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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax - 09/2022

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..... nvestment by specified person in Category I or Category II Alternative Investment Funds (hereinafter referred as AIF) which invest in one or more of the companies, enterprises or entities as referred to in item (b) (hereinafter referred to as “eligible infrastructure entity”) through domestic companies and Non-Banking Finance Companies or in AIFs investing in an Infrastructure Investment Trust referred to in sub-clause (i) of clause (13A) of section 2 of the Act (hereinafter referred to as InvIT). Further, the Finance Act also relaxed the condition requiring an AIF to have investment in eligible infrastructure entity or InvIT from 100% to 50%; (ii) inserted item (d) in sub-clause (iii) thereof, to allow investment by specified person in a domestic company set up and registered on or after 01.04.2021, having minimum 75 per cent investments in eligible infrastructure entity; (iii) inserted item (e) in sub-clause (iii) thereof, to allow investment by specified person in a Non-Banking Financial Company registered as an Infrastructure Finance Company or in an Infrastructure Debt Fund (hereinafter referred to as NBFC), having minimum 90 per cent lending in eligible infrastruc .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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..... r of investment within 3 years by the specified person or AIF/ domestic Company/NBFC 4.1.1. As per clause (23FE) of section 10 of the Act, any income of a specified person in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India, whether in the form of debt or share capital or unit, is exempt from income tax subject to certain conditions. One of such conditions is prescribed in sub-clause (ii) of clause (23FE) of section 10 of the Act. Under this sub-clause, such investment is required to be held for at least three years’. It has been brought to the notice of the Board that there may be cases where any of the following investments is transferred before the lock-in period of 3 years (“three years’ rule”): (a) Investment by the specified person in eligible infrastructure entity or InvIT or AIF or domestic company or NBFC; (b) Investment by the AIF, out of the investment made by the specified person, in domestic company or NBFC or eligible infrastructure entity or InvIT; (c) Investment by the domestic company, out of the investment made by the specified person directly or through AIF, in eligible infrastructu .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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..... investments (which is transferred in violation of the three years’ rule) which has been exempted from income-tax under clause (23FE) of section 10 of the Act in the earlier years, will be subjected to tax in the hands of the specified person as the income of the previous year in which such investment is transferred in violation of the three year rule by the specified person or AIF or domestic company or NBFC, as the case may be. 4.1.5. The above guidelines are explained with the help of following examples: Example 1: Specified person invests Rs 100 crore in an eligible infrastructure entity. The specified person is notified as on 30.04.2021 and such investment is made on 31.03.2022 in the form of shares. During the previous year 2022-23, the specified person gets dividend of Rs 10 crore from such investment which is claimed to be exempt. Further during the previous year 2023-24, dividend of Rs 12 crore is received which is also claimed to be exempt. As on 01.04.2024, the specified person decides to exit and transfers its shares for an amount of Rs 120 crore. In such case, during the previous year 2024-25, the dividend income given exemption during the previous year 2022-23 am .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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..... 30.05.2021 in the form of units. The AIF in turn invests the entire amount in a domestic company referred to in item (d) of sub-clause (iii) of clause (23FE) of section 10 of the Act as on 30.06.2021 out of the investment made by the specified person. The domestic company in turn invests Rs. 60 crore in an eligible infrastructure entity A and Rs 40 crore in eligible infrastructure entity B, on 31.07.2021 out of the investment made by the AIF. During the previous year 2022-23, the specified person gets dividend of Rs 10 crore from the investment made in the domestic company through AIF. Under Rule 2DCA of the Rules, an amount of Rs 8 crore is found to be exempt (Rs 4.8 crore attributable to investment in eligible infrastructure entity A and 3.2 crore attributable to investment in eligible infrastructure entity B). Further during the previous year 2023-24, dividend of Rs 12 crore is received. Under Rule 2DCA of the Rules, an amount of Rs 10 crore is found to be exempt (Rs 6 crore attributable to investment in eligible infrastructure entity A and 4 crore attributable to investment in eligible infrastructure entity B). As on 15.07.2024, the domestic company decides to exit and transfer .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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..... the taxpayer, it is clarified that if eligible infrastructure entity carries on businesses other than the business of developing, or operating and maintaining, or developing, operating and maintaining any infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA of the Act or such other business as the Central Government may, by notification in the Official Gazette, specify in this behalf (hereinafter referred as “eligible activity”), the exemption could still be provided if the profit before tax of the eligible infrastructure entity from eligible activity is 50% or more of the total profit before tax of the eligible infrastructure entity. The exempt income from investment in such eligible infrastructure entity (hereinafter referred to as “hybrid infrastructure entity”) attributable to such eligible activity shall be calculated proportionately. For the purposes of determination of such exempt income attributable to eligible activity, separate books of account shall be maintained by such hybrid infrastructure entity. The income of the specified person, from such hybrid infrastructure entity attributable to such e .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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..... gible infrastructure entities and one or more of such eligible infrastructure entities are hybrid infrastructure entities, exemption under rule 2DCA of the rules shall be computed as follows: (a) in respect of the hybrid infrastructure entities as per paragraph 4.2.2 of these guidelines; (b) in respect of other eligible infrastructure entities, as per rule 2DCA of the rules, to the extent attributable to the investment in such entities. 4.2.4. The above guidelines are explained with the help of following examples: Example 4: Specified person invests Rs 100 crore in an hybrid infrastructure entity. The specified person is notified as on 30.04.2021 and such investment is made on 31.03.2022 in the form of shares. During the previous year 2022-23, the specified person gets dividend of Rs 10 crore from such investment which is claimed to be exempt. In such case, the hybrid infrastructure entity will have to maintain separate books of account for the eligible and non-eligible activities. Assuming that the profit before tax of the eligible infrastructure entity from the eligible infrastructure activities is Rs 50 crore and total profit before tax is Rs 100 crore. In such a case the income .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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..... count for the eligible and non-eligible business. Assuming that the profit before tax of the hybrid infrastructure entity from the eligible infrastructure activities is Rs 50 crore and total profit before tax is Rs 100 crore. In such a case the income of the specified person exempted under clause (23FE) of section 10 of the Act for the previous year 2022-23 shall be calculated as follows: A=B*C/D B= Rs 6 crore C= Rs 50 crore D= Rs 100 crore. A=6 crore* 50 crore/100 crore= Rs 3 crore [assuming all other conditions of clause (23FE) of section 10 of the Act are satisfied. The minimum threshold of investment by the domestic company, as per sub-rule (2) and (3) of rule 2DCA, in eligible infrastructure entities will also have to be maintained.] Example 7: Specified person invests Rs 100 crore in a domestic company, as referred to in item (d) of sub-clause (iii) of clause (23FE) of section 10 of the Act. The specified person is notified as on 30.04.2021 and such investment is made on 31.03.2022 in the form of shares of the domestic company. Such domestic company in turn invests Rs 40 crore out of such 100 crore in an hybrid infrastructure entity A and 20 crore in eligible infrastructure e .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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..... gible infrastructure entities shall be computed as per rule 2DCA of the rules to the extent attributable to the investment in such entities. The total investment of the specified person in hybrid infrastructure entity A and eligible infrastructure entity B is Rs 60 crore. As per clause (b) of the paragraph 4.2.3, while computing the exemption with respect to the income from eligible infrastructure entity other than the hybrid infrastructure entity, the investment of the specified person in eligible infrastructure entity other than the hybrid infrastructure entity A will be considered. Thus, the value of N in the formula in sub-rule (6) of rule 2DCA of the rules shall be Rs 60 crore minus Rs 40 crore=Rs 20 crore and the exemption attributable to investment in eligible infrastructure entity B shall be calculated as follows: Exempt income as per rule 2DCA=M*N/O (exempt income computed under sub-rule (6) of rule 2DCA of the rules to the extent attributable to the investment in eligible infrastructure entities other than hybrid infrastructure entities) i.e. 10 crore*20 crore/100 crore= 2 crore Thus, the total exemption available to the specified person under clause (23FE) of section 10 .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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..... er conditions specified under clause (23FE) of section 10 of the Act or rules 2DCA are not violated. For example, if the “three years’ rule” is violated, consequences will be decided as per paragraph 4.1 of these guidelines. 4.4. Violation of one or more conditions in clause (23FE) of section 10 of the Act or rules thereunder or under the notification exempting the specified person under the said clause. 4.4.1. The exemption provided to the specified person under clause (23FE) of section 10 of the Act is subject to certain conditions provided under the said clause, relevant rules and also specific conditions provided in the notification issued in the case of the specified person. Concerns have been raised that in case of violation of one or more of such conditions during any of the previous years, the exemption provided during the previous years preceding such previous year may also be taken away leading to a lot of uncertainty in the hands of the investors. 4.4.2. The conditions provided under clause (23FE) of section 10 of the Act or prescribed under Rule 2DB of the Rules or under Circular No 15 of 2020, dated the 22nd July, 2020 with F No. 370142/26/2020-TPL ar .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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..... ncome of the specified person of the previous year during which such specified person fails to satisfy any of the conditions of the said clause. 4.4.4. Further, the following conditions have been specified in the notifications issued in the case of a specified person being either a SWF or PF: a. The specified person shall get its books of account audited for the previous years referred to in clause (i) by an accountant specified in the Explanation below sub-section (2) of section 288 of the Act and furnish the Audit Report in the format annexed as Annexure to this notification herewith at least one month prior to the due date specified for furnishing the return of income under sub-section (1) of section 139 of the Act b. It shall maintain a segmented account of income and expenditure in respect of such investment which qualifies for exemption under clause (23FE) of section 10 of the Act. 4.4.5. It is clarified that if the specified person, being a SWF or PF, fails to meet any of the conditions specified in the notification (referred to in paragraph 4.4.4), during any subsequent previous year then income of the said specified person ,being a SWF or PF, which has been exempted during .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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..... nding by the domestic company/NBFC, as on the last date of the previous year immediately preceding the relevant previous year (last date of the relevant previous year if eligible lending has been made during the relevant previous year), in accordance with sub-rule (6) or (7) of rule 2DCA of the rules. Since the eligible downstream investments were transferred by the domestic company in an earlier year, the value of “N”, as specified under sub-rule (6) of rule 2DCA of the rule, will reduce and therefore the exemption available to the specified person with respect to the capital gain on the transfer of investment will also reduce and there may be cases where such exemption from capital gains is not at all available to the specified person in the subsequent year in which eligible capital asset is transferred on account of reduction in the value of the said “N”. 4.5.3. In order to remove the difficulties, the capital gain arising on eligible capital assets to the specified person may need to be computed in the ratio worked out as per sub-rule (6) or (7) of rule 2DCA of the rules as on the date of transfer of each of the eligible downstream investments or repayme .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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..... estment in infrastructure companies 4.6.1. As per the provisions of clause (23FE) of section 10 of the Act, the specified person shall invest in eligible infrastructure entities either directly or through AIF or a domestic company or NBFC or in an InvIT either directly or through AIF. The exemption under said clause is intended to promote investment in eligible infrastructure entities or InvIT. 4.6.2. Concerns have been raised that some of the specified persons may acquire the stake in eligible infrastructure entities or InvITs from any other person as secondary investment i.e. the specified person is buying stake from a person who had earlier invested in such entity/InvIT. Similarly, AIF or domestic company may invest the funds of specified persons by acquiring stake in eligible infrastructure entities or InvITs from any other person as secondary investment. Income on such investment may not qualify for exemption under the said clause as it is a secondary investment and not a first time investment in infrastructure made between 1st April, 2020 and 31st March, 2024. 4.6.3. In order to remove the difficulties, it is hereby clarified that the following transfers of capital asset, bet .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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..... the return of income under sub-section (1) of section 139 of the Act. 4.7.3. Concerns have been raised that the specified person may have large scale global operations out of which the investments made in India may constitute a significantly lower proportion. In such scenarios, it would be difficult for the specified person to get accounts audited for their entire global operations for the purposes of making investment in India. 4.7.4. In order to remove the above mentioned difficulty, it is hereby clarified that where the specified person maintains (i) separate account with respect to the Indian investments and foreign investments and (ii) a segmented account of income and expenditure in respect of eligible investment which qualifies for exemption under clause (23FE) of section 10 of the Act, then the certificate of the accountant, as mentioned in paragraph 4.7.1 and 4.7.2 above, shall be based on audit of the books of account pertaining to the investments made in India only ( both eligible and non-eligible investments) and not the global operations of such specified person. 4.8. Quarterly statement of investments 4.8.1. Clause (v) of the rule 2DB of the rules provides that the Pe .....

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Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 - Income Tax

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