Section 10(23FBA)

Section 10(23FBA) — the law in short

What the courts have decided on section 10(23FBA), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• DCIT v Sundaram Alternative Opportunities Series High Yield Secured Debt Fund — an Assessing Officer cannot re-label a Category II AIF's investment income as business income without enquiry ITATHelps taxpayerNo later treatment found
  The Assessing Officer has re-characterised my Category II AIF's interest, gains and processing fees as business income and denied the section 10(23FBA) exemption on the whole lot. What is the answer?
  The Chennai Tribunal dismissed the Revenue's appeals. Income of a Category I or Category II AIF becomes business income only where the nature of the activities shows a systematic and organised commercial venture undertaken with the dominant intention of earning trading profits rather than making investments, tested by the ordinary badges — frequency and volume, holding period, intention at acquisition, treatment in the books, infrastructure and manner of execution — and here the re-characterisation had been made with no enquiry, no rejection of books, no show-cause notice on that head, and on the further erroneous footing that the assessee was a venture capital fund governed by section 10(23FB) and section 115U.
• Edelweiss Crossover Opportunities Fund v ITO — a scheme of a registered Category II AIF does not lose the pass-through because the SEBI certificate is in the trust's name ITATHelps taxpayerNo later treatment found
  The Assessing Officer says my AIF scheme has its own PAN but no SEBI registration of its own, so it is not an 'investment fund' and section 10(23FBA) is gone. Is that right?
  No, on these facts. The Mumbai Tribunal held that exemption under section 10(23FBA) cannot be denied solely because the scheme has a separate PAN while the SEBI registration stands in the name of the trust, where the scheme is floated under a SEBI-registered Category II Alternative Investment Fund trust — and it pointed to Explanation 1 to section 115UB, which itself recognises a 'scheme of the investment fund'. The consequential addition treating the book surplus in excess of the distributed income as business income was also deleted, because once the pass-through applies the premise for that addition disappears, and because the difference was only statutory indexation under section 48.
• Statutory position — section 115UB(2) and (2A): which AIF losses pass through to the unit holder and which stay with the fund CBDT Circulars & InstructionsCuts both ways
  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.
• Statutory position — s.10(23FBA) and s.10(23FBB): the two clauses that put an AIF's business income at fund level and everything else at investor level CBDT Circulars & InstructionsCuts both waysNo later treatment found
  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.
• Statutory position — s.115U: the venture capital pass-through, the bar on withholding in sub-section (4), and sub-section (6), which closed the Chapter for Category I and II AIFs from AY 2016-17 CBDT Circulars & InstructionsCuts both ways
  My client is a fund registered with SEBI as a venture capital fund. Is it still on the old section 115U pass-through, or has it been moved to section 115UB, and what turns on the answer?
  It depends on whether the fund is an "investment fund" within clause (a) of Explanation 1 to section 115UB — that is, whether it holds a certificate of registration as a Category I or a Category II Alternative Investment Fund. Sub-section (6) of section 115U provides that nothing contained in Chapter XII-F shall apply in respect of any income, of a previous year relevant to the assessment year beginning on or after 1 April 2016, accruing or arising to, or received by, a person from investments made in a venture capital company or venture capital fund being such an investment fund. So a fund that is a Category I or Category II AIF is out of section 115U and into section 115UB from the assessment year 2016-17. A fund that is not — for example one still holding a certificate under the older SEBI (Venture Capital Funds) Regulations, 1996 and not registered as a Category I or II AIF — is not taken out by sub-section (6) in terms. That distinction is being fought at the Tribunal and has not been settled.
• Statutory position — section 115UB: the Category I and II AIF pass-through, the charge on the fund's own income, and why a Category III AIF is outside the section CBDT Circulars & InstructionsCuts both ways
  My client has invested in an Alternative Investment Fund. Is the fund's income taxed in the fund's hands or in his, and does it matter which category the fund is?
  It matters more than anything else: section 115UB applies only to a fund granted a certificate of registration as a Category I or a Category II Alternative Investment Fund, so a Category III AIF is outside the section altogether and is taxed under the ordinary law applicable to its legal form. For a fund within the section, income accruing to a unit holder out of investments made in the fund is chargeable in his hands as if he had made the investments directly and retains its character, except income chargeable under the head profits and gains of business or profession, which is taxed in the fund's own hands — at Finance Act rates if the fund is a company or a firm, and at the maximum marginal rate in any other case.
• Statutory position — s.139(4E) and s.139(4F): a business trust and an investment fund must file a return every year even when the pass-through leaves them nothing to be taxed on CBDT Circulars & InstructionsCuts both ways
  Our REIT's income is all exempt at trust level and our Category II AIF's income is all passed through to investors. Neither has any taxable income. Do they still have to file returns?
  Yes, both, every year. Section 139(4E) requires every business trust which is not required to furnish a return of income or loss under any other provision of section 139 to furnish the return of its income in respect of its income or loss in every previous year, and section 139(4F) imposes the identical obligation on every investment fund referred to in section 115UB. In each case all the provisions of the Act apply as if it were a return required to be furnished under section 139(1). Sub-section (4E) was inserted by section 49(b) of the Finance (No. 2) Act, 2014 with effect from 1 April 2015; sub-section (4F) by section 35(III) of the Finance Act, 2015 with effect from 1 April 2016.
• Statutory position — section 194LBB: ten per cent for a resident, rates in force for a non-resident, and nothing on income not chargeable to tax CBDT Circulars & InstructionsCuts both ways
  Our Category II AIF is allocating income to investors. What do we deduct, and can we skip deduction for a foreign investor whose share is not taxable in India?
  Section 194LBB requires the payer of income in respect of units of an investment fund specified in clause (a) of Explanation 1 to section 115UB to deduct tax at ten per cent where the payee is a resident, and at the rates in force where the payee is a non-resident (not being a company) or a foreign company. Income of the same nature as income referred to in clause (23FBB) of section 10 — that is, the fund's business income, which is taxed at fund level — is outside the section altogether, and a proviso allows no deduction to be made from a non-resident's income that is not chargeable to tax under the provisions of the Act.
• Statutory position — s.115UB(5) and (6) with Explanation 2: the AIF investor is taxed on income the fund never paid him, and is protected when it is finally paid CBDT Circulars & InstructionsCuts both ways
  My client's Category II AIF has not distributed anything for two years, but the Form 64C shows income allocated to him and he is being asked to pay tax on it. Can he be taxed on money he has not received, and will he be taxed again when the fund finally pays it out?
  Yes to the first and no to the second. Section 115UB(6) provides that income accruing or arising to, or received by, the investment fund during a previous year which is not paid or credited to the unit holder shall — subject to the provisions of sub-section (2) — be deemed to have been credited to his account on the last day of the previous year, in the same proportion in which he would have been entitled to receive it had it been paid in that year. Explanation 2 then declares, for the removal of doubts, that income already included in his total income in a previous year on the footing that it accrued or arose in that year shall not be included again in the previous year in which the fund actually pays it to him. Sub-section (5) separately provides that Chapter XII-D and Chapter XII-E do not apply to income paid by an investment fund under the Chapter.
• Statutory position — rule 12CA and rule 12CB with s.115UA(4) and s.115UB(7): the two pass-through statements, Forms 64A to 64D, and the 15 June and 30 June dates CBDT Circulars & InstructionsCuts both waysNo later treatment found
  Our REIT has to give unit holders a statement of distributed income and file one with the department. Which form goes where, by when, and is the machinery the same for an Alternative Investment Fund?
  There are two parallel sets and they are not interchangeable. For a business trust, section 115UA(4) requires the person responsible for paying the distributed income to furnish a statement to the unit holder and to the prescribed authority, and rule 12CA prescribes it: Form No. 64A, verified by an accountant and filed electronically under digital signature with the Principal Commissioner or Commissioner within whose jurisdiction the principal office of the business trust is situated, by 15 June of the financial year following the previous year in which the income is distributed; and Form No. 64B to the unit holder by 30 June of that financial year, generated and downloaded from the departmental web portal. For an investment fund, section 115UB(7) requires the same thing and rule 12CB prescribes Form No. 64C to the unit holder by 30 June and Form No. 64D to the Principal Commissioner or Commissioner by 15 June, on the same electronic footing.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.