Accumulated Non-Business Losses of Category II AIF

Accumulated Non-Business Losses of Category II AIF as on 31-3-2019 Are Eligible for Carry Forward and Set Off by Unit Holders

Issue

Whether non-business losses accumulated at the level of a Category II Alternative Investment Fund (AIF) as on 31-3-2019 can be passed through, carried forward, and set off by unit holders against their capital gains in subsequent assessment years pursuant to the amendment made by Finance (No. 2) Act, 2019 to Section 115UB.

Facts

Unit Holder Profile: The assessee-firm was a unit holder in ‘IIFL Special Opportunities Fund (CAT II)’, a Category II Alternative Investment Fund (AIF).
Loss Attribution: The investment fund attributed a pass-through short-term capital loss of ~Rs. 19.88 lakhs pertaining to AY 2018-19 to the assessee on a pro rata basis.
Claim for Set-Off: In its return of income for AY 2020-21, the assessee claimed a set-off of this accumulated short-term capital loss.
AO’s Action: The Assessing Officer (AO) reclassified the loss as business income, enhanced the assessee’s income by ~Rs. 19.88 lakhs, and disallowed the set-off claim.
CIT(A) Decision: The CIT(A) upheld the AO’s action and held the assessee ineligible to carry forward the said loss.

Decision

Applicability of Statutory Amendment: Pursuant to the amendment introduced to Section 115UB by the Finance (No. 2) Act, 2019, non-business losses accumulated at the level of an investment fund as on 31-3-2019 are deemed to be losses of the unit holder who held units on that date.
Eligibility for Set-Off: Such deemed losses are fully eligible to be carried forward and set off by the unit holder in accordance with the provisions of Chapter VI.
Relief Granted: The assessee was held eligible to carry forward and set off the pro rata short-term capital loss attributed by the Category II AIF. (In favour of assessee)

Key Takeaways

Deemed Loss Principle: Non-business losses (e.g., short-term capital losses) accumulated in a Category I or II AIF up to March 31, 2019, pass through directly to the unit holders holding units on that date.
Retrospective Relief Mechanism: The Finance (No. 2) Act, 2019 amendment protects unit holders from losing tax benefits on accumulated AIF non-business losses incurred prior to April 1, 2019.
Classification Rights: Revenue cannot arbitrarily recharacterize capital losses attributed by an AIF as business income to deny legitimate set-off claims under Section 115UB.

IN THE ITAT MUMBAI BENCH ‘C’

Italcoats

Income-tax Officer

NARENDER KUMAR CHOUDHRY, Judicial Member
and ARUN KHODPIA, Accountant Member

ITAppeal No. 1325 (Mum) OF 2026
[Assessment year 2020-21]

SEPTEMBER 18, 2026

Rajesh Shah for the Appellant. Ajay Soneji, Sr. DR for the Respondent.

ORDER

Arun Khodpia, Accountant Member. – The present appeal is preferred by the assessee against the order of Ld. Commissioner of Income Tax Appeals Addl/ JCIT (A) – 3, Bengaluru [in short, “Ld. CIT(A)”] dated 13^th January, 2026, arises against the order under section 154 r.w.s 143(1) of the Income Tax Act, 1961 [in short, “the Act”] dated 06.09.2024, wherein the assessee has sought certain rectification. However, as per order u/s 154 of the Act, the adjustments sought by the assessee does not constitute a mistake apparent from record.

2. The assessee preferred an appeal before the Ld. CIT(A), raised certain grounds before the him and stated that the Ld. Assessing Officer (in short, “the Ld. AO”) has wrongly enhanced the income of the assessee by making an addition in respect of business income of Rs.19,88,036/- as against Nil business income. The assessee had declared a loss of Rs.19,88,036/- from pass-through Short-Term Capital Loss, however the wrong adjustment has been made and loss has been converted into profit without any reason.

3. The Ld. AO has wrongly considered the Short-Term Capital Loss, by treating it to be Income from business and profession and did not allow the same. The Ld. CIT(A) has decided the issue based on facts on record and finally decided that the adjustment has only been made with respect to disallowance of Short-Term Capital Loss of Rs.19,88,037/-. Therefore, the same would only impact the computation under the head capital gain in the hands of assessee and not the business income. The Ld. AO was, thereby directed to recompute the capital gain of the assessee for the year under consideration after disallowing Short-Term Capital Loss of Rs.19,88,037/- by holding that the assessee is not eligible to carry forward original Short-Term Loss on investment fund pertaining to assessment year 2018-19 to be set off in assessment year 2020-21. Therefore, the addition of Rs.19,88,036/- on account of disallowance of Short-Term Capital Loss arising out of investment fund is thereby upheld and the appeal filed by the assessee on this ground is dismissed.

4. Being aggrieved with the order of Ld. CIT(A), assessee preferred an appeal before the Tribunal.

5. The sole issue before us is that after Amendment brought in Finance (No.2) Act, 2019 in section 115UB, whether the set off of carry forward losses as on 31^st March, 2019 shall be allowed to be carried forward to the individual assessees or to be carried forward by the investment fund.

6. Before proceeding further, first we shall be going through the amended provisions of section 115UB which reads as under:

“115UB. (1) Notwithstanding anything contained in any other provisions of this Act and subject to the provisions of this Chapter, any income accruing or arising to, or received by, a person, being a unit holder of an investment fund, out of investments made in the investment 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 the investments made by the investment fund been made directly by him.

(2) Where in any previous year, the net result of computation of total income of the investment fund [without giving effect to the provisions of clause (23FBA) of section 10] is a loss under any head of income and such loss cannot be or is not wholly setoff against income under any other head of income of the said previous year, then,—

(i)

such loss shall be allowed to be carried forward and it shall be set-off by the investment fund in accordance with the provisions of Chapter VI; and

(ii)

such loss shall be ignored for the purposes of sub-section (1).

(3) The income paid or credited by the investment fund shall be deemed to be of the same nature and in the same proportion in the hands of the person referred to in subsection (1), as if it had been received by, or had accrued or arisen to, the investment fund during the previous year subject to the provisions of sub-section (2).

(4) The total income of the investment fund shall be charged to tax—

(i)

at the rate or rates as specified in the Finance Act of the relevant year, where such fund is a company or a firm; or

(ii)

at maximum marginal rate in any other case.

(5) The provisions of Chapter XII-D or Chapter XII-E shall not apply to the income paid by an investment fund under this Chapter.

(6) The income accruing or arising to, or received by, the investment fund, during a previous year, if not paid or credited to the person referred to in sub-section (1), shall subject to the provisions of sub-section (2), 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.

(7) The person responsible for crediting or making payment of the income on behalf of an investment fund and the investment 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 such 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.

Explanation 1.—For the purposes of this Chapter,—

(a)

“investment fund” means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(b)

“trust” means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force;

(c)

“unit” means beneficial interest of an investor in the investment fund or a scheme of the investment fund and shall include shares or partnership interests.

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 investment fund. “

6.1 The aforesaid provisions, which have been discussed by the Ld. CIT(A) in his order in paras 5.1.9 to 5.1.20 are extracted as under:

“5.1.9 . In the instant case the Appellant has claimed set off of short term capital loss of Rs.19,88,036/- pertaining to A.Y 2018-19. This implies that to the extent the short term amounting to Ra 19,88,038/- pertaining to A.Y 2018-19, the units were held for held for less than 12 months because of which the short term capital loss arose. The provisions of section 115UB(2)(ii) specifies that only such capital loss shall be allowed wherein units are held for atleast 12 months thereby making only long term capital loss eligible to be passed on to the unit holders.

5.1.10. Section 115UB creates a restricted pass-through regime for income and losses of an investment fund to its unit holders. The provision does not permit unconditional transfer of all losses; rather, it specifically carves out categories of losses that are to be ignored.

5.1.11. Post amendment by the Finance Act, 2019, section 115UB(2) draws a clear distinction between:

•

business losses; and

•

losses under other heads (including capital gains).

5.1.12. As per amended section 115UB(2)(ii) “the loss other than the loss referred to in clause (i), if any, shall also be ignored for the purposes of sub-section (1), If such loss has arisen in respect of a unit which has not been held by the unit holder for a period of at least twelve months. Thus, capital losses (other than business loss) are not eligible for pass-through unless the unit is held for at least 12 months. This condition is mandatory and goes to the root of eligibility.

5.1.13. A short-term capital loss, by definition, arises only when the capital asset (unit) is held for less than the prescribed long-term period which is of 12 months. In the context of section 115UB(2) (II) of the Act, short-term capital loss Inherently establishes that the unit was held for less than 12 months. Therefore, such loss squarely falls within the exclusion clause of the said section. The statute expressly mandates that such loss “shall be ignored” for pass-through purposes. Hence, short-term capital loss is statutorily barred from being passed on to unit holders.

5.1.14. The Appellant appears to rely indirectly on section 115UB(2A), which allows certain accumulated losses as on 31.03.2019 to be deemed as losses of unit holders. However, Section 115UB(2A) applies only to losses accumulated at the level of the investment fund. It does not override the specific exclusion under section 115UB(2)(ii). The carry-forward under section 115UB(2A) is subject to the nature of loss and holding conditions. Therefore, short-term capital loss remains excluded, even if accumulated prior to 31.03.2019.

5.1.15. The amendment to section 115UB effective from A.Y. 2020-21 does not create a new right to claim losses which were otherwise ineligible. It only clarifies and restricts the pass-through mechanism. Allowing short-term capital loss to be claimed by the unit holder would render section 115UB(2)(ii) of the Act redundant and defeat the clear legislative intent to restrict pass-through only to long-term capital losses for which the holding period of the units are clearly specified in the provision.

5.1.16. The legislative Intent behind amendment to section 115UB of the Act is to prevent short-term trading losses in Investment fund units from being passed through and to allow pass-through only where the investment demonstrates long-term holding and risk participation. This policy objective would be completely frustrated if shortterm capital losses are allowed to be set off at the unit holder level.

5.1.17. Moreover, the short term capital loss which the Appellant is claimed as set off during the year under consideration pertains to A.Y 2018-19. The Appellant seeks to rely on the Finance Act, 2019 amendment (effective A.Y. 2020-21) to claim a past STCL. However, the amendment does not create a vested right to claim short-term losses. It restricts the scope of pass-through. Transitional relief under section 115UB(2A) applies only to eligible non-business losses, subject to the holding-period condition. Therefore, STCL remains excluded even if it relates to A.Y. 2018-19.

5.1.18. Furthermore, allowing STCL of A.Y. 2018-19 to be set off in A.Y. 2020-21 would defeat the express language “shall be ignored”, override the legislative intent explained in the Finance Bill, 2019 and permit precisely what Parliament sought to prevent that is pass-through of short-term trading losses.

5.1.19. Sections 70-74 of the Act pertaining to set-off and carry-forward applies only after a loss is legally eligible to be recognised in the hands of the assessee. In the instant case, Section 115UB(2)(ii) of the Act prevents recognition of short term capital loss Itself, hence, sections 70-74 of the Act never get triggered.

5.1.20. In view of the facts mentioned above, the Appellant is not eligible to carry forward provisional short term loss on investment fund pertaining to A.Y 2018-19 to be set off in A.Y 2020-21. Therefore, the addition of Rs.19,88,036/- on account of disallowance of short term capital loss arising out of Investment Fund is hereby upheld and the appeal filed on this ground is dismissed.”

7. Before us, Ld. Counsel of the assessee discussed provisions of section 115UB(2A) which deals with the losses other than losses under the head profit and gain of business or profession, if any, accumulate at the level of investment fund as on 31^st day of March, 2019. Such losses shall be deemed to be the loss of unit holder, who had held the unit on 31^st day of March, 2019 in respect of investment made by him in the investment fund in the same manner as provided in sub-section (1). Sub-section (2A)(ii) allows the assessee to carry forward for the remaining period from the year in which the loss had occurred for the first time that as the first year and shall be set off in accordance with the provisions of Chapter VI provided that the loss so deemed under this sub-section shall not be available to the investment fund on or after 1^st day of April, 2019.

8. The question arises whether the losses which are passed on by the investment fund to the assessee-firm have ever been claimed as carry forward losses by the said investment fund after 1^st day of April, 2019. Since the section allows the assessee to carry forward the losses accumulated at the level of investment fund as on 31^st day of March, 2019 stating to be deemed losses of the unit holder who held such unit as on 31^st March, 2019, therefore, as per provisions of section 115UB(2A), the assessee would be eligible to carry forward the losses attributed on pro rata basis towards the investment made by the assessee in ‘IIFL Special Opportunities Fund (CAT II)’, as categorically mentioned by the Investment fund in their statement provided to assessee.

9. We, thus, in terms of aforesaid observations, set aside the order of Ld. CIT(A) and direct the Ld. AO to allow carry forward of losses to the assessee in terms of amended provisions of section 115UB of the Act, subject to verification of facts, in terms of aforesaid observation.

10. In result, the appeal of assessee is allowed in above terms.