The Assessing Officer has re-labelled my Category II AIF's interest and gains as business income. Which provision actually decides whether income is taxed in the fund's hands or in the investor's, because section 115UB does not say so in terms?
It is not section 115UB that draws the line; it is clauses (23FBA) and (23FBB) of section 10, both inserted by section 7(III)(c) of the Finance Act, 2015 with effect from 1 April 2016. Clause (23FBA) exempts any income of an investment fund OTHER than income chargeable under the head "Profits and gains of business or profession", so the fund itself is charged only on its business income. Clause (23FBB) exempts, in the unit holder's hands, that proportion of the income referred to in section 115UB which is of the same nature as income chargeable under that head, so the investor is not charged on the slice the fund has already been taxed on. The line is drawn by HEAD of income, and by nothing else. The Explanation to the two clauses ties "investment fund" to clause (a) of Explanation 1 to section 115UB, which is why a Category III Alternative Investment Fund gets neither clause.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2016-04-01, reported as Clauses (23FBA) and (23FBB) and the proviso to clause (23FB) as inserted by section 7(III)(b) and (c) of the Finance Act, 2015 (indiankanoon.org/doc/127799810/); Explanation 1 to section 115UB on incometaxindia.gov.in/w/section-115ub (Year 2026). It bears on section 10(23FBA), section 10(23FBB), section 10(23FB), section 115UB, section 115U, section 194LBB, section 139(4F), section Rule 12CB of the Income Tax Act 1961, in Charitable Trusts & Exemption, Capital Gains Exemptions and How Tax Law Is Read matters.
Section 115UB itself contains no carve-out of business income from the pass-through — the whole of the fund-level charge on business income and the whole of the investor-level exemption for it live in these two clauses of section 10, which are easy to miss because they sit hundreds of clauses away from the section they operate on. Three consequences follow. First, because the test is the HEAD under which income is chargeable and not a description of the activity, an Assessing Officer who re-characterises a fund's interest, capital gains or fee receipts as business income does not merely move the income; he destroys the pass-through for that whole stream, taxing it in the fund's hands and taking it out of the investor's return. That is the fight worth having at the assessment stage rather than later. Second, the two clauses are complementary and have to be applied together: if a stream is business income in the fund's hands under clause (23FBA), the investor's share of it must be exempt under clause (23FBB), and a computation that taxes the same stream in both places is wrong on the face of it. Third, the same Finance Act closed the older venture capital route for these funds. Section 7(III)(b) inserted a proviso to clause (23FB) providing that nothing contained in that clause shall apply in respect of any income of a venture capital company or venture capital fund, being an investment fund specified in clause (a) of Explanation 1 to section 115UB, of the previous year relevant to the assessment year beginning on or after 1 April 2016. A fund that is within section 115UB therefore cannot fall back on clause (23FB); the two regimes are mutually exclusive from that year.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 7 of the Finance Act, 2015 amended section 10 of the Income-tax Act. Part (III) of that section is expressed to operate "with effect from the 1st day of April, 2016". Sub-part (b) inserted a proviso before the Explanation to clause (23FB). Sub-part (c) inserted clauses (23FBA) and (23FBB) after clause (23FB), with an Explanation providing that for the purposes of those two clauses the expression "investment fund" shall have the meaning assigned to it in clause (a) of Explanation 1 to section 115UB. Explanation 1 to section 115UB, as printed on the departmental Year 2026 page, defines an investment fund as any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the SEBI (Alternative Investment Funds) Regulations, 2012 or regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022.
Statutory position — no holding is asserted; this entry reproduces statutory text. Any income of an investment fund other than income chargeable under the head "Profits and gains of business or profession" is not included in the fund's total income (clause (23FBA)), so the fund is charged only on income under that head. Any income referred to in section 115UB accruing or arising to, or received by, a unit holder of an investment fund, being that proportion of income which is of the same nature as income chargeable under that head, is not included in the unit holder's total income (clause (23FBB)). "Investment fund" for both clauses means what clause (a) of Explanation 1 to section 115UB says it means. And from the assessment year 2016-17 clause (23FB) does not apply to any income of a venture capital company or venture capital fund that is such an investment fund.
Not applicable — statutory text.
For the purposes of clauses (23FBA) and (23FBB), the expression "investment fund" shall have the meaning assigned to it in clause (a) of the Explanation 1 to section 115UB;
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Handle my notice → Ask a CA on WhatsAppIt is not section 115UB that draws the line; it is clauses (23FBA) and (23FBB) of section 10, both inserted by section 7(III)(c) of the Finance Act, 2015 with effect from 1 April 2016. Clause (23FBA) exempts any income of an investment fund OTHER than income chargeable under the head "Profits and gains of business or profession", so the fund itself is charged only on its business income. Clause (23FBB) exempts, in the unit holder's hands, that proportion of the income referred to in section 115UB which is of the same nature as income chargeable under that head, so the investor is not charged on the slice the fund has already been taxed on. The line is drawn by HEAD of income, and by nothing else. The Explanation to the two clauses ties "investment fund" to clause (a) of Explanation 1 to section 115UB, which is why a Category III Alternative Investment Fund gets neither clause. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 10(23FBA), section 10(23FBB), section 10(23FB), section 115UB, section 115U, section 194LBB, section 139(4F), section Rule 12CB of the Income Tax Act 1961. It is reported as Clauses (23FBA) and (23FBB) and the proviso to clause (23FB) as inserted by section 7(III)(b) and (c) of the Finance Act, 2015 (indiankanoon.org/doc/127799810/); Explanation 1 to section 115UB on incometaxindia.gov.in/w/section-115ub (Year 2026). Section 115UB itself contains no carve-out of business income from the pass-through — the whole of the fund-level charge on business income and the whole of the investor-level exemption for it live in these two clauses of section 10, which are easy to miss because they sit hundreds of clauses away from the section they operate on. Three consequences follow. First, because the test is the HEAD under which income is chargeable and not a description of the activity, an Assessing Officer who re-characterises a fund's interest, capital gains or fee receipts as business income does not merely move the income; he destroys the pass-through for that whole stream, taxing it in the fund's hands and taking it out of the investor's return. That is the fight worth having at the assessment stage rather than later. Second, the two clauses are complementary and have to be applied together: if a stream is business income in the fund's hands under clause (23FBA), the investor's share of it must be exempt under clause (23FBB), and a computation that taxes the same stream in both places is wrong on the face of it. Third, the same Finance Act closed the older venture capital route for these funds. Section 7(III)(b) inserted a proviso to clause (23FB) providing that nothing contained in that clause shall apply in respect of any income of a venture capital company or venture capital fund, being an investment fund specified in clause (a) of Explanation 1 to section 115UB, of the previous year relevant to the assessment year beginning on or after 1 April 2016. A fund that is within section 115UB therefore cannot fall back on clause (23FB); the two regimes are mutually exclusive from that year. If it applies to you, the first step is this: Identify the head of income for each stream in the fund's own computation, and keep the working. Everything turns on whether a receipt is chargeable under "Profits and gains of business or profession" or under some other head; the SEBI description of the fund's strategy is not the test.
Section 7 of the Finance Act, 2015 amended section 10 of the Income-tax Act. Part (III) of that section is expressed to operate "with effect from the 1st day of April, 2016". Sub-part (b) inserted a proviso before the Explanation to clause (23FB). Sub-part (c) inserted clauses (23FBA) and (23FBB) after clause (23FB), with an Explanation providing that for the purposes of those two clauses the expression "investment fund" shall have the meaning assigned to it in clause (a) of Explanation 1 to section 115UB. Explanation 1 to section 115UB, as printed on the departmental Year 2026 page, defines an investment fund as any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the SEBI (Alternative Investment Funds) Regulations, 2012 or regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022. The matter was decided on 2016-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Statutory position — no holding is asserted; this entry reproduces statutory text. Any income of an investment fund other than income chargeable under the head "Profits and gains of business or profession" is not included in the fund's total income (clause (23FBA)), so the fund is charged only on income under that head. Any income referred to in section 115UB accruing or arising to, or received by, a unit holder of an investment fund, being that proportion of income which is of the same nature as income chargeable under that head, is not included in the unit holder's total income (clause (23FBB)). "Investment fund" for both clauses means what clause (a) of Explanation 1 to section 115UB says it means. And from the assessment year 2016-17 clause (23FB) does not apply to any income of a venture capital company or venture capital fund that is such an investment fund.
Not applicable — statutory text. In the words reproduced by the source cited on this page: "For the purposes of clauses (23FBA) and (23FBB), the expression "investment fund" shall have the meaning assigned to it in clause (a) of the Explanation 1 to section 115UB;"
It was decided by the CBDT Circulars & Instructions on 2016-04-01 and is reported as Clauses (23FBA) and (23FBB) and the proviso to clause (23FB) as inserted by section 7(III)(b) and (c) of the Finance Act, 2015 (indiankanoon.org/doc/127799810/); Explanation 1 to section 115UB on incometaxindia.gov.in/w/section-115ub (Year 2026). Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 10(23FBA), section 10(23FBB), section 10(23FB), section 115UB, section 115U, section 194LBB, section 139(4F), section Rule 12CB, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Statutory position — no holding is asserted; this entry reproduces statutory text. Any income of an investment fund other than income chargeable under the head "Profits and gains of business or profession" is not included in the fund's total income (clause (23FBA)), so the fund is charged only on income under that head. Any income referred to in section 115UB accruing or arising to, or received by, a unit holder of an investment fund, being that proportion of income which is of the same nature as income chargeable under that head, is not included in the unit holder's total income (clause (23FBB)). "Investment fund" for both clauses means what clause (a) of Explanation 1 to section 115UB says it means. And from the assessment year 2016-17 clause (23FB) does not apply to any income of a venture capital company or venture capital fund that is such an investment fund. It arises in Charitable Trusts & Exemption, Capital Gains Exemptions and How Tax Law Is Read matters, on section 10(23FBA), section 10(23FBB), section 10(23FB), section 115UB, section 115U, section 194LBB, section 139(4F), section Rule 12CB of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the Assessing Officer proposes to treat an investment stream as business income, meet it on the ordinary tests for that head — intention at acquisition, holding period, source of funds, treatment in the books, volume and frequency — and point out what the re-characterisation does downstream to clause (23FBB) and to the investors' returns. Check that the fund and the investors are not both being taxed on the same slice. Clause (23FBB) exempts the investor on the proportion that is of the same nature as business income; if the fund has paid on that slice under clause (23FBA), the investor's Form 64C must show it as exempt. Confirm the fund is an "investment fund" within clause (a) of Explanation 1 to section 115UB before relying on either clause. Both clauses take their subject from that Explanation, so a Category III Alternative Investment Fund is outside both. For a fund registered under the older SEBI (Venture Capital Funds) Regulations, 1996, do not claim clause (23FB) and section 115UB in the alternative for the same year. The proviso inserted by the Finance Act, 2015 shuts clause (23FB) for any fund that is an investment fund under Explanation 1(a) to section 115UB from the assessment year 2016-17 onwards.
Validity check could not be completed. Validity check could not be completed. The two clauses are quoted from the enacting words of the Finance Act, 2015 because no consolidated departmental page for section 10 could be read as far as them. The definition they depend on was read on the departmental Year 2026 page for section 115UB and is current. Whether the clauses themselves have been amended since 2015 was not established, and no judicial treatment was searched for. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Both clauses are quoted from the enacting words of section 7(III)(c) of the Finance Act, 2015, transcribed verbatim, because the consolidated departmental page for section 10 could not be read as far as clause (23FBA): nine departmental section 10 URLs were fetched under a fetch forbidden to answer "absent", and none reached these clauses; the three that got furthest — the pages stamped Year 2017, Year 2018 and Year 2019 (No. 1) — stopped at clause (23DA). That the clauses remain the operative machinery is corroborated by the departmental Year 2026 page for section 115UB, whose Explanation 1(a) is the definition the Explanation to these clauses points at, and by section 139(4F), which speaks of an "investment fund referred to in section 115UB". Whether any Finance Act after 2015 has amended clause (23FBA) or clause (23FBB) was not established on this pass; the Explanation 1(a) definition to which they point HAS since been widened to take in a fund regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022, which is on the Year 2026 departmental page, but that page prints no footnote list so the amending instrument and its date could not be sourced. The commencement date given is the one stated in the Finance Act, 2015 itself for the whole of Part (III) of its section 7, "with effect from the 1st day of April, 2016". The proviso to clause (23FB) inserted by section 7(III)(b) of the Finance Act, 2015 is reproduced and applied by the ITAT Mumbai in JM Financial Property Fund I v. ITO, ITA Nos. 1689 and 1691/Mum/2024, order of 24 July 2024, whose paragraph 11 records that "proviso has been introduced u/s 10(23FB) of the Act which we have already reproduced above. This proviso is effective from the assessment year 2016-17" — an independent confirmation that the proviso is in force and takes effect from that year (https://indiankanoon.org/doc/140874372/). This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Statutory position — no holding is asserted; this entry reproduces statutory text. Any income of an investment fund other than income chargeable under the head "Profits and gains of business or profession" is not included in the fund's total income (clause (23FBA)), so the fund is charged only on income under that head. Any income referred to in section 115UB accruing or arising to, or received by, a unit holder of an investment fund, being that proportion of income which is of the same nature as income chargeable under that head, is not included in the unit holder's total income (clause (23FBB)). "Investment fund" for both clauses means what clause (a) of Explanation 1 to section 115UB says it means. And from the assessment year 2016-17 clause (23FB) does not apply to any income of a venture capital company or venture capital fund that is such an investment fund.
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