Budget 2019- Provide for pass through of losses in cases of Category I and Category II Alternative Investment Fund (AIF)

Section 115UB of the Act, inter alia, provides for pass through of income earned by the Category I and II AIF, except for business income which is taxed at AIF level. Pass through of profits (other than profit & gains from business) has been allowed to individual investors so as to give them benefit of lower rate of tax, if applicable. Pass through of losses are not provided under the existing regime and are retained at AIF level to be carried forward and set off in accordance with Chapter VI.

In order to remove the genuine difficulty faced by Category I and II AIFs , it is proposed to amend section 115UB to provide that

(i) the business loss of the investment fund, if any, shall be allowed to be carried forward and it shall be set-off by it in accordance with the provisions of Chapter VI and it shall not be passed onto the unit holder;

(ii) the loss other than business loss, if any, shall also be ignored for the purposes of pass through to its unit holders, 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;

(iii) the loss other than business loss, if any, accumulated at the level of investment fund as on 31st March, 2019, shall be deemed to be the loss of a unit holder who held the unit on 31st March, 2019 in respect of the investments made by him in the investment fund and allowed to be carried forward by him 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 and it shall be set-off by him in accordance with the provisions of Chapter VI;

(iv) the loss so deemed in the hands of unit holders shall not be available to the investment fund for the purposes of chapter VI.

These amendments will take effect from the 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.

[Clause 38]

Extract of Clause 38 of Finance Bill 2019

38. Amendment of section 115UB.

In section 115UB of the Income-tax Act, in sub-section (2), with effect from the 1st day of April, 2020,––

(a) for clauses (i) and (ii), the following clauses shall be substituted, namely:––

‘(i) out of such loss, the loss arising to the investment fund as a result of the computation under the head “Profit and gains of business or profession”, if any, shall be,––

(a) allowed to be carried forward and it shall be set off by the investment fund in accordance with the provisions of Chapter VI; and

(b) ignored for the purposes of sub-section (1);

(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 at least twelve months.’;

(b) after sub-section (2), the following sub-section shall be inserted, namely:––

‘(2A) The loss other than the loss under the head “Profit and gains of business or profession”, if any, accumulated at the level of investment fund as on the 31st day of March, 2019, shall be,––

(i) deemed to be the loss of a unit holder who held the unit on the 31st day of 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 20

(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 and shall be set off by him in accordance with the provisions of Chapter VI:

Provided that the loss so deemed under this sub-section shall not be available to the investment fund on or after the 1st day of April, 2019.’.

Note on Clause 38 of Finance Bill 2019

Clause 38 of the Bill seeks to amend section 115 UB of the Income-tax Act relating to tax on income of investment fund and its unit holders.

Clauses (i) of sub-section (2) of said section, inter alia, provides that the loss of an investment fund for any previous year, being the net result of computation of total income of the investment fund, without giving effect to the exemption to income other than business income, under any head of income which cannot be or is not wholly set-off against income under any other head of income of the said previous year, shall be allowed to carry forward and set-off in accordance with the provisions of Chapter VI.

Clause (ii) of said sub-section provides that such loss shall not accrue or arise or received by the unit holder.

It is proposed to substitute the said sub-clauses so as to provide that,–

(i) the loss arising to the investment fund as a result of the computation under the head “Profit and gains of business or profession”, if any, shall be, allowed carry forward and set off in accordance with the provisions of Chapter VI; and such loss shall not accrue, or arise or received by the unit holder; and

(ii) the other loss, if any, shall not accrue, or arise or received by the unit holder, 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.

It is further proposed to insert sub-section (2A) to the said section so as to provide that the loss other than the loss under the head “Profit and gains of business or profession”, if any, accumulated at the level of investment fund as on the 31st day of March, 2019, shall be deemed to be the loss of a unit holder who held the unit on that day in respect of the investments made by him in the investment fund and be allowed carry forward and set off for the remaining period calculated from the year in which it had occurred for the first time taking that year as the first year in accordance with the provisions of Chapter VI and that thereafter said loss shall not be available to the investment fund.

These amendments will take effect from the 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

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One Comment

  1. jupudy says:

    To avail the benefit of cumulative capital gain losses of AIF ( cat II ) as on 31 March 2019 , by set off with capital gains of Fy 2019-20 , the losses should be mentioned in CFL ( carry forward losses ) schedule by showing this loss for Fy 2018-19 ,which is feasible by revising ITR of Fy 2018-19 by showing in PTI schedule of ITR. ?
    The fund had already shown these losses til 31 st March 2019 in their books ,can the investor treat as current year losses of Fy2019-201 and take the benefit of set off ?
    will you please enlighten on this aspect ?

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