In my last article I have discussed Concept of Business Trust in India; in this article I am going to discuss Taxation of Business Trust in India. Concept of Business Trust was introduced vide Finance Act, 2014. The Finance Act, 2014 has put in place special taxation regime in respect of Business Trust. The tax structure of the Business Trust as explained in the Finance Act, 2014 is as follows:

INCOME OF BUSINESS TRUST

  • Earns dividend on Shares of SPV
  • Earns Rental Income from Properties
  • Earns Interest on Loans to SPV
  • Earns Capital Gain on Transfer of Assets of Business Trust

EXEMPTION OF INCOME OF BUSINESS TRUST

Section 10(23FC)

Any income of a business trust by way of interest received or receivable from a special purpose vehicle.

Explanation.—For the purposes of this clause, the expression “special purpose vehicle” means an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration;]

Section 10(23FCA)

Any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting out any real estate asset owned directly by such business trust.

Explanation.—For the purposes of this clause, the expression “real estate asset” shall have the same meaning as assigned to it in clause (zj) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);

As per clause (zj) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 “real estate assets” means properties owned by REIT whether directly or through a special purpose vehicle;

Analysis

  • Interest income as referred to in section 10(23FC) and rental income as referred to in section 10(23FCA) is exempt in the hands of Business Trust.
  • Long term capital gain on transfer of assets of Business Trust is taxable in the hands of Business Trust at rates given in Section 112.
  • Short term Capital Gain on transfer of assets is taxable at the maximum marginal rate i.e. 33.99% subject to provisions of Section 111A.
  • Dividend received by Business Trust will be exempt in the hands of business trust u/s 10(34).
  • As per section 115UA (2), Other Incomes of Business Trust shall be taxable at the maximum marginal rate i.e. 33.99%.

Illustration: A Business Trust earns following Incomes:

Interest Income from SPV Rs. 10 Lakh, Long term capital gain on sale of real estate properties Rs 20 Lakh, Dividend of Rs. 30 Lakh from SPV on which SPV have paid CDT under section 115-O.

Treatment in hands of Business Trust-

  • Interest Income of Rs. 10 Lakh is exempt u/s 10(23FC).
  • LTCG of RS. 20 Lakh on sale of real estate properties will be taxable u/s 112.
  • Dividend of Rs. 30 Lakh will be exempt u/s 10(34).

TAXABILITY OF BUSINESS TRUST

  •  Interest income is exempt u/s 10(23FC).
  • Rental Income is exempt u/s 10(23FCA)
  • LTCG/STCG is taxable u/s 112/111A or MMR as the case may be.
  • Other Income Taxable at MMR.

INCOME OF UNIT HOLDERS BUSINESS TRUST

BUSINESS TRUST→ → → → Distributes its Income to → → → → UNIT HOLDERS

EXEMPTION OF INCOME OF UNIT HOLDERS

Section 10(23FD)

any distributed income, referred to in section 115UA, received by a unit holder from the business trust, not being that proportion of the income which is of the same nature as the income referred to in clause (23FC [or clause (23FCA)];]

Analysis

  • As per section 115UA (1), 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, or accrued to, the business trust.
  • Any distributed income received by Unit Holders from Business Trust is exempt under section 10(23FD). However, such income is not exempt if it is of the nature as referred to in clause (23FC) [or clause (23FCA)] of section 10.
  • If distributed income is of the nature as referred to in clause (23FC) [or clause (23FCA)] of section 10, then, such distributed income or part thereof shall be deemed to be income of such unit holder and shall be charged to tax as income of the previous year.
  • Short term capital gain in the hands of unit holder on transfer of a short term capital asset, being units of business trust on sale of which STT is paid is taxable at the rate of fifteen percent as per section 111A.
  • Long term capital gain in the hands of unit holder on transfer of long term capital asset, being units of business trust on sale of which STT is paid is exempt as per section 10(38).

Illustration: A Business Trust earns following Incomes:

Interest Income from SPV Rs. 10 Lakh, Long term capital gain on sale of real estate properties Rs 20 Lakh, Dividend of Rs. 30 Lakh from SPV on which SPV have paid CDT under section 115-O.

Business Trust distributes Rs. 30 Lakh to its unit holders. One unit holder, Mr. Tarun receives Rs. 30,000 from Business Trust.

Treatment in hands of unit holder, Mr. Tarun –

  • As per section 115UA (1), 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, or accrued to, the business trust.
  • Amount attributable to Business Trust’s Interest Income= 30,000*10, 00,000/60, 00,000= Rs. 5,000.

Such interest income is taxable.

  • Amount attributable to Business Trust’s Long Term Capital Gain=30,000*20, 00,000/60, 00,000= Rs. 10,000. Such LTCG is exempt as per section 10(23FD).
  • Amount attributable to Business Trust’s Dividend Income= 30,000*30, 00,000/60, 00,000= Rs. 15,000. Such dividend is exempt as per section 10(23FD).

CAPITAL GAIN IN HANDS OF UNIT HOLDERS WHO ACQUIRED UNITS IN CONSIDERATION OF TRANSFER OF SHARES OF SPV

  • As per section 47(xvii), any transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust to the transferor shall not be regarded as transfer. Hence, no capital gain shall arise in the hands of shareholders of SPV at the time of exchange of shares of SPV with units of Business Trust.
  • As per proviso to section 111A, provisions of section 111A shall not apply in respect of any income arising from transfer of units of a business trust which were acquired by the assessee in consideration of a transfer as referred to in clause (xvii) of section 47.Thus, such short term capital gain shall not be taxable at the rate of 15% but shall be taxable normal tax rates in the hands of assessee.
  • As per proviso to section 10(38), provisions of section 10(38) shall not apply in respect of any income arising from transfer of units of a business trust which were acquired in consideration of a transfer referred to in clause (xvii) of section 47.Thus, such long term capital gain shall not be exempt but shall be taxable at the rate of 20% as per section 112.

Illustration: Shareholders of SPV transferred shares in SPV to business trust in consideration of Units of Business Trust.

  • Such transfer will be exempt in the hands of shareholder as per section 47(xvii) and will be taxable at the time of transfer of units of business trust by shareholders. Benefit of section 111A and 10(38) will not be available at the time of transfer of units of business trust by shareholders of SPV.

TAXABILITY OF UNIT HOLDERS

  • Income exempt in hands of business trust u/s 10(23FC) & 10(23FCA) is taxable in hands of Unit holders.
  • Other distributed income by business trust exempt in hands of unit holders u/s 10(23FD)
  • Capital gain arising on transfer of units of Business trust is taxable as per provisions of Section 111A and Section 10(38).
Tarun Kumar(Submitted by – Tarun Kumar (B.Com, CA-Final) Mobile: +91-888-282-8112 Email-ID: tktarun786@gmail.com)

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One response to “Taxation of Business Trust in India”

  1. Tarun Kumar says:

    Dear Readers,

    It is for your updation that Finance Act, 2015 made following amendments in the Taxation of Business Trust.

    CAPITAL GAIN IN HANDS OF UNIT HOLDERS WHO ACQUIRED UNITS IN CONSIDERATION OF TRANSFER OF SHARES OF SPV –

    Proviso to Section 111A and Section 10(38) were omitted by Finance Act, 2015. Thus the benefits of Section 111A and Section 10(38) will now also be available to the unit holders who acquired units in consideration of transfer of shares of SPV.

    Thus the 2nd and 3rd point of paragraph CAPITAL GAIN IN HANDS OF UNIT HOLDERS WHO ACQUIRED UNITS IN CONSIDERATION OF TRANSFER OF SHARES OF SPV are no more relevant.

    Illustration: Shareholders of SPV transferred shares in SPV to business trust in consideration of Units of Business Trust.

    Such transfer will be exempt in the hands of shareholder as per section 47(xvii) and will be taxable at the time of transfer of units of business trust by shareholders. Benefit of section 111A and 10(38) will be available at the time of transfer of units of business trust by shareholders of SPV as per Amendment made by Finance Act’2015.

  2. VIVEK N. HARIYANI says:

    I want to get the information of income tax. Is there any co-op. social trust’s yearly turn-over goes beyond Rs. 15 lack. So, Is it mandatory to inform income-tax department. We paid service – tax.

  3. venkataratnam sanagapalli says:

    I am running an educational institution registered under the Societies Act. Yearly turnover towards tuition fees is around less than 40 Lakhs. No other income viz Bank Interest or Long term Or short term capital gain. Whether I have to seek special exemption permission under Rule 12 of IT Act for getting the tax exemption

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