Bombay High Court
THE PR. COMMISSIONER OF INCOME TAX-17, MUMBAIversusMILE STONE REAL ESTATE FUND,
- Decided
- Disposal
- DISPOSED OFF
Holding
The trust’s SEBI registration suffices for all schemes and only the trustees’ personal shareholdings, not fiduciary holdings, determine the ‘associated company’ test, making the fund eligible for exemption under Section 10(23FB).
Summary
The Milestone Real Estate Fund, a trust registered as a Venture Capital Fund (VCF) with SEBI, claimed exemption under Section 10(23FB) of the Income‑Tax Act for AY 2014‑15 on income from its seven separate schemes. The Assessing Officer disallowed the exemption, but the Commissioner of Income‑Tax (Appeals) allowed it, holding that SEBI registration of the trust suffices for all schemes and that trustee shareholding is to be considered only in personal capacity. The Revenue appealed to the ITAT, which dismissed the appeal, and subsequently filed a petition before the High Court. The Court examined two reframed questions: (i) whether each scheme requires separate SEBI registration for the exemption, and (ii) whether investments in venture‑capital undertakings where trustees hold more than 15% (including shares held on behalf of the fund) render the fund ineligible. The Court upheld the Commissioner’s view that a single trust registration is adequate and that only personal trustee holdings determine ‘associated company’ status, thereby confirming the fund’s eligibility for exemption. The appeal was dismissed.
Issues considered
- Whether separate SEBI registration/recognition is required for each scheme of a Venture Capital Fund to claim exemption under Section 10(23FB).
- Whether investments in Venture Capital Undertakings where trustees hold more than 15% of equity, including shares held on behalf of the fund, disqualify the fund from exemption under Section 10(23FB).
Legislation cited
- Income Tax Act, 1961 — s. 10(23FB), 263
- Indian Trust Act, 1882
- Registration Act, 1908
- SEBI (Venture Capital Funds) Regulations, 1996 — s. Regulation 11.3, Regulation 12, Regulation 23, Regulation 2(l), Regulation 3(1), Regulation 7
Subjects
- Venture Capital Fund
- Section 10(23FB) exemption
- SEBI registration
- Associated company
- Trust law
- Income‑tax assessment
- Venture Capital Undertaking
Judgment
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The Pr. CIT Mumbai vs. Milestone Real Estate Fund
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 1209 OF 2022
The Pr. Commissioner of Income Tax – 17, Mumbai .. Appellant
V/s.
Mile Stone Real Estate Fund .. Respondent
______________________________________
Mr. Ravi Rattesar for Appellant.
Mr. J. D. Mistri, Senior Advocate a/w Mr. Madhur Agrawal i/b Mr. Atul K. Jasani
for Respondent.
_______________________________________
CORAM : B. P. COLABAWALLA AND
FARHAN P. DUBASH, JJ.
DATE : 9th SEPTEMBER 2026
P.C.:
1. This Appeal has been filed by the Revenue challenging the order dated 22 nd
September 2020 passed by the Income-tax Appellate Tribunal, Mumbai – ‘D’
Bench (“ITAT”). By the impugned order, the ITAT has dismissed the appeal
filed by the Revenue and has confirmed the order of the Commissioner of
Income-tax (Appeals) holding that the Assessee is eligible for claim for
exemption under Section 10(23FB) of the Income-tax Act, 1961 (“the Act”).
2. In the Appeal before us, the Revenue has proposed the following questions as
substantial questions of law:-
I. Whether, on the facts and in the circumstances of the case and in law,
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the ITAT has erred in ignoring the fact that Section 10(23FB) clearly
states that the entire income of VCF is not exempt but only income
from investments in Venture Capital Undertakings which are
recognized by SEBI should be exempt from tax. In the Assessee’s case
no separate recognition has been provided to even contributory
schemes even though all of them are separately auditable and maintain
separate books of accounts.
II. Whether, on the facts and in the circumstances of the case and in law,
the ITAT has erred in ignoring the fact that Assessee has made
investments in VCUs which are associated concerns in which trustees
held shares exceeding 15% of the paid-up equity share capital either
individually or collectively and as per sub-clause (c) of Regulation 12,
all investments made or to be made by VCF shall not be in associated
companies.
3. As the above questions proposed by the Assessing Officer do not clearly
bring out the controversy in the matter, we propose to reframe the questions
of law as under:
a. Whether, on the facts and in the circumstances of the case and in law,
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the ITAT has erred in holding that the Assessee is eligible for
exemption under Section 10(23FB) of the Act even though no separate
recognition / registration has been obtained from SEBI for every
contributory scheme each of which is separately auditable and
separate books of accounts are maintained for each scheme?
b. Whether, on the facts and in the circumstances of the case and in law,
the ITAT has erred in ignoring the fact that Assessee has made
investments in VCUs which are associated concerns in which trustees
held shares (by virtue of being trustees of the Fund) exceeding 15% of
the paid-up equity share capital either individually or collectively and
as per sub-clause (c) of Regulation 12 are therefore, not eligible for
exemption under section 10(23FB) of the Act?
4. The brief facts relevant to consider the aforesaid reframed questions are that
the Milestone Real Estate Fund (“Assessee” / “Fund”) is a Trust created
under the Indian Trust Act, 1882 and is a Venture Capital Fund (“VCF”)
which is registered with the Securities Exchange Board of India (“SEBI”)
under the SEBI (Venture Capital Funds) Regulations, 1996 (“VCF
Regulations”). The primary activity of the Assessee is to float various
schemes with a focus to invest primarily in entities engaged in the real estate
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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 the Assessment Year under consideration (i.e. AY 2014-15), the Assessee
had filed its Return of Income on 29th November 2014, declaring a total
income of Rs. 12,84,49,120. The Assessee had claimed exemption of Rs.
161,69,79,775/- under Section 10(23FB) of the Act being the income earned
by the Assessee from investment in Venture Capital Undertakings. The Fund
had floated seven separate schemes as under –
a. IL & FS Milestone Fund-I
b. IL & FS Milestone Fund-II
c. IL & FS Milestone Fund-IIA
d. IL & FS Milestone Fund-IIB
e. Milestone Domestic Scheme I
f. Milestone Domestic Scheme II
g. Milestone Domestic Scheme III
6. Under each scheme, separate units are issued to unit holders of each scheme
and the unit holders in each scheme have rights to the profits earned from the
investments made in their scheme. The Assessee maintains separate accounts
for each scheme and investments from the funds contributed to each scheme
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The Pr. CIT Mumbai vs. Milestone Real Estate Fund
are also separately recorded. Income from each scheme is also separately
determined. The details of the claim for exemption under Section 10(23FB)
of the Act is also determined scheme-wise. As all seven separate schemes are
floated by the Fund, the Return of Income is filed by the Fund in a
consolidated manner, considering all the seven schemes which comprise the
Fund.
7. The Assessing Officer in the Assessment Order dated 30 th December 2016 for
the Assessment Year 2014-15 disallowed the claim of exemption of Rs.
161,69,79,775/- made under Section 10(23FB) of the Act. The Assessing
Officer inter alia held as under:
a. The Assessee's claim that SEBI has inspected and has not found fault
with the operation of the Assessee cannot be a ground for allowing
exemption under Section 10(23FB) of the Act. Both the SEBI and
Income-tax Department have an equal right to examine and interpret
the provisions laid down in the statute for general public interest. If
one department reads the provision in a particular manner, it does not
mean that the other should also follow the same with blinkers. The
Income-tax Department is independently entitled to look at the
relevant provisions to see whether the conditions for claiming
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The Pr. CIT Mumbai vs. Milestone Real Estate Fund
exemption under Section 10(23FB) of the Act are fulfilled or not.
b. Every scheme floated by the Fund has a separate identity. The
contributors of the respective schemes are different and do not have
any claim on the result of the other scheme. Separate books of
accounts are maintained for each of the seven schemes. Investments
made by each scheme are different and do not have any relationship
with one another. Therefore, it is as if, there are seven separate funds
being operated by the Assessee. There is nothing to show that SEBI
has accepted or granted recognition / registration to each of the seven
funds floated by the Assessee. Each such fund is required to be
separately registered with SEBI for claiming exemption under Section
10(23FB) of the Act.
c. The Fund is not entitled to invest in Venture Capital Undertakings in
which the trustee or the settlor holds, either individually or
collectively, equity shares in excess of 15% of the paid-up equity
share capital of such Venture Capital Undertakings. In the present
case, the trustees hold shares in excess of 15% of the equity share
capital of various Venture Capital Undertakings, and therefore, such
investments are in contravention of the Act and the scheme. In
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considering the holding of 15%, the Assessing Officer also considered
the shares held by the trustee for and on behalf of the Fund. The
Assessing Officer rejected the argument of the Assessee that only the
shareholding of the trustees in their individual capacity is required to
be considered and not the shares held by the trustee on behalf of the
Fund for the purpose of considering the shareholding in excess of 15%
of the share of the Venture Capital Undertaking. Therefore, as per the
Assessing Officer, the Assessee has invested in an associated company
as defined in the VCF Regulations and hence, is not eligible for
exemption under Section 10(23FB) of the Act.
d. The investments made by the Fund in Venture Capital Undertakings
engaged in real estate activities is not eligible for exemption under
Section 10(23FB) as it is neither a service nor an activity which is
involved in production and manufacture of articles or things.
8. The Assessee challenged the Assessment Order before the Commissioner of
Income-tax (Appeals). The Assessee succeeded in the appeal and the
Commissioner of Income-tax (Appeals) vide order dated 26th December
2017, allowed the claim for exemption under Section 10(23FB) of the Act.
The Commissioner of Income-tax (Appeals) inter alia held as under:
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a. The Commissioner of Income-tax (Appeals) referred to the definition
of the term "unit" in Regulation 2(l) of the VCF Regulations, which
defines "unit" to mean beneficial interests of the investors in the
scheme or fund floated by a trust or shares issued by a company,
including a body corporate. It further referred to Regulation 11.3 of
the VCF Regulations, which provide that each scheme launched or
fund set up by a Venture Capital Fund shall have firm commitment
from the investors for contribution of an amount of at least Rs. 5
crores before the start of operation of the Venture Capital Fund. It
further noted that SEBI permits the launch of a new scheme by filing a
private placement memorandum of such scheme with SEBI.
Regulation 23 of the VCF Regulations provides the mechanism for
winding up of any scheme of the VCF. Further, the Assessee is
required to file a quarterly report to SEBI, and therefore, each scheme
is monitored and regulated by SEBI on an ongoing basis.
b. The Commissioner of Income-tax (Appeals) concluded that the VCF
has been set up as a trust, which has been registered by SEBI as a
Venture Capital Fund. Such trust can launch various schemes, and
though each scheme is regulated by SEBI, they are not treated as a
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The Pr. CIT Mumbai vs. Milestone Real Estate Fund
separate entity. The schemes launched by a VCF are not separate and
distinct from the Fund itself. VCF Regulations permits a VCF to
launch various schemes so that each such scheme may have a distinct
objective, a separate bank account, separate set of investors and
underlying investment of each such scheme. Each such scheme does
not require separate registration. Once the trust is registered with
SEBI as a VCF, such registration is valid for all schemes launched by
the said VCF.
c. The Commissioner of Income-tax (Appeals) further held that as per
sub-clause (c) of Regulation 12 of the VCF Regulations, all
investments made or to be made by a Fund shall not be in an
“associated company”. It was further noted that the term "associated
company" is defined under the VCF Regulations to mean a company
in which a director or trustee or sponsor or settlor of the Venture
Capital Fund or the Asset Management Company holds, either
individually or collectively, equity shares in excess of 15% of the
paid-up equity share capital of a Venture Capital Undertaking. The
reason for providing this restriction is that by virtue of such company
being associate companies, the trustees are deemed to have a vested
interest in them, and hence, its decision to invest in associate
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The Pr. CIT Mumbai vs. Milestone Real Estate Fund
companies can give rise to a conflict of interest. Therefore, to
determine whether a Venture Capital Undertaking is an associated
company or not, one has to see the share-holding of the trustees in
their personal capacity in such undertaking and not the shareholding
which the trustees are holding for and on behalf of the Fund. There is
no restriction on the percentage of holding by the VCF in the Venture
Capital Undertaking and a VCF can hold up to 100% shares of a
Venture Capital Undertaking. Therefore, the finding of the Assessing
Officer that to see as to whether the Venture Capital Undertaking is an
associated company, the shares held by the trustee for and on behalf of
the Fund is also required to be considered, is clearly unsustainable and
bad in law.
d. The Commissioner of Income-tax (Appeals) further held that to
consider the issue of claim for exemption under Section 10(23FB) of
the Act, the Assessing Officer only needs to enquire whether the
Assessee holds a valid certificate of registration. If the Assessee trust
is registered with SEBI as per the Certificate granted under Regulation
7(3) of the VCF Regulations, then it should be accepted that such
Certificate is granted after ensuring that the conditions laid down
before granting such Certificate are fulfilled. In other words,
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The Pr. CIT Mumbai vs. Milestone Real Estate Fund
conditions laid down in the Explanation-1(b) to Section 10(23FB) of
the Act are deemed to be fulfilled, the moment relevant Certificates
are produced before the Assessing Officer. Therefore, he is not
required to go into alleged violation of any conditions, pertaining to
the matter of grant of such Certificate.
e. The Commissioner of Income-tax (Appeals) further held that the
Venture Capital Undertaking is defined in Rule 2(3) read with
Schedule III of the VCF Regulations. Schedule III provides a
Negative List and prior to its amendment w.e.f. 5 th April 2004, “real
estate” was included in the Negative List. However, the same is
excluded from Negative List post amendment w.e.f. 5 th April 2004.
The Fund has been granted recognition vide Registration Certificate
dated 26th September 2005 that is post amendment of the Negative
List. As the Negative List does not include real estate within its ambit,
the Assessee is eligible for exemption under Section 10(23FB) of the
Act.
9. Being aggrieved by the order of the Commissioner of Income-tax (Appeals),
the Revenue filed an appeal before ITAT. The ITAT dismissed the appeal
filed by the Revenue and confirmed the order passed by the Commissioner of
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The Pr. CIT Mumbai vs. Milestone Real Estate Fund
Income-tax (Appeals). The ITAT held that the issue of the eligibility of the
Assessee for the claim for exemption under Section 10(23FB) of the Act was
decided in favor of the Assessee in the Assessee's own case for the
Assessment Year 2013-14 at the assessment stage itself. Under Section 263
of the Act, the Commissioner revised the order passed by the Assessing
Officer. The Assessee therefore challenged the order passed by the
Commissioner under Section 263 of the Act before the ITAT. The ITAT, for
Assessment Year 2013-14, reversed the order of the Commissioner under
Section 263 and restored the order passed by the Assessing Officer. In the
present Assessment Year, the ITAT, relying on the findings of the Coordinate
Bench of the Tribunal for the Assessment Year 2013-14, held that the appeal
filed by the Revenue is to be dismissed as deduction under Section 10(23FB)
of the Act was allowed to the Assessee in the earlier Assessment Year on
identical facts and circumstances.
10. We have heard Mr. Ravi Rattesar, the learned Advocate appearing on behalf
of the Appellant, as well as Mr. J. D. Mistri, learned Senior Advocate
appearing on behalf of the Respondent.
11. The issue which has been raised for our consideration is with respect to the
eligibility of the Assessee for exemption under Section 10(23FB) of the Act.
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Section 10(23FB) of the Act provides that any income of a Venture Capital
Company or a Venture Capital Fund from investment in a Venture Capital
Undertaking shall not be included in computing the total income of the
Assessee for the previous year. Explanation (b) of the said Section defines
"Venture Capital Fund" to mean a fund operating under a trust deed
registered under the provisions of the Registration Act, 1908, which has been
granted a Certificate of Registration before 21 st May 2012, as a Venture
Capital Fund and is regulated under the Venture Capital Funds Regulations.
12. With respect to the first question as reframed in the present appeal, we
uphold with the finding of the Commissioner of Income-tax (Appeals) that as
per the VCF Regulations, only the trust is required to be registered as a
Venture Capital Fund and separate registration is not required for each
scheme operated by the Fund. With reference to each Scheme, the only
requirement is that the Trust or the Fund must submit a copy of the private
placement memorandum for each scheme before SEBI. Regulation 3(1) of
the VCF Regulations inter alia provides that a Trust proposing to carry on
any activity as a Venture Capital Fund shall make an application to the Board
for grant of a Certificate. Regulation 7 of the VCF Regulations provides for
grant of registration. From these Regulations, it is clear that registration is
granted to the trust and not for an individual scheme operated by the trust.
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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 said finding has been confirmed by ITAT by dismissing the Revenue’s
appeal. In this view of the matter and considering the concurrent findings
being recorded by the Appellate Authorities, the first question as reframed
does not give rise to any substantial question of law, and hence, the same is
not entertained.
13. With respect to the second reframed question, we concur with the finding
given by the Commissioner of Income-tax (Appeals) that for a Venture
Capital Undertaking to be considered as an associated company, the trustees
or the settlor should hold more than 15% of the shares of the Venture Capital
Undertaking, individually or collectively, in their personal capacity and not
with respect to the shares held by the Trustee on behalf of the Fund.
Regulation 12 of the VCF Regulations prohibits investments in an ‘associate
company’ by a Venture Capital Fund. Associate companies is defined in
Section 2(aa) of the VCF Regulations inter alia, to mean a company in which
the trustee holds, either individually or collectively, equity shares in excess of
15% of the paid-up equity share capital of a Venture Capital Undertaking.
Therefore, in our view, it is clear that the holding of the trustees is to be seen
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in their individual capacity and not by virtue of the Fund making an
investment in the Venture Capital Undertaking which investment (shares)
must be held by the Trustee in that capacity. The Commissioner of Income-
tax (Appeals) has rightly held that the holding of the shares by the trustee in
its fiduciary capacity, on behalf of the Fund, cannot be considered for
determining whether the Venture Capital Undertaking is an associated
company or not. In this view of the matter and considering the concurrent
findings being recorded by the Appellate Authorities, the second question as
reframed, also does not give rise to any substantial question of law, and
hence, the same is not entertained.
14. Even otherwise we note that a VCF has been defined in Explanation (b)
below Section 10(23FB) to mean inter alia a Fund operating under a trust
deed registered under the provisions of the Registration Act, 1908, which has
been granted a Certificate of Registration before 21 st May 2012 as a Venture
Capital Fund and is regulated under the Venture Capital Fund Regulations.
Therefore, once the Assessee operates under a trust deed registered under the
provisions of the Registration Act, 1908 and has a registration from SEBI as
a VCF [granted before 21st May 2012], which has not been cancelled or
withdrawn, the conditions in the definition are satisfied. Nothing has been
brought on record by the Revenue that SEBI, which is the appropriate
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The Pr. CIT Mumbai vs. Milestone Real Estate Fund
regulatory authority, has alleged or taken any action against the Assessee for
any violation of the Venture Capital Regulations even though quarterly
reports are filed by the Assessee before SEBI. In the absence of such
allegation or violation, it is not open to the Income-tax Department to make
such an allegation and deny exemption under the provisions of section
10(23FB) of the Act. A similar view has been taken by this Court in the
Assessee's own case for the assessment year 2013-14 in Income-tax Appeal
No. 3056 of 2019 in its order dated 19th January 2026. For this reason as
well, the reframed questions of law do not give rise to any substantial
question of law requiring an answer by this Court.
15. In view of the foregoing discussion, the above Appeal is dismissed. However,
in the facts and circumstances of the case, there shall be no order as to costs.
16. This order will be digitally signed by the Private Secretary / Personal
Assistant of this Court. All concerned will act on production by fax or email
of a digitally signed copy of this order.
( FARHAN P. DUBASH, J. ) ( B. P. COLABAWALLA, J.)
Shubham Gadhavepatil
Digitally signed
by SHUBHAM
SHUBHAM SHESHRAO
SHESHRAO GADHAVEPATIL
GADHAVEPATIL Date: Page 16 of 16
2026.09.17 -------------------------------------
11:36:29 +0530
Order dated 9th September 2026.
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