Section 115U

Section 115U — the law in short

What the courts have decided on section 115U, 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 taxpayerValidity unconfirmed
  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.
• Kae Capital Fund v ITO — the live question whether a SEBI 1996-Regulations venture capital fund is an "investment fund" under s.115UB, and why the Tribunal never reached it ITATHelps taxpayerValidity unconfirmed
  The Commissioner (Appeals) has directed the Assessing Officer to allow my fund's section 10(23FB) exemption only if it proves it is not an investment fund under Explanation 1 to section 115UB, without ever hearing us. Has anyone decided whether a SEBI venture capital fund registered under the 1996 Regulations is inside section 115UB?
  Not in this order, and that is the point to take from it. The Mumbai Tribunal set the Commissioner (Appeals)' order aside and restored the appeal for de novo adjudication because a request for a personal hearing through video conferencing had been made and not granted, which clause 12 of the Faceless Appeal Scheme, 2021 does not permit — the Commissioner (Appeals) "shall allow such request". Having remitted on that ground the Tribunal expressly held that the assessee's other grievances did not call for adjudication at that stage. So the substantive question — whether a fund holding a certificate under the SEBI (Venture Capital Funds) Regulations, 1996 that has not migrated to the SEBI (Alternative Investment Funds) Regulations, 2012 is an "investment fund" within clause (a) of Explanation 1 to section 115UB, and so loses section 10(23FB) by the proviso inserted with effect from 1 April 2016 — remains undecided.
• DCIT v Business Excellance Trust — shares that were unlisted when bought fall in the main part of the section 10(38) notification ITATCuts both waysValidity unconfirmed
  My client bought shares off-market when the company was unlisted, sold them on the exchange after listing and paid STT on the sale. The officer denies section 10(38) because no STT was paid on purchase. Is he right?
  No, on this Tribunal's reasoning. All three carve-out clauses of the notification issued under the third proviso to section 10(38) are about listed equity shares, so a purchase of shares that were unlisted at the time of acquisition falls in the main part of the notification, and the exemption survives even though no STT was paid on acquisition.
• 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.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 waysValidity unconfirmed
  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 — 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.

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.