The present article provides a briefing on penalty provisions of section 271FAB of the Income Tax Act. It also explains the relevant provisions of section 9A of the Income Tax Act along with the amount of penalty payable under section 271FAB.
Circumstances when penalty provisions of section 271FAB get attracted
The penalty provisions of section 271FAB get applicable as explained hereunder –
- As per provisions of section 9A (5) of the Income Tax Act, the ‘eligible investment fund’ is required to furnish a statement or information or document.
- In case the ‘eligible investment fund’ fails to furnish such statement / information / documents within the prescribed time limit. Then for such failure, the income tax authority can direct the eligible investment fund to pay the penalty under section 271FAB.
Understanding the connecting relevant provisions of section 9A of the Income Tax Act
In order to understand the applicability of section 271FAB, it is important to understand the relevant provisions of section 9A, which are explained hereunder –
Section 9A provides that in case of an ‘Eligible Investment Fund’, the fund management activity being carried out by the ‘eligible fund manager’ (manager acting on behalf of the fund), shall not create a business connection in India of such funds.
Here, it is important to understand the two terms, namely, ‘Eligible Investment Fund’ and ‘Eligible Fund Manager’ which are explained hereunder.
Eligible Investment Fund means as under –
‘Eligible Investment Fund’ means a fund which is established or registered or incorporated outside India. The Eligible Investment Fund should satisfy the following conditions –
- The fund should not be a person resident in India.
- The fund should be a resident of the country/specified territory with which an agreement as referred to in section 90 (1) or section 90A (1) has been entered.
- The total participation / investment in the fund, by a person resident in India, shouldn’t exceed 5% of the corpus of the fund.
- The fund should be subject to applicable investor protection regulations in the country / specified territory where it is established / incorporated / registered.
- The fund should have a minimum of 25 members, who are (directly / indirectly) not connected persons.
- Any member of the fund (including connected persons) should not have (directly / indirectly) any participation interest exceeding 10%.
- The total participation interest of 10 or less members (including connected persons) should be less than 50%.
- The fund should not be investing more than 20% of its corpus in any entity.
- The fund should not be making any investment in its associate entity.
- The monthly average of the corpus of the fund should not be less than INR 100 Crore.
Eligible Fund Manager means the one who satisfies the following conditions –
- The person should be registered as a ‘Fund Manager’ or an ‘Investment Advisor’.
- The person should not be an employee of the ‘Eligible Investment Fund’ or a connected person of the fund.
- The person should be acting as a Fund Manager in the ordinary course of his business.
- The person (along with the connected person) should not be entitled (directly / indirectly) to more than 20% of the profits accruing / arising to the ‘Eligible Investment Fund’ from the transactions carried out by the fund through the Fund Manager.
Provisions of section 9A (5) mandate the ‘Eligible Investment Fund’ to furnish a statement (along with prescribed information / documents) within a period of 90 days from the end of the respective financial year.
In case the ‘Eligible Investment Funds’ fails to furnish such statement / information / documents then, they would be liable to pay the penalty under section 271FAB.
Amount of penalty payable under section 271FAB of the Income Tax Act
In case of default, the defaulter would be liable to pay the penalty amounting to INR 5 Lakhs under section 271FAB.
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