Section-10(23FC) of the Income Tax Act, 1961 provides for exemption for any income derived by a business trust from interest or dividend from special purpose vehicle. There has been certain amendments in the Income tax Act by Finance Act, 2020 having significant impact on business trusts. We will discuss such amendments in this article.
Section-10(23FC) provided as follows:-
“Any income of a business trust by way of:
a. Interest from Special Purpose Vehicle or
b. Dividend referred to in section-115-O(7) Shall be exempt from tax.
Explanation:- For the purpose 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 115-O(7) states that no tax on distributed profits i.e. Dividend Distribution Tax shall be chargeable in respect of any amount declared, distributed or paid by a specified domestic company by way of dividend to a business trust out of its current income of the company after the date acquisition of holding by business trust.
However, nothing contained in subsection (7) of section 115-O shall apply in respect of any dividend declared, distributed or paid by specified domestic company by way of dividend to a business trust out of its accumulated profits or current profits accruing up to the date of acquisition of holding in company.
Analysis of Section-10(23FC) read with Section 115-O(7)
Where a business trust is holding a controlling interest or specified percentage of interest in an Indian Company (SPV) and such company makes payment of dividend to business trust, there may be two situations:-
a. If such company (SPV) pays dividend out of current profits i.e. profits accruing after the date of acquisition of holding by Business Trust:-
The company need not pay Dividend Distribution Tax on such dividend declared or paid to Business Trust. Thus, there arises liability of tax payment on business trust on such dividend income. However, by virtue of Section-10(23FC), such dividend income shall be exempt in the hands of the business trust.
b. If such company (SPV) pays dividend out of accumulated profits or current profits accrued up to the date of acquisition of holding by Business Trust:-
In this case, such company (SPV) shall pay dividend distribution tax on dividend distributed to business trust out of accumulated profits or current profits accruing up to date of acquisition of holding by business trust. Therefore, such dividend income will be exempted in the hands of business trust under section 10(34).
c. Any other dividend income received by a business trust:-
Since, the company paying dividend has already paid dividend distribution tax on such dividend u/s 115-O, it will be an exempt income in the hands of the business trust under section 10(34).
Note:
However, in cases (b) and (c) above, if such dividend income exceeds Rs. 10 Lakhs, then the dividend in excess of Rs. 10 Lakhs shall be taxable in the hands of business trust @ 10% under section 115BBDA.
The above analysis depicts the position of taxability till A.Y. 2020-21. However, Finance Act, 2020 has brought amendments pertaining to “Dividend Distribution Tax” which have taxation impact on business trusts as well. We will now discuss the amended provisions so that a clear comparison can be made in pre amendment and post amendment scenario.
Section 10(23FC) has been amended as follows:-
“Any income of a business trust by way of:
a. Interest from Special Purpose Vehicle or
b. Dividend received or receivable from a Special Purpose Vehicle Shall be exempt from tax.”
Analysis of amendment read with Section 115-O
a. By virtue of amendment made in Section-10(23FC), income of a business trust by way of interest and dividend from Special Purpose vehicle shall be fully exempted w.e.f. A.Y. 2021-22.
b. It does not matter whether dividend is paid out by the SPV out of the current profits or accumulated profits.
c. However, if the business trust receives dividend income from any company other than SPV, such dividend income shall be fully taxable in the hands of the business trust.
