Section 115U — Tax on Income from Venture Capital (VCC and VCF)

CHAPTER XII-F — SPECIAL PROVISIONS RELATING TO TAX ON INCOME RECEIVED FROM VENTURE CAPITAL COMPANIES AND VENTURE CAPITAL FUNDS

Section 115U — Tax on income in certain cases

Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise

Provision: The sole section of Chapter XII-F. It accords a statutory “pass-through” (tax-transparency) to income that a person derives from investments routed through a venture capital company (VCC) or venture capital fund (VCF): the income is taxed in the investor's hands as though he had invested directly in the venture capital undertaking (VCU).

Origin: Inserted by the Finance Act, 2000, with effect from 1 April 2001, and re-cast by the Finance Act, 2007 and the Finance Act, 2012 to align the chapter with the venture-capital exemption in section 10(23FB).

Present status under FA 2026: Retained on the statute book but, for current funds, superseded. By its own sub-section (6) the chapter does not apply, from assessment year 2016-17 onwards, to income from a fund that is an “investment fund” under section 115UB. The Finance Act, 2026 makes no amendment to section 115U. The live pass-through regime for SEBI-registered Category I and II Alternative Investment Funds is section 115UB (Chapter XII-FB).

Reading note: Section 115U works only in tandem with the exemption in section 10(23FB). The body of authority is correspondingly built around that linkage — (i) whether a SEBI-registered VCF keeps its section 10(23FB) exemption (and hence the section 115U pass-through), and (ii) the trust-law question of when a pooled fund is a determinate “conduit” at all. Each authority below states candidly the precise leg of the section it bears on.

A. SECTION COMMENTARY

A.1 What Chapter XII-F does — a single-section pass-through for venture capital

Chapter XII-F contains one section. Section 115U is the income-tax counterpart of a deliberate policy choice: to channel risk capital into start-ups and unlisted growth companies, the Act treats the pooling vehicle — the venture capital company or venture capital fund — as fiscally transparent. Income that the vehicle earns from a venture capital undertaking is not taxed at the vehicle level (it is exempt under section 10(23FB)); instead, it is taxed in the hands of the investor who put money into the vehicle, in the same manner, character and proportion as if that investor had himself invested directly in the underlying VCU. The slogan for the scheme is “one level of tax, in the investor's hands, with the fund as a transparent conduit.”

The design is the mirror-image of the distribution-tax model used for companies (dividend-distribution tax, Chapter XII-D) and mutual funds (income-distribution tax, Chapter XII-E). There, a single tax was collected at the entity gate and the income flowed out exempt. Here, the opposite technique is used — nothing is collected at the fund gate, and the whole charge is shifted to the investor. Sub-section (4) makes the contrast explicit by switching off Chapters XII-D and XII-E (and the TDS machinery of Chapter XVII-B) for income paid by a VCC/VCF, so that the two models never overlap.

A.2 The mechanics of section 115U — sub-section by sub-section

Sub-section (1) is the charging-cum-transparency rule: notwithstanding anything else in the Act, income “accruing or arising to or received by a person out of investments made in” a VCC or VCF is chargeable “in the same manner as if” the person had invested directly in the VCU. The non obstante clause overrides the ordinary rules of entity-level taxation; the “as if direct investment” fiction is the heart of the pass-through.

Sub-section (2) is the reporting machinery: the person responsible for crediting or paying the income, and the VCC/VCF, must furnish a statement (in the prescribed form — Form No. 64, under Rule 12C) to the investor and to the prescribed income-tax authority, giving the nature of the income paid or credited during the year. This is the document on which the investor builds the Schedule PTI of his return.

Sub-section (3) preserves character and proportion: income paid or credited by the fund is “deemed to be of the same nature and in the same proportion” in the investor's hands as it had been in the fund's hands. Long-term capital gain remains long-term capital gain; dividend remains dividend; interest remains interest. The fund is a pane of clear glass, not a prism — it transmits the income's colour unchanged.

Sub-section (4) prevents double taxation and over-deduction: Chapter XII-D (DDT), Chapter XII-E (mutual-fund IDT) and Chapter XVII-B (TDS) do not apply to income paid by a VCC/VCF under this Chapter. Because the investor bears tax on the pass-through income directly, neither a distribution tax at the fund level nor withholding on the payment is appropriate.

Sub-section (5) is the anti-deferral rule: income earned by the fund from a VCU but not paid or credited to the investor is nonetheless “deemed to have been credited” to the investor on the last day of the previous year, in his proportionate share. The transparency is therefore complete — the investor cannot escape or defer tax by leaving the income to accumulate in the fund.

Sub-section (6) is the sunset/boundary rule: nothing in the chapter applies, from assessment year 2016-17 onwards, to income from a fund that is an “investment fund” under section 115UB. The two Explanations complete the section — Explanation 1 borrows the definitions of VCC, VCF and VCU from section 10(23FB); Explanation 2 removes doubt by providing that income once taxed on accrual is not taxed again when actually paid out.

A.3 The two-leg architecture — section 10(23FB) and section 115U read together

Section 115U cannot be read in isolation; it is one leg of a two-leg structure. Section 10(23FB) exempts the income of a SEBI-registered VCC/VCF from investment in a VCU; section 115U then taxes the same income in the investor's hands. Remove either leg and the scheme collapses: without the section 10(23FB) exemption the income would be taxed twice (once in the fund, once in the investor); without section 115U it might escape tax altogether. The courts have repeatedly described the “conjoint reading” of the two provisions as revealing “the intention of the legislature to accord a pass-through status to SEBI-registered VCFs” (the formulation adopted by the Mumbai Tribunal in the HDFC Property Fund and allied rulings catalogued in Cluster C-1).

This linkage explains why so much of the litigation is fought on the section 10(23FB) front rather than on section 115U directly. If the Revenue can deny the fund its section 10(23FB) exemption — by alleging a breach of the SEBI (Venture Capital Funds) Regulations, 1996 — the income falls to be taxed at the fund level and the pass-through is defeated. The reported decisions are, in substance, a defence of the first leg so that the second can operate.

A.4 Character and proportion preserved — the significance of sub-section (3)

Sub-section (3) is the provision that gives the pass-through its commercial value. Venture-capital income is overwhelmingly capital gain on the eventual exit from a portfolio company. If that gain were re-characterised as the fund's business income or as a residuary receipt on its way to the investor, the favourable capital-gains rates and exemptions would be lost. By deeming the income to retain “the same nature and … the same proportion” in the investor's hands, sub-section (3) ensures that the investor is taxed exactly as a direct co-investor would have been. The Revenue's recurring attempt — seen in the HDFC Property Fund line — to tax fund receipts of capital gains and dividends under the residuary head is, at bottom, an attack on this character-preservation rule, and has consistently been rejected where the fund qualifies under section 10(23FB).

A.5 No distribution tax, no withholding — sub-section (4)

Sub-section (4) disapplies Chapters XII-D, XII-E and XVII-B to income paid by a VCC/VCF. The point is structural: the venture-capital model taxes the investor, not the vehicle, so a distribution tax at the vehicle (DDT/IDT) would contradict the scheme, and withholding on the payment would be a needless cash-flow burden where the recipient is already directly assessable. The disapplication is, however, confined to income “under this Chapter” — it does not exempt the fund from withholding obligations that arise in other capacities, a distinction the practitioner must keep in view.

A.6 The anti-deferral deeming — sub-section (5)

Sub-section (5) closes the obvious loophole in a pass-through: if income could be left in the fund untaxed until some later distribution, investors could defer tax indefinitely. The sub-section meets this by deeming undistributed VCU income to be credited to each investor on the last day of the previous year in his proportionate share. Coupled with Explanation 2 (no second tax when the income is later actually paid), the result is a clean accrual-based transparency: the investor is taxed once, in the year the fund earns the income, whether or not it is distributed.

A.7 Sunset and migration to section 115UB — sub-section (6) and the AIF regime

The venture-capital regulatory landscape changed in 2012. The SEBI (Alternative Investment Funds) Regulations, 2012 replaced the SEBI (Venture Capital Funds) Regulations, 1996, and funds began registering as Category I and II Alternative Investment Funds (AIFs). The Finance Act, 2015 responded by enacting a new, broader pass-through in section 115UB (Chapter XII-FB) for such “investment funds.” Section 115U(6) draws the boundary between the two regimes: from assessment year 2016-17, the older Chapter XII-F does not apply to a fund that is an “investment fund” under section 115UB. In practical terms, Chapter XII-F now governs only (a) the legacy population of VCFs that were granted SEBI registration before 21 May 2012 and continue under the grandfathering in section 10(23FB), and (b) assessment years up to 2015-16 for the wider VCF population. New money is taxed under section 115UB. The two chapters are designed to be mutually exclusive, so that no fund is caught by both.

A.8 The trust-law substrate — determinacy, and why SEBI registration is the special exception

Most VCFs are constituted as trusts. That brings into play the general scheme for taxing trusts — sections 160 to 164. A determinate (“specific”) trust, whose beneficiaries and shares are known, is a conduit: its income is taxed in the beneficiaries' hands (or in the trustee's hands as their representative). An indeterminate or discretionary trust is taxed at the maximum marginal rate under section 164(1). The pass-through that section 115U confers on a SEBI-registered VCF is, in one sense, a statutory short-cut around this enquiry: a SEBI-registered VCF eligible under section 10(23FB) gets transparency even though, as a pooled fund with changing investors, it might struggle to satisfy the strict determinacy test on the date of the trust deed.

This is precisely the point the Chennai Tribunal made in TVS Investments iFund (Cluster C-2): if every pooled trust were ipso facto a pass-through, “specific exemptions in the form of Section 10(23FB) read with Section 115U … would be rendered nugatory.” A non-SEBI fund must earn its conduit status the hard way — by being a genuinely determinate, irrevocable trust; only a SEBI-registered VCF gets the statutory exception. The Karnataka High Court's decision in India Advantage Fund-VII (also Cluster C-2) shows the determinacy enquiry being resolved in the assessee's favour on ordinary trust-law principles, independently of section 10(23FB): shares are “determinable” if ascertainable from the trust deed at any time, not only as a fixed quantum on the date of execution. Read together, the two decisions map the whole field — SEBI VCFs pass through by statute (sections 10(23FB)/115U); other trusts pass through only if determinate (sections 161/164).

A.9 Reading section 115U in 2026

For the practitioner today, section 115U is relevant in four residual situations: (a) legacy VCFs grandfathered under section 10(23FB) (SEBI registration before 21 May 2012) whose income continues to pass through under this chapter; (b) appellate, reassessment or recovery proceedings touching assessment years up to 2015-16; (c) as the interpretive parent of section 115UB, whose wider AIF pass-through is best understood against the venture-capital model that preceded it; and (d) the recurring section 10(23FB) compliance dispute — whether temporary deployment of idle funds in liquid mutual funds, bank deposits or convertible-debenture application money breaches the VCF Regulations and forfeits the exemption — a controversy the Mumbai Tribunal has decided in the assessee's favour (Cluster C-1). The Finance Act, 2026 leaves the section untouched. There is no Supreme Court decision construing section 115U itself; the chapter's meaning has been worked out at High Court and Tribunal level around the section 10(23FB) linkage and the trust-determinacy substrate, and the authorities below are presented on that candid footing.

B. STATUTORY POSITION (verbatim operative text)

Section 115U, Income-tax Act, 1961 (Chapter XII-F), as it stands on the statute book:

115U. (1) Notwithstanding anything contained in any other provisions of this Act, any income accruing or arising to or received by a person out of investments made in a venture capital company or venture capital fund shall be chargeable to income-tax in the same manner as if it were the income accruing or arising to or received by such person had he made investments directly in the venture capital undertaking.

(2) The person responsible for crediting or making payment of the income on behalf of a venture capital company or a venture capital fund and the venture capital company or venture capital fund shall furnish, within such time as may be prescribed, to the person who is liable to tax in respect of such income and to the prescribed income-tax authority, a statement in the prescribed form and verified in the prescribed manner, giving details of the nature of the income paid or credited during the previous year and such other relevant details as may be prescribed.

(3) The income paid or credited by the venture capital company and the venture capital fund shall be deemed to be of the same nature and in the same proportion in the hands of the person referred to in sub-section (1) as it had been received by, or had accrued or arisen to, the venture capital company or the venture capital fund, as the case may be, during the previous year.

(4) The provisions of Chapter XII-D or Chapter XII-E or Chapter XVII-B shall not apply to the income paid by a venture capital company or venture capital fund under this Chapter.

(5) The income accruing or arising to or received by the venture capital company or venture capital fund, during a previous year, from investments made in venture capital undertaking if not paid or credited to the person referred to in sub-section (1), shall be deemed to have been credited to the account of the said person on the last day of the previous year in the same proportion in which such person would have been entitled to receive the income had it been paid in the previous year.

(6) Nothing contained in this Chapter shall apply in respect of any income, of a previous year relevant to the assessment year beginning on or after the 1st day of April, 2016, accruing or arising to, or received by, a person from investments made in a venture capital company or venture capital fund, being an investment fund specified in clause (a) of the Explanation 1 to section 115UB.

Explanation 1.—For the purposes of this Chapter, “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (23FB) of section 10.

Explanation 2.—For the removal of doubts, it is hereby declared that any income which has been included in total income of the person referred to in sub-section (1) in a previous year, on account of it having accrued or arisen in the said previous year, shall not be included in the total income of such person in the previous year in which such income is actually paid to him by the venture capital company or the venture capital fund.

C. AUTHORITIES

Candour note: there is no reported Supreme Court decision on section 115U, and the section's own charge has rarely been litigated in isolation — because the live battleground is the section 10(23FB) exemption on which the pass-through depends, and the trust-law determinacy question that decides whether a fund is a conduit at all. The authorities below are grouped by the work they do: (C-1) the section 10(23FB)/115U pass-through upheld for SEBI-registered VCFs; (C-2) trust determinacy and beneficiary-level taxation — the conduit principle, including the contrasting case where pass-through was denied; (C-3) foundational and cognate principles relied on; and (C-4) the administrative and forward-looking context. Each entry states its precise relationship to section 115U; tribunal-level and interim orders are flagged as such.

Cluster C-1 : The section 10(23FB)/115U pass-through upheld — SEBI-registered VCFs

HDFC Property Fund v. ITO (ITAT Mumbai, order dated 28 February 2019, AY 2013-14).

Facts: A trust established under the Indian Trusts Act, 1882, settled by Housing Development Finance Corporation Ltd. and registered with SEBI as a venture capital fund under the SEBI (Venture Capital Funds) Regulations, 1996. It earned income from investments in VCUs and claimed exemption under section 10(23FB) (and section 10(35) for mutual-fund dividends). The Assessing Officer denied the exemption, alleging that temporary investments in units of mutual funds and in optionally-convertible-debenture application money breached the trust deed and the VCF Regulations, and taxed the capital gains and dividends under the residuary head at the fund level.

Held: The Tribunal upheld the pass-through and the section 10(23FB) exemption. (i) The fund satisfied the conditions of section 10(23FB) — it operated under a registered trust deed and held a subsisting SEBI certificate of registration. (ii) The trust deed expressly permitted “temporary investments,” which included money-market instruments and units of liquid funds; SEBI's informal guidance also permitted a VCF to park idle funds in liquid mutual funds, and industry practice confirmed it. (iii) Debenture application money towards optionally convertible debentures was an equity-linked investment, and in any event within the 33.33% debt limit permitted by regulation 12 of the VCF Regulations where equity had also been invested in the same VCU. The temporary deployment therefore did not breach the Regulations, and the exemption — and the section 115U pass-through to investors — stood.

Application to s.115U: A direct application of the two-leg architecture (A.3). The Tribunal expressly held that a conjoint reading of sections 10(23FB) and 115U evidences the legislature's intention to accord pass-through status to SEBI-registered VCFs — income exempt at the fund, taxable in the investors' hands. It is also a direct vindication of the character-preservation rule of sub-section (3), the Revenue's attempt to tax fund-level capital gains and dividends under the residuary head having been rejected.

Status: ITAT Mumbai; appeal allowed in favour of the assessee. Tribunal-level merits decision on section 10(23FB) read with section 115U. (The assessee name and order date — “M/s HDFC Property Fund v. ITO”, 28 February 2019 — are as stated in the reported professional commentary; the bench's internal appeal number is not given in those sources.)

Business Excellence Trust v. DCIT, ITA No. 2879/Mum./2023 & C.O. No. 15/Mum./2024 (ITAT Mumbai “B” Bench, order pronounced 26 July 2024, AY 2018-19).

Facts: A trust settled by trust deed dated 12 May 2006 and registered with SEBI as a venture capital fund (certificate of registration granted 10 October 2008). It invested in an unlisted venture capital undertaking (M/s Dixon Technologies Ltd.) and, on exit (sale of 11,55,730 shares between September and November 2017), earned long-term capital gain of Rs. 247.67 crore. It claimed the LTCG as exempt under section 10(23FB). The Assessing Officer and the CIT(A) rejected the section 10(23FB) claim; the CIT(A) instead allowed the LTCG as exempt under section 10(38). The Revenue appealed, contending inter alia (grounds 6–7) that, the assessee being a VCF, the income was a pass-through and exemption could be claimed only by the investors under section 115U, not by the fund itself.

Held: Revenue's appeal partly allowed. On the pass-through grounds the Tribunal stated the linkage in terms: a venture capital fund “will acquire the character of ‘Pass through entity’, only if it is granted exemption in terms of sec. 10(23FB)”; where that exemption is granted, the income “is liable to be assessed in the hands of investors in terms of sec.115U.” But because the fund's section 10(23FB) claim had been rejected (and that rejection was not further challenged), its status as a pass-through entity had not been accepted for that year, so the question of applying section 115U did not arise. The trust, being a “person” under the Act, remained entitled to claim exemption of the LTCG under section 10(38) in its own hands, which the Tribunal upheld.

Application to s.115U: The most recent and most explicit judicial statement of the conditional, reciprocal relationship between section 10(23FB) and section 115U (commentary A.3) — pass-through under section 115U operates only if the fund is exempt under section 10(23FB), and vice versa. It also illustrates the negative case: where the section 10(23FB) exemption is denied, section 115U does not engage and the fund is assessed in its own right. (The CIT(A) below had relied on Aditya Birla Real Estate Fund, ITA No. 7504/Mum./2019, order dated 13 August 2021.)

Status: ITAT Mumbai “B” Bench (Justice (Retd.) C.V. Bhadang, President, and B.R. Baskaran, AM); Revenue's appeal partly allowed, assessee's cross-objection dismissed. Merits decision turning on sections 10(23FB), 10(38) and 115U. Verified against the full text of the Tribunal order.

ITO-23(1)(4), Mumbai v. DHFL Venture Capital Fund (ITAT Mumbai; ITA No. 4099/Mum./2015 and the further order dated 26 June 2019).

Facts: A SEBI-registered venture capital fund (PAN AAATD8633L) settled with DHFL as settlor/trustee, whose section 10(23FB) exemption was challenged on the footing that it had invested more than the permitted proportion of investor commitments, allegedly in breach of the VCF Regulations; the Assessing Officer had also sought to assess it as an association of persons under section 161.

Held: Exemption under section 10(23FB) was allowed. Construing the SEBI (Venture Capital Funds) Regulations, 1996, the Tribunal held that “corpus” means the amount actually committed by the investors, and that the fund had not invested more than the regulatory ceiling (25 per cent) of that committed amount; there was accordingly no breach of the Regulations, and the exemption — with the consequent section 115U pass-through to investors — was upheld.

Application to s.115U: A companion to HDFC Property Fund on the first leg of the architecture. It shows the Tribunal construing the VCF Regulations purposively (defining “corpus” by reference to committed capital) so as to preserve the section 10(23FB) exemption and the section 115U transparency, rather than allowing a technical regulatory argument to collapse the pass-through.

Status: ITAT Mumbai; merits decision in favour of the assessee on section 10(23FB). The matter generated more than one order (ITA No. 4099/Mum./2015, order dated 30 June 2017, AY 2011-12; and the further order of 26 June 2019); holdings stated as reported.

Venture Capital Fund v. ITO (ITAT Mumbai, ITA No. 7472/Mum./2017; reported November 2019).

Facts: A trust registered as a SEBI VCF that, pending deployment in target VCUs, had temporarily parked funds in units of mutual funds and bank fixed deposits and had invested in convertible-debenture application money. The Assessing Officer and CIT(A) denied exemption under sections 10(23FB) and 10(35), treating the temporary deployment as a violation of the trust deed and the VCF Regulations.

Held: Exemption under section 10(23FB) was allowed. The Tribunal held that the trust deed and the VCF Regulations permitted temporary deployment of uninvested funds in liquid mutual funds and bank deposits (citing SEBI's informal guidance), that the SEBI certificate of registration continued to subsist and SEBI had taken no adverse action, and that convertible-debenture application money was linked to equity investment. Reliance was placed on the Supreme Court's decision in Gestetner Duplicators (P) Ltd. v. CIT for the proposition that a registration subsists until withdrawn by the competent authority.

Application to s.115U: Reinforces the Cluster C-1 line. The Tribunal again read sections 10(23FB) and 115U conjointly to confirm pass-through status, and recorded the alternative pass-through argument — that, the investors having already returned the income on a pass-through basis, the same income could not be taxed again in the fund's hands.

Status: ITAT Mumbai; merits decision in favour of the assessee on section 10(23FB). The publicly reported source identifies the matter by appeal number (ITA No. 7472/Mum./2017) without naming the assessee; cited on that candid basis.

Cluster C-2 : Trust determinacy and beneficiary-level taxation — the conduit principle

CIT v. India Advantage Fund-VII, [2017] 78 taxmann.com 301 (Karnataka High Court, judgment dated 1 February 2017).

Facts: A fund settled by ICICI Venture Funds Management Co. Ltd. as a trust (trustee: The Western India Trustee & Executor Co. Ltd.), in which the contributors were also the beneficiaries, their shares being fixed by a pre-determined formula in the trust deed. The Revenue sought to assess the trust as an association of persons at the maximum marginal rate under section 164(1), arguing that the beneficiaries' shares were indeterminate on the date the trust deed was executed.

Held: Dismissing the Revenue's appeal and affirming the Tribunal: (i) the Explanation to section 164 cannot be read to require the shares of the beneficiaries to be ascertained, as a fixed quantum, on the date the trust deed is executed; the real test is whether the shares are determinable — at the time of, or after, the formation of the trust. (ii) Where beneficiaries share the benefit in proportion to their investment, “any person with reasonable prudence” would conclude that the shares are determinable; the trust is therefore outside section 164(1). (iii) Once the shares are determinable, the income is taxable in the hands of the beneficiaries and not in the hands of the trustees.

Application to s.115U: The leading High Court statement of the conduit principle that underlies the entire venture-capital pass-through. While decided on sections 161/164 rather than section 115U, it establishes — for a fund managed by a venture-capital manager — that a determinate pooled trust is taxed in the investors' hands, which is precisely the result section 115U secures by statute for SEBI-registered VCFs. It is the doctrinal anchor for treating a venture fund as transparent.

Status: Karnataka High Court; Revenue's appeal dismissed. Binding High Court authority on trust determinacy (sections 161/164); affirms the ITAT Bangalore decision noted next.

DCIT v. India Advantage Fund-VII (ITAT Bangalore, order dated 17 October 2014).

Facts: The Tribunal decision affirmed by the Karnataka High Court above. The trust was constituted by an instrument dated 25 September 2006; the trust deed provided that the contributors to the fund would be its beneficiaries, with their shares capable of determination by a formula prescribed in the deed, the trustee having no discretion to alter the contributors' shares.

Held: (i) A private trust may be fixed or discretionary; a fixed trust is one in which the beneficiaries have a current fixed entitlement to the income remaining after proper exercise of the trustee's powers. (ii) For a trust to be determinate it suffices that the trust deed lays down that the beneficiaries are those who have made (or agreed to make) contributions and that their shares are capable of being determined from the deed; the shares need not be a fixed quantum stated on the date of execution. (iii) A determinate trust is a “pass-through” conduit; the Revenue may tax the income either in the beneficiary's hands or in the trustee's hands as representative assessee, but not the trust as an AOP at the maximum marginal rate. The revocable-trust character (sections 61–63) reinforced the beneficiary-level taxation.

Application to s.115U: Described by commentators as a comprehensive, landmark ruling on the tax transparency of pooled funds. It is the Tribunal foundation of the conduit principle (A.8): it explains why a venture fund's income is the investors' income — the very premise section 115U codifies for SEBI VCFs and section 115UB now extends to AIFs.

Status: ITAT Bangalore; Revenue's appeal dismissed. Tribunal-level merits decision on sections 61–63/161/164, affirmed by the Karnataka High Court.

TVS Investments iFund v. ITO, [2017] 81 taxmann.com 296 (ITAT Chennai) — contrast: pass-through denied to a non-SEBI trust.

Facts: A fund (TVS Investments iFund) mobilised contributions from 656 high-net-worth individuals but was not itself registered with SEBI as a VCF; a separate vehicle (TVS Shriram Growth Fund) was the SEBI-registered VCF. The names of the beneficiaries were not set out in the trust deed, nor were their individual shares ascertainable on the date the deed was instituted. The fund, as representative assessee, claimed that interest income on bank deposits should pass through to its contributors.

Held: Pass-through was denied. (i) Only the income of a SEBI-registered VCF is exempt under section 10(23FB); there is no such exemption for other Alternative Investment Funds, whose taxation depends on their legal form. (ii) A trust is taxed under sections 161/164; to be a determinate (pass-through) trust the beneficiaries must be named in the deed and their shares ascertainable on the date of the deed. (iii) On the facts the beneficiaries were neither named nor ascertainable at inception, so the fund was an indeterminate trust taxable at the maximum marginal rate under section 164(1). (iv) Crucially, the only exception extending pass-through to an indeterminate trust is for SEBI-registered VCFs eligible under section 10(23FB) read with section 115U; were every trust ipso facto a pass-through, “specific exemptions in the form of Section 10(23FB) read with Section 115U … would be rendered nugatory.” The fund, not being a SEBI VCF, could not claim that exception.

Application to s.115U: The decision that most sharply locates section 115U in the trust-taxation map (A.8). It holds, in terms, that section 10(23FB)/115U is a special statutory exception for SEBI VCFs, without which a pooled trust must satisfy the ordinary determinacy test to pass through. (Note: its strict ‘ascertainable on the date of the deed’ view of determinacy sits in tension with the Karnataka High Court in India Advantage Fund-VII, which was not cited; for SEBI VCFs the tension is immaterial because the statutory exception applies regardless.)

Status: ITAT Chennai; merits decision on sections 161/164 read with sections 10(23FB)/115U. Cited as the leading contrast authority delineating the boundary of the pass-through.

Cluster C-3 : Foundational and cognate principles relied on

Gestetner Duplicators (P) Ltd. v. CIT, [1979] 117 ITR 1 (Supreme Court).

Principle: A registration, recognition or certificate granted by the competent authority continues to subsist, and the assessee continues to enjoy the benefits flowing from it, until it is duly withdrawn or cancelled by that authority; a tax officer cannot, collaterally, treat the recognition as non-existent.

Application to s.115U: The doctrinal support drawn on in the Cluster C-1 line (notably ITA No. 7472/Mum./2017) to hold that, so long as the SEBI certificate of registration as a VCF subsists and SEBI has taken no adverse action, the Assessing Officer cannot deny the section 10(23FB) exemption by alleging a regulatory breach. It protects the first leg of the pass-through. Cited on principle.

Status: Supreme Court. A foundational authority of general application; not itself a venture-capital or section 115U decision.

CIT v. Kamalini Khatau, [1994] 209 ITR 101 (Supreme Court).

Principle: Under the representative-assessee scheme, where a trust's income is dealt with by the trustees, the Revenue has the option to assess and recover the tax either from the trustees in their representative capacity or directly from the beneficiary who receives the income; the two are concurrent, not mutually exclusive, modes of assessing the same income.

Application to s.115U: Cognate support for the conduit analysis at the heart of the venture-capital pass-through (A.8): the income of a transparent fund is the beneficiary/investor's income, assessable in his hands. It explains the ‘either the beneficiary or the trustee as representative assessee’ formulation adopted in the India Advantage Fund decisions. Cited on principle, as background trust-taxation law rather than as a section 115U authority.

Status: Supreme Court. General authority on the taxation of trust income; not a section 115U or section 10(23FB) decision.

Cluster C-4 : Administrative and forward-looking context

The following are not contentious authorities on section 115U but complete the practitioner's picture and are catalogued as context, clearly labelled.

Reporting framework — Form No. 64 / Rule 12C and Schedule PTI.

Note: Sub-section (2) is operationalised through Form No. 64 (the statement of income paid or credited by a VCC/VCF), prescribed under Rule 12C of the Income-tax Rules, 1962, and through the “Schedule PTI” (Pass Through Income) in the return of income, in which an investor reports income passed through under sections 115U, 115UA and 115UB. These are the compliance instruments by which the pass-through is given effect in practice. Cited as administrative context, not as adjudicated authority.

Migration to the AIF pass-through — section 115UB (Chapter XII-FB).

Note: Following the SEBI (Alternative Investment Funds) Regulations, 2012 and the Finance Act, 2015, the wider pass-through for Category I and II AIFs is contained in section 115UB. By section 115U(6), Chapter XII-F does not apply, from AY 2016-17, to income from a fund that is an “investment fund” under section 115UB. The two chapters are mutually exclusive; for funds and years outside the grandfathered VCF population, the governing provision is section 115UB. Noted to fix the temporal boundary of section 115U.

Caution — ICICI Econet Internet & Technology Fund v. Commissioner of Central Tax (CESTAT Bangalore, 1 July 2021): a service-tax, not income-tax, decision.

Note: This widely-cited decision — holding a venture capital fund liable to service tax on expenditure incurred in administering the fund and on “carried interest” — arises under the service-tax law, not under section 115U or the Income-tax Act. It is flagged here only to prevent its mis-citation as an income-tax pass-through authority. It has no bearing on the section 10(23FB)/115U income-tax analysis and is not relied on as authority on section 115U.

Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced verbatim from the Income-tax Act, 1961. Citations stated as reported; tribunal and stay-stage orders are flagged as such. This material is for professional reference and is not legal advice.