEE MENTIONE D THAT ITS INCOME IS EXEMPT U/S 10(23FB) OF THE ACT. IN THE NOTES ATTACHED TO THE RETURN OF INCOME, THE ASSESSEE EXPRESSED ITS DI FFICULTY IN MAKING CORRECT DISCLOSURE, SINCE THE INCOME TAX UTILITY PR OVIDED FOR FILING RETURNS OF INCOME ELECTRONIC FORM CREATED CERTAIN G LITCHES. SUBSEQUENTLY, THE ASSESSEE FILED A REVISED RETURN O F INCOME. IN THE REVISED RETURN OF INCOME, THE ASSESSEE MENTIONED TH AT THE CAPITAL GAIN IS EXEMPT U/S 10(23FB) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE FILED A LETTER DATED 25/10/2016 BEFORE AO, WHEREIN ALSO IT CLAIMED THAT THE CAPITAL GAIN IS EXEMPT U/S 10(23FB) OF THE ACT. IN ADDITION TO INCOME FROM CAPITAL GAIN, THE ASSESSEE ALSO DECLARED INTEREST I NCOME OF RS.487.72 LAKHS FROM LOANS GIVEN TO OTHER VENTURE C APITAL UNDERTAKINGS. THE ASSESSEE ALSO CLAIMED THE SAME A S EXEMPT U/S 10(23FB). ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 8 OF 46 7. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE PROVISION OF SEC. 10(38) OF THE ACT ALLOWS EXEMPTION OF LONG TERM CAPITAL GAIN ARISING ON SALE OF SHARES, IF THE Y ARE LISTED SHARES AND ARE HELD CONTINUOUSLY FOR MORE THAN 12 MONTHS, I.E., THE AO TOOK THE VIEW THAT, FOR AVAILING EXEMPTION U/S 10(3 8) OF THE ACT, THE STATUS OF LISTED SHARES SHOULD BE MAINTAINED THRO UGHOUT THE PERIOD OF 12 MONTHS. IN THE INSTANT CASE, THE AO N OTICED THAT THE ASSESSEE HAS ACQUIRED LISTED SHARES OF MAHENDRA CIE LTD., ONLY IN THE MONTH OF DECEMBER 2014 AND SOLD THE SAME IN JAN UARY 2015. IN FACT, SHARES OF MAHENDRA CIE LTD WAS HELD FOR AB OUT TWO MONTHS ONLY AND EARLIER TO THAT, THE ASSESSEE HAS HELD UNL ISTED SHARES FOR MORE THAN 10 MONTHS. SINCE THE ASSESSEE HAS NOT HEL D LISTED SHARES FOR ENTIRE PERIOD OF 12 MONTHS PRIOR TO ITS SALE, T HE AO TOOK THE VIEW THAT THE ASSESSEE IS NOT ELIGIBLE FOR EXEMPTION U/S 10(38) OF THE ACT. 8. THE AO ALSO HELD THAT THE ASSESSEE IS NOT ELIGIB LE FOR EXEMPTION U/S 10(23FB) OF THE ACT, SINCE THE ASSESS EE HAS SOLD SHARES OF A LISTED COMPANY. IT IS PERTINENT TO N OTE THAT, AS PER VENTURE CAPITAL FUND REGULATIONS, A VENTURE CAPITAL UNDERTAKING IS DEFINED TO MEAN A DOMESTIC COMPANY (I) WHOSE SHARES ARE NOT LISTED ON A RECOGNIZED STOCK EXCHANGE IN INDIA; AND (II) WHICH IS ENGAGED IN THE BUSINESS OF PROVIDING SERVICES; OR WHICH DOES NOT FALL IN THE NEGATIVE LIST SPECIFIED UNDER THE VCF REGULATIONS. ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 9 OF 46 SINCE SHARES OF M/S MAHENDRA CIE LTD ARE LISTED IN STOCK EXCHANGES, THE AO TOOK THE VIEW THAT THE ASSESSEE C ANNOT CLAIM EXEMPTION U/S 10(23FB) OF THE ACT. 9. ACCORDINGLY HE ASSESSED THE GAIN ARISING ON S ALE OF SHARES MENTIONED ABOVE (WITHOUT INDEXATION BENEFIT) AMOUNT ING TO RS.316.04 CRORES AS INCOME OF THE ASSESSEE UNDER TH E HEAD INCOME FROM OTHER SOURCES. 10. THE AO FURTHER NOTICED THAT THE ASSESSEE HAS, I NTER ALIA, GIVEN LOAN TO M/S INNOVATIVE B2B LOGISTICS SOLUTIONS LTD. , TO THE TUNE OF RS.114.89 CRORES AND ASSESSEE HAS NOT CHARGED ANY I NTEREST THEREON. IN THE NOTES TO THE ACCOUNTS, THE ASSESSE E HAS STATED THAT IT HAS NOT ACCOUNTED FOR INTEREST ACCRUED ON ABOVE SAID LOAN, SINCE THERE WAS DIFFERENCE OF OPINION BETWEEN THE ASSESSE E AND THE ABOVE SAID COMPANY OVER THE TERMS OF LOAN & RATE OF INTER EST. THE AO NOTICED THAT THE ASSESSEE IS FOLLOWING MERCANTILE S YSTEM OF ACCOUNTING AND ACCORDINGLY TOOK THE VIEW THAT THE A SSESSEE SHOULD HAVE ACCOUNTED FOR ACCRUED INTEREST ON THE LOAN GIV EN TO M/S INNOVATIVE B2B LOGISTICS SOLUTIONS LTD. THE AO FUR THER NOTICED THAT THE ASSESSEE HAS CHARGED INTEREST @15% IN RESPECT O F LOANS GIVEN TO OTHER VENTURE CAPITAL UNDERTAKINGS. ACCORDINGLY, HE COMPUTED THE INTEREST ON THE ABOVE SAID LOAN BY APPLYING INTERES T RATE OF 15%, WHICH WORKED OUT TO RS.17.23 CRORES. THE AO ASSESSE D THE SAME AS INCOME OF THE ASSESSEE. IT IS PERTINENT TO NOTE TH AT THE ASSESSEE HAD CLAIMED THAT ITS ENTIRE INCOME IS EXEMPT U/S 10(23F B) OF THE ACT AND ACCORDINGLY CLAIMED EXEMPTION IN RESPECT OF INT EREST INCOME OF RS.4.87 CRORES RECEIVABLE FROM LOANS GIVEN TO OTHER VENTURE CAPITAL ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 10 OF 46 UNDERTAKINGS. THE AO ALSO ALLOWED EXEMPTION TO THE ABOVE SAID AMOUNT OF RS.4.87 CRORES. HOWEVER, THE AO DENIED EXEMPTION U/S 10(23FB) TO THE INTEREST INCOME OF RS.17.23 CRORES COMPUTED BY HIM ON THE LOAN GIVEN TO INNOVATIVE B2B LOGISTIC SO LUTION LTD. IN THE REMAND REPORT SUBMITTED TO LD CIT(A), THE AO GA VE FOLLOWING EXPLANATIONS FOR NOT ALLOWING EXEMPTION U/S 10(23FB ) OF THE ACT ON THE INTEREST INCOME SO ASSESSED:- THE ASSESSEE HAS CLAIMED EXEMPTION U/S 10(23FB) OF THE ACT ON RS.4,87,72,436/- BEING THE INTEREST FROM VCUS WH ICH HAS BEEN ALLOWED AS THIS AMOUNT HAS BEEN TAXED IN THE H ANDS OF THE INVESTORS. SIMILARLY, NOTIONAL INTEREST IS ALS O TO BE TAXED EITHER IN THE HANDS OF THE ASSESSEE OR THE INVESTOR S. THE ASSESSING OFFICER DO NOT HAVE JURISDICTION OVER THE INVESTORS AND THEREFORE, IT HAS BEEN BROUGHT TO TAX IN THE HA NDS OF THE ASSESSEE. 11. THE ASSESSEE CHALLENGED BOTH THE ABOVE DISCUSS ED ADDITIONS BY FILING APPEAL BEFORE LD CIT(A). BEFORE HIM, THE ASS ESSEE MADE DETAILED SUBMISSIONS AND HENCE THE LD CIT(A) CALLED FOR REMAND REPORTS FROM THE ASSESSING OFFICER FROM TIME TO TIM E. WE NOTICE THAT THE AO HAS FURNISHED REMAND REPORTS THREE TIMES. I N REPLY TO THE REMAND REPORT, THE ASSESSEE SUBMITTED THAT ITS PRIM ARY CLAIM IS EXEMPTION U/S 10(23FB) OF THE ACT AND AS AN ALTERNA TIVE CLAIM, EXEMPTION U/S 10(38) WAS MADE. 12. THE LD CIT(A) CONSIDERED THE VENTURE CAPITAL F UND REGULATIONS, WHICH HAVE BEEN DISCUSSED BY LD CIT(A) IN PARAGRAPH 4.10 TO 4.15 ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 11 OF 46 OF HIS ORDER. WITH REGARD TO THE CLAIM FOR EXEMPTI ON U/S 10(23FB) OF THE ACT, THE LD CIT(A) HELD AS UNDER:- 4.21 THE APPELLANT IS A VCF AND HAS MADE INVESTMENTS IN MAHINDRA HINODAY, A VCU, DURING THE PERIOD 2009-2011. THIS COMPANY WAS (SHARES) WAS AMALGAMATED INTO MAHINDRA CIE WITH APPROVAL OF THE HIGH COURT ON 10TH DECEMBER, 2014, AND THE APPELLANT RECEIVED 1,79,19,704 EQUITY SHARES OF MAHINDRA CIE AS AGAINST 1,62,90,640 EQUITY SHARES HELD IN MAHINDRA HINODAY. THE APPELLANT SOLD ALL TH E SHARES ALLOTTED IN MAHINDRA CIE ON 16 JANUARY, 2015 ; 19 JANUARY, 2015; AND 21 JANUARY, 2015, ON THE BOMBAY STOCK EXCHANGE AND NATIONAL STOCK EXCHANGE FOR RS. 4,11,92,52,979, THE APPELLANT EARNED A CAPI TAL GAIN OF RS, 2,46,50,93,394, AS COMPUTED UNDER THE PROVISIONS OF THE INCOME-TAX ACT, 1961 (THE ACT) FO R THE SALE OF MAHINDRA CIE SHARES AFTER TAKING INTO CONSIDERATION THE BENEFIT OF INDEXATION. NO DOUBT T HE APPELLANT HAS FULFILLED ALL THE CONDITIONS OF THE S ECTION 10(23FB) OF THE ACT; NAMELY: A. THE FUND IS A VENTURE CAPITAL COMPANY OR A VCF; AND B. THE INCOME IS FROM INVESTMENT MADE IN A VENTURE CAPITAL UNDERTAKING (VCU), ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 12 OF 46 4.22 THE ONLY ISSUE IS AS TO WHETHER THE STATUS OF SHARES ON THE DATE OF SALE RELEVANT FOR THE PURPOSE OF CLAIMING THE BENEFIT UNDER SECTION 10(23FB)? THE SHARES OF THE VCU HAVING BEEN INVESTED AS UNLISTED SHARES REMAINED FOR THREE AND HALF YEARS AS UNLISTE D TILL DEC 2014 AND BECAME LISTED ONLY IN DECEMBER 2014 LISTED ON THE STOCK EXCHANGES AND THEREAFTER THEY WERE SOLD IN JANUARY 2015. 4.23 AS PER THE PROVISIONS OF SEC 10(23FB) READ WI TH THE FINANCE MINISTERS SPEECH (243 ITR 46 STATUTES) (PAGE 24 & 25 OF PAPER BOOK) IN THE LOK SABHA, DATE D MAY 3, 2000 WHILE MOVING THE FINANCE BILL 2000-01 FOR CONSIDERATION OF THE HOUSE, IT IS EVIDENT THAT THE INTENT OF THE LEGISLATURE HAS BEEN TO INCENTIVISE T HE INVESTMENTS IN THE UNLISTED VENTURE CAPITAL UNDER TAKINGS (VCU). THERE IS NO MENTION OF THE STATUS OF THE SAID INVESTMENT ON THE DATE OF SALE OR EXIT. 4.24 EVEN IF IT IS ASSUMED THAT UPON CONVERSION OF THE INVESTMENTS FROM UNLISTED TO LISTED THE AVAILABLE T AX EXEMPTION STOPS, EVEN IN SUCH A SITUATION ONE SHOUL D COMPUTE THE GAIN MADE BY THE VCF IN THE SHARES OF THE VCU TILL THE DATE OF AMALGAMATION. THUS, THE GA IN MADE FROM THE DATE OF (20092011) INITIAL INVESTMENT S IN THE SHARES OF THE VCU TO THE DATE OF AMALGAMATIO N DEC 2014, SHALL BE TREATED AS COVERED BY THE PROVISIONS OF SEC 10(23FB) OF THE ACT AS EXEMPT. TH E ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 13 OF 46 BALANCE GIN MADE BY THE APPELLANT UPON CONVERSION O F SHARES TO LISTED SHARES CONSEQUENT TO AMALGAMATION TILL THE DATE OF SALE, BE CONSIDERED AS TAXABLE. SI NCE, BOTH THESE EVENTS (DECEMBER 2014 & JANUARY 2015) HAPPENED DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR 2015-16, THE AO MAY UNDER-TAKE THIS EXERCISE TO SPLIT THE CAPITAL GAINS INTO TWO TRANSACTIONS. THE LD CIT(A) HAS EXPRESSED THE VIEW THAT THE CAPIT AL GAINS ARISING UPTO THE DATE OF AMALGAMATION SHOULD BE ALLOWED EXE MPTION U/S 10(23FB) OF THE ACT AND THE BALANCE AMOUNT OF CAPIT AL GAINS SHALL BE TAXABLE. HOWEVER, IN PARAGRAPH 5.1 OF THE ORDER , THE LD CIT(A) HAS HELD THAT THE ISSUE RELATING TO DENIAL OF EXEMP TION U/S 10(38) IN THE HANDS OF THE ASSESSEE IS ACADEMIC IN NATURE, SI NCE HE HAS HELD THAT THE INCOME OF THE ASSESSEE IS EXEMPT U/S 10(23 FB) OF THE ACT. 13. THE ASSESSEE HAD ALSO CONTENDED BEFORE LD C IT(A) THAT IT IS A CONTRIBUTORY TRUST AND THE CONTRIBUTIONS MADE BY TH E INVESTORS/BENEFICIARIES ARE REVOCABLE TRANSFERS. A CCORDINGLY, IT WAS CONTENDED THAT THE PROVISIONS OF SEC.61 AND 63 SHAL L BE APPLICABLE TO IT. IT WAS ALSO SUBMITTED THAT THE ASSESSING OF FICER HAD ACCEPTED THE ABOVE SAID POSITION IN AY 2014-15. THE LD CIT( A) HAS DISCUSSED THIS ISSUE AS UNDER:- 4.26 THE APPELLANT IS A CONTRIBUTORY TRUST AND TH E CONTRIBUTIONS MADE BY THE INVESTORS OR BENEFICIARIE S IN THE APPELLANT ARE REVOCABLE TRANSFERS. WHERE THE ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 14 OF 46 TRANSFERS BY THE INVESTORS OF A VCF ARE REVOCABLE TRANSFERS, SECTION 61 OF THE ACT APPLIES. FOR AY 20 14- 15, THE INCOME OF THE APPELLANT WAS ACCEPTED AS NI! ON THE BASIS THAT IT WAS A REVOCABLE TRUST. THE APPELL ANT VIDE SUBMISSIONS DATED 14 DECEMBER, 2017; 20 DECEMBER, 2017; AND 28 DECEMBER, 2017, MADE BEFORE THE AO, HAD SUBMITTED THAT IT IS A REVOCABLE TRUST. 4.27 IN THE ASSESSMENT ORDER FOR AY 2015-16, THE AO HAS MADE AN ADDITION OF RS. 3,33,27,40,895, TO THE TOTAL INCOME OF THE APPELLANT COMPRISING OF RS. 3,16,04,05,895 TOWARDS INCOME ON SALE OF SHARES OF MAHINDRA CIE AND RS. 17,23,35,000 TOWARDS NOTIONAL INTEREST ON LOANS GIVEN TO INLOG. 4.28 AS PER SECTION 61 READ WITH SECTION 63 OF THE ACT, THE INCOME OF THE APPELLANT SHALL BE CHARGEABLE TO INCOME-TAX AS THE INCOME OF THE INVESTORS OF THE APPELLANT AND SHALL BE INCLUDED IN THEIR TOTAL INCO ME. 4.29 FURTHER, IT IS PERTINENT TO NOTE THAT SECTION 61 DOES NOT DISTINGUISH BETWEEN TYPES OF INCOME. ANY INCOME OF A VCF WHETHER OUT OF INVESTMENTS IN VCUS OR OTHERWISE, IS NOT TAXABLE IN THE HANDS OF THE VCF. SUCH INCOME IS TAXABLE IN THE HANDS OF THE INVESTORS. ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 15 OF 46 4.30 THE INVESTORS / BENEFICIARIES OF THE APPELLANT HAVE OFFERED THEIR SHARE OF CAPITAL GAINS IN THEIR RESPE CTIVE RETURN OF INCOME AND PAID APPROPRIATE TAXES 4.31 IT IS ALSO INFORMED THAT THE DETAILS OF THE BENEFICIARIES WERE FURNISHED TO THE AO VIDE SUBMISS ION DATED 16 AUGUST, 2017. 4.32 THE APPELLANT HAS FURTHER SUBMITTED THAT THE CONFIRMATIONS FROM THE BENEFICIARIES THAT THEY HAVE OFFERED THEIR SHARE OF INCOME FROM THE APPELLANT TO TAX, AS APPROPRIATE, IN THEIR RETURN OF INCOME VIDE SUBMISSION DATED 16 AUGUST, 2017, AND 1 SEPTEMBER, 2017. 4.33 WITHOUT PREJUDICE TO SUBMISSIONS UNDER GROUND NOS. 1 TO 11, THE APPELLANT SUBMITS THAT THE ADDITI ON OF RS. 3,33,27,40,895, MADE BY THE AO TO THE TOTAL INC OME OF THE APPELLANT, IS NOT TAXABLE ON ACCOUNT OF SECT ION 61, AS WELL AS SECTION 10(23FB), AS WELL AS SECTION 10(38) OF THE ACT. DETERMINATE STATUS OF THE TRUST NOT TO BE AFFECTED IF TRUST DEED IS CAPABLE OF IDENTIFYING THE BENEFICIAR IES AND DETERMINING THEIR RESPECTIVE SHARES 4.34 HOWEVER, EVEN IF ONE SEEKS TO GO BY THE INTENT ION OF THE LEGISLATURE IN CASE OF SECTION 10(23FB) THE INTENTION OF THE LEGISLATURE WAS TO EXTEND THE EXEM PTION ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 16 OF 46 TO THE ENTIRE INCOME OF A VGF (SIC. VCF) WHICH IS S ET UP TO RAISE FUNDS FOR VESTMENT IN VGUS (SIC. VCUS) AS IS EVIDENT FROM THE FINANCE MINISTER'S SPEECH (243 ITR 46 STATUTES) (PAGE 24 & 25 OF PAPER BOOK) IN THE 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 THROUGH STATUS. THERE WILL BE NO TAX ON DISTRIBUTED OR UNDISTRIBUTED INCOME OF SUCH FUNDS. THE INCOME DISTRIBUTED BY THE FUNDS WILL ONLY BE TAXED IN THE HANDS OF INVESTORS AT THE RATES APPLICABLE TO THE N ATURE OF INCOME'. 4.35 IN LIGHT OF THE ABOVE, IT IS CLEAR THAT THE IN TENTION OF THE LEGISLATURE IS TO TREAT THE ENTIRE INCOME OF VC FS AS EXEMPT FROM TAX UNDER SECTION 10(23FB) IRRESPECTIVE OF ITS NATURE, AND INSTEAD TAX THE SAME IN THE HANDS O F 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. 4.36 THE SUBSEQUENT AMENDMENT OF SECTION 10(23FB) BY FINANCE BILL 2007 IS EFFECTIVE FROM 1.4.2008 RESTRICTING THE EXEMPTION AVAILABLE U/S 10(23FB) TO ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 17 OF 46 ONLY INCOME OF VENTURE CAPITAL FUND FROM AN INVESTM ENT IN VENTURE CAPITAL UNDERTAKING 4.37 THE TAXATION OF DOMESTIC VENTURE CAPITAL FUNDS (VCFS) AND ALTERNATIVE INVESTMENT FUNDS (ALFS) HAS UNDERGONE VARIOUS CHANGES OVER THE YEARS. CURRENTLY , VCFS1 AND CATEGORY I/ II AIFS2 HAVE BEEN GRANTED TA X PASS THROUGH STATUS UNDER THE INCOME-TAX ACT, 1961 (THE ACT) IN RELATION TO SPECIFIED INCOME. SUCH INC OME IS DIRECTLY CHARGEABLE TO TAX IN THE HANDS OF THE BENEFICIARIES/INVESTORS. 4.38 IN THE ABOVE CASES, IT IS CRITICAL THAT THE FU ND (SET- UP AS A TRUST) QUALIFIES AS A DETERMINATE TRUST, SO THAT TAX LEVIED IN THE HANDS OF THE TRUSTEE IS IN THE LI KE MANNER AND TO THE SAME EXTENT AS IT WOULD BE LEVIAB LE UPON THE BENEFICIARIES. IN CASE WHERE THE FUND IS TREATED AS INDETERMINATE TRUST', IT COULD GET TAXED UNDER SECTION 164(1) OF THE ACT, WHICH PROVIDES FOR TAXAT ION AT MAXIMUM MARGINAL RATE UNDER CERTAIN CIRCUMSTANCES. 4.39 EXPLANATION 1 TO SECTION 164 OF THE ACT PROVID ES THAT FOR A TRUST TO BE DETERMINATE, (I) THE BENEFIC IARIES SHOULD BE EXPRESSLY STATED AND IDENTIFIABLE AS ON T HE DATE OF THE TRUST DEED; AND (II) THEIR INDIVIDUAL S HARES SHOULD BE EXPRESSLY STATED AND ASCERTAINABLE AS ON THE DATE OF THE TRUST DEED. ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 18 OF 46 4.40 IN THIS CONNECTION, IT MAY BE NOTED THAT THE AUTHORITY FOR ADVANCE RULING HELD THAT IF THE TRUST DEED SETS OUT EXPRESSLY THE MANNER IN WHICH THE BENEFICIARIES ARE TO BE ASCERTAINED AND ALSO THE SH ARE TO WHICH EACH OF THEM WOULD BE ENTITLED WITHOUT AMBIGUITY, THEN IT CANNOT BE SAID THAT THE TRUST IS INDETERMINATE. 4.41 HOWEVER, THE CENTRAL BOARD OF DIRECT TAXES ISSUED CIRCULAR NO, 13/2014, DATED 28 JULY, 2014, WHEREIN IT HAD STATED THAT IN A SITUATION WHERE THE TRUST DEED EITHER DOES NOT NAME THE INVESTORS OR DO ES NOT SPECIFY THEIR BENEFICIAL INTEREST, THE PROVISIO NS OF SECTION 164(1) OF THE ACT WOULD APPLY AND THE ENTIR E INCOME SHOULD BE CHARGEABLE TO TAX AT MAXIMUM MARGINAL RATE IN THE HANDS OF THE TRUSTEE IN THEIR REPRESENTATIVE CAPACITY. 4.42 SIMILAR QUESTIONS AROSE FOR CONSIDERATION BEFO RE THE AUTHORITY FOR ADVANCE RULING IN THE CASE OF XYZ , IN RE 224 ITR 473 (AAR). XYZ., IN RE 224 ITR 473 (AAR): THE AUTHORITY FOR ADVANCE RULING (AAR) HELD THAT IF THE TRUST DEED SE TS OUT EXPRESSLY THE MANNER IN WHICH THE BENEFICIARIES ARE TO BE ASCERTAINED AND ALSO THE SHARE TO WHICH EACH OF THEM WOULD BE ENTITLED WITHOUT AMBIGUITY, THEN IT CANNOT BE SAID THAT THE TRUST DEED DOES NOT NAME TH E ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 19 OF 46 BENEFICIARIES OR THAT THEIR SHARES ARE INDETERMINAT E. THE PERSONS AS WELL AS THE SHARES MUST BE CAPABLE O F BEING DEFINITELY PIN-POINTED AND ASCERTAINED ON THE DATE OF THE TRUST DEED ITSELF WITHOUT LEAVING THESE TO BE DECIDED UPON AT A FUTURE DATE BY A PERSON OTHER THA N THE AUTHOR EITHER AT HIS DISCRETION OR IN A MANNER NOT ENVISAGED IN THE TRUST DEED. EVEN IF THE TRUST DEED AUTHORISES ADDITION OF FURTHER CONTRIBUTORS TO THE TRUST AT DIFFERENT POINTS OF TIME IN ADDITION TO INITIAL CONTRIBUTORS, THAN THE SAME WOULD NOT MAKE THE BENEFICIARIES UNKNOWN OR THEIR SHARE INDETERMINATE. EVEN IF THE SCHEME OF COMPUTATION OF INCOME OF BENEFICIARIES IS COMPLICATED, IT IS NOT POSSIBLE TO SAY THAT THE SHARE INCOME OF THE BENEFICIARIES CANNOT B E DETERMINED OR KNOWN FROM THE TRUST DEED 4.43 IN A RECENT DECISION, THE KARNATAKA HIGH COURT IN THE CASE OF THE TRUST (INDIA ADVANTAGE FUND-VII IN ITA NO. 191/2OL5 DATED 2O-02-2017), UPHELD THE DECISION OF THE BANGALORE INCOME-TAX APPELLATE TRIBUNAL IN I TA NO 178/2012 AY 2008-09 AND HELD THAT FOR A TRUST T O BE A DETERMINATE TRUST, IT WOULD BE SUFFICIENT IF T HE TRUST DEED LAID DOWN THAT THE BENEFICIARIES WOULD BE THE PERSONS WHO HAD MADE, OR HAD AGREED TO MAKE, CONTRIBUTIONS TO THE TRUST IN ACCORDANCE WITH THE CONTRIBUTION AGREEMENT, AND THEIR SHARES WERE CAPAB LE OF BEING DETERMINED BASED ON THE PROVISIONS OF THE ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 20 OF 46 TRUST DEED. THE ISSUE BEFORE THE KARNATAKA HIGH COU RT WAS: WHETHER THE TRIBUNAL WAS RIGHT IN HOLDING THE TRUST AS A DETERMINATE TRUST AND NOT ASSESSING THE TRUST AT THE MAXIMUM MARGINAL RATE AS PER SECTION 164(1) OF THE ACT? HIGH COURT'S RULING: THE HIGH COURT UPHELD THE DECI SION OF THE TRIBUNAL ON THE FOLLOWING PRINCIPLES: ALL THAT IS NECESSARY IS THAT THE BENEFICIARIES S HOULD BE IDENTIFIABLE BASED ON THE PROVISIONS OF THE TRUS T DEED, AND IT WAS NOT NECESSARY THAT THE BENEFICIARI ES SHOULD BE SPECIFICALLY NAMED IN THE TRUST DEED. IN THE PRESENT CASE, THE TRUST DEED CLEARLY LAID DOWN THAT BENEFICIARIES MEANT THE PERSONS, EACH OF WHOM HAD MADE OR AGREED TO MAKE, CONTRIBUTIONS TO THE TRUST IN ACCORDANCE WITH THE CONTRIBUTION AGREEMENT. IT IS NOT NECESSARY THAT THE TRUST DEED SHOULD AC TUALLY PRESCRIBE THE PERCENTAGE SHARE OF THE BENEFICIARIES IN ORDER FOR THE TRUST TO BE DETERMINATE. IT IS ENOUGH THAT THE SHARE OF THE BENEFICIARIES IS CAPABLE OF BEING DETERMINED BASED ON THE PROVISION/ FORMULA AS ON TH E DATE OF THE TRUST DEED AND NOT AT THE DISCRETION OF THE TRUSTEE. IN THE PRESENT CASE, THE TRUST DEED CLEARL Y SPECIFIED THE MANNER IN WHICH THE INCOME HAD TO BE DISTRIBUTED. ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 21 OF 46 IF THE TRUST DEED AUTHORISES ADDITION OF FURTHER CONTRIBUTORS TO THE TRUST AT DIFFERENT POINTS IN TI ME IN ADDITION TO THE INITIAL CONTRIBUTORS, THE SAME WOUL D NOT MAKE THE BENEFICIARIES UNKNOWN OR THEIR SHARES INDETERMINATE. 14. THE LD CIT(A) NOTICED THAT THE BENEFICIARIES H AVE INDEPENDENTLY OFFERED TO TAX THEIR RESPECTIVE SHARE OF INCOME IN THE RETURNS OF INCOME FILED BY THEM. ACCORDINGLY, THE LD CIT(A) H ELD THAT THE INCOME OF THE ASSESSEE IS EXEMPT U/S 10(23FB) OF TH E ACT. THE DECISION RENDERED BY LD CIT(A) IN THIS REGARD IS EX TRACTED BELOW:- 5.0 IN THE LIGHT OF THE ABOVE FACTS, ESPECIALLY CONSIDERING THE FACT THAT THE BENEFICIARIES/INVESTO RS HAVE INDEPENDENTLY OFFERED TO TAX THEIR SHARE OF IN COME RECEIVED FROM THE APPELLANT, IT IS HELD THAT ALL TH E INCOMES OF THE APPELLANT ARISING FROM THE INVESTMEN T IN THE VCU, IRRESPECTIVE OF THE FACT THAT THE SAID VCU IS SUBSEQUENTLY AMALGAMATED INTO A LISTED ENTITY, ARE EXEMPT UNDER THE PROVISIONS OF SECTION 10(23FB) OF THE ACT. OTHERWISE IT AMOUNTS TO DOUBLE TAXATION BOTH I N THE HANDS OF APPELLANT AND THE INVESTORS/BENEFICIARIES. FURTHER, DENYING THE EXEMPTION UNDER SECTION 10(23F B) MERELY ON THE GROUND OF SUBSEQUENT AMALGAMATION, WHICH IS BEYOND THE CONTROL OF EITHER THE APPELLANT OR THE BENEFICIARIES, IS NOT IN THE INTEREST OF EQUITABLE JUSTICE. ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 22 OF 46 15. IN VIEW OF THE ABOVE DECISION, THE LD CIT(A) EXPRESSED THE VIEW THAT THE ISSUE RELATING TO REJECTION OF EXEMPTION U /S 10(38) OF THE ACT IS ACADEMIC IN NATURE. HOWEVER, HE EXPRESSED T HE VIEW THAT THE ISSUE RELATING TO EXEMPTION U/S 10(38) OF THE ACT A S WELL AS TAXABILITY OF INTEREST INCOME NEED TO BE EXAMINED I N THE HANDS OF ULTIMATE BENEFICIARIES OF THE ACT. 16. IN THE GROUNDS OF APPEAL, THE REVENUE IS CO NTESTING FOLLOWING ISSUES:- (A) THE REVENUE IS AGGRIEVED BY THE DECISION OF LD CIT(A) IN HOLDING THAT THE INCOME OF THE ASSESSEE IS EXEMPT U /S 10(23FB) OF THE ACT. (B) THE REVENUE IS ALSO CONTENDING THAT THE ASSESSE E SHOULD NOT BE ALLOWED EXEMPTION U/S 10(38) OF THE ACT. (C) WITH REGARD TO THE INTEREST INCOME RECEIVABLE F ROM INNOVATIVE B2B LOGISTIC SOLUTIONS LTD, THE REVENUE IS CONTENDING THAT THE SAME SHOULD BE ASSESSED ON ACCR UAL BASIS IN THE HANDS OF THE ASSESSEE. 17. IN THE CROSS OBJECTION, THE ASSESSEE IS CONT ESTING MAKING FOLLOWING PLEAS:- (A) THE LD CIT(A) SHOULD HAVE HELD THAT THE SHARES SOLD BY THE ASSESSEE ARE LONG TERM CAPITAL ASSETS IN TERMS OF EXPLANATION 1(I)(C) TO SECTION 2(42A) READ WITH SEC TION 47(VII) OF THE ACT. ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 23 OF 46 (B) THE LD CIT(A) SHOULD HAVE ADJUDICATED THE ISSU E RELATING TO DENIAL OF EXEMPTION U/S 10(38) OF THE ACT. (C) THE LD CIT(A) SHOULD HAVE ADJUDICATED THE ISS UE RELATING TO ASSESSMENT OF NOTIONAL INTEREST ON THE LOAN GIVE N TO INNOVATIVE B2B LOGISTIC SOLUTIONS P LTD. (D) THE LD CIT(A) HAS EXCEEDED HIS JURISDICTION IN OBSERVING THAT THE TAXABILITY OF CAPITAL GAINS AND INTEREST I NCOME NEED TO BE EXAMINED IN THE HANDS OF BENEFICIARIES. 18. WE HEARD THE PARTIES AND PERUSED THE RECORD. FROM THE RECORD, WE NOTICE THAT THE PRIMARY CLAIM OF THE ASS ESSEE IS EXEMPTION U/S 10(23FB) OF THE ACT, AS PER WHICH ANY INCOME OF A VENTURE CAPITAL COMPANY OR VENTURE CAPITAL FUND FRO M INVESTMENT IN A VENTURE CAPITAL UNDERTAKING IS EXEMPT. THE EXPRES SIONS VENTURE CAPITAL FUND AND VENTURE CAPITAL UNDERTAKING ARE DEFINED AS UNDER IN THE EXPLANATION GIVE BELOW SEC.10(23FB):- (B) VENTURE CAPITAL FUND MEANS A FUND:- (A) OPERATING UNDER A TRUST DEED REGISTERED UNDER T HE PROVISIONS OF THE REGISTRATION ACT, 1908 (16 OF 190 8), WHICH (I) HAS BEEN GRANTED A CERTIFICATE OF REGISTRATION, BEFORE THE 21 ST DAY OF MAY 2012, AS A VENTURE CAPITAL FUND AND IS REGULATED UNDER THE VENTURE CAPITAL FUNDS REGULATIONS; OR ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 24 OF 46 (II) HAS BEEN GRANTED A CERTIFICATE OF REGISTRATION AS VENTURE CAPITAL FUND AS SUB-CATEGORY OF CATEGORY I ALTERNATIVE INVESTMENT FUND UNDER THE ALTERNATIVE INVESTMENT FUNDS REGULATIONS AND WHICH FULFILLS TH E FOLLOWING CONDITIONS, NAMELY:-.. (C) VENTURE CAPITAL UNDERTAKING MEANS (I) A VENTURE CAPITAL UNDERTAKING AS DEFINED IN CLA USE (N) OF REGULATION 2 OF VENTURE CAPITAL FUNDS REGULATIONS; OR (II) A VENTURE CAPITAL UNDERTAKING AS DEFINED IN C LAUSE (AA) OF SUB REGULATION (1) OF REGULATION 2 OF THE ALTERNATI VE INVESTMENT FUNDS REGULATIONS. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT TH E ASSESSEE IS A VENTURE CAPITAL FUND AND IS REGULATED BY THE VENTUR E CAPITAL FUNDS REGULATIONS. THE LD CIT(A) HAS EXTRACTED THE SUBMI SSIONS MADE BY THE ASSESSEE ON VENTURE CAPITAL FUNDS REGULATIONS A S UNDER:- 4.10 TO APPRECIATE THE ISSUE IT IS RELEVANT TO APPRECIATE THE PROVISIONS OF SECTION 10(23FB) OF TH E ACT. AS PER THE PROVISIONS OF SECTION 10(23FB) OF T HE ACT, THE EXEMPTION IS AVAILABLE TO THE INCOME OF TH E VCF FROM INVESTMENT IN A VCU IF THE FOLLOWING TWO CONDITIONS ARE SATISFIED: A. THE FUND IS A VENTURE CAPITAL COMPANY OR A VCF; AND ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 25 OF 46 B. THE INCOME IS FROM INVESTMENT MADE IN A VENTURE CAPITAL UNDERTAKING (VCU), 4.11 THE CLAUSE (B) OF THE EXPLANATION TO SECTION 10(23FB) OF THE ACT DEFINES VENTURE CAPITAL FUND' A S BELOW (RELEVANT EXTRACTS ONLY): '(B) 'VENTURE CAPITAL FUND' MEANS A FUND - (A) OPERATING UNDER A TRUST DEED REGISTERED UNDER T HE PROVISIONS OF THE REGISTRATION ACT, 1908 (16 OF 190 8), WHICH - (I) HAS BEEN GRANTED A CERTIFICATE OF REGISTRATION, BEFORE THE 21 DAY OF MAY, 2012, AS A VENTURE CAPITAL APPELLANT AND IS REGULATED BY THE VENTURE CAPITAL F UND REGULATIONS, OR...... (II) . 4.12 THUS, FROM THE PROVISIONS OF THE ABOVE SECTION , THE FUND NEEDS TO COMPLY WITH THREE CONDITIONS IN ORDER TO QUALIFY AS A VCF WITHIN THE MEANING OF CLAUSE (B) O F EXPLANATION TO SECTION 10(23FB) OF THE ACT: A. THE FUND IS OPERATING UNDER A TRUST DEED REGISTE RED UNDER THE PROVISIONS OF THE REGISTRATION ACT, 1908; ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 26 OF 46 B, A CERTIFICATE OF REGISTRATION SHOULD BE GRANTED TO THE FUND BY THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) BEFORE MAY 21, 2012, AND C. THE FUND SHOULD BE REGULATED UNDER THE VCF REGULATIONS. 4.13 AS PER THE AGREED FACTS, THE TRUE NORTH FUND L ILA, FORMERLY KNOWN AS INDIA VALUE FUND LILA (THE APPELLANT), IS A TRUST WITHIN THE MEANING OF THE IN DIAN TRUSTS ACT, 1882, AND IS REGISTERED UNDER THE REGISTRATION ACT, 1908. THUS IT IS CLEAR THAT THE APPELLANT IS REGISTERED AS A VENTURE CAPITAL FUND ( VCF) UNDER THE SECURITIES AND EXCHANGE BOARD OF INDIA (VENTURE CAPITAL FUNDS) REGULATIONS, 1996 (VCF REGULATIONS). THESE FACTS HAVE NOT BEEN DISPUTED BY THE AO. 4.14 THE VCF REGULATIONS GOVERN INTER-ALIA THE CATEGORY OF INVESTORS FROM WHOM THE FUNDS CAN BE RAISED, MINIMUM INVESTMENT IN A VCU, MODES OF INVESTMENT AND REPORTING OBLIGATIONS. IN THIS REGAR D, IT IS SUBMITTED BY THE APPELLANT THAT IT HAD MADE ITS INVESTMENTS IN COMPLIANCE WITH REGULATION 12 OF THE VCF REGULATIONS. THE APPELLANT HAS ALSO MADE VARIOU S FILINGS WITH SEBI AS PER THE VCF REGULATIONS FROM T IME TO TIME. THUS, THE APPELLANT QUALIFIES AS A VCF WI THIN ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 27 OF 46 THE MEANING OF CLAUSE (B) OF EXPLANATION TO SECTION 10(23FB) OF THE ACT. 4.15 CONSIDERING THE SUBMISSIONS OF THE APPELLANT, IT IS RELEVANT TO UNDERSTAND THE MEANING OF THE PHRASE INVESTMENT IN A VENTURE CAPITAL UNDERTAKING AS PER REGULATION 2(N) OF THE VCF REGULATIONS, A VENTURE CAPITAL UNDERTAKING (VCU) MEANS - '(N) 'VENTURE CAPITAL UNDERTAKING' MEANS A DOMESTIC COMPANY - (I) WHOSE SHARES ARE NOT LISTED ON A RECOGNIZED STO CK EXCHANGE IN INDIA, (II') WHICH IS ENGAGED IN THE BUSINESS OF PROVIDING SERVICES, PRODUCTION OR MANUFACTURE OF ARTICLE OR T HINGS,' OR DOES NOT INCLUDE SUCH ACTIVITIES, OR SECTORS WHI CH ARE SPECIFIED IN THE NEGATIVE LIST BY THE BOARD WITH TH E APPROVAL OF THE CENTRAL GOVERNMENT BY NOTIFICATION IN THE OFFICIAL GAZZETTE IN THIS BEHALF' ALSO, THE THIRD SCHEDULE TO THE VCF REGULATIONS LAY S DOWN THE LIST OF ITEMS IN THE NEGATIVE LIST, THE AC TIVITIES SPECIFIED IN THE NEGATIVE LIST ARE I. * ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 28 OF 46 II. NON-BANKING FINANCIAL SERVICES [EXCLUDING THOSE NON- BANKING FINANCIAL COMPANIES WHICH ARE REGISTERED WITH THE RESERVE BANK OF INDIA AND HAVE BEEN CATEGORISED AS EQUIPMENT LEASING OR F-I/RE PURCHASE COMPANIES]. III GOLD FINANCING **[EXCLUDING THOSE COMPANIES WHI CH ARE ENGAGED IN GOLD FINANCING FOR JEWELLERY]. IV ACTIVITIES NOT PERMITTED UNDER INDUSTRIAL POLICY OF GOVERNMENT OF INDIA. V ANY OTHER ACTIVITY WHICH MAY BE SPECIFIED BY SEBI IN CONSULTATION WITH THE GOVERNMENT OF INDIA FROM TIME TO TIME,] AS PER REGULATION 12 OF VCF REGULATIONS - '12. ALL INVESTMENT MADE OR TO BE MADE BY A VENTURE CAPITAL FUND SHALL BE SUBJECT TO THE FOLLOWING COND ITIONS, NAMELY:- A) VENTURE CAPITAL FUND SHALL DISCLOSE THE INVESTME NT STRATEGY AT THE TIME OF APPLICATION FOR REGISTRATIO N; B) VENTURE CAPITAL FUND SHALL NOT INVEST MORE THAN 25% CORPUS OF THE FUND IN ONE VENTURE CAPITAL UNDERTAKI NG, 2(BA) VENTURE CAPITAL FUND MAY INVEST IN SECURITIES OF FOREIGN COMPANIES SUBJECT TO SUCH CONDITIONS OR ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 29 OF 46 GUIDELINES THAT MAY BE STIPULATED OR ISSUED BY THE RESERVE BANK OF INDIA AND THE BOARD FROM TIME TO TIME,] C) SHALL NOT INVEST IN THE ASSOCIATED COMPANIES; AN D D) VENTURE CAPITAL FUND SHALL MAKE INVESTMENT 3[* * *1 AS ENUMERATED BELOW.' (I) AT LEAST [66.67%] OF THE INVESTIBLE FUNDS SHALL BE INVESTED IN UNLISTED EQUITY SHARES OR EQUITY LINKED INSTRUMENTS '[OF VENTURE CAPITAL UNDERTAKING] (II) NOT MORE THAN [33.33%] OF THE INVESTIBLE FUNDS MAY BE INVESTED BY WAY OF : A) SUBSCRIPTION TO INITIAL PUBLIC OFFER OF A VENTUR E CAPITAL UNDERTAKING WHOSE SHARES ARE PROPOSED TO BE LISTED [***],. B) DEBT OR DEBT INSTRUMENT OF A VENTURE CAPITAL UNDERTAKING IN WHICH THE VENTURE CAPITAL APPELLANT HAS ALREADY MADE AN INVESTMENT BY WAY OF EQUITY.] C) PREFERENTIAL ALLOTMENT OF EQUITY SHARES OF A LIS TED COMPANY SUBJECT TO LOCK IN PERIOD OF ONE YEAR; D) THE EQUITY SHARES OR EQUITY LINKED INSTRUMENTS O F A FINANCIALLY WEAK COMPANY OR A SICK INDUSTRIAL COMPA NY WHOSE SHARES ARE LISTED. ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 30 OF 46 EXPLANATION 1.FOR THE PURPOSE OF THESE REGULATIONS , A 'FINANCIALLY WEAK COMPANY' MEANS A COMPANY, WHICH HAS AT THE END OF THE PREVIOUS FINANCIAL YEAR ACCUMULATED LOSSES, WHICH HAS RESULTED IN EROSION O F MORE THAN 50% BUT LESS THAN 100% OF ITS NET WORTH A S AT THE BEGINNING OF THE PREVIOUS FINANCIAL YEAR E) SPECIAL PURPOSE VEHICLES WHICH ARE CREATED BY A VENTURE CAPITAL FUND FOR THE PURPOSE OF FACILITATIN G OR PROMOTING INVESTMENT IN ACCORDANCE WITH THESE REGULATIONS. EXPLANATION.-THE INVESTMENT CONDITIONS AND RESTRICT IONS STIPULATED IN CLAUSE (D) OF REGULATION 12 SHALL BE ACHIEVED BY THE VENTURE CAPITAL FUND BY THE END OF ITS LIFE CYCLE,] F) VENTURE CAPITAL FUND SHALL DISCLOSE THE DURATION OF LIFE CYCLE OF THE FUND,]' 19. ON A PERUSAL OF THE ABOVE SAID VENTURE CAPITA L REGULATIONS, WE NOTICE THAT THERE IS MERIT IN THE CONTENTIONS OF THE ASSESSEE THAT THE CONDITION PRESCRIBED TO THE EFFECT THAT THE SHA RES OF VENTURE CAPITAL UNDERTAKING SHOULD NOT HAVE BEEN LISTED IN A RECOGNIZED STOCK EXCHANGE SHALL APPLY ONLY AT THE TIME OF MAKI NG INVESTMENT. THIS CONTENTION IS FURTHER FORTIFIED, IF WE LOOK AT LIMITS PRESCRIBED FOR MAKING INVESTMENT IN A VENTURE CAPITAL UNDERTAKING UNDER REGULATION 12. AS PER THE SAID REGULATION, ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 31 OF 46 (A) AT LEAST 66.67% OF INVESTIBLE FUNDS SHALL BE I NVESTED IN UNLISTED EQUITY SHARES AND (B) NOT MORE THAN 33.33% OF THE INVESTIBLE FUNDS MA Y BE INVESTED BY WAY OF (I) SUBSCRIPTION TO INITIAL PUBLIC OFFER OF A VENT URE CAPITAL UNDERTAKING WHOSE SHARES ARE PROPOSED TO BE LISTED; (II) DEBT OR DEBT INSTRUMENTS.; (III) PREFERENTIAL ALLOTMENT OF EQUITY SHARES OF A LISTED COMPANY SUBJECT TO LOCK IN PERIOD OF ONE YEAR; (IV) THE EQUITY SHARES OR EQUITY LINKED INSTRUMENT S OF A FINANCIALLY WEAK COMPANY OR A SICK INDUSTRIAL COMPA NY WHOSE SHARES ARE LISTED WHILE CLAUSE (A) PRESCRIBES A LIMIT OF 66.67% FOR I NVESTING IN UNLISTED SHARES, THE CLAUSE (B) PRESCRIBES A LIMIT OF 33.33% FOR INVESTING IN SHARES WHICH ARE GOING TO BE LISTED. THUS CLAUSE (B) VISUALIZES LISTING OF SHARES IN FUTURE, MEANING THE REBY, THE SUBSEQUENT LISTING OF SHARES SHOULD NOT BE A BAR FO R AVAILING EXEMPTION U/S 10(23FB) OF THE ACT. IT CAN BE NOTIC ED THAT THE VCF REGULATIONS PRESCRIBES CONDITIONS TO BE FOLLOWED AT THE TIME OF MAKING INVESTMENTS ONLY. THUS, THERE IS MERIT IN T HE CONTENTIONS OF THE ASSESSEE THAT THE VCF REGULATIONS DO NOT PROHIB IT CASES WHERE THE INITIAL INVESTMENTS MADE IN UNLISTED SHARES OF VENTURE CAPITAL ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 32 OF 46 UNDERTAKING BECOMES LISTED SHARES DUE TO CORPORATE ACTIONS. SUCH KIND OF CORPORATE ACTIONS ARE USUALLY UNDERTAKEN ON COMMERCIAL EXPEDIENCY, BUSINESS EXIGENCIES AND FOR THE FUTURE WELFARE OF THE COMPANY. THE ASSESSEE HAS ALSO MADE FOLLOWING SUBM ISSIONS BEFORE LD CIT(A) ON THE ALLEGATION OF VIOLATION OF VENTURE CAPITAL FUND REGULATIONS:- 4.20 THE AO HAS NOT GRANTED THE EXEMPTION UNDER SE CTION 10(23FB) OF THE ACT, ON THE BASIS THAT THE APPELLAN T HAS SOLD THE SHARES OF A LISTED COMPANY, NOT BEING A VC F. IN THIS REGARD, THE APPELLANT FURTHER SUBMITTED THAT: 'THE NATURE OF VENTURE CAPITAL IS SUCH THAT THE INV ESTMENT IN A VCU IS MADE AT AN EARLY STAGE. AT A LATER STAG E, THE DIVESTMENT IS MADE WHEN THE VCU IS ABLE TO STAND ON ITS OWN FEET. VERY OFTEN, SUCCESSFUL VCUS GET LISTED ON THE STOCK MARKET AND THE DIVESTMENT HAPPENS THROUGH SAL E OF SHARES IN THE STOCK MARKET. WHILE THE VCF REGULATIO NS ORDINARILY ENVISAGE THAT THE COMPANIES IN WHICH INVESTMENTS ARE MADE SHOULD BE UNLISTED COMPANIES A S OF THE DATE OF THE /INVESTMENT THEY DO NOT PROHIBIT C ASES WHERE SUCH INVESTMENTS BECOME LISTED INVESTMENTS THROUGH CORPORATE ACTION. THEY NEITHER PROHIBIT AN UNLISTED VCU FROM LISTING ITS SHARES, NOR DO THEY PROHIBIT A N UNLISTED VCU FROM MERGING INTO A LISTED COMPANY. WHERE AN UNLISTED INVESTMENT MADE BY A VCF IN A VCU BECOMES A LISTED INVESTMENT FOR ANY REASON, NOTHING IN THE ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 33 OF 46 VCF REGULATIONS SUGGEST THAT THERE HAS BEEN A VIOLA TION OF THE REGULATION; NOR DO THE REGULATIONS PROHIBIT THE VCF FROM CONTINUING TO HOLD SUCH LISTED SHARES. THE VERY FACT THAT VCF REGULATIONS ENVISAGE INVEST MENT BY WAY OF SUBSCRIPTION TO INITIAL PUBLIC OFFER OF A VCU WHOSE SHARES ARE PROPOSED TO BE LISTED [REFER REGUL ATION 12(D)(II)(A) OF VCF REGULATIONS, AS PROVIDED ABOVE] AS WELL AS INVESTMENT BY WAY OF PREFERENTIAL ALLOTMENT OF E QUITY SHARES OF A LISTED COMPANY [REFER REGULATION 12(D)( II)(C) OF VCF REGULATIONS, AS PROVIDED ABOVE], IT IS CLEAR TH AT INVESTMENT IN A LISTED COMPANY IS NOT PROHIBITED. FURTHER, AS PER THE ERSTWHILE VCF REGULATIONS, A VC F WHICH SEEKS TO AVAIL BENEFITS UNDER THE RELEVANT PR OVISIONS OF THE INCOME-TAX ACT, 1961 APPLICABLE TO A VCF, WA S REQUIRED TO DISINVEST FROM SUCH INVESTMENTS WITHIN A PERIOD OF ONE YEAR FROM THE DATE ON WHICH THE SHARES OF TH E VCU ARE LISTED IN A RECOGNIZED STOCK EXCHANGE. THIS RES TRICTIVE CONDITION ON VCFS WAS REMOVED FROM THE VCF REGULATI ONS WITH EFFECT FROM 30TH DECEMBER, 2000. THE VERY FACT THAT THE INVESTMENT BY A VCF IN LISTE D SHARES WHICH EARLIER HAD TO BE EXITED WITHIN A PERIOD OF O NE YEAR FROM THE DATE ON WHICH THE SHARES OF THE VCU ARE LI STED IN A RECOGNIZED STOCK EXCHANGE, IS NOW OMITTED, IT IS EVIDENT THAT A VCF CAN CONTINUE HOLDING ITS INVESTMENT IN E QUITY SHARES OF A LISTED COMPANY. CONSIDERING THE FACT TH AT THE ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 34 OF 46 ABOVE RESTRICTIVE CONDITION HAS BEEN DELETED, IT IS CLEAR THAT A VCF IS FREE TO SELL ITS LISTED INVESTMENTS AT ANY TIME AND THE SAME DOES NOT IMPACT THE TAX BENEFITS IT SEEKS TO AVAIL UNDER THE ACT. BASED ON THE ABOVE, THE APPELLANT PLEADED THAT ON P LAIN READING OF THE VCF REGULATIONS, IT IS CLEAR THAT SA LE OF SHARES OF A LISTED COMPANY IS NOT PROHIBITED BY VCF REGULATIONS, TO CLAIM EXEMPTION ON THE INITIAL INVE STMENT MADE IN THE UNLISTED SHARES OF A VCU.' 20. HENCE, WE ARE OF THE VIEW THAT THERE IS MERIT IN THE SUBMISSION OF THE ASSESSEE THAT IT IS ELIGIBLE FOR EXEMPTION U /S 10(23FB) OF THE ACT. WE HAVE NOTICED EARLIER THAT THE LD CIT(A) HA S TAKEN THE VIEW THAT THE EXEMPTION U/S 10(23FB) IS AVAILABLE FOR TH E CAPITAL GAINS ACCRUED TO THE ASSESSEE UP TO THE DATE OF AMALGAMAT ION AND THE BALANCE AMOUNT OF CAPITAL GAINS MAY BE CONSIDERED A S TAXABLE. THE RELEVANT DISCUSSION OF LD CIT(A) FINDS PLACE IN PAR AGRAPH 4.24 OF HIS ORDER, WHICH WAS EXTRACTED EARLIER. THERE IS FALLA CY IN THE DECISION SO RENDERED BY LD CIT(A). THE INCOME FROM CAPITAL GAINS IS NOT A PERIOD COST/INCOME LIKE INTEREST INCOME. ONLY PE RIOD COST/INCOME ARE AMENABLE FOR SPLIT UP ON THE BASIS OF TIME PERI OD. CAPITAL GAINS ARISES ONLY ON SALE OF SHARES AND HENCE, THE QUESTI ON OF SPLITTING UP THE SAME ON THE BASIS OF TIME PERIOD CANNOT BE MADE . ACCORDINGLY, WE ARE UNABLE TO AGREE WITH THE SAID DECISION OF LD CIT(A). ONCE IT IS HELD THAT THE ASSESSEE QUALIFIES FOR EXEMPTION U /S 10(23FB) OF THE ACT, ITS ENTIRE INCOME SHOULD BE GRANTED EXEMPTION AND ACCORDINGLY, THE QUESTION OF SPLITTING UP DOES NOT ARISE. ACCOR DINGLY, WE MODIFY ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 35 OF 46 THE ORDER PASSED BY LD CIT(A) IN PARAGRAPH 4.24 OF THE ORDER AND HOLD THAT THE ASSESSEE IS ENTITLED FOR EXEMPTION U/ S 10(23FB) OF THE ACT. 21. WE NOTICED THAT THE ASSESSEE HAS TAKEN A G ROUND BEFORE LD CIT(A) THAT THE ASSESSEE IS ONLY A CONTRIBUTORY TRU ST AND HENCE THE INCOME EARNED BY IT IS TAXABLE IN THE HANDS OF BENE FICIARIES IN ACCORDANCE WITH THE PROVISIONS OF SEC. 61 R.W.S. 63 OF THE ACT. THE ASSESSEE HAS ALSO FURNISHED THE LIST OF BENEFICIARI ES AND ACCORDINGLY IT HAS SUBMITTED THAT IT IS A DETERMINATIVE TRUST. IT WAS ALSO SUBMITTED BEFORE LD CIT(A) THAT THE BENEFICIARIES H AVE OFFERED THEIR SHARE OF CAPITAL GAINS IN THE RETURNS OF INCOME FIL ED BY THEM. THE LD CIT(A) WAS CONVINCED WITH THESE CONTENTIONS OF T HE ASSESSEE. ACCORDINGLY, HE HAS HELD THAT THE EXEMPTION U/S 10( 23FB) SHOULD BE GRANTED TO THE ASSESSEE AS IT IS ONLY A PASS TH ROUGH ENTITY. THE RELEVANT OBSERVATIONS MADE BY LD CIT(A) ARE EXTRACT ED BELOW:- 4.34 HOWEVER, EVEN IF ONE SEEKS TO GO BY THE INTENTION OF THE LEGISLATURE IN CASE OF SECTION 10(23FB) THE INTENTION OF THE LEGISLATURE WAS TO EXTEND THE EXEMPTION TO THE ENTIRE INCOME OF A VCF WHICH IS SET UP TO RAISE FUNDS FOR INVESTMENT IN VCUS AS IS EVIDENT FROM THE FINANCE MINISTERS SPEECH (243 ITR 46 STATUTES) (PAGE 24 & 25 OF PAPER BOOK) IN THE LOK SABHA, DATED MAY 3,2000 WHILE MOVING THE FINANCE BILL 2000-01 FOR CONSIDERATION OF THE HOUSE, WHICH STATES AS UNDER: ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 36 OF 46 'VENTURE CAPITAL FUND SHALL ENJOY A COMPLETE PASS THROUGH STATUS. THERE WILL BE NO TAX ON DISTRIBUTED OR UNDISTRIBUTED INCOME OF SUCH FUNDS. THE INCOME DISTRIBUTED BY THE FUNDS WILL ONLY BE TAXED IN THE HANDS OF INVESTORS AT THE RATES APPLICABLE TO THE NATURE OF INCOME'. 4.35 IN LIGHT OF THE ABOVE, IT IS CLEAR THAT THE INTENTION OF THE LEGISLATURE IS TO TREAT THE ENTIRE INCOME OF VCFS AS EXEMPT FROM TAX UNDER SECTION 10(23FB) IRRESPECTIVE OF ITS NATURE, AND INSTEAD TA X 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. 4.36 THE SUBSEQUENT AMENDMENT OF SECTION 10(23FB) 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. 4.37 THE TAXATION OF DOMESTIC VENTURE CAPITAL FUNDS (VCFS) AND ALTERNATIVE INVESTMENT FUNDS (ALES) HAS UNDERGONE VARIOUS CHANGES OVER THE YEARS CURRENTLY, VCFS1 AND CATEGORY 1/ 11 AIFS2 HAVE BEEN GRANTED TAX PASS THROUGH STATUS UNDER ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 37 OF 46 THE INCOME-TAX ACT, 1961 (THE ACT) IN RELATION TO SPECIFIED INCOME SUCH INCOME IS DIRECTLY CHARGEABLE TO TAX IN THE HANDS OF THE BENEFICIARIES/ INVESTORS . 4.38 IN THE ABOVE CASES, IT IS CRITICAL THAT THE FU ND (SET-UP AS A TRUST) QUALIFIES AS A DETERMINATE TRUS T, SO THAT TAX LEVIED IN THE HANDS OF THE TRUSTEE IS I N THE LIKE MANNER AND TO THE SAME EXTENT AS IT WOULD BE LEVIABLE UPON THE BENEFICIARIES. IN CASE WHERE THE FUND IS TREATED AS INDETERMINATE TRUST', IT COU LD GET TAXED UNDER SECTION 164(1) OF THE ACT, WHICH PROVIDES FOR TAXATION AT MAXIMUM MARGINAL RATE UNDER CERTAIN CIRCUMSTANCES. 4.39 EXPLANATION 1 TO SECTION 164 OF THE ACT PROVIDES THAT FOR A TRUST TO BE DETERMINATE, (I) TH E BENEFICIARIES SHOULD BE EXPRESSLY STATED AND IDENTIFIABLE AS ON THE DATE OF THE TRUST DEED; AND (II) THEIR INDIVIDUAL SHARES SHOULD BE EXPRESSLY STATED AND ASCERTAINABLE AS ON THE DATE OF THE TRUST DEED. 4.40 IN THIS CONNECTION, IT MAY BE NOTED THAT THE AUTHORITY FOR ADVANCE RULING HELD THAT IF THE TRUST DEED SETS OUT EXPRESSLY THE MANNER IN WHICH THE BENEFICIARIES ARE TO BE ASCERTAINED AND ALSO THE SHARE TO WHICH EACH OF THEM WOULD BE ENTITLED WITHOUT AMBIGUITY, THEN IT CANNOT BE SAID THAT THE TRUST IS INDETERMINATE. ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 38 OF 46 4.41 HOWEVER, THE CENTRAL BOARD OF DIRECT TAXES ISSUED CIRCULAR NO. 13/2014, DATED 28 JULY, 2014, WHEREIN IT HAD STATED THAT IN A SITUATION WHERE THE TRUST DEED EITHER DOES NOT NAME THE INVESTORS OR DOES NOT SPECIFY THEIR BENEFICIAL INTEREST, THE PROVISIONS OF SECTION 164(1) OF THE ACT WOULD APPLY AND THE ENTIRE INCOME SHOULD BE CHARGEABLE TO TAX AT MAXIMUM MARGINAL RATE IN THE HANDS OF THE TRUSTEE IN THEIR REPRESENTATIVE CAPACITY. 4.42 SIMILAR QUESTIONS AROSE FOR CONSIDERATION BEFORE THE AUTHORITY FOR ADVANCE RULING IN THE CASE OF XYZ, IN RE 224 ITR 473 (AAR). XYZ., IN RE 224 ITR 473 (AAR): THE AUTHORITY FOR ADVANCE RULING (AAR) HELD THAT IF THE TRUST DEED SETS OUT EXPRESSLY THE MANNER IN WHICH THE BENEFICIARIES ARE TO BE ASCERTAINED AND ALSO THE SHARE TO WHICH EACH OF THEM WOULD BE ENTITLED WITHOUT AMBIGUITY, THEN IT CANNOT BE SAID THAT THE TRUST DEED DOES NOT NAME THE BENEFICIARIES OR THAT THEIR SHARES ARE INDETERMINATE, THE PERSONS AS WELL AS THE SHARES MUST BE CAPABLE OF BEING DEFINITELY PIN-POINTED AND ASCERTAINED ON THE DATE OF THE TRUS T DEED ITSELF WITHOUT LEAVING THESE HTTP://WWW.ITATONLINE.ORG ITA NO,178/BANG/2012 PAGE 41 OF 76 TO BE DECIDED UPON AT A FUTURE DATE BY A PERSON OTHER THAN THE AUTHOR EITHER AT HIS ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 39 OF 46 DISCRETION OR IN A MANNER NOT ENVISAGED IN THE TRUS T DEED, EVEN IF THE TRUST DEED AUTHORISES ADDITION OF FURTHER CONTRIBUTORS TO THE TRUST AT DIFFERENT POIN TS OF TIME IN ADDITION TO INITIAL CONTRIBUTORS, THAN T HE SAME WOULD NOT MAKE THE BENEFICIARIES UNKNOWN OR THEIR SHARE INDETERMINATE. EVEN IF THE SCHEME OF COMPUTATION OF INCOME OF BENEFICIARIES IS COMPLICATED, IT IS NOT POSSIBLE TO SAY THAT THE SHA RE INCOME OF THE BENEFICIARIES CANNOT BE DETERMINED OR KNOWN FROM THE TRUST DEED. 4.43 IN A RECENT DECISION, THE KARNATAKA HIGH COURT IN THE CASE OF THE TRUST (INDIA ADVANTAGE FUND-VII IN ITA NO. 191/2015 DATED 20-02-2017), UPHELD THE DECISION OF THE BANGALORE INCOME-TAX APPELLATE TRIBUNAL IN ITA NO 178/2012 AY 2008-09 AND HELD THAT FOR A TRUST TO BE A DETERMINATE TRUST , IT WOULD BE SUFFICIENT TRUST DEED LAID DOWN THAT TH E BENEFICIARIES WOULD BE THE PERSONS WHO HAD MADE OR HAD AGREED TO MAKE, CONTRIBUTIONS TO THE TRUST I N ACCORDANCE WITH THE CONTRIBUTION AGREEMENT, AND THEIR SHARES WERE CAPABLE OF BEING DETERMINED BASED ON THE PROVISIONS OF THE TRUST DEED. THE ISSU E BEFORE THE KARNATAKA HIGH COURT WAS: WHETHER THE TRIBUNAL WAS RIGHT IN HOLDING THE TRUST AS A DETERMINATE TRUST AND NOT ASSESSING THE TRUST AT ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 40 OF 46 THE MAXIMUM MARGINAL RATE AS PER SECTION 164(1) OF THE ACT? HIGH COURT'S RULING: THE HIGH COURT UPHELD THE DECISION OF THE TRIBUNAL ON THE FOLLOWING PRINCIPLE S: * ALL THAT IS NECESSARY IS THAT THE BENEFICIARIES SHOULD BE IDENTIFIABLE BASED ON THE PROVISIONS OF THE TRUST DEED, AND IT WAS NOT NECESSARY THAT THE BENEFICIARIES SHOULD BE SPECIFICALLY NAMED IN THE TRUST DEED. IN THE PRESENT CASE, THE TRUST DEED CLEARLY LAID DOWN THAT BENEFICIARIES MEANT THE PERSONS, EACH OF WHOM HAD MADE OR AGREED TO MAKE, CONTRIBUTIONS TO THE TRUST IN ACCORDANCE WITH THE CONTRIBUTION AGREEMENT. IT IS NOT NECESSARY THAT THE TRUST DEED SHOULD ACTUALLY PRESCRIBE THE PERCENTAGE SHARE OF THE BENEFICIARIES IN ORDER FOR THE TRUST TO BE DETERMINATE. IT IS ENOUGH THAT THE SHARE OF THE BENEFICIARIES IS CAPABLE OF BEING DETERMINED BASED ON THE PROVISION/ FORMULA AS ON THE DATE OF THE TRUST DEED AND NOT AT THE DISCRETION OF THE TRUSTEE . IN THE PRESENT CASE, THE TRUST DEED CLEARLY SPECIFI ED THE MANNER IN WHICH THE INCOME HAD TO BE DISTRIBUTED. ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 41 OF 46 IF THE TRUST DEED AUTHORISES ADDITION OF FURTHER CONTRIBUTORS TO THE TRUST AT DIFFERENT POINTS IN TI ME IN ADDITION TO THE INITIAL CONTRIBUTORS, THE SAME WOULD NOT MAKE THE BENEFICIARIES UNKNOWN OR THEIR SHARES INDETERMINATE. 5.0 IN THE LIGHT OF THE ABOVE FACTS, ESPECIALLY CONSIDERING THE FACT THAT THE BENEFICIARIES/INVESTO RS HAVE INDEPENDENTLY OFFERED TO TAX THEIR SHARE OF INCOME RECEIVED FROM THE APPELLANT, IT IS HELD THAT ALL THE INCOMES OF THE APPELLANT ARISING FROM THE INVESTMENT IN THE VCU, IRRESPECTIVE OF THE FACT THA T THE SAID VCU IS SUBSEQUENTLY AMALGAMATED INTO A LISTED ENTITY, ARE EXEMPT UNDER THE PROVISIONS OF SECTION 10(23FB) OF THE ACT. OTHERWISE IT AMOUNTS TO DOUBLE TAXATION BOTH IN THE HANDS OF APPELLANT AND THE INVESTORS/BENEFICIARIES. FURTHER, DENYING THE EXEMPTION UNDER SECTION 10(23FB) MERELY ON THE GROUND OF SUBSEQUENT AMALGAMATION, WHICH IS BEYOND THE CONTROL OF EITHER THE APPELLANT OR THE BENEFICIARIES, IS NOT IN THE INTEREST OF EQUITABLE JUSTICE. 22. THE ASSESSEE HAS CLAIMED THAT IT IS A CONTR IBUTORY TRUST (REVOCABLE TRUST) AND HENCE THE INCOME WAS TAXABLE IN THE HANDS OF CONTRIBUTORS OF FUNDS (CALLED AS BENEFICIARIES HE RE) IN TERMS OF SEC. 61 TO 63 OF THE ACT. WE NOTICE THAT THE LD CIT(A) HAS APPRECIATED ABOVE SAID CONTENTIONS OF THE ASSESSEE AND ACCORDIN GLY HELD THAT, ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 42 OF 46 SINCE THE BENEFICIARIES HAVE OFFERED THEIR RESPECTI VE SHARE OF INCOME IN THEIR HANDS, THE ASSESSEE SHOULD NOT BE TAXED AG AIN. ACCORDINGLY, HE HAS HELD THAT THE ASSESSEE SHOULD B E ALLOWED EXEMPTION U/S 10(23FB) OF THE ACT. THOUGH THE PROV ISIONS OF SEC.61 TO 63 AND THE PROVISIONS OF SEC.10(23FB) OP ERATE IN DIFFERENT MANNER, YET THE CONCLUSION IS THAT THE ASSESSEE SHO ULD NOT SUBJECTED TO TAX TO CAPITAL GAINS AND INTEREST INCO ME. WE ALSO NOTICE THAT THE BENEFICIARIES HAVE OFFERED THEIR RE SPECTIVE SHARE OF INCOME IN THEIR HANDS, MEANING THEREBY, THE ASSESSE E ALSO SEEKS TO AVAIL THE BENEFITS OF SEC. 61 TO 63 OF THE ACT. TH E ASSESSEE HAS ALSO SUBMITTED THAT IT IS A PASS THROUGH ENTITY, MEANIN G THAT THE INCOME FROM INVESTMENTS IS TAXABLE IN THE HANDS OF BENEFIC IARIES. 23. IT IS PERTINENT TO NOTE THAT THE REVENUE HAS NOT CHALLENGED THE OBSERVATIONS OF LD CIT(A) IN HOLDING THAT THE ASSES SEE CANNOT BE ASSESSED TO TAX THE VERY SAME INCOME WHICH HAS BEEN OFFERED BY THE BENEFICIARIES IN THEIR RESPECTIVE HANDS. THIS OBSE RVATION OF LD CIT(A) WERE, APPARENTLY, BASED ON THE FACT THAT THE ASSESSEE IS A REVOCABLE TRUST AND ALTERNATIVELY IT IS A PASS THRO UGH ENTITY. 24. SINCE WE HAVE HELD IN THE PRECEDING PARAGRAP HS, THAT THE ASSESSEE CANNOT BE SUBJECTED TO TAX FOR CAPITAL GAI NS, THERE WAS NO NECESSITY TO EXAMINE THE QUESTION OF APPLICABILITY OF PROVISIONS OF SEC.10(38) OF THE ACT TO THE CAPITAL GAINS EARNED B Y THE ASSESSEE ON SALE OF SHARES. ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 43 OF 46 25. THE NEXT ISSUE RELATES TO THE ASSESSMENT OF ACCRUED INTEREST ON THE LOAN GIVEN TO INNOVATIVE B2B LOGISTIC SOLUTI ONS LTD COMPUTED BY THE AO NOTIONALLY. IT IS PERTINENT TO NOTE THAT THE ASSESSING OFFICER HAS ALLOWED EXEMPTION OF INTEREST INCOME EA RNED BY THE ASSESSEE ON THE LOANS GIVEN TO OTHER VENTURE CAPITA L UNDERTAKINGS. HE DID NOT ALLOW EXEMPTION FOR INTEREST INCOME COMP UTED BY HIM ON THE LOAN GIVEN TO INNOVATIVE B2B LOGISTIC SOLUTIONS LTD ON THE FOLLOWING REASONING:- THE ASSESSEE HAS CLAIMED EXEMPTION U/S 10(23FB) OF THE ACT ON RS.4,87,72,436/- BEING THE INTEREST FROM VCUS WH ICH HAS BEEN ALLOWED AS THIS AMOUNT HAS BEEN TAXED IN THE H ANDS OF THE INVESTORS. SIMILARLY, NOTIONAL INTEREST IS ALS O TO BE TAXED EITHER IN THE HANDS OF THE ASSESSEE OR THE INVESTOR S. THE ASSESSING OFFICER DO NOT HAVE JURISDICTION OVER THE INVESTORS AND THEREFORE, IT HAS BEEN BROUGHT TO TAX IN THE HA NDS OF THE ASSESSEE. THE REASONING GIVEN BY THE AO, IN OUR VIEW, IS NOT IN ACCORDANCE WITH THE LAW. THE LOAN TRANSACTIONS ARE GOVERNED B Y THE TERMS AND CONDITIONS ENTERED BETWEEN THE PARTIES. THE ASSESS EE HAS STATED IN ITS ANNUAL REPORT THAT THERE WAS DISPUTE BETWEEN TH E PARTIES WITH REGARD TO THE INTERPRETATION OF TERMS AND CONDITION S AND ACCORDINGLY IT HAS STATED THAT INTEREST INCOME WAS NOT RECOGNIZ ED. THE AO DID NOT ACCEPT THE ABOVE SAID REASONING AND ACCORDINGLY PROCEEDED TO COMPUTE NOTIONAL INTEREST. HOWEVER, IN OUR VIEW, T HE AO IS NOT ENTITLED TO GIVE DIFFERENT TREATMENT TO THE NOTIONA L INTEREST SO COMPUTED BY HIM, I.E., HE HAS TO GIVE VERY SAME TRE ATMENT THAT WAS ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 44 OF 46 GIVEN TO THE INTEREST INCOME EARNED FROM LOANS GIVE N TO OTHER VENTURE CAPITAL UNDERTAKINGS. THE AO HAS ALLOWED EX EMPTION TO THE INTEREST INCOME EARNED FROM OTHER VCU, IN WHICH CASE, THE NOTIONAL INTEREST INCOME COMPUTED BY HIM SHOULD ALS O ENJOY VERY SAME EXEMPTION. WE ORDER ACCORDINGLY. 26. THE FOREGOING DISCUSSIONS ADJUDICATES ALL TH E GROUNDS URGED BY THE REVENUE AND GROUNDS 1 TO 4 URGED BY THE ASSE SSEE IT ITS CROSS OBJECTION. IN GROUND NO.5, THE ASSESSEE HAS CONTEN DED THAT THE LD CIT(A) HAS EXCEEDED HIS JURISDICTION BY MAKING OBSE RVATION THAT INCOME FROM CAPITAL GAINS OUT OF INVESTMENT IN SHAR ES AND INTEREST INCOME FROM VENTURE CAPITAL UNDERTAKINGS EARNED BY THE ASSESSEE NEED TO BE EXAMINED IN THE HANDS OF ULTIMATE BENEFI CIARIES. WE NOTICE THAT THE LD CIT(A) HAS NOT GIVEN ANY DIRECTI ONS AND HAS ONLY MADE OBSERVATIONS, IMPLIEDLY IN SUPPORT OF HIS DECI SION THAT THE ABOVE SAID INCOMES ARE NOT TAXABLE IN THE HANDS OF THE ASSESSEE. HENCE, WE ARE OF THE VIEW THAT THERE IS NO REQUIREM ENT OF INTERFERING WITH THE ABOVE SAID OBSERVATIONS MADE BY LD CIT(A). 27. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED AND THE CROSS OBJECTION OF THE ASSESSEE IS TREATED AS ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH JANUARY, 2019. SD/ - (BEENA PILLAI) JUDICIAL MEMBER SD/ - (B.R BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED, 29 TH JANUARY, 2019. / VMS / ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 45 OF 46 COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE. ITA NO.486 /BANG/2019 CO NO.50/BANG/2019 PAGE 46 OF 46 1. DATE OF DICTATION 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO SR.P.S .. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER .. 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S. .. 6. DATE OF UPLOADING THE ORDER ON WEBSITE.. 7. IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO .. 8. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. DICTATION NOTE ENCLOSED DATE ON WHICH ORDER GOES FOR XEROX & ENDORSEMENT 10. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 11. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER . 12. THE DATE ON WHICH THE FILE GOES TO DISPATCH SEC TION FOR DISPATCH OF THE TRIBUNAL ORDER . 13. DATE OF DESPATCH OF ORDER. .. 14. DICTATION NOTE ENCLOSED