TaxTMI 
TaxTMI 
2026 (7) TMI 779
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....d business income taxable u/s. 10(23FBA) of the Act, thereby granting relief of exemption u/s. 10(23FBA) of total income earned by the assessee to the tune of Rs. 61,55, 12,750/-. 3. The Id CIT(A) failed to note that the total income earned by the assessee under different heads to the tune of Rs. 61,55, 12,750/-, includes income earned in the nature of processing fee of Rs. 1,84,00,000/-, which is in the nature of business income not exempt as per section 10(23FBA) which grants exemption to any income of an investment fund (as defined under clause (a) of Explanation 1 of Sec. 115UB), other than the income chargeable under the head "Profits and gains of business or profession". 4. The ld CIT(A) ought to have noted that in order to avail the benefit of exemption for its entire income us 10(23FBA), including business income, the assessee has clubbed his business income in the nature of processing fee of Rs. 1,84,00,000/- with interest income in Form 64D under the head "others" and shown total income at Rs. 57,92,59,756/-, and showed income under the head "Profits and gains of business or profession" in Form 64D as "Zero" 5. For these and other grounds that m....
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....e pertains to capital gains on sale of investments and interest income on the said investments. The assessee also submitted that, as per the provisions of Section 10(23FBA), all income except income from business or profession of Category I and Category II AIF registered with SEBI would be tax exempt. The CIT(A) deleted the disallowance of exemption by the Assessing Officer by holding that- 6.17 It can be observed from the above provisions that, all income except business and profession income of Category I and Category I AIF registered with SEBI would be exempt. Since the appellant is a registered Category I Alternative Investment Fund under SEBI rules and regulations, the appellant is eligible to claim the exemption under section 10(23FBA). The appellant has explained that in response to the show cause notice issued dated 06th September 2022, it had duly furnished the AlF Certificate along with its response, which categorically stated that the Appellant is registered as a CAT I AIF with SEBI. However, despite the submission, the Ld. AO applied Section 10(23FB) to the present facts without appreciating the submissions of the appellant and concluded that the appellant is a....
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....ther income", without any reasoning whatsoever. The said conclusion was made in just a single line in the order without any analysis/ reasoning. 1. 1. The Ld. AO has further stated that, as the appellant did not provide any details about the nature and amounts of investments undertaken, the said exemption could not be allowed. The appellant has, however, explained that at no stage of the assessment proceedings it was asked to provide such details. Neither in the show cause notice, nor during the course of personal hearing was the appellant even made aware that the Ld. AO was proposing to deny the exemption on this ground and therefore the appellant was not even granted an opportunity to canvass its submissions on this point. 2. The appellant has further submitted that as per provisions of Section 115UB(7) of the Act, the category I and I! AIF, are required to file an annual form with the tax authority, for distribution of income to its unit holder in Form 64D. The said form contains the break-up nature of the income earned by the Cat Il fund and the distribution of the same to respective unit holder. Based on the said filing, the tax authority generates a Form 64C....
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.... hands of the investors is determined in the like and same manner as if such investment was made directly by the investors. Accordingly, the nature of income for investors is determined qua the nature of income earned by the AlF. For example, if AIF earns capital gain from sale of shares held in an Indian company, the investors are liable to tax under the head 'capital gains' at the rates applicable to respective investors. (b) The Business Income is, however, taxable at AlF level at the rate specified in the Finance Act for AlF being a company or a limited liability partnership or at maximum marginal rate ("MMR") if the AlF is set up as a trust. 6.31 Business Income vs Capital Gains As no tax pass through is available for Business Income, it is critical to assess whether the income arising from sale of shares and securities could be classified as Business Income or Capital Gains. Traditionally, the issue of characterization of exit gains (whether taxable as Business Income or Capital Gains) has been a subject matter of litigation. There have been judicial pronouncements on whether gains from transactions in securities should be taxed as "Business....
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....g that the appellant is a VC and has earned business income taxable under the Sec 10(23FBA) of the Act. 6.34 In view of the above discussion and the case laws relied upon by the appellant, the Grounds No. 1 and 2 of the appeal are hereby ALLOWED." 6. Aggrieved, the revenue is in appeals before the Tribunal. 7. The ld. AR submitted that the assessee, being a Category II AIF, is not engaged in any business. The activity of the assessee mainly involves pooling of funds to make investments and, therefore, cannot be regarded as business. The ld. AR presented the following table to explain the nature of income earned by the assessee:- SR. NO. INCOME (WITH AMOUNT) DESCRIPTION OF TRANSACTION/INCOME 1. Interest on debt securities (Rs. 56,08,59,756/-) Since the investment objective is to invest in debt securities, the return is in the form of interest on debt securities. The Assessee made investment in NCDs of only 11 companies. Thus, there was no regular business. The strategy of the Assessee was to make investment in NCDs and generate interest income. Borrowings is one factor which shows carrying out of business. However, the Assessee is prohibited from ....
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....submitted that the Assessee satisfied the definition of an "investment fund" under section 115UB read with section 10(23FBA), since it was constituted as a trust and duly registered with SEBI as a Category II AIF. It was contended that the AO had proceeded on a fundamentally erroneous premise by treating the Assessee as a Venture Capital Fund and by applying provisions relating to section 10(23FB) and section 115U, which were wholly inapplicable to a Category II AIF governed by section 10(23FBA) and section 115UB. The ld. AR further submitted that the Assessee was not carrying on any business activity and that the pooling of investor funds for making investments could not be regarded as a business operation. The interest earned on debt securities represented return on investments made in a limited number of companies through NCDs, without any borrowing or leverage, as borrowing itself was prohibited under the AIF Regulations and the private placement memorandum. Similarly, gains arising from sale of mutual fund units were claimed as capital gains since the units constituted capital assets reflected as investments in the balance sheet and were only temporary parking of surplus funds....
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....e ld. DR supported the assessment order and contended that the Assessee had failed to establish its eligibility for exemption under section 10(23FBA). It was argued that the nature of activities carried on by the Assessee, including earning processing fees and other investment-related returns, indicated a profit-oriented commercial activity liable to be assessed as business income. The ld. DR further submitted that the Assessee had not furnished adequate documentary evidence regarding the nature of investments and applicability of the exemption provisions. Reliance was also placed on the fact that Schedule PTI in the return of income was left blank, which according to the ld. DR created doubt regarding the Assessee's claim of pass-through status. The ld. DR accordingly contended that the AO was justified in denying exemption and in treating the income of the Assessee under the head "Profits and Gains of Business or Profession." 12. We heard the parties and perused the material on record. The assessee in the return of income has declared Capital Gains and Income from Other Sources. Since the assessee is a Category II AIF, as per the provisions section 10(23FBA) the assessee claim....
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....FBA) was the reclassification of the income earned by the assessee as "business income". The Assessing Officer while doing so has simply held that the income declared under the head capital gains, interest and processing fee are all to be classified under the head business income. It is relevant to note here that the Assessing Officer has treated the assessee as a Venture Capital fund which is an incorrect factual finding since the assessee is a SEBI registered Category II AIF. The income earned by a Category II AIF is classified as "Profits and Gains from Business or Profession" when the nature of the activities carried on by the fund demonstrates a systematic and organized commercial venture undertaken with the dominant intention of earning trading profits rather than making investments. The determination of such characterization depends upon the cumulative effect of various judicially recognised tests, including the frequency and volume of transactions, holding period of investments, intention at the time of acquisition, treatment of securities in the books of account, deployment of infrastructure for trading operations, and the manner in which the transactions are executed and ....
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....ice was issued proposing reclassification of the income under the head "Profits and Gains from Business or Profession". Even otherwise, the Assessing Officer has not rejected the books of account nor brought any material on record to demonstrate that the assessee was carrying on systematic trading or commercial business operations. We further notice that the observations made in the assessment order are not based on any factual analysis and are not supported by any reasoning. In our considered view, the Assessing Officer proceeded on an erroneous assumption by treating the assessee as a Venture Capital Fund and by applying provisions relatable to section 10(23FB) and section 115U, which are admittedly inapplicable to a Category II AIF governed by section 10(23FBA) and section 115UB. We also find no merit in the contention of the Assessing Officer regarding non-furnishing of Schedule PTI in the return of income. As rightly pointed out by the ld AR, Schedule PTI is required to be filled by the investors receiving pass-through income from the investment fund and not by the investment fund itself. The ld AR in this regard placed reliance on the CBDT instructions governing filing of the....