Taxation of Business Trusts (REITS, InvITs) – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.
Taxation of Business Trusts (REITS, InvITs) – CA Final DT Question Bank
Question 1.
A Real Estate Investment Trust (REIT) received income of ₹120 lakhs from Special Purpose Vehicle Company. The break-up of the income so received is as follows:
Interest ₹ 90 lakhs
Dividend ₹ 30 lakhs
The REIT distributes ₹ 90 lakhs to its unit-holders. 40% of the unit holders are non-residents. Examine the tax implication of the above transactions in the hands of the REIT and unit holders including the requirement to deduct tax at source. [CA Final Nov. 2015] [6 Marks]
Answer:
Tax implications in the hands of REIT:
As per sec. 10(23FC), income of a business trust by way of interest received or receivable from a Special Purpose Vehicle (SPV) and dividend received or receivable from SPV shall be exempt. Thus, the business trust enjoys a pass-through status in respect of interest income and dividend income from SPV. Subsequently, such interest income and dividend’income (only when SPV has exercised option u/s 115BAA) when distributed, shall be taxable in the hands of unit holders u/s 115UA(3).
Therefore, the interest income of ₹ 90 lakhs and dividend income of ₹ 30 lakhs received by the business trust shall be exempt in its hands.
Tax implications in the hands of Unit holders:
As per sec. 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 REIT’s interest income:
= ₹ 90 lakhs × ₹ 90 lakhs/₹ 120 lakhs
= ₹ 67.5 lakhs
₹ 67.5 lakhs is taxable in the hands of the unit holders.
For the Resident unitholders, the interest income shall be taxable under the head “Income from other sources” at the normal rate. The business trust u/s 194LBA has to deduct tax @ 10% (3/4th of such rate in case it is distributed during the period 14.05.2020 to 31.03.2021) on such interest income.
However, for the unit holders who are non-resident, such interest income shall be taxable @ 5% u/s 115A. The business trust u/s 194LBA has to deduct tax @ 5% on such interest income.
Amount attributable to REIT’s Dividend income:
= ₹ 30 lakhs × ₹ 90 lakhs/₹ 120 lakhs
= ₹ 22.5 lakhs
For the Resident unit-holders, the dividend income shall be taxable under the head “Income from other sources” at the normal rate. The business trust u/s 194LBA has to deduct tax @ 10% (3/4th of such rate in case it is distributed during the period 14.05.2020 to 31.03.2021) on such dividend income.
However, for the unit holders who are non-resident, such interest income shall be taxable @ 20% u/s 115A. The business trust u/s 194LBA has to deduct tax @ 10% on such dividend income.
If SPV has not exercised option u/s 115BAA, such dividends shall not be taxable in the hands of unit holders (whether resident or non-resident)
Question 2.
KDS Realty Trust, a business trust registered under SEBI (Real Estate , Investment Trusts) Regulations, 2014, provides the following particulars of its income for the previous year 2020-21:
- Interest income from Brahma Ltd.: ₹ 5 crores;
- Rental income ₹ 3 crore, from the directly owned real estate assets;
- Short-term capital gain ₹ 1.5 crore, on sale of listed shares of Brahma Ltd., an Indian company in which KDS Realty Trust holds controlling interest through holding 60% of the shareholding of Brahma Ltd.
- Short term capital gain ₹ 2 crore, on sale of developmental properties;
- Interest ₹ 1 crore, received from investments in unlisted debentures of real estate companies;
- Dividend ₹ 3.5 crore from Brahma Ltd.
Other Information:
KDS Realty Trust has distributed ₹ 10 crore to its unit holders in the I previous year 2020-21.
Discuss the tax implications (including TDS implications) based on the above income earned by KDS Realty Trust, both in the hands of KDS Realty Trust and its unit holders in the previous year 2020-21. [CA Final Nov. 2016] [10 Marks]
Answer:
Tax consequences in the hands of the business trust and its unit holders: Interest income of ₹ 5 crores from Brahma Ltd:
The Business trust will not be taxable for the interest income from Brahma Ltd., being the special purpose vehicle, due to pass-through status enjoyed by the Business trust under section 10(23FC)(u). Therefore, Brahma Ltd. is not required to deduct tax at source on interest payment to the business trust.
However, the interest component of income distributed to unit holders is taxable in the hands of the unit holders. Therefore, the business trust has to deduct tax at source under section 194LBA-
- @ 10% (3/4th of such rate in case it is distributed during the period 14.05.2020 to 31.03.2021), on interest component of income distributed to resident unit holders; and
- @ 5%, on interest component of income distributed to non-corporate non-resident unit holders and foreign companies.
The interest component of income received from the business trust in the hands of each unit-holder would be determined in the proportion of 5 /16 [Refer Note 1] by virtue of section 115UA(1).
Rental income of ₹ 3 crores from directly owned real estate assets:
Any income of a business trust, being a REIT, by way of renting or leasing ‘ or letting out any real estate asset owned directly by such business trust is exempt in the hands of the trust as per section 10(23FCA).
So, no tax is deductible at source under section 194-I on such income.
The distributed income or any part thereof, received by a unit holder from the REIT, which is in the nature of income by way of renting or leasing or letting out any real estate asset owned directly by such REIT is deemed income of the unit holder as per section 115UA(3).
The business trust has to deduct tax at source @ 10% under section 194LBA in case of distribution to a resident unit holder and at rates in force in case of distribution to a non-resident unit holder.
Short-term capital gains of ₹ 1.5 crores on sale of listed shares of Brahma Ltd.:
As per section 115UA(2), the business trust is liable to pay tax @15% under section 111A in respect of short-term capital gains on sale of listed shares of special purpose vehicle. There would, however, be no tax liability on the capital gain component of income distributed to unit holders, by virtue of the exemption u/s 10(23FD).
Short-term capital gains of ₹ 2 crores on sale of developmental properties:
The short-term capital gains of ₹ 2 crores on sale of developmental properties shall be taxable at maximum marginal rate (MMR) of 34.944% [i.e. 30% plus surcharge @ 12% plus H & EC @ 4%] in the hands of the business trust as per section 115UA. There would be no tax liability in the hands of the unit holders on the capital gain component of income distributed to them, by virtue of the exemption contained in section 10(23FD).
Interest of ₹ 1 crore received in respect of investment in unlisted debentures ₹ of real estate companies:
Such interest is taxable @ 34.944%, being the maximum marginal rate, in ₹ the hands of the business trust, as per section 115UA(2). However, there would be no tax liability in the hands of the unit holders on the interest component of income distributed to them, by virtue of section 10(23FD).
Dividend income of ₹ 3.5 crores from Brahma Ltd:
The Business trust will not be taxable for the dividend income from Brahma Ltd., being the special purpose vehicle, due to pass-through status enjoyed by the Business trust under section 10(23FC)(b). Therefore, Brahma Ltd. is no required to deduct tax at source on interest payment to the business trust.
However, the dividend component of income distributed to unit holders j is taxable in the hands of the unit holders only where SPV has exercised option u/s 115BAA. If the SPV has not exercised option u/s 115BAA, such dividends shall be exempt in the hands of unit holders as per Sec. 10(23FD).
Where the dividends are taxable in the hands of unit holders, the business trust has to deduct tax at source under section 194LBA-
- @ 10% (3/4th of such rate in case it is distributed during the period 14.05.2020 to 31.03.2021), on dividend component of income distributed to resident unit holders; and
- @ 10%, on dividend component of income distributed to non-corporate non-resident unit holders and foreign companies.
The dividend component of income received from the business trust in the hands of each unit-holder would be determined in the proportion of 3.5/16 [Refer Note 1] by virtue of section 115UA(1).
Notes:
(1) Section 115UA provides that 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.
(2) Section 10(23FC) exempts any income of a business trust by way of interest received or receivable and dividend received or receivable from a Special Purpose Vehicle (SPV). Thus, the business trust enjoys a pass-through status in respect of interest received or receivable from a SPV and dividend received or receivable from a SPV.