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

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

The Finance Act, 2020, inter-alia, inserted clause (23FE) in section 10 of the Income-tax Act, 1961 to provide for exemption to wholly owned subsidiaries of Abu Dhabi Investment Authority (ADIA), sovereign wealth funds (SWF) and pension funds (PF) [these are referred as “specified person” hereinafter] on their income in the nature of dividend, interest and long-term capital gains arising from investment made in infrastructure in India, during the period beginning with 01.04.2020 and ending on 31.03.2024 subject to fulfilment of certain conditions.

The method for computation of eligible threshold of 50 per cent, 75 per cent or 90 per cent and exempt income under clause (23FE) of section 10 of the Act has been prescribed in rule 2DCA of the Income Tax Rules (the Rules) vide Notification No 50 of 2022 dated 6th May, 2022.

Now, CBDT has issued Circular No. 9 of 2022 dated 9th May 2022 issuing guidelines on the following aspects:

(A) Transfer of investment within 3 years by the specified person or AIF/ domestic Company/NBFC

(B) Eligible infrastructure entity carrying on other businesses as well

In this context, it is hereby clarified that any capital gain accruing or arising on transfer of such investments (which have been transferred in violation of the three years’’ rule) will be treated as follows:

(a) Investment by the specified person in eligible infrastructure entity or InvIT or AIF or domestic company or NBFC : such capital gain will not be exempt from tax under clause (23FE) of section 10 of the Act in the hands of the specified person.

(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 : Since AIF is a pass through entity, such capital gain will be taxable in the hands of the specified person and since three years’ rule has not been complied with, the income shall not be exempt from tax under clause (23FE) of section 10 of the Act in the hands of the specified person.

(c) Investment by the domestic company, out of the investment made by the specified person directly or through AIF, in eligible infrastructure entity: the income, attributable to such capital gains, shall be taxable in the hands of the specified person and since three years’ rule has not been complied with, such income shall not be exempt from tax under clause (23FE) of section 10 of the Act in the hands of the specified person

(d) Lending by NBFC, out of the investment made by the specified person directly or through AIF, to eligible infrastructure entity: the income, attributable to such capital gain or other income of the NBFC, shall be taxable in the hands of the specified person and since three years’ rule has not been complied with, such income shall not be exempt from tax under clause (23FE) of section 10 of the Act in the hands of the specified person

The guidelines have been explained with the help of examples also.

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