Budget 2023: Tax avoidance through distribution by business trusts to its unit holders
Finance (No.2) Act, 2014 introduced a special taxation regime for Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InVIT) [commonly referred to as business trusts]. The special regime was introduced in order to address the challenges of financing and investment in infrastructure. The business trusts invest in special purpose vehicles (SPV) through equity or debt instruments.
2. Keeping in mind the business structure, the special taxation regime under section 115UA of the Act, inter-alia, provides a pass-through status to business trusts in respect of interest income, dividend income received by the business trust from a special purpose vehicle in case of both REIT and InvIT and rental income in case of REIT. Such income is taxable in the hands of the unit holders unless specifically exempted.
3. Sub-section (1) of section 115UA of the Act, inter-alia, provides any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by the business trust.
4. Further, Sub-section (3) of section 115UA of the Act, inter-alia, provides that if the “distributed income” received by a unit holder from the business trust is of the nature as referred to in clause (23FC) or clause (23FCA) of section 10 of the Act i.e., is either rental income of the REIT or interest or dividend received by the business trust from the SPV, then, such distributed income or part thereof shall be deemed to be income of such unit holder.
5. It has been noticed in certain cases that business trusts distribute sums to their unit holders which are categorised in the following four categories:
(a) Interest;
(b) Dividend;
(c) Rental income;
(d) Repayment of debt.
6. As has been stated above, interest, dividend and rental income have been accorded a pass-through status at the level of business trust and are taxable in the hands of the unit holder. However, in respect of the distributions made by the business trust to its unit holders which are shown as repayment of debt, it is actually an income of unit holder which does not suffer taxation either in the hands of business trust or in the hands of unit holder.
7. It may be noted that dual non-taxation of any distribution made by the business trust i.e. which is exempt in the hands of the business trust as well as the unit holder, is not the intent of the special taxation regime applicable to business trusts.
8. In view of the above, it is proposed to make such sum received by unit holder taxable in his hands. However, provision is also proposed for a situation when the sum received by unit holder represents redemption of unit held by him. Hence it is proposed to amend the Act by way of,-
(i) insertion of clause (xii) in sub-section (2) of section 56 of the Act to provide that income chargeable to income-tax under the head “income from other sources” shall also include any sum, received by a unit holder from a business trust, which-
(a) is not in the nature of income as referred to in clause (23FC) or clause (23FCA) of section 10 of the Act; and
(b) is not chargeable to tax under sub-section (2) of section 115UA of the Act;
(ii) insertion of a proviso to the said clause to provide that where the sum received by a unit holder from a business trust is for redemption of unit or units held by him, the sum received shall be reduced by the cost of acquisition of the unit or units to the extent such cost does not exceed the sum received;
(iii)insertion of sub-section (3A) in section 115UA of the Act to provide that the provisions of sub – sections (1), (2) and (3) of this section, shall not apply in respect of any sum, as referred to in clause (xii) of sub-section (2) of section 56 of the Act, received by a unit holder from a business trust;
(iv) insertion of sub-clause (xviic) in clause (24) of section 2 of the Act to provide that income shall include any sum referred to in clause (xii) of sub-section (2) of section 56 of the Act.
9. These amendments will take effect from 1st April, 2024 and will accordingly apply to assessment year 2024-25 and subsequent assessment years.
[Clauses 3, 32 & 58]
Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions.
It is proposed to amend clause (19B) of the said section to omit “Additional Commissioner of Income-tax (Appeals)” from the definition.
This amendment will take effect from 1st April, 2023.
Clause 32 of the Bill seeks to amend section 56 of the Income-tax Act relating to income from other sources.
Sub-section (2) of the said section provides for incomes that are chargeable to income-tax under the head “Income from other sources”.
The provisions of clause (viib) of sub-section (2) of the said section, inter alia, provides that where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income-tax under the head “Income from other sources”.
It is proposed to omit the words “being a resident” from the said clause (viib) so as to cover all the investors within the ambit of the said clause of sub-section (2) of section 56, irrespective of their residency.
It is further proposed to insert a new clause (xii) in the said sub-section (2) to provide that income chargeable to income-tax under the head “income from other sources” shall also include any sum received by a unit holder from a business trust which––
(a) is not in the nature of income referred to in clause (23FC) or clause (23FCA) of section 10; and
(b) is not chargeable to tax under sub-section (2) of section 115UA.
It is also proposed to insert a proviso to the said clause (xii) of the said sub-section (2) to provide that where the sum received by a unit holder from a business trust is for redemption of unit or units held by him, the sum so received shall be reduced by the cost of acquisition of the unit or units to the extent such cost does not exceed the sum received.
It is also proposed to insert clause (xiii) in the said sub-section (2) so as to provide that where any sum is received, including the amount allocated by way of bonus, at any time during a previous year, under a life insurance policy, other than the sum,––
(a) received under a unit linked insurance policy;
(b) being the income referred to in clause (iv),
which is not to be excluded from the total income of the previous year in accordance with the provisions of clause (10D) of section 10, the sum so received as exceeds the aggregate of the premium paid, during the term of such life insurance policy, and not claimed as deduction in any other provision of the Act, computed in the manner as may be provided by rules shall be chargeable to income-tax under the head “Income from other sources”.
It is also proposed to define the expression “unit linked insurance policy” for the purposes of the said clause.
These amendments will take effect from 1st April, 2024 and will, accordingly, apply in relation to the assessment year 2024-2025 and subsequent assessment years.
Clause 58 seeks to amend section 115UA of the Income-tax Act relating to tax on income of unit holder and business trust.
It is proposed to insert sub-section (3A) in the said section to provide that the provisions of sub- sections (1), (2) and (3) of the said section shall not apply in respect of any sum, referred to in clause (xii) of sub-section (2) of section 56, received by a unit holder from a business trust.
This amendment will take effect from 1st April, 2024 and will, accordingly, apply in relation to the assessment year 2024-2025 and subsequent assessment years.
Extract of Relevant Amendment Proposed by Finance Bill 2023
3. Amendment of section 2.
In section 2 of the Income-tax Act,––
(a) in clause (19B), the words and brackets “or an Additional Commissioner of Income-tax (Appeals)” shall be omitted;
(b) in clause (24), after sub-clause (xviib), the following sub-clauses shall be inserted with effect from the 1st day of April, 2024, namely:––
“(xviic) any sum referred to in clause (xii) of subsection (2) of section 56;”;
“(xviid) any sum referred to in clause (xiii) of subsection (2) of section 56;”;
(c) after clause (28C), the following clause shall be inserted, namely:––
‘(28CA) “Joint Commissioner (Appeals)” means a person appointed to be a Joint Commissioner of Income-tax (Appeals) or an Additional Commissioner of Income-tax (Appeals) under sub-section (1) of section 117;’;
(d) in clause (42A), in Explanation 1, in clause (i), after sub-clause (hh), the following sub-clause shall be inserted with effect from the 1st day of April, 2024, namely:––
“(hi) in the case of a capital asset, being––
(a) Electronic Gold Receipt issued in respect of gold deposited as referred to in clause (viid) of section 47, there shall be included the period for which such gold was held by the assessee prior to conversion into the Electronic Gold Receipt;
(b) gold released in respect of an Electronic Gold Receipt as referred to in clause (viid) of section 47, there shall be included the period for which such Electronic Gold Receipt was held by the assessee prior to its conversion into gold.”.
32. Amendment of section 56.
In section 56 of the Income-tax Act, in sub-section (2), with effect from the 1st day of April, 2024,–
(a) in clause (viib), the words “being a resident” shall be omitted;
(b) after clause (xi), the following clauses shall be inserted, namely:–
‘(xii) any sum received by a unit holder from a business trust which–
(a) is not in the nature of income referred to in clause (23FC) or clause (23FCA) of section 10; and
(b) is not chargeable to tax under sub-section (2) of section 115UA:
Provided that where the sum received by a unit holder from a business trust is for redemption of unit or units held by him, the sum so received shall be reduced by the cost of acquisition of the unit or units to the extent such cost does not exceed the sum received;
(xiii) where any sum is received, including the amount allocated by way of bonus, at any time during a previous year, under a life insurance policy, other than the sum,–
(a) received under a unit linked insurance policy;
(b) being the income referred to in clause (iv),
which is not to be excluded from the total income of the previous year in accordance with the provisions of clause (10D) of section 10, the sum so received as exceeds the aggregate of the premium paid, during the term of such life insurance policy, and not claimed as deduction under any other provision of this Act, computed in such manner as may be prescribed.
Explanation.—For the purposes of this clause “unit linked insurance policy” shall have the meaning assigned to it in Explanation 3 to clause (10D) of section 10.’.
58. Amendment of section 115UA.
In section 115UA of the Income-tax Act, after sub-section (3), the following sub-section shall be inserted with effect from the 1st day of April, 2024, namely:–
“(3A) The provisions of sub- sections (1), (2) and (3) shall not apply in respect of any sum referred to in clause (xii) of sub-section (2) of section 56, received by a unit holder from a business trust.”.
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