Sec. 10(23FE) exemption is available only if source of investment in India is not from any borrowings: CBDT

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Income Tax Act Sec. 10(23FE) Exemption

Circular No. 19/2021, dated 26-10-2021

Section 10(23FE) provides an exemption to sovereign wealth funds and pension funds (specified fund) on their income like dividend, interest, and long-term capital gains arising from investment in infrastructure in India made between 01.04.2020 and 31.03.2024 subject to fulfillment of certain conditions.

The Finance Act, 2021, inter alia, inserted the seventh proviso to section 10(23FE) to provide that in case the specified fund has loans or borrowings, directly or indirectly, for the purposes of making the investment in India, such fund shall be deemed to be not eligible for exemption.

Concerns have been raised with regards to the term ‘indirectly’ as same has not been defined. There was no clarity that if the specified fund or its holding entity or any other entity in the chain of holding or any associate thereof (group concern) has any loans or borrowings, the specified fund may be ineligible to get the exemption or not?.
In order to remove such difficulties, the Central Board of Direct Taxes (CBDT) has issued the following clarifications:

(a) If the loans and borrowings have been taken by the specified fund or any of its group concerns, specifically for the purposes of making an investment by the specified fund in India, such fund shall not be eligible for exemption; and

(b) If the loans and borrowings have been taken by the specified fund or any of its group concern, not specifically for the purposes of making investment in India, it shall not be presumed that the investment in India has been made out of such loans and borrowings. Accordingly, such specified fund shall be eligible for exemption under section 10(23FE), subject to the fulfilment of all other conditions. However, the source of the investment in India by such specified fund shall not be from such loans and borrowings.

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