Pass-through entities can pass on income as well as corresponding expenditure to their investors

Venture Capital Company and Venture Capital Fund (VCF) are given status of pass through vehicles for purpose of treatment of income received on account of investment made in venture capital undertaking. Therefore, assessee, which invests in a VCF, would be entitled to book expenditure incurred by VCF as if same had been incurred directly by assessee.

Facts:

a)    The assessee-company received interest in respect of investment made in SARA fund, a SEBI registered VCF.

b)    It offered interest to tax on net basis after claiming the deduction of its share of expenditure incurred by SARA fund.

c)    Assessing Officer (AO) taxed interest income received by assessee from VCF on gross basis without giving deduction of assessee’s share of expenses incurred by VCF for earning said income.

d)    The contention of the AO was that the said expenses were incurred by VCF and not by assessee.

e)    The Commissioner (Appeals) confirmed the order of the AO. Aggrieved assessee filed the instant appeal before the tribunal.

The tribunal held in favour of assessee as under:

1)    As per section 115U of the Income-tax Act, Venture Capital Company and Venture Capital Fund have been given the status of pass through vehicles for the purpose of treatment of income received on account of investment made in the venture capital undertaking.

2)    Therefore, income received from VCF was taxable in the hands of assessee, as if the investment was directly made by it in the venture capital undertaking.

3)    Hence, assessee was entitled to book expenditure incurred by VCF, as if same had been directly incurred by assessee - [2016] 68 taxmann.com 98 (Delhi - Trib.)