Venture Capital Funds Need No Separate SEBI Registration For Each Scheme For Income Tax Exemption: Bombay High Court

The Bombay High Court on Thursday held that a Venture Capital Fund (VCF) registered with SEBI does not need separate registration for each scheme it operates to claim exemption under Section 10(23FB) of the Income Tax Act.

A Division Bench comprising Justice B.P. Colabawalla and Justice Farhan P. Dubash dismissed the Revenue's appeal against Milestone Real Estate Fund. The court upheld the Fund's eligibility for the exemption.

Section 10(23FB) provides that income earned by a qualifying VCF from investments in Venture Capital Undertakings (VCUs) is not included while computing its total income. The provision defines a VCF as a fund operating under a registered trust deed, which obtained VCF registration before May 21, 2012 and is regulated under the VCF Regulations.

On the issue of separate registration for individual schemes, the court observed:

“From these Regulations, it is clear that registration is granted to the trust and not for an individual scheme operated by the trust.We, therefore, uphold the findings of the Commissioner of Income-tax (Appeals) that what is contemplated under the VCF Regulations is the registration of the trust, which is then entitled to operate separate schemes.”

The dispute concerned Assessment Year 2014-15. Milestone Real Estate Fund had claimed exemption of ₹161.69 crore on income earned from investments in VCUs. The Fund had floated seven schemes, each with separate unit holders, accounts and investments, while filing a consolidated return.

The Assessing Officer rejected the claim. He held that the seven schemes effectively operated as separate funds and therefore each required separate SEBI registration.

The court rejected this interpretation. It held that the VCF Regulations require registration of the trust as a VCF, rather than separate registration for every scheme. For each scheme, the trust or Fund must submit its private placement memorandum to SEBI.

The court also considered the Revenue's objection concerning investments in “associated companies”.

Regulation 12 prohibits a VCF from investing in such companies. The relevant test is whether the trustees or settlor hold more than 15% of the shares in the VCU, individually or collectively, in their personal capacity.

The court clarified that shares held by a trustee on behalf of the Fund are not personal holdings for this purpose. Such fiduciary holdings therefore cannot be counted towards the 15% threshold.

The court further noted that Milestone's SEBI registration had not been cancelled or withdrawn. SEBI had also not alleged or taken action against the Fund for violating the VCF Regulations, despite the Fund filing quarterly reports with SEBI.

In these circumstances, the court observed that the Income Tax Department could not itself allege a violation of the VCF Regulations and use it to deny the Section 10(23FB) exemption.

The court consequently found that neither of the two reframed questions raised a substantial question of law and dismissed the Revenue's appeal.

Appearances: Ravi Rattesar for the Revenue; Senior Advocate J.D. Mistri with Madhur Agrawal, instructed by Atul K. Jasani, for Milestone Real Estate Fund.