The court confirmed that factual determinations supporting the nexus between income and expenditure negate the necessity for further legal interpretation in tax appeals, leading to dismissal based on low tax effect.

JUDGMENT :

1. The above Appeal has been filed by the Revenue challenging the order dated 15^th September 2017 passed by the Income Tax Appellate Tribunal, Bench Mumbai (“for short “ITAT”). By the impugned order, the ITAT dismissed the Appeal filed by the Revenue challenging the order dated 27^th February 2015 passed by the Commissioner of Income Tax (Appeals) [for short “CIT (A)”].

2. In the Appeal before us, it is the case of the Revenue that the impugned order of the ITAT gives rise to the following three substantial questions of law:-

A) Whether, On the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in deleting the addition of Rs.18,62,63,876/- on account of disallowance of expenses not considering that the assessee did not explain the purpose and nexus of such expenditure to earning such income ?

B) Whether, On the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in not considering that most of the expenses incurred were enduring in nature having impact on multiple years and need to be claimed against substantial income i.e. capital gains which he obtains through the main activity of investment and not against interest income which incidental income ?

C) Whether, On the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in allowing disallowances as per Rule 14A of Rs.68,14,151/- in spite of having exempted dividend income of Rs.7,26,35,789/-, whereas all the expenses were incurred for earning exempt income in the form of capital gains and dividend income?

3. At the outset, the learned counsel appearing on behalf of the Revenue fairly stated that as far as Question (C) is concerned, the same does not arise from the impugned order, and hence, should be disregarded. He, therefore, submitted that what would survive for our consideration is only Questions (A) and (B).

4. To understand the controversy, it would be necessary to set out some brief facts. The Assessee is a Trust created under the Indian Trust Act, 1882 and is a venture capital fund which is registered with the Securities Exchange Board of India. The main activity of the Assessee is to float various schemes with a focus to invest primarily in entities engaged in the real estate sector dealing with immovable property of any kind and any rights and interests therein. The Fund’s duration is of 20 years or until the expiry of the last scheme of the Fund whichever is later.

5. For Assessment Year 2009-10, the Assessee filed its Return of Income on 30^th September 2009 declaring a total income of Rs.26.77 Crores. During the Assessment Proceedings, the Assessing Officer, after examining the nature of the activities carried on by the Assessee, was of the view that it being a Venture Capital Fund, would have to be assessed in terms of Section 115U of the Income Tax Act, 1961 (for short “I.T. Act”). As per the Assessing Officer, the Venture Capital Fund did not have its own income but the income was taxable in the hands of the investors/contributors to the said Fund. However, according to the Assessing Officer, since the Assessee had voluntarily subjected itself to be taxed, the Assessing Officer accepted the decision of the Assessee. This position is, of course, refuted by the Assessee, in as much as it is the case of the Assessee that during the relevant period, the Fund being one which invested in the real estate sector, was not one which was exempted from paying tax under Section 10 (23FB) of the I. T. Act, and hence, offered to pay tax on its income.

6. Be that as it may, the Assessing Officer initially came to the conclusion that the most of the expenditure incurred by the Assessee were not