Taxation of interest income from venture capital fund

This query is : Open

Forum Sonpal (Querist)
Follow

09 April 2014 Interest income from investments in Venture Capital Funds (VCF) The Finance Act, 2012 has amended section 10(23FB) & section 115U of the Income-tax Act, 1961 as a result of which from the FY 2012-13 onwards the VCF (Fund) is eligible for pass through under section 10(23FB) of the Act in respect of any income derived from venture capital investment and the income of the Fund will be chargeable to tax in the hands of its beneficiaries/investors in accordance with the provisions of section 115U of the Act. Let us take the example of a VCF which invests in real estate projects in the form of Non Convertible Debentures (NCD) and for a financial year earns accrued interest of Rs.10,000 for the investor and incurs expenses to the tune of Rs. 2,000 to earn such interest income for the investor. The Fund will obviously distribute only Rs. 8,000 to the investor as and when it receives the interest income. The queries in this regard are follows:- 1. How interest income is taxed in the hands of the investor ? whether on gross basis (ie. Rs.10,000) or net basis after expenses (ie. Rs.10,000 less Rs. 2,000 = Rs.8,000) ? Sec 115U does not make any specific reference to deductibility of expenses. Alternatively can the investor who declares such interest income as ?Income from other sources? in his tax returns claim such expenses as deduction u/s 57 of the Income Tax Act. In the above context it should be noted that the VCF gives annually a statement in prescribed form to the investors, which provides details of proportionate share of interest income due to each investor (Rs.10,000) and also the proportionate share of expenses incurred by the fund to earn the interest income (Rs.2,000). The VCF also files annually Form 64 with the Income Tax authorities in which they only declare the gross income (Rs.10,000 in this example) against the investors PAN number and do not show the expenses. 2. Sec 115U states that the income shall be taxed in the hands of the investor on an accrual basis in each financial year whether or not such income has been paid or credited to their account ? so what happens if the investor has offered the income for tax on accrual basis and a part of this income is not received by him in the later years?