The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ), while granting LTCG ( Long Term Capital Gain) Income tax exemption to the assessee trust under Section 10(38) of the Income Tax Act, 1961 observed that mere change in section for claiming exemption before the first appellate authority cannot be considered as a fresh claim.
Business Excellence Trust, respondent /assessee, the trust was set up on May 12, 2006, and registered under the Registration Act, 1908. Although it applied for VCF status on May 18, 2006, it only received the official registration certificate on October 10, 2008, making it a Venture Capital Fund according to SEBI regulations.
Venture Capital Funds, according to SEBI Regulations, can invest in “Venture Capital Undertakings” (VCUs). The assessee identified M/s Dixon Technologies Limited (formerly M/s Dixon Technologies Private Limited), an unlisted company at the time, as a VCU. Over time, the assessee invested in this VCU by subscribing to its shares.
The assessee made a total investment in shares as follows: 2,40,838 shares were acquired before receiving the Certificate of Registration on October 10, 2008. After obtaining the certificate, the assessee invested in an additional 9,14,892 shares from November 2008 to September 2016. In total, the assessee invested in 11,55,730 shares. The assessee sold all the shares between September 2017 and November 2017. Since the shares qualify as long-term capital assets, the assessee earned a Long Term Capital Gain (LTCG) of Rs.247.67 crores for the assessment year 2018-19.
In the return of income, the assessee claimed exemption of Long Term Capital Gain (LTCG) under section 10(23FB) and dividend income of ₹3,97,300 under section 10(35). While the LTCG exemption was accepted, the dividend income exemption was denied during processing under section 143(1)(a). The assessee did not challenge the denial of the dividend income exemption.
During scrutiny, the Assessing Officer (AO) determined that the assessee was not eligible for LTCG exemption under Section 10(23FB) and rejected the alternative claim under Section 10(38), reasoning that only investors could claim such an exemption and noting the absence of Securities Transaction Tax(STT) on share acquisition. The AO also disallowed the dividend income exemption of Rs.3,97,300 under Section 10(35). Consequently, the AO assessed both the LTCG and dividend income as taxable.
In the appellate proceedings, the Commissioner of Tribunal (Appeals)[CIT(A)] agreed with the AO that the assessee was not eligible for exemption under Section 10(23FB). However, the CIT(A) accepted the alternative claim and granted LTCG exemption under Section 10(38).
Additionally, the CIT(A) allowed the exemption for dividend income of Rs.3,97,300 under Section 10(35), referencing the Tribunal’s decision in Aditya Birla Real Estate Fund.
The Revenue, appellant-assessee, filed an appeal against the CIT(A)’s order, challenging the exemptions granted under Section 10(38) for LTCG and Section 10(35) for dividend income.
The Tribunal on considering the facts of the case contended that even the respondent assessee had claimed for an exemption of dividend income of ₹3,97,300 under section 10(35) in the return of income, the same was rejected by the CPC during processing under section 143(1)(a). Since the assessee did not challenge this disallowance, it became final.
Further, the tribunal noted that the respondent assessee had presented an alternative claim directly to the AO. Initially, the assessee claimed exemption under Section 10(23FB) in the return of income. When the AO concluded that the exemption under Section 10(23FB) was not applicable, the assessee made an alternative claim under Section 10(38). It is considered as a mere change in the section under which CIT(A) has granted exemption rather than a fresh claim. Therefore, the ground raised by the appellant assessee arguing that the claim was fresh and impermissible was rejected by the bench.
Before the bench, the AO/income tax department submitted that according to a Central Government notification the assessee is not eligible to claim 10(38) exemption. However, the ITAT bench noted that according to the notification issued by the Central Government viz., Notification no. SO 1789(E) dated 5th June, 2017 clause (a) and (b) deals with existing listed equity shares, while clause (c) addresses shares of a company that has been delisted from a recognized stock exchange. Since the shares in question were unlisted at the time of acquisition, none of these clauses apply to this case. Thus, the claim of the AO was rejected that aspect.
The tribunal added that as per the main part of the notification, even if STT was not paid at the time of acquiring the shares, the respondent-assessee is still entitled to claim the exemption of LTCG under Section 10(38) of the Act. Therefore, the tribunal upheld the decision made by the CIT(A) that the shares acquired by the assessee are covered by this exemption.
The tribunal stated that the assessee, a Trust registered as a Venture Capital Fund, claimed “pass-through entity” status under Section 10(23FB), which provides exemption on income earned by the VCF. However, since the claim for exemption was rejected by the tax authorities, the “pass-through entity” status is not accepted for this year, and the provisions of Section 115U do not apply.
A coram of Justice (Retd.) C.V. Bhadang (President) and B.R.Baskaran (Accountant Member) have given the views based on the grounds raised by the appellant assessee and partly allowed the appeal.
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