Our Category II AIF has a loss for the year. Can the investors set it off in their own returns, and what happens to the losses the fund accumulated before 2019?
A business loss of the investment fund never passes through: section 115UB(2)(i) requires it to be carried forward and set off by the fund itself under Chapter VI and to be ignored for the purposes of sub-section (1). Any other loss passes through to the unit holder unless the unit was not held by him for at least twelve months, in which case section 115UB(2)(ii) requires it also to be ignored; and section 115UB(2A) deems non-business losses accumulated at fund level as on 31 March 2019 to be the loss of the unit holder who held the unit on that date, allowing him to carry it forward for the remaining period, with a proviso that the fund itself cannot use it on or after 1 April 2019.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2020-04-01, reported as Clauses (i) and (ii) of section 115UB(2) substituted, and sub-section (2A) inserted, by the Finance (No. 2) Act, 2019 (Act No. 23 of 2019) with effect from 1 April 2020. It bears on section 115UB, section 115UB(2), section 115UB(2A), section 10(23FBA), section 74, section 72 of the Income Tax Act 1961, in Charitable Trusts & Exemption, Deductions & Disallowances, How Tax Law Is Read and Assessment & Scrutiny matters.
Before the Finance (No. 2) Act 2019 substituted clauses (i) and (ii) and inserted sub-section (2A) with effect from 1 April 2020, every loss of an investment fund was stranded at fund level while every profit passed through — an asymmetry that made a loss-making year in one scheme worthless to an investor who had gains elsewhere. The 2019 change fixed that for non-business losses, but it fixed it with a holding-period condition that is easy to fail: the twelve months in clause (ii) runs on the UNIT, not on the underlying security, so an investor who subscribed part-way through the year gets nothing even where the fund's loss arose from an asset held for years. Two further points. The section 115UB(2A) transition is a one-time deeming keyed to the person who held the unit on 31 March 2019 and to the remaining carry-forward period computed from the year the loss first arose; it is not a fresh eight-year clock. And the opening words of sub-section (2) require the computation to be made 'without giving effect to the provisions of clause (23FBA) of section 10', so the loss is worked out on the fund's gross computation and not after the exemption has been applied.
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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Sub-section (2) of section 115UB applies where, in any previous year, the net result of computation of the total income of the investment fund, without giving effect to the provisions of clause (23FBA) of section 10, is a loss under any head of income which cannot be or is not wholly set off against income under any other head of income of that previous year. In that case, clause (i) provides that out of such loss, the loss arising to the investment fund as a result of the computation under the head 'Profits and gains of business or profession', if any, shall be allowed to be carried forward and shall be set off by the investment fund in accordance with the provisions of Chapter VI, and shall be ignored for the purposes of sub-section (1). Clause (ii) provides that the loss other than the loss referred to in clause (i), if any, shall also be ignored for the purposes of sub-section (1), if such loss has arisen in respect of a unit which has not been held by the unit holder for a period of at least twelve months. Sub-section (2A) provides that the loss other than the loss under the head 'Profits and gains of business or profession', if any, accumulated at the level of the investment fund as on 31 March 2019 shall be (i) deemed to be the loss of a unit holder who held the unit on 31 March 2019 in respect of the investments made by him in the investment fund, in the same manner as provided in sub-section (1), and (ii) allowed to be carried forward by such unit holder for the remaining period calculated from the year in which the loss had occurred for the first time taking that year as the first year, to be set off by him in accordance with the provisions of Chapter VI, with a proviso that the loss so deemed shall not be available to the investment fund on or after 1 April 2019.
Statutory position — no holding is asserted; this entry reproduces statutory text. A business loss of an investment fund is carried forward and set off by the fund and never reaches the unit holder; a non-business loss reaches the unit holder unless the unit has not been held by him for at least twelve months, in which case it too is ignored; and non-business losses standing at fund level on 31 March 2019 are deemed to belong to the unit holder who held the unit on that date, for the balance of the original carry-forward period, and cease to be available to the fund from 1 April 2019.
The scheme reflects the same division that governs income under the Chapter. Business income is taxed at fund level, so business loss is allowed to shelter it at fund level and is deliberately withheld from the conduit; everything else is taxed in the unit holder's hands, so the corresponding loss is allowed to reach him. The twelve-month condition in clause (ii) is an anti-abuse limit on that allowance: without it, a subscription taken up shortly before the year-end could harvest a loss that accrued over an earlier period in which the subscriber had no interest in the fund, so the section fixes the qualifying period by reference to the holding of the unit rather than the underlying asset. Sub-section (2A) is a pure transition, converting the stock of stranded non-business losses at the moment of change into unit-holder losses, and its two limbs are matched: the deeming in clause (i) puts the loss in the unit holder's hands 'in the same manner as provided in sub-section (1)', while clause (ii) preserves only the unexpired balance of the original carry-forward period, so nothing is gained by the transition except the change of hands.
(ii) the loss other than the loss referred to in clause (i), if any, shall also be ignored for the purposes of sub-section (1), if such loss has arisen in respect of a unit which has not been held by the unit holder for a period of atleast twelve months.
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Handle my notice → Ask a CA on WhatsAppA business loss of the investment fund never passes through: section 115UB(2)(i) requires it to be carried forward and set off by the fund itself under Chapter VI and to be ignored for the purposes of sub-section (1). Any other loss passes through to the unit holder unless the unit was not held by him for at least twelve months, in which case section 115UB(2)(ii) requires it also to be ignored; and section 115UB(2A) deems non-business losses accumulated at fund level as on 31 March 2019 to be the loss of the unit holder who held the unit on that date, allowing him to carry it forward for the remaining period, with a proviso that the fund itself cannot use it on or after 1 April 2019. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 115UB, section 115UB(2), section 115UB(2A), section 10(23FBA), section 74, section 72 of the Income Tax Act 1961. It is reported as Clauses (i) and (ii) of section 115UB(2) substituted, and sub-section (2A) inserted, by the Finance (No. 2) Act, 2019 (Act No. 23 of 2019) with effect from 1 April 2020. Before the Finance (No. 2) Act 2019 substituted clauses (i) and (ii) and inserted sub-section (2A) with effect from 1 April 2020, every loss of an investment fund was stranded at fund level while every profit passed through — an asymmetry that made a loss-making year in one scheme worthless to an investor who had gains elsewhere. The 2019 change fixed that for non-business losses, but it fixed it with a holding-period condition that is easy to fail: the twelve months in clause (ii) runs on the UNIT, not on the underlying security, so an investor who subscribed part-way through the year gets nothing even where the fund's loss arose from an asset held for years. Two further points. The section 115UB(2A) transition is a one-time deeming keyed to the person who held the unit on 31 March 2019 and to the remaining carry-forward period computed from the year the loss first arose; it is not a fresh eight-year clock. And the opening words of sub-section (2) require the computation to be made 'without giving effect to the provisions of clause (23FBA) of section 10', so the loss is worked out on the fund's gross computation and not after the exemption has been applied. If it applies to you, the first step is this: Split the fund's loss by head first. Anything under profits and gains of business or profession stays with the fund, is carried forward by the fund under Chapter VI, and must be ignored when allocating income to unit holders.
Sub-section (2) of section 115UB applies where, in any previous year, the net result of computation of the total income of the investment fund, without giving effect to the provisions of clause (23FBA) of section 10, is a loss under any head of income which cannot be or is not wholly set off against income under any other head of income of that previous year. In that case, clause (i) provides that out of such loss, the loss arising to the investment fund as a result of the computation under the head 'Profits and gains of business or profession', if any, shall be allowed to be carried forward and shall be set off by the investment fund in accordance with the provisions of Chapter VI, and shall be ignored for the purposes of sub-section (1). Clause (ii) provides that the loss other than the loss referred to in clause (i), if any, shall also be ignored for the purposes of sub-section (1), if such loss has arisen in respect of a unit which has not been held by the unit holder for a period of at least twelve months. Sub-section (2A) provides that the loss other than the loss under the head 'Profits and gains of business or profession', if any, accumulated at the level of the investment fund as on 31 March 2019 shall be (i) deemed to be the loss of a unit holder who held the unit on 31 March 2019 in respect of the investments made by him in the investment fund, in the same manner as provided in sub-section (1), and (ii) allowed to be carried forward by such unit holder for the remaining period calculated from the year in which the loss had occurred for the first time taking that year as the first year, to be set off by him in accordance with the provisions of Chapter VI, with a proviso that the loss so deemed shall not be available to the investment fund on or after 1 April 2019. The matter was decided on 2020-04-01 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. A business loss of an investment fund is carried forward and set off by the fund and never reaches the unit holder; a non-business loss reaches the unit holder unless the unit has not been held by him for at least twelve months, in which case it too is ignored; and non-business losses standing at fund level on 31 March 2019 are deemed to belong to the unit holder who held the unit on that date, for the balance of the original carry-forward period, and cease to be available to the fund from 1 April 2019.
The scheme reflects the same division that governs income under the Chapter. Business income is taxed at fund level, so business loss is allowed to shelter it at fund level and is deliberately withheld from the conduit; everything else is taxed in the unit holder's hands, so the corresponding loss is allowed to reach him. The twelve-month condition in clause (ii) is an anti-abuse limit on that allowance: without it, a subscription taken up shortly before the year-end could harvest a loss that accrued over an earlier period in which the subscriber had no interest in the fund, so the section fixes the qualifying period by reference to the holding of the unit rather than the underlying asset. Sub-section (2A) is a pure transition, converting the stock of stranded non-business losses at the moment of change into unit-holder losses, and its two limbs are matched: the deeming in clause (i) puts the loss in the unit holder's hands 'in the same manner as provided in sub-section (1)', while clause (ii) preserves only the unexpired balance of the original carry-forward period, so nothing is gained by the transition except the change of hands. In the words reproduced by the source cited on this page: "(ii) the loss other than the loss referred to in clause (i), if any, shall also be ignored for the purposes of sub-section (1), if such loss has arisen in respect of a unit which has not been held by the unit holder for a period of atleast twelve months."
It was decided by the CBDT Circulars & Instructions on 2020-04-01 and is reported as Clauses (i) and (ii) of section 115UB(2) substituted, and sub-section (2A) inserted, by the Finance (No. 2) Act, 2019 (Act No. 23 of 2019) with effect from 1 April 2020. 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 115UB, section 115UB(2), section 115UB(2A), section 10(23FBA), section 74, section 72, 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. A business loss of an investment fund is carried forward and set off by the fund and never reaches the unit holder; a non-business loss reaches the unit holder unless the unit has not been held by him for at least twelve months, in which case it too is ignored; and non-business losses standing at fund level on 31 March 2019 are deemed to belong to the unit holder who held the unit on that date, for the balance of the original carry-forward period, and cease to be available to the fund from 1 April 2019. It arises in Charitable Trusts & Exemption, Deductions & Disallowances, How Tax Law Is Read and Assessment & Scrutiny matters, on section 115UB, section 115UB(2), section 115UB(2A), section 10(23FBA), section 74, section 72 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. For every other loss, test the holding period of the UNIT in the hands of each unit holder as at the date the loss arose; if the unit has not been held for at least twelve months, the loss is ignored for that unit holder and is not allocated. Compute the loss without giving effect to section 10(23FBA), as the opening words of sub-section (2) require, and keep that gross computation on the file — an allocation worked out after applying the exemption will not reconcile with Form 64D. For funds that existed on 31 March 2019, identify who held each unit on that date: sub-section (2A) deems the accumulated non-business loss to be that person's, and only that person can carry it forward. Compute the remaining carry-forward period under sub-section (2A)(ii) from the year the loss first occurred, treating that year as the first year — do not restart the clock in 2019. Do not let the fund claim any part of the deemed loss for a year on or after 1 April 2019; the proviso to sub-section (2A) removes it from the fund.
Still good law. The substituted clauses and the inserted sub-section were read in their current form on the department's section 115UB page carrying a 'Year: 2026' stamp, and the amendment notes attributing both to Act No. 23 of 2019 with effect from 1 April 2020 were read on the department's page for the same section stamped Year 2019 (No. 2), which still prints the pre-amendment text with those changes flagged prospectively. No decision construing section 115UB(2) or (2A) was located this pass, and no search directed specifically at the twelve-month condition was run; the validity label reflects the currency of the text only. 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.
The operative text was read on the department's section 115UB page stamped Year 2026. The amendment notes were read on a separate departmental page for the same section stamped Year 2019 (No. 2), which prints the pre-amendment text with two prospective notes: 'Following clauses (i) and (ii) shall be substituted for the existing clauses (i) and (ii) of sub-section (2) of section 115UB by the Act No. 23 of 2019, w.e.f. 1-4-2020' and 'Following sub-section (2A) shall be inserted after sub-section (2) of section 115UB by the Act No. 23 of 2019, w.e.f. 1-4-2020'. Act No. 23 of 2019 is the Finance (No. 2) Act, 2019. Note the internal date mismatch built into the provision itself, which is not an error in this entry: the amendment takes effect from 1 April 2020 (assessment year 2020-21) but sub-section (2A) operates on losses accumulated as on 31 March 2019 and bars the fund from using them on or after 1 April 2019. The word 'atleast' in clause (ii) is printed as one word on the departmental page and is reproduced here as printed. The text of section 10(23FBA), referred to in the opening words of sub-section (2), was not read this pass because the department's section 10 pages truncate long before that clause. The date in `decided_on` is the date from which the substituted clauses (i) and (ii) of section 115UB(2) and the inserted sub-section (2A) take effect — 1 April 2020 — and not a decision date; this is a statutory entry and there is no decision behind it. 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. A business loss of an investment fund is carried forward and set off by the fund and never reaches the unit holder; a non-business loss reaches the unit holder unless the unit has not been held by him for at least twelve months, in which case it too is ignored; and non-business losses standing at fund level on 31 March 2019 are deemed to belong to the unit holder who held the unit on that date, for the balance of the original carry-forward period, and cease to be available to the fund from 1 April 2019.
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