Investee Not Pass-Through Entity – Section 10(23FB) Exemption Allowed | ITAT

Case Details: LICHFL Fund vs. ITO Ward 23(2)(1) [2026] 183 taxmann.com 420 (Mumbai-Trib.)

Judiciary and Counsel Details

• Amit Shukla, Judicial Member & Makarand Vasant Mahadeokar, Accountant Member
• Dhanesh Bafna, Hardik Nirmal & Ms Hinal Shah, ARs for the Applicant.

  Surendra Mohan, DR for the Respondent.

Facts of the Case

The assessee was a trust registered with the Securities and Exchange Board of India (SEBI) as a Venture Capital Fund (VCF) under the SEBI (Venture Capital Funds) Regulations, 1996. For the relevant assessment year, the assessee filed its returns of income, declaring nominal taxable income after claiming exemption under section 10 (23FB) of the Income-tax Act, 1961, in respect of income earned from investments in portfolio companies treated as Venture Capital Undertakings (VCUs).

The cases were selected for scrutiny, and notices under section 143(2) and section 142(1) were issued. During the assessment proceedings, the assessee furnished details of investments made in portfolio companies, the nature of income earned therefrom and the basis for claiming exemption under section 10(23FB).

The Assessing Officer (AO), however, did not accept the assessee’s claim of exemption in respect of interest income earned from certain portfolio companies, holding that the investee entities did not qualify as eligible Venture Capital Undertakings in terms of SEBI Regulations and that the income was in the nature of fixed return akin to interest. Aggrieved by the order, the assessee preferred an appeal to the CIT(A).

The CIT(A) deleted the additions made by the AO. Aggrieved by the order, the AO preferred an appeal to the Tribunal.

ITAT Held

The Mumbai Tribunal held that section 10(23FB) is a special provision intended to accord a pass-through exemption to a Venture Capital Company or Venture Capital Fund registered with SEBI, in respect of income arising from investment in a Venture Capital Undertaking, subject to fulfilment of the prescribed conditions. The object is to facilitate venture capital funding by avoiding tax friction at the fund level, while the tax incidence, if any, is ordinarily intended to arise at the level of investors or at the appropriate stage as contemplated by the scheme of the law.

However, the exemption is not an unfettered blanket immunity for all receipts. The statute, on its plain language, links exemption to the income of an SEBI-registered VCF/VCC from investment in a Venture Capital Undertaking, and therefore, the character and eligibility of the investee as a “venture capital undertaking” remains a jurisdictional fact that must be satisfied.

The assessee contended that Explanation 1 clause (c), as substituted w.e.f. 01.04.2013, aligns the meaning of “venture capital undertaking” to the SEBI (Venture Capital Funds) Regulations, 1996 framed under the SEBI Act, 1992. On this aspect, the Tribunal agreed with the proposition that, post-substitution, the enquiry into whether an investee qualifies as a “venture capital undertaking” must be tested against the SEBI regulatory framework.

Accordingly, to the extent the lower authorities may have proceeded on a pre-amended understanding or an incorrect statutory benchmark, the same would require correction. SEBI registration is a necessary foundational requirement, but it does not dispense with the assessee’s obligation to demonstrate, on facts and evidence, that the income claimed as exempt is of the kind contemplated by section 10(23FB).

In the instant case, the assessee has produced the relevant documents, including NCLT records, SEBI quarterly and sector-wise filings, and investment deployment details, which establish that the investee entity was incorporated and structured for the acquisition and operation of hospital and healthcare assets. These materials further show that the sectoral deployment of funds was in healthcare and real estate, which do not fall within the negative list prescribed under the Third Schedule to the SEBI (Venture Capital Funds) Regulations, 1996. Accordingly, the assessee qualified for exemption under section 10(23FB) in respect of the income earned from its investment in the Venture Capital Undertaking.