Taxability / exemption in respect of income of Business Trust

In Income Tax Act, 1961 provisions relating to taxability / exemption of income of Business Trust were inserted vide Finance (No.2) Act, 2014 w.e.f. 01.04.2015 and new sections 10(23FC), 10(23FD) and Section 115UA were inserted. Section 10(23FC) was inserted to grant exemption not business trust for interest received from Special Purpose Vehicle (SPV), which has been defined to mean a company in which business trust has controlling interest. Section 10(23FD) provided for exemption in respect of income received by unit holders. Section 115UA provided for mechanism for taxability of income of business trust and unit holders and rates at which income was taxable. These provisions have further been amended from time to time. There are lot of confusion in regard to taxability / exemption of income of business trust and of unit holders. Therefore, an attempt has been made to examine provisions of these section including provisions of section 10(23FCA) which was inserted w.e.f. 01.04.2016 to provide exemption in case of business trust, being a Real Estate Investment Trust (REIT) receiving income by way of renting or leasing or letting out any real estate asset owned directly by the business trust and also provisions of section 56(2)(xii) of the Act which have been inserted w.e.f. 01.04.2024.

In the case of Business Trust there are three entities i.e. Unit Holder, who makes the investment in Business Trust, the Business Trust and Special Purpose Vehicle, being an Indian company in which business trust holds controlling interest. The position in regard to taxability / exemption of income in the hands of each of the entities is being discussed hereunder.

1. Special Purpose Vehicle (SPV)

• This is an Indian company carrying on the business and accordingly tax will be payable as per provisions of Income Tax Act and it can also opt to pay tax at 22% in terms of section 115BAA of the Act. Hence, there is no exemption of any income in the case of SPV and it has to pay tax on income earned by it.
• Upto assessment year 2020-21 dividend distributed by an Indian company was exempt in the hands of shareholders in terms of section 10(34) of the Act and the company distributing the dividend was liable to pay tax u/s 115-O of the Act. Accordingly, SPV was also liable to pay tax u/s 115-O and dividend was exempt in the hands of business trust and also in the hands of unit holders.

1. Business Trust

• Section 10(23FC) of the Act provides that any interest or dividend received by business Trust from SPV shall be exempt from tax.
• section 10(23FCA) of the Act provides that an income of a business trust, being a real estate investment trust (REIT) in the nature of rent, leasing or letting out of any real estate asset owned by business trust will be exempt from tax.
• Section 115UA(2) of the Act provides that total income of the business trust shall be charged to tax at MMR except capital gain which is chargeable at special rates provides in sections 111A, 112 and 112A.

On the basis of above the legal position is that interest or dividend received from SPV and income in the nature of rent, leasing, letting out any real estate asset are exempt from tax in the case of business trust and apart from above income any other income, being business income, capital gain or income from other source is chargeable at MMR.

1. Unit Holders

• Sub-section (1) of Section 115UA provides that notwithstanding anything contained in any provision of this Act 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 unit holders as it had been received by or accrued to the business trust. In view of this specific provision any income which is distributed by business trust to unit holders is to be proportionality allocated in the same ratio in which business trust has received the income and taxability of the same has to be considered in the hands of unit holders accordingly. In other words, business trust is to be considered as pass though entity and treatment of income in the hands of unit holders will be accordingly.
• Sub-section (3A) of Section 115UA provides that above referred provisions of sub-section (1) are not applicable to any sum received by a unit holder from business trust which is referred to in section 56(2)(xii), meaning thereby provisions of section 56(2)(xii) shall be applicable to any such sum received by the unit holder. It is important to note that while sub-section (1) refers to income, sub-section (3A) refers to any sum received.
• Sub-section (3) of Section 115UA provides that any income received by a unit holder from business trust as referred to in Section 10(23FC) or 10(23FCA) shall be deemed to be income of the unit holder and shall be charged to tax as income of the unit holder. It is stated that income referred to in above clauses of section 10 are income in the nature of dividend, interest, rent etc. which have not been taxed in the hands of business trust and therefore, same are taxable in hands of unit holders on the principle of pass through entity basis.
• It may further be stated in this regard that dividend income upto A.Y.2020-21 was exempt in the hands of an assessee u/s 10(34) of the Act and the company paying the dividend was liable to pay the tax u/s 115-O of the Act. W.e.f. A.Y.2021-22 dividend has become chargeable to tax in the hands of an assessee including unit holder.
• Section 10(23FD) provided upto A.Y.2020-21 that any income distributed by the business trust shall be exempt in the hands of unit holder other than interest and rental income referred to in clauses (23FC) and (23FCA). W.e.f. A.Y.2021-22 provisions of section 10(23FD) have been amended to provide that income received by unit holder from business trust shall be exempt other than interest or dividend (in case SPV has opted for concessional rate u/s 115BAA of the Act) or rental income. In other words, this sub-section was amended to grant exemption in respect of dividend in case SPV has paid tax at normal rate but exemption is not available in case SPV has paid tax at concessional rate. Though this appears to be unreasonable that dividend is fully exempt in case SPV has paid tax on normal rate whereas dividend is taxable in the hands of unit holder in case SPV has paid tax at concessional rate of 22% but that is the provision now and accordingly, exemption is available only if SPV has paid tax at normal rate.
• section 56(2)(xii) of the Act provides for taxability of any sum received by unit holder from business trust, not being in the nature of income. In other words, it is towards investment made by the unit holder and therefore, only the amount which is exceeding the amount of investment is chargeable to tax. Provisions of above clause provides that amount chargeable is to be determined considering aggregate amount received in all the years from the trust and deducting therefrom the amount of investment made by the unit holder and the amount which has already been charged in earlier years. In other words, taxability under this section is to be determined every year considering aggregate amount received, amount of investment and amount already taxed. Upto the year aggregate amount received does not exceed amount of investment no amount will be chargeable and thereafter amount over and above the amount of investment is chargeable after deducting therefrom amount already taxed in earlier year(s).

Corresponding sections of Income Tax Act, 2025 which contains exactly same provisions as are contained in sections of Income Tax Act 1961 mentioned above are as under: -

Pursuant to the provisions of sub-section (4) of Section 115UA r.w.r 12CA of Income Tax Rules, 1962 Business Trust or REIT have to submit details regarding distribution of income electronically in Form No. 64A by 15th June following the end of financial year and has also to provide details to unit holders in Form 64B by 30th June generated through the system. Corresponding rule of Income Tax Rules, 2026 is 145 and Form Nos. 76 and 77 respectively. Unit holders have to incorporate income in their returns on the basis of information provided to them in Form No. 64B / 77.