Registered Venture Capital Funds Can Claim Sections 10(34) and 10(35) Exemptions Simultaneously With 10(23FB)

By | July 22, 2026
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Registered Venture Capital Funds Can Claim Sections 10(34) and 10(35) Exemptions Simultaneously With 10(23FB)

Issue

Whether a SEBI-registered Venture Capital Fund (VCF) claiming exemption under Section 10(23FB) is barred from simultaneously claiming exemptions under Sections 10(34) (dividend income) and 10(35) (income from mutual fund units) of the Income-tax Act, 1961, for Assessment Year 2016-17.

Facts

  • Assessee’s Status: The assessee is a SEBI-registered Venture Capital Fund (VCF) structured as a registered trust.

  • Dividend Income Earned: During AY 2016-17, the assessee earned dividend income aggregating to ~₹14.83 crores from Sabarmati Gas Limited and Mytrah Energy (India) Limited—both portfolio companies classified as Venture Capital Undertakings (VCUs).

  • Mutual Fund Income: The assessee deployed surplus, temporarily uninvested funds into short-term, liquid mutual fund schemes and earned income from these units.

  • Exemptions Claimed: The assessee claimed exemption on dividend income under Section 10(34) (and/or Section 10(23FB)) and exemption on liquid mutual fund income under Section 10(35).

  • Assessing Officer’s (AO) Action:

    • The AO allowed exemption under Section 10(23FB) for capital gains from the same portfolio companies, but denied Section 10(34) exemption on dividend income.

    • The AO denied Section 10(35) exemption on mutual fund income, alleging that investing in mutual funds violated SEBI VCF Regulations and that claiming Section 10(23FB) barred the assessee from claiming other Section 10 exemptions.

  • SEBI Registration Status: The assessee’s SEBI registration remained valid throughout the year, with no violation or cancellation notice issued by SEBI.

Decision

  • Co-existence of Exemptions: Section 10(23FB), Section 10(34), and Section 10(35) operate in distinct, independent fields. There is no express or implied bar preventing a VCF from claiming Sections 10(34) or 10(35) exemptions alongside Section 10(23FB).

  • Dividend Income Exempt [Section 10(34) / Section 10(23FB)]: Since the AO accepted the VCU status for capital gains, the dividend income from the exact same underlying VCUs cannot be treated differently merely due to the form of receipt. It is exempt under Section 10(23FB) as income from VCU investments, and independently under Section 10(34).

  • Mutual Fund Income Exempt [Section 10(35)]: Temporary deployment of idle capital into liquid mutual funds aligns with commercial practice. Since SEBI never alleged any breach or cancelled registration, the income from liquid mutual fund units remains eligible for exemption under Section 10(35).

Key Takeaways

  1. No Mutual Exclusivity: Claiming exemption under Section 10(23FB) as a registered VCF does not forfeit entitlement to other general statutory exemptions provided under Section 10 (such as 10(34) or 10(35)).

  2. Substance Over Form for VCU Income: Income arising from a qualified VCU investment retains its exempt character under Section 10(23FB), regardless of whether it is realized as capital gains or dividends.

  3. Tax Authorities Cannot Usurp Regulatory Roles: Revenue officers cannot deny tax exemptions by alleging regulatory breaches (e.g., SEBI guidelines) if the primary regulator (SEBI) has neither initiated action nor revoked the entity’s registration.

IN THE ITAT MUMBAI BENCH ‘B’
Income-tax Officer
v.
India Infrastructure Fund
Amit Shukla, Judicial Member
and Prabhash Shankar, Accountant Member
IT Appeal No. 2448 (Mum) of 2026
[Assessment year 2016-17]
MAY  29, 2026
Abhishek Meshram, CIT-DR for the Appellant. Ms. Hirali Desai, Hardik Nirmal and Ms. Urvi Jhaveri for the Respondent.
ORDER
Amit Shukla, Judicial Member.- The aforesaid appeal has been filed by the Revenue against the impugned order dated 03.12.2025 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, for the quantum of assessment passed under section 143(3) of the Income-tax Act, 1961 for the Assessment Year 2016-17.
2. The Revenue is mainly aggrieved by the action of the learned CIT(A) in deleting the additions/disallowances made by the Assessing Officer by denying the assessee’s claim of exemption under sections 10(34) and 10(35) of the Act and in holding that the assessee, being a Venture Capital Fund, was not disentitled from claiming such exemptions merely because it had also claimed exemption under section 10(23FB) of the Act. The grounds raised by the Revenue are reproduced hereunder:
1. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of 116,43,77,200/- made by the Assessing Officer, without properly appreciating the findings recorded in the assessment order passed u/s 143(3).”
2. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that dividend income of 114,83,12,333/- received from Venture Capital Undertakings (VCUs) is eligible for exemption under section 10(23FB) of the Act, without appreciating the restrictive scope and legislative intent of the said provision as examined by the Assessing Officer.”
3. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing exemption under section 10(23FB) in respect of income not strictly falling within the ambit of “income from investment in Venture Capital Undertaking, as interpreted in the assessment order.
4. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing exemption on distribution income of J 1,60,64,864/- earned from investment in mutual funds, ignoring the specific finding of the Assessing Officer that exemption under section 10(23FB) is confined only to income derived from investment in VCUs and that exemption under section 10(35) is not independently available to a Venture Capital Fund.”
5. “Whether on the facts and in the circumstances of the case and in law, the Ld. CITYA) has failed to appreciate that the assessee had invested funds in mutual funds in deviation from the primary investment objectives prescribed under the SEBI (VCF) Regulations and the trust deed, and that such deviation disentitles the assessee from claiming exemption on income arising therefrom.”
6. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that incidental or temporary parking offunds in mutual funds would not affect eligibility under section 10(23FB), without adequately considering the findings recorded by the Assessing Officer regarding regulatory compliance and scope of exemption.
7. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not properly appreciating that exemption provisions are to be construed strictly and that the burden lies upon the assessee to demonstrate strict compliance with statutory conditions.
8. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has failed to consider that the exemption under section 10(23FB) is a special provision and cannot be extended by implication to income streams not expressly covered under the said section.”
9. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition without adequately addressing the reasoning and interpretation adopted by the Assessing Officer in the assessment order.”
10. “The appellant craves leave to add, amend, alter or modify any of the grounds of appeal at the time of hearing.”
3. The brief facts are that the assessee, India Infrastructure Fund, is a trust constituted under the Indian Trusts Act, 1882, by way of trust deed dated 04.03.2008, duly registered under the Registration Act, 1908, and was established for undertaking investments in infrastructure projects. The assessee is registered with the Securities and Exchange Board of India as a Venture Capital Fund under the SEBI (Venture Capital Funds) Regulations, 1996. The certificate of registration bearing No. IN/VCF/07-08/112 was granted by SEBI on 07.03.2008 and the said registration continued to remain valid during the relevant assessment year. Being a Venture Capital Fund, the assessee receives capital contributions from its investors and deploys such funds in Venture Capital Undertakings and portfolio companies in accordance with the SEBI regulatory framework. Income arising from such investments has been claimed as exempt under section 10(23FB) of the Act.
4. During the year under consideration, the assessee filed its return of income on 30.07.2016 declaring total income at Nil after claiming exemption under the relevant provisions of the Act. The assessee had earned various streams of income, including capital gains from sale of shares and preference shares of portfolio companies, dividend income from Venture Capital Undertakings, distributed income on buy-back of shares, and dividend income from units of liquid mutual funds. The details of such income, as forming part of the assessee’s submissions and record, are to be incorporated hereunder:
Sr No. Details of Nature of Income earned Amount (in INK) Amount (in INK) Claimed as exempt under section of the Income-tax Act, 1961 (‘the Act’)
i Long Term capital gains on sale of equity shares of Sabarmati Gas Limited 22,66,42,585 Section 10(23FB) of the Act
2 Long Term capital gains on sale of compulsorily convertible preference shares of Mytrah Energy (India) Limited 3,41,61,612 Section 10(23FB) of the Act
3 Long Term Capital loss on conversion of Compulsorily convertible preference shares of Karaikal Port Private Limited (37,67,50,451) Section 10(23FB) of the Act
4 Short Term Capital gains on sale of partially convertible redeemable preference shares of VIOM Networks Limited 52,65,99,355 Section 10(23FB) of the Act
5 Director sitting fees 2,05,000 Section 10(23FB) of the Act
6 Distributed income on account of buy-back of shares of Mytrah Energy (India) Limited 7,00,00,200 Section io(34A) of the t
7 Distribution on mutual funds -ICICI Prudential Liquid Plan -Direct Daily Dividend 1,60,64,864 Section 10(35) of the Act
8 Dividend income received from 83,12,333 14,00,00,000 14,83,12,333 Section 10(34) of the Also, claimed under Sec 10(23FB)of the Act
investment in Venture Capital
Undertakings (VCUs’) being
– Sabarmati Gas Limited -Mytrah Energy (India) Limited

 

5. The assessment proceedings were initiated by issuance of notices under sections 143(2) and 142(1) of the Act. During the course of assessment, the Assessing Officer issued a show cause notice dated 12.12.2018 proposing to withdraw the exemption of Rs.14,83,12,333 claimed by the assessee under section 10(34) in respect of dividend income earned from portfolio investments, which according to the assessee had also been claimed as exempt under section 10(23FB). The Assessing Officer further proposed to withdraw exemption of Rs.1,60,64,864 claimed under section 10(35) in respect of dividend income received from units of liquid mutual funds.
6. The Assessing Officer, in substance, required the assessee to explain why the exemption claimed under section 10(23FB) should not be denied on the premise that the assessee, being a registered Venture Capital Fund, had allegedly violated the objectives of the trust deed and the SEBI (VCF) Regulations by making investments in mutual funds instead of restricting itself only to investments in investee companies. He further proposed, without prejudice, to deny the exemptions claimed under sections 10(34) and 10(35), on the footing that once the assessee enjoyed a special status as a Venture Capital Fund for purposes of section 10(23FB), it could not simultaneously claim other exemptions available under section 10.
7. In response, the assessee filed a detailed reply dated 17.12.2018, explaining that it had fully complied with the investment objectives contained in the trust deed as well as the SEBI (VCF) Regulations. The assessee clarified that the investment in liquid mutual fund units was only a temporary deployment of surplus and uninvested funds pending their ultimate deployment in Venture Capital Undertakings or pending distribution to contributors, and such deployment was a recognized and permissible cash management measure. The assessee also submitted that section 10(23FB) grants exemption to a particular stream of income of a Venture Capital Fund and does not create any statutory embargo against claiming other exemptions under section 10 in respect of other streams of income.
8. The Assessing Officer accepted the status of the assessee as a Venture Capital Fund and also allowed exemption under section 10(23FB) in respect of other income arising from investments in Venture Capital Undertakings, including capital gains and other eligible receipts. However, he denied exemption under sections 10(34) and 10(35), principally holding that the expression “person” as defined in section 2(31) does not specifically include a Venture Capital Fund and that the assessee, being a trust enjoying a special status under section 10(23FB), could not claim exemption under other clauses of section 10. According to the Assessing Officer, the income of a Venture Capital Fund is exempt only to the extent it arises from investments in Venture Capital Undertakings, and the assessee could not bifurcate its income so as to claim exemption partly under section 10(23FB) and partly under sections 10(34) and 10(35). Accordingly, the exemption claimed in respect of dividend income from shares and liquid mutual fund units was denied.
9. Before the learned CIT(A), the assessee reiterated that it was a duly registered Venture Capital Fund, that its SEBI registration had not been withdrawn, and that no violation of the SEBI (VCF) Regulations had ever been alleged by SEBI. The assessee further pointed out that dividend income received from Sabarmati Gas Limited and Mytrah Energy (India) Limited arose from investments in Venture Capital Undertakings and therefore qualified for exemption under section 10(23FB) itself. In the alternative, such dividend income was independently exempt under section 10(34). Similarly, dividend income earned from units of liquid mutual funds was exempt under section 10(35), and there was no provision in the Act which barred a Venture Capital Fund from claiming the same.
10. The learned CIT(A), after considering the assessment order, the submissions of the assessee and the judicial precedents relied upon, allowed the appeal of the assessee. The learned CIT(A) held that the assessee had fulfilled the statutory conditions under section 10(23FB) and was eligible for exemption thereunder. He further held that dividend income received from Venture Capital Undertakings qualified for exemption, and alternatively was also exempt under section 10(34). In respect of dividend income from units of liquid mutual funds, the learned CIT(A) held that the exemption under section 10(35) could not be denied merely because the assessee was also a Venture Capital Fund claiming exemption under section 10(23FB). Reliance was placed on the decisions of the Coordinate Benches in the cases of JM Financial India Fund Scheme and HDFC Property Fund, wherein it was held that exemptions under section 10(23FB) and section 10(35) operate in distinct fields and are not mutually destructive.
11. We have heard the rival submissions and perused the material placed on record. The controversy before us lies within a narrow compass. The Assessing Officer has not disputed that the assessee is a Venture Capital Fund operating under a registered trust deed, that it was granted registration by SEBI before 21.05.2012, and that it was regulated under the SEBI (VCF) Regulations, 1996. These are precisely the statutory conditions contemplated in the Explanation to section 10(23FB) for a trust to qualify as a Venture Capital Fund. Once these foundational facts are admitted, the assessee’s eligibility under section 10(23FB) cannot be put in doubt on assumptions which are neither borne out from the record nor supported by any adverse finding of the competent regulator.
12. The reasoning of the Assessing Officer that a Venture Capital Fund does not fall within the expression “person” under section 2(31) is fundamentally misconceived. The assessee is a trust, and a trust is assessable under the Act through the recognized charging and machinery provisions. If the Assessing Officer’s reasoning were to be accepted, it would lead to an incongruous result that the assessee would not be chargeable to tax at all, for the charging section itself applies to a “person”. Section 10(23FB) does not create a separate taxable species outside section 2(31); it merely exempts a specified class of income earned by a Venture Capital Fund from investments in Venture Capital Undertakings. It cannot be read as a disabling provision which takes away exemptions otherwise available under other clauses of section 10.
13. There is nothing in section 10(23FB), expressly or by necessary implication, to suggest that a Venture Capital Fund, once eligible thereunder, is barred from claiming exemption under sections 10(34) or 10(35). The legislature, whenever it intends to impose such a restriction, says so in clear words. A useful contrast is found in section 11(7), where the legislature has specifically provided that where a trust or institution is registered under sections 12A, 12AA or 12AB, certain exemptions under section 10 shall not operate to exclude income from total income. No such exclusionary clause has been enacted in the context of Venture Capital Funds or section 10(23FB). Therefore, to read such a prohibition into the provision would amount not to interpretation but legislation by implication, which is impermissible.
14. The dividend income received from Sabarmati Gas Limited and Mytrah Energy (India) Limited arose from investments made in Venture Capital Undertakings. The Assessing Officer himself has accepted exemption under section 10(23FB) in respect of capital gains and other streams of income arising from investments in the very same portfolio companies. If the source of the income is the same eligible Venture Capital Undertaking, then dividend income flowing from such investment cannot be placed on a different footing merely because the form of receipt is dividend. In any case, dividend income from Indian companies was, at the relevant time, exempt under section 10(34), and therefore the assessee’s claim was allowable either under section 10(23FB), as income arising from investment in Venture Capital Undertakings, or independently under section 10(34).
15. The objection of the Assessing Officer that the assessee cannot “criss-cross” between different clauses of section 10 is also bereft of statutory foundation. Section 10 contains different exemption provisions operating upon different categories of income. If an assessee earns multiple streams of income, each stream must be examined according to its own character and the corresponding exemption provision applicable to it. There is no principle in the Act that once one clause of section 10 is invoked for one stream of income, all other clauses become unavailable for other streams. Such an approach would defeat the legislative scheme and produce artificial taxation of income which Parliament has otherwise exempted.
16. The Coordinate Bench of the Tribunal in Aditya Birla Private Equity Trust v. NFAC has considered an identical controversy and held that a Venture Capital Fund does not possess a special status outside section 2(31) and that section 10(23FB) only exempts income earned by a VCF from investments made in a Venture Capital Undertaking. The Tribunal further held that there is no restriction in section 10(23FB) preventing a VCF from claiming exemption under sections 10(34) and 10(35) in respect of other streams of income. Similar view has also been taken in ACIT v. Aditya Birla Real Estate Fund, wherein it was held that exemption under section 10(23FB) and exemption under section 10(35) operate in different fields and the assessee’s claim under section 10(35) cannot be denied merely because the assessee is a Venture Capital Fund.
17. The principle also finds support from the judgment of the Hon’ble Jurisdictional High Court in CIT(E) v. Jasubhai Foundation  374 ITR 315 (Bombay), wherein the Hon’ble Court held that when there is nothing in the language of sections 10 or 11 to suggest that what is provided by section 10 should be excluded from consideration under section 11, the assessee’s claim under section 10 cannot be disallowed by reading words into the statute. The ratio squarely applies here. In the absence of a statutory prohibition, the assessee’s claim under sections 10(34) and 10(35) cannot be denied merely because it also claims exemption under section 10(23FB).
18. Insofar as the allegation of violation of the trust deed or SEBI (VCF) Regulations by investment in liquid mutual funds is concerned, we find that the said objection does not survive even on facts. The Assessing Officer, after issuing the show cause notice, ultimately accepted the assessee’s status as a Venture Capital Fund and allowed exemption under section 10(23FB) in respect of several other streams of income. Had there been any real violation of the trust deed or SEBI Regulations so as to destroy the assessee’s status as a Venture Capital Fund, the Assessing Officer could not have selectively allowed exemption under section 10(23FB) for some receipts while denying exemption for others. Such selective acceptance is internally inconsistent.
19. More importantly, the certificate of registration granted by SEBI continued to subsist during the relevant year and there is nothing on record to show that SEBI had ever alleged any violation or withdrawn the registration. The regulatory authority competent to examine compliance with the SEBI (VCF) Regulations is SEBI. The income-tax authorities cannot, in the absence of any finding by SEBI, presume a regulatory violation and deny exemption on that speculative premise. Regulation 22 of the SEBI (VCF) Regulations empowers SEBI to call for reports; Regulation 25 empowers inspection or investigation; and Regulations 29 and 30 provide for measures in case of violation. No such regulatory action is shown to have been taken against the assessee.
20. The assessee’s explanation that surplus and temporarily uninvested funds were deployed in ICICI Prudential Liquid Plan – Direct Daily Dividend, a liquid mutual fund scheme investing in short-term and highly liquid money market and debt instruments, is reasonable and consistent with commercial practice. A Venture Capital Fund does not deploy the entire corpus into portfolio companies on the very day of receipt. Funds may remain temporarily uninvested pending identification of suitable opportunities, drawdown schedules, disbursement obligations, expenses or distribution to investors. Parking such funds in liquid mutual funds or similar liquid instruments is a prudent treasury function and cannot, by itself, be treated as a deviation from the investment objective.
21. The assessee has also relied upon SEBI’s interpretative letter dated 10.06.2016 issued under the SEBI (Informal Guidance) Scheme, 2003, wherein SEBI clarified that Chapter III of the VCF Regulations, dealing with investment conditions and restrictions, does not impose any condition on deployment of the uninvested portion of investible funds of a VCF. SEBI further clarified that temporary funds may be deployed in liquid mutual funds, bank deposits or other high quality liquid assets such as Treasury Bills, CBLOs, Commercial Papers and Certificates of Deposits till deployment of funds as per the investment objective. This clarification completely answers the Revenue’s allegation that investment in liquid mutual fund units amounted to violation of the SEBI (VCF) Regulations.
22. The decision of the Coordinate Bench in HDFC Property Fund v. ITO also directly supports the assessee. In that case, the Tribunal recognized that it is an industry and trade practice for Venture Capital Funds to retain certain amounts pending regular investments in Venture Capital Undertakings, disbursement of expenses or distribution to unit-holders, and till such time, such funds may be temporarily invested in mutual funds or bank deposits. The Tribunal further held that in the absence of any regulatory action by SEBI and when the certificate of registration as Venture Capital Fund continues to subsist, the allegation of violation of VCF Regulations cannot be sustained. The facts before us are substantially similar.
23. Thus, both on legal principle and factual matrix, the assessee’s claim is well-founded. Dividend income from investments in Venture Capital Undertakings was eligible for exemption under section 10(23FB) and, in any event, under section 10(34). Dividend income from units of liquid mutual funds was eligible for exemption under section 10(35). The Assessing Officer’s attempt to deny these exemptions rests on an artificial and restrictive reading of section 10(23FB), which neither the statutory text nor judicial precedent supports.
24. We therefore find no infirmity in the order of the learned CIT(A). The learned CIT(A) has correctly appreciated that section 10(23FB), section 10(34) and section 10(35) operate in their respective fields, and that the assessee, being a validly registered Venture Capital Fund, cannot be denied exemption otherwise available under law. The Revenue has not brought any contrary material to show that SEBI had withdrawn the assessee’s registration or held the assessee to be in violation of the applicable regulations. In absence thereof, the Revenue’s challenge cannot be accepted.
25. Accordingly, the order of the learned CIT(A) deleting the disallowance and allowing the assessee’s claim of exemption under sections 10(23FB), 10(34) and 10(35), as applicable, is upheld. The grounds raised by the Revenue are dismissed.
26. In the result, the appeal filed by the Revenue is dismissed.