INCOME TAX ACT, 1961

Section 10(23FB) Section 10(38)

Capital gains - Exemption under section 10(23FB) - Sale of listed shares of venture fund undertaking (VCU) - Tratement also of interest on loan given to VCU

Before the AO, the assessee claimed that it was eligible for exemption under section 10(23FB) in respect of income from investments made in a venture capital undertaking. AO had made two additions, viz., the capital gains earned by the assessee and notional interest income on a loan given by the assessee. Assessee had invested its funds in a Venture Capital Undertaking named “M/s Mahindra Hinoday Industries Ltd” (earlier known as “Mahindra Castings Pvt. Ltd) during the financial years 2007-08 to 2011-12. Shares were not listed in any stock exchange. Subsequently, during December 2014, the above said M/s Mahendra Hinoday Industries Ltd., got amalgamated with M/s Mahendra CIE Automotive Ltd.. However, Mahendra CIE Automative Ltd. was a listed company and its shares were traded in stock exchanges. Since the assessee had not held listed shares for entire period of 12 months prior to its sale, AO took the view that the assessee was not eligible for exemption under section 10(38). AO also held that the assessee was not eligible for exemption under section 10(23FB), since the assessee had sold shares of a “listed company”. Especially considering the fact that the beneficiaries/investors have independently offered to tax their share of income received from the appellant, it was held that all the incomes of the appellant arising from the investment in the VCU, irrespective of the fact that the said VCU was subsequently amalgamated into a listed entity, were exempt under the provisions of section 10(23FB). However, he expressed the view that the issue relating to exemption under section 10(38) as well as taxability of interest income need to be examined in the hands of ultimate beneficiaries of the Act. Held: There was merit in the contentions of the assessee that the VCF Regulations do not prohibit cases where the initial investments made in unlisted shares of Venture Capital undertaking becomes listed shares due to corporate actions. Such kind of corporate actions were usually undertaken on commercial expediency, business exigencies and for the future welfare of the company. CIT(A) had taken the view that the exemption under section 10(23FB) is available for the capital gains accrued to the assessee up to the date of amalgamation and the balance amount of capital gains may be considered as taxable. Capital gains arises only on sale of shares and hence, the question of splitting up the same on the basis of time period cannot be made. Accordingly, Tribunal was unable to agree with the said decision of CIT(A). Once it was held by CIT(A) that the assessee qualifies for exemption under section 10(23FB), its entire income should be granted exemption. Accordingly, the order passed by CIT(A) modified and hold that the assessee was entitled for exemption under section 10(23FB). It was pertinent to note that the revenue had not challenged the observations of CIT(A) in holding that the assessee cannot be assessed to tax the very same income which had been offered by the beneficiaries in their respective hands. There was no necessity to examine the question of applicability of provisions of section 10(38) to the capital gains earned by the assessee on sale of shares. Next issue relates to the assessment of 'accrued interest' on the loan given to Innovative B2B logistic solutions Ltd. computed by the AO notionally. The AO had allowed exemption to the interest income earned from other VCU, in which case, the notional interest income computed by him should also enjoy very same exemption. Tribunal order accordingly.

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