Rule 2DA: Venture Capital Fund Approval under Section 10(23FA)
Rule 2DA of the Income-tax Rules, 1962 set out a historical approval process for venture capital funds and venture capital companies seeking the benefit associated with section 10(23FA) of the Income-tax Act, 1961. The rule dealt with applications, supporting documents, regulatory conditions, the duration of approval and circumstances in which approval could be withdrawn.
Purpose and scope of Rule 2DA
Rule 2DA was titled Guidelines for approval under clause (23FA) of section 10. It prescribed how a venture capital fund or venture capital company applied to the Central Government for approval in connection with the former exemption for specified income, including dividend income and long-term capital gains arising from qualifying equity investments in a venture capital undertaking.
1. Application for approval: Form No. 56AA
Under sub-rule (1), an application for approval was required to be made by a venture capital fund or venture capital company to the Central Government in Form No. 56AA.
Sub-rule (2) contemplated an application in a previous year in which qualifying income by way of dividend or long-term capital gains from equity-share investments in a venture capital undertaking was sought to be excluded from the fund's or company's total income under the historical section 10(23FA) framework.
2. Documents accompanying the application
Sub-rule (3) specified the following attachments:
- A copy of the trust deed registered under the Registration Act, 1908, or a certificate of incorporation under the Companies Act, 1956, as applicable to the original rule.
- Balance sheets and profit and loss accounts for the three previous years immediately preceding the year of application.
- Duly completed and signed Forms 56BA and 56CA.
- A copy of the registration certificate issued by the Securities and Exchange Board of India (SEBI) under section 12(1) of the SEBI Act, 1992.
3. Conditions for Central Government approval
Sub-rule (4) allowed approval subject to specified safeguards:
- SEBI registration: The venture capital fund or venture capital company had to be registered with SEBI.
- Single-investment ceiling: Investment in one venture capital undertaking could not exceed 25% of the total monies raised by a venture capital fund or 25% of paid-up share capital of a venture capital company, as applicable.
- Books and audit: Books of account had to be maintained and audited by an accountant within the meaning of the relevant provision of the Income-tax Act, 1961.
- Audit-report submission: The signed and verified audit report had to be furnished to the Central Government before the return-filing due date under section 139(1), as prescribed in the original rule.
4. Approval, refusal and validity
Under sub-rule (5), the Central Government could issue a written order granting or refusing approval. Before refusing approval, the applicant had to be given an opportunity of being heard.
Under sub-rule (6), an approval could cover one or more assessment years, but not more than three assessment years at a time.
5. Withdrawal of approval
Sub-rule (7) required withdrawal of approval in specified circumstances, including:
- Failure to invest in accordance with the prescribed conditions.
- Investment exceeding the 25% concentration limit in a single venture capital undertaking.
- Failure to maintain or audit books of account, or failure to furnish the required audit report.
- Violation of applicable provisions of the Income-tax Act or rules.
- Suspension or cancellation by SEBI of the relevant registration certificate.
The original text refers in its withdrawal clause to the audit-report requirement as clause (d) of sub-rule (4), although the supplied version of sub-rule (4) lists that requirement under clause (c). This is an apparent internal cross-reference inconsistency in the historical text, not an additional requirement.
Rule 2DA at a glance
| Provision | Historical requirement |
|---|---|
| Rule 2DA(1) | Application to Central Government in Form 56AA |
| Rule 2DA(2) | Application linked to the relevant previous year and specified investment income |
| Rule 2DA(3) | Trust or incorporation documents, three years' accounts, Forms 56BA and 56CA, SEBI certificate |
| Rule 2DA(4) | SEBI registration, 25% single-undertaking investment ceiling, accounts and audit |
| Rule 2DA(5)-(6) | Written approval or refusal; hearing before refusal; maximum three assessment years |
| Rule 2DA(7) | Withdrawal for specified non-compliance or SEBI registration action |
Practical significance today
Rule 2DA remains useful when reviewing historical tax positions, older approval orders, assessments, or legacy venture capital structures. It should not be confused with the later tax regimes for investment funds, alternative investment funds or venture capital investments. Eligibility, reporting, withholding and investor-level taxation depend on the relevant year, fund classification and operative statutory provisions.
For an existing investment structure, review the fund's SEBI registration category, original approval documents, applicable assessment year and the relevant income-tax provisions before drawing a tax-exemption conclusion.
Related income-tax rules
For related historical approval provisions, see Rule 2D on section 10(23F), Rule 2C on section 10(23C)(iv) and (v) and Rule 2CA on educational and medical institution approvals.
This article is an explanatory guide to the historical rule and is not a substitute for the official text or professional advice on a particular assessment year.