Court Rules Single SEBI Registration for Venture Capital Fund Covers Multiple Schemes and Trustees' Shareholding in Fiduciary Capacity Does Not Affect Exemption Eligibility
In a significant ruling dated 9th September 2026, the Bombay High Court (Division Bench comprising Justices B. P. Colabawalla and Farhan P. Dubash) dismissed the appeal filed by the Principal Commissioner of Income Tax, Mumbai, upholding the exemption claim of Mile Stone Real Estate Fund (the Assessee) under Section 10(23FB) of the Income-tax Act, 1961. The judgment clarifies critical aspects concerning the eligibility of Venture Capital Funds (VCFs) for tax exemption, the scope of SEBI registration, and the treatment of trustees' shareholding in Venture Capital Undertakings (VCUs).
The Assessee, a trust registered under the Indian Trust Act, 1882, operates as a Venture Capital Fund registered with the Securities and Exchange Board of India (SEBI) under the SEBI (Venture Capital Funds) Regulations, 1996. The Fund floated seven separate schemes, each maintaining separate books of accounts and investment portfolios, but operated under a single trust. The Income Tax Department challenged the exemption claim of approximately Rs. 161.69 crore under Section 10(23FB), arguing that each scheme required separate SEBI registration and that certain investments were disqualified because trustees held shares exceeding 15% in VCUs, thereby classifying those VCUs as associated companies.
The Court addressed two principal issues:
1. Requirement of Separate SEBI Registration for Each Scheme:
The Court affirmed that SEBI registration is granted to the trust operating the Venture Capital Fund and not to each individual scheme. The Court held that the trust is entitled to operate multiple schemes under a single SEBI registration, provided a private placement memorandum for each scheme is submitted to SEBI. Separate registration for every scheme is not mandated by law. This interpretation aligns with the SEBI (VCF) Regulations, which allow a registered trust to launch multiple schemes, each with separate bank accounts and investors, but under one registration certificate.
2. Determination of "Associated Company" Status:
The Income Tax Department contended that trustees' shareholding exceeding 15% in VCUs disqualified the investments from exemption. However, the Court clarified that trustees' shares held in a fiduciary capacity on behalf of the Fund should not be counted to determine association. Only shares held by trustees in their personal capacity are relevant for assessing whether a VCU is an associated company under Regulation 12 of the SEBI VCF Regulations. Consequently, investments by the Fund in VCUs do not breach the associated company restriction merely because trustees hold shares on behalf of the Fund.
Further, the Court reiterated that once a Venture Capital Fund is registered with SEBI and operates under a registered trust deed (with registration granted before 21st May 2012), the conditions for exemption under Section 10(23FB) are deemed fulfilled. The Income Tax Department cannot deny exemption absent any SEBI action or violation against the Fund.
This ruling reinforces the regulatory framework governing Venture Capital Funds and their tax treatment, providing clarity that a single SEBI registration suffices for multiple schemes and emphasizing the fiduciary nature of trustees' shareholding. It also upholds the principle of respecting SEBI's regulatory oversight when determining tax exemption eligibility.
The Revenue's appeal was dismissed with no order as to costs.
Bottom Line:
Income Tax - Exemption under Section 10(23FB) of the Income-tax Act, 1961 - Registration of Venture Capital Fund (VCF) is sufficient; separate registration for each scheme is not required - Holding of shares by trustees in fiduciary capacity does not make Venture Capital Undertaking an associated company for exemption purposes.
Statutory provision(s):
Income-tax Act, 1961 Section 10(23FB), SEBI (Venture Capital Funds) Regulations, 1996, Indian Trust Act, 1882, Registration Act, 1908
