KAE CAPITAL FUND ,MUMBAI V. ITO WARD 25(1)(1), MUMBAI

ITA 3752/MUM/2025

AI Insights

KAE Capital Fund appealed against the order of the CIT(A), which upheld the disallowance of exemptions under sections 10(35) and 10(23FB) of the Income Tax Act, 1961, for the assessment year 2020-21. The main issues revolved around the interpretation and applicability of these sections to the fund's income and the procedural fairness in the appellate process. The Tribunal found that the CIT(A) had not adequately addressed the appellant's request for a personal hearing and had not properly considered the fund's status as a Venture Capital Fund under SEBI regulations, which could affect the applicability of the exemptions claimed.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 788041 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-11-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: misc
• Appeal Filed On: 28-05-2025
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HEMANSHU JOSHI
• Assessee Lawyers: MADHUR AGRAWAL
• Keywords: Set aside; Opportunity of being heard; Revised return; Capital Gains; Principle of natural justice; Rectification of order; Earning of tax free income
• Section: 143(3); 154; 139(5)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “E” BENCH, MUMBAI BEFORE SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER ITA No.3752/MUM/2025 (Assessment Year: 2020-21) KAE Capital Fund, 74AB, Jolly Maker Chambers II, Vinay Shah Marg, Mumbai – 400021 PAN : AABTK9875E ............... Appellant v/s Income Tax Officer, Ward – 25(1)(1)., Kautilya Bhavan, BKC, Mumbai ……………… Respondent Assessee by : Shri Madhur Agrawal Revenue by : Shri Hemanshu Joshi, Sr.DR Date of Hearing – 25/11/2025 Date of Order - 27/11/2025 O R D E R PER SANDEEP SINGH KARHAIL, J.M. The assessee has filed the present appeal against the impugned order dated 31.03.2025, passed under section 250 of the Income Tax Act, 1961 (\"the Act\") by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2020-21. 2. In this appeal, the assessee has raised the following grounds: “Ground No. 1: Erred in violation of principle of natural justice while passing the appellate order by Hon'ble CIT(A) 1.1. On the facts and circumstances of the case and in law, the Learned CIT (A) erred in confirming the action of the Centralised Processing Centre ('CPC\") Printed from counselvise.com ITA No.3752/Mum/2025 (A.Y. 2020-21) 2 in disallowing the exemption under section 10(35) of the Act as in Order passed under section 154 of the Act, and erred in directing the assessing officer ('AO\") to verify the condition for claiming exemption under section 10(23FB) of the Act without issuing any show cause notice to the Appellant before passing of the appellate order under section 250 of the Act. 1.2. The Ld. CIT(A) erred in not allowing the opportunity of personal hearing through video conferencing inspite of being requested by the Appellant in writing during the submissions filed before the CIT(A) - NFAC. 1.3. The Ld. CIT(A) erred in not following the principle of Audi Alteram by not granting an effective opportunity of being heard before passing the order under Section 250 of the Act. 1.4 The Ld. CIT(A) ought to have issued a show cause notice and/ or allowed the Appellant's request for a hearing through video conferencing prior to adjudicating the issues under appeal. 1.5. In view of the above, the order passed by the Ld. CIT(A) without affording a fair and reasonable opportunity to the Appellant, thereby warranting its recall due to the procedural infirmity. 2. Ground No.2: Non-grant of exemption under section 10(35) of the Act on dividend income from mutual fund units due to misinterpretation of the provisions of the Act 2.1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in interpreting the provisions of Section 10(35) of the Act, and in upholding the disallowance of exemption claimed in respect of dividend income of R10,08,399 received from mutual fund units. The disallowance was made by the CPC in the rectification order passed under Section 154 read with Section 143(1) of the Act. 2.2. The Ld. CIT(A) erred in not acknowledging the fact that as per the Finance Act 2020, the exemption under section 10(35) of the Act in respect of any income in respect of mutual fund units received is revoked for any such income received on or after 01 April 2020, i.e., from AY 2021-22 onwards. Accordingly, the said exemption was available till AY 2020-21, being the year under consideration. 2.3. The Ld. CIT(A) has incorrectly held that the exemption under section 10(35) is not applicable from Assessment Year 2020-21 onwards and has thereby overlooked the correct interpretation of the amendment made by the Finance Act, 2020 which states that exemption is withdrawn from Financial Year 2020-21 onwards. 2.4. In light of the above, the Appellant is eligible for exemption under section 10(35) of the Act in respect of dividend income of #10,08,399 received from mutual fund units during AY 2020-21, and the disallowance made in this regard ought to be deleted. Ground No. 3: Erred in considering the Appellant as Investment Fund under section 115UB (instead of venture capital fund \"VCU') for which Printed from counselvise.com ITA No.3752/Mum/2025 (A.Y. 2020-21) 3 exemption under section 10(23FB) of the Act is non-operational from AY 2016-17 onwards. 3.1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the Assessing Officer to verify whether the Appellant qualifies as an \"investment fund as defined under Explanation 1 to Section 115UB of the Act, thereby implying that the exemption under section 10(23FB) is not applicable from Assessment Year 2016-17 onwards. 3.2. The Ld. CIT(A) erred in not appreciating the fact that the Appellant had duly submitted and placed on record that it is validly set up as an irrevocable and determinate trust under the provisions of Indian Trusts Act, 1882, by way of a trust deed and is registered as a close-ended Domestic Venture Capital Fund (\"VCF') with Securities and Exchange Board of India ('SEBI') under the SEBI (Venture Capital Funds), Regulations, 1996 on 27 July 2011 and governed under section 115U read with section 10(23FB) of the Act. 3.3. Section 10(23FB) of the Act provides exemption in respect of any income of a venture capital company or venture capital fund from investment in a venture capital undertaking. 3.4. Clause (b) of section 10(23FB) defines a 'venture capital fund' as below: \"venture capital fund\" means a fund- (A) operating under a trust deed registered under the provisions of the Registration Act, 1908 (16 of 1908), which- (i) has been granted a certificate of registration, before the 21st day of May, 2012, as a Venture Capital Fund and is regulated under the Venture Capital Funds Regulations; or (ii) has been granted a certificate of registration as Venture Capital Fund as a sub-category of Category I Alternative Investment Fund under the Alternative Investment Funds Regulations 3.5. In light of the submissions and documentary evidence furnished, the Ld. CIT(A) ought to have granted the exemption under Section 10(23FB) in respect of capital gains of R1,55,51,062 arising from the sale of a venture capital undertaking, as the Appellant is a SEBI-registered Venture Capital Fund governed by the SEBI (Venture Capital Funds) Regulations, 1996, and satisfies the conditions prescribed under the Act. Ground No. 4: The Ld. AO while passing the order giving effect to the CIT(A) order ('OGE\") has erred in holding that exemption under section 10(23FB) of the Act is not operational for the Venture Capital Funds from AY 2016-17 onwards. 4.1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the Assessing Officer to verify whether the Appellant qualifies as an \"investment fund\" as defined under Explanation 1 to Section 115UB of the Act, thereby implying that the exemption under Section 10(23FB) is not applicable from Assessment Year 2016-17 onwards. Printed from counselvise.com ITA No.3752/Mum/2025 (A.Y. 2020-21) 4 4.2. On the facts and circumstances of the case and in law, the Ld. AO while passing the OGE dated April 24, 2025 erred in denying the exemption under section 10(23FB) of the Act to the Appellant. While passing the OGE, the Ld. AO relied on the SEBI Circular No. SEBI/HO/AFD/AFD-POD-1/P/CIR/2024/111 dated August 19, 2024 and incorrectly held that the SEBI (Venture Capital Fund) Regulations, 1996 has been replaced by SEBI (Alternative Investment Fund) Regulations 2012. 4.3. It is submitted that the SEBI (AIF) Regulations, 2012 were amended and notified on July 20, 2024, to allow Venture Capital Funds (VCFs) registered under the erstwhile SEBI (VCF) Regulations, 1996 the flexibility to migrate to the AIF framework. As per the SEBI Circular dated August 19, 2024, such migration is permitted until July 19, 2025, i.e., 12 months from the date of the said amendment. 4.4. Further, the AO also held that the Venture Capital Fund is not operational from AY 2016-17 onwards and therefore, exemption under section 10(23FB) is not valid and the Appellant is mandatorily required to take registration under the SEBI (Alternative Investment Fund) Regulations, 2012. 4.5. On the facts and circumstances of the case and in law, the Ld. AO erred in interpreting the above mentioned circular and SEBI (Alternative Investment Fund) Regulations, 2012. The said circular and SEBI (AIF) Regulations instead states that VC continue to remain regulated by VCF regulation and migration of Venture Capital Fund to Alternative Investment Fund is not mandatory but at the discretion of the Fund. Further, the Ld. AO also erred in appreciating the fact that the amendment for migration of VCF has been introduced in 2024. Furthermore, the amendment of such migration was introduced only in 2024 and was not applicable during AY 2020-21 - the assessment year in question. 4.6. In view of the above, the AO ought to have granted the exemption under Section 10(23FB) of the Act, as the Appellant continues to qualify as a Venture Capital Fund registered under the SEBI (VCF) Regulations, 1996 and is therefore eligible for the exemption for the relevant year under consideration. 5. Ground No. 5: Erred in not deleting the levy of interest under section 234C of the Act 5.1. The Ld. CIT(A) failed to appreciate that, as per the provisions of the section 234C of the Act, interest is leviable only on the shortfall or failure to pay advance tax based on the returned income, and not on the assessed income. 5.2. The Ld. CIT(A) erred in upholding the action of the CPC in levying interest under Section 234C through the order passed under section 154 read with Section 143(1) of the Act. The Ld. CIT(A) incorrectly treated the levy of interest under section 234C as merely consequential in nature and linked it to the outcome of the OGE to be passed by the AO. 5.3. The Ld. CIT(A) ought to have directed deletion of the interest levied under section 234C of the Act, considering that the Appellant had filed a Nil return Printed from counselvise.com ITA No.3752/Mum/2025 (A.Y. 2020-21) 5 of income and was therefore not liable to pay advance tax for the relevant assessment year.” 3. We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that the assessee is a Venture Capital Fund registered with SEBI under the SEBI (Venture Capital Funds) Regulation, 1996 and SEBI has issued a registration certificate, certifying the assessee as a Venture Capital Fund. For the year under consideration, the assessee originally filed its return of income on 14.12.2020, claiming exemption of dividend earned on mutual funds under section 10(35) of the Act and exemption under section 10(23FB) of the Act in respect of its income as a Venture Capital Fund. During the hearing, the learned Authorized Representative (“learned AR”) by referring to the original return of income filed by the assessee on 14.12.2020, which forms part of the paper book from pages 1-76, submitted that the assessee in the Schedule-BP in respect of computation of income from business or profession correctly mentioned the amount of dividend income from mutual funds to the tune of Rs.10,08,99/- which was claimed as exempt under section 10(35) of the Act and also correctly mentioned profit of Rs.1,55,51,062/- claimed as exempt under section 10(23FB) of the Act. However, in the Schedule-EI declaring the details of exempt income, the assessee only mentioned the dividend income of Rs.10,08,399/- claimed as exempt under section 10(35) of the Act and inadvertently did not mention the amount claimed as exempt under section 10(23FB) of the Act. The learned AR submitted that the assessee immediately on the next date, i.e., 15.12.2020 filed the revised return of income under section 139(5) of the Act, however again repeated the same mistake of Printed from counselvise.com ITA No.3752/Mum/2025 (A.Y. 2020-21) 6 correctly mentioning the total exempt income of Rs.1,65,59,461/- in the schedule of income from business or profession and not reporting the same amount in the schedule of exempt income. Thus, the learned AR submitted that even in the revised return of income, which forms part of the paper book from pages 77-152, the assessee only claimed an exempt income of Rs.1,35,16,769/-, which was also an incorrect figure as the correct amount of exemption was to the tune of Rs.1,65,59,461/-. The said revised return of income filed by the assessee was processed vide intimation dated 26.12.2021 computing the total income at Rs.30,42,690/- as against Rs. Nil declared by the assessee in its return of income. The learned AR submitted that the said addition is nothing but the difference between the actual exemption of Rs. 1,65,59,461/- claimed by the assessee in its return of income in the Schedule of income from business or profession and the exempt income of Rs. 1,35,16,769/- as declared by the assessee in the Schedule of exempt income. The learned AR submitted that against the aforesaid intimation issued under section 143(1) of the Act, the assessee filed a rectification under section 154 of the Act, pointing out the correct exempt income earned by the assessee amounting to Rs.1,65,59,461/- claimed as exempt under section 10(35) and section 10(23FB) of the Act. However, it is evident from the record that vide order dated 23.12.2022 passed under section 154 of the Act, the entire exemption of Rs.1,65,59,460/- was denied and the said amount was added to the total income of the assessee, as compared to the addition only of Rs.30,42,690/- vide intimation issued under section 143(1) of the Act. Printed from counselvise.com ITA No.3752/Mum/2025 (A.Y. 2020-21) 7 4. The learned CIT(A), vide impugned order, in the appeal filed by the assessee against the rectification order dated 23.12.2022, passed under section 154 of the Act, held that the provisions of section 10(35) are not applicable to the year under consideration. Further, the learned CIT(A) held that the exemption under section 10(23FB) of the Act is only available to the assessee if it is not in the category of Venture Capital Fund which has become non-operational from the assessment year 2016-17 onwards. The relevant findings of the learned CIT(A), vide impugned order, are reproduced as follows: “6. Ground No. 1 I have considered the facts of the case, submissions of the appellant, grounds of appeal and order of the CPC Bangalore. During course of appellate proceedings, it has been submitted by the appellant that the appellant states that their incomes are exempt u/s 10(23FB) and 10(35) of the Act as they are governed by sec. 115U of the Act. However, it is seen that Section 10(35) of the Act provides for exemption of the income received in respect of M.F. Units which will NOT be the applicable from A.Y. 2020-21. The case of the assesse pertains to A.Y. 2020-21 and therefore erroneous section has been quoted both in terms of the nature of income and the applicability of the section from the A.Y. point of view. Therefore, the appellant is not eligible for claiming exemption u/s 10(35) of the Act. 6.2 Further, even section 10(23FB) will cease to the operational from A.Y.2016-17 if the VC fund is an investment fund specified in clause (a) of the Explanation 1 to section 115UB. The appellant has not categorically stated whether they fall under this category or not. In absence of this information, exemption u/s 10(23FB) of the Act cannot be granted. 6.3 However, in the interest of natural justice and the fact that the impugned order is issued not u/s 143(3) but u/s 154 of 143(1) order, both issued by the CPC, the AO is directed to allow exemption u/s 10(23FB) of the Act only if it is proved that the appellant is not the category of VC fund for which exemption u/s 10(23FB) is not operational from A.Y. 2016-17 onwards. The appellant may be given due opportunity in this regard.” 5. During the hearing, the learned AR, by referring to the relevant provisions of the Act, submitted that the assessee has been allowed exemption in other years under section 10(23FB) and section 10(35) of the Act, and for the year under consideration also, the assessee duly satisfies the Printed from counselvise.com ITA No.3752/Mum/2025 (A.Y. 2020-21) 8 conditions as laid down in the aforesaid provisions for claiming exemption. However, as noted in the foregoing paragraph, the learned CIT(A) rejected the plea of the assessee in the absence of requisite information. From the perusal of the impugned order, we find that the assessee specifically made a request before the learned CIT(A) for the grant of an opportunity of a personal hearing to explain the relevant grounds. During the hearing, the learned AR submitted that no opportunity of personal hearing through video conferencing was granted by the learned CIT(A). 6. We find that the Faceless Appeal Scheme, 2021, formulated by the Central Government in the exercise of powers conferred by sub-section (6B) and sub-section (6C) of section 250 of the Act, provides that the Appellant or his authorised representative may request for personal hearing so as to make his oral submission or present his case and the concerned Commissioner (Appeals) shall allow such request and communicate the date and time of hearing to the Appellant through the National Faceless Appeal Centre. The relevant clause of the Faceless Appeal Scheme, 2021, in this regard, reads as follows: - “12. No personal appearance in the Centres or Units.–– (1) A person shall not be required to appear either personally or through authorised representative in connection with any proceedings under this Scheme before the income-tax authority at the National Faceless Appeal Centre or appeal unit set up under this Scheme. (2) The appellant or his authorised representative, as the case may be, may request for personal hearing so as to make his oral submissions or present his case before the Commissioner (Appeals), through the National Faceless Appeal Centre, under this Scheme. (3) The concerned Commissioner (Appeals) shall allow the request for personal hearing and communicate the date and time of hearing to the appellant through the National Faceless Appeal Centre. Printed from counselvise.com ITA No.3752/Mum/2025 (A.Y. 2020-21) 9 (4) Such hearing shall be conducted through video conferencing or video telephony, including use of any telecommunication application software which supports video conferencing or video telephony, to the extent technologically feasible, in accordance with the procedure laid down by the Board. (5) Any examination or recording of the statement of the appellant or any other person shall be conducted by Commissioner (Appeals) under this Scheme, exclusively through video conferencing or video telephony, including use of any telecommunication application software which supports video conferencing or video telephony, to the extent technologically feasible, in accordance with the procedure laid down by the Board. (6) The Board shall establish suitable facilities for video conferencing or video telephony including telecommunication application software which supports video conferencing or video telephony at such locations as may be necessary, so as to ensure that the appellant, or his authorised representative, or any other person is not denied the benefit of this Scheme merely on the ground that such appellant or his authorised representative, or any other person does not have access to video conferencing or video telephony at his end.” 7. As, it is evident from the record that the assessee, though made the request to the learned CIT(A) for grant of opportunity for personal hearing through the National Faceless Appeal Centre, the same was not granted to the assessee. Therefore, in view of the above, we deem it appropriate to restore the appeal to the file of the learned CIT(A) for de novo adjudication after granting the opportunity to the assessee for personal hearing as per the Faceless Appeal Scheme, 2021. The assessee can make a fresh request in this regard as per the aforesaid clause (12) of the Faceless Appeal Scheme, 2021. With the above directions, the impugned order passed by the learned CIT(A) is set aside. As the matter is being restored to the file of the learned CIT(A) for consideration afresh, the other grievances raised by the assessee in the present appeal do not call for adjudication at this stage. 8. During the hearing, the learned AR, reiterating the submissions made by the assessee before the learned CIT(A), submitted that the assessee has Printed from counselvise.com ITA No.3752/Mum/2025 (A.Y. 2020-21) 10 already exited from all its investments and necessary intimation has also been issued to the SEBI regarding the winding up of the funds. The learned AR submitted that, only due to the pending litigation on this issue in the year under consideration, the assessee is unable to close the funds as per the relevant SEBI guidelines. Accordingly, the learned AR prayed that a specific direction be issued to the learned CIT(A) to decide the present appeal at the earliest so that statutory compliance under other laws can be ensured. Considering the peculiar facts of the present case, we accede to the request of the learned AR and direct the learned CIT(A) to decide the present appeal as expeditiously as possible, preferably within a period of six months from the date of this order. Accordingly, the grounds raised by the assessee are allowed for statistical purposes. 9. In the result, the appeal by the assessee is allowed for statistical purposes. Order pronounced in the open Court on 27/11/2025 Sd/- Sd/- OM PRAKASH KANT ACCOUNTANT MEMBER S Sd/- SANDEEP SINGH KARHAIL JUDICIAL MEMBER MUMBAI, DATED: 27/11/2025 Prabhat Printed from counselvise.com ITA No.3752/Mum/2025 (A.Y. 2020-21) 11 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order Assistant Registrar ITAT, Mumbai Printed from counselvise.com "