My client is a registered InvIT. It receives interest and dividend from the project companies it controls. Is that income taxed in the trust's hands, and if not, where does the charge go?
Neither is taxed in the trust's hands. Clause (23FC) of section 10 keeps out of the trust's total income (a) interest received or receivable from a special purpose vehicle and (b) dividend received or receivable from a special purpose vehicle. The charge does not disappear: section 115UA(3) moves income of the nature described in clause (23FC) to the unit holder, and section 10(23FD) — which exempts the rest of a distribution in the unit holder's hands — expressly does not cover the interest limb, and does not cover the dividend limb where the special purpose vehicle has exercised the option under section 115BAA. A "special purpose vehicle" is defined inside the clause itself as an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest required by the regulations under which the trust is registered.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2021-04-01, reported as Clause (23FC) as inserted by s.5(b) of the Finance (No. 2) Act, 2014 (indiankanoon.org/doc/151046659/); sub-clause (b) as substituted by s.7(II)(b) of the Finance Act, 2020 (indiankanoon.org/doc/64850385/); the sub-clause (a)/(b) structure and the s.115BAA switch confirmed on incometaxindia.gov.in/w/section-194lba-10 (Year 2024 No. 2) and /w/section-194lba-5 (Year 2019 No. 2). It bears on section 10(23FC), section 10(23FCA), section 10(23FD), section 115UA, section 115UA(2), section 115UA(3), section 194LBA, section 194LBA(2A), section 115BAA, section 2(13A), section 56(2)(xii) of the Income Tax Act 1961, in Charitable Trusts & Exemption, Capital Gains Exemptions and TDS Defaults matters.
This is the hinge of the whole business trust regime, and it is where readers most often go wrong by treating the trust as tax-free. It is not tax-free: section 115UA(2) charges the trust's total income at the maximum marginal rate, and clause (23FC) is one of the two carve-outs that keep specified streams out of that total income so that they can be taxed one level up instead. Four points decide live disputes. First, the exemption is confined to income from a special purpose vehicle as defined in the clause — an Indian company that the trust controls in the manner the SEBI regulations require. Interest from a bank deposit, from a loan to an outsider, or from a company that is not an SPV in that sense is not within clause (23FC) at all and stays in the trust's own total income under section 115UA(2). Second, the two limbs behave differently downstream: the interest limb is always taxable in the unit holder's hands, while the dividend limb is taxable in his hands only if the SPV has opted into the concessional corporate rate in section 115BAA, and is otherwise exempt to him under section 10(23FD). Third, the withholding machinery mirrors that split exactly — section 194LBA(2) deducts five per cent on the sub-clause (a) stream and ten per cent on the sub-clause (b) stream for a non-resident unit holder, and section 194LBA(2A) switches deduction off altogether for the sub-clause (b) stream where the SPV has not exercised the section 115BAA option. That is the cleanest independent confirmation available that the clause has two sub-clauses and which is which. Fourth, nothing in clause (23FC) touches a distribution that is repayment of shareholder debt; that stream falls outside clause (23FC) and outside clause (23FCA), and since 1 April 2024 it is caught in the unit holder's hands by section 56(2)(xii).
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Clause (23FC) was inserted into section 10 by section 5(b) of the Finance (No. 2) Act, 2014 with effect from 1 April 2015, in a single-limb form covering only interest, together with an Explanation defining "special purpose vehicle". By 2019 the clause had been split into sub-clauses (a) and (b): the departmental section 194LBA page stamped Year 2019 (No. 2) refers throughout to "sub-clause (a) of clause (23FC) of section 10", which it could not do unless sub-clauses existed. Section 7(II)(b) of the Finance Act, 2020 then provided that in clause (23FC), in sub-clause (b), for the words, brackets, figures and letter "referred to in sub-section (7) of section 115-O", the words "received or receivable from a special purpose vehicle" shall be substituted, with effect from 1 April 2021 — the same Finance Act having abolished dividend distribution tax. The departmental section 194LBA page stamped Year 2024 (No. 2) prints sub-section (2) as deducting "five per cent in case of income of the nature referred to in sub-clause (a) and ten per cent in case of income of the nature referred to in sub-clause (b), of the said clause", and sub-section (2A) as switching off sub-sections (1) and (2) for income of the nature referred to in sub-clause (b) of clause (23FC) where the special purpose vehicle has not exercised the option under section 115BAA.
Statutory position — no holding is asserted; this entry reproduces statutory text. Income of a business trust by way of interest received or receivable from a special purpose vehicle, and income of a business trust by way of dividend received or receivable from a special purpose vehicle, are not included in the trust's total income, so they are not charged in the trust's hands under section 115UA(2). "Special purpose vehicle" means, for this clause, 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 the trust is granted registration. The charge on the interest limb, and on the dividend limb where the special purpose vehicle has exercised the option under section 115BAA, falls instead on the unit holder, by section 115UA(3) read with the exclusion in section 10(23FD).
Not applicable — statutory text.
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;
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Handle my notice → Ask a CA on WhatsAppNeither is taxed in the trust's hands. Clause (23FC) of section 10 keeps out of the trust's total income (a) interest received or receivable from a special purpose vehicle and (b) dividend received or receivable from a special purpose vehicle. The charge does not disappear: section 115UA(3) moves income of the nature described in clause (23FC) to the unit holder, and section 10(23FD) — which exempts the rest of a distribution in the unit holder's hands — expressly does not cover the interest limb, and does not cover the dividend limb where the special purpose vehicle has exercised the option under section 115BAA. A "special purpose vehicle" is defined inside the clause itself as an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest required by the regulations under which the trust is registered. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 10(23FC), section 10(23FCA), section 10(23FD), section 115UA, section 115UA(2), section 115UA(3), section 194LBA, section 194LBA(2A), section 115BAA, section 2(13A), section 56(2)(xii) of the Income Tax Act 1961. It is reported as Clause (23FC) as inserted by s.5(b) of the Finance (No. 2) Act, 2014 (indiankanoon.org/doc/151046659/); sub-clause (b) as substituted by s.7(II)(b) of the Finance Act, 2020 (indiankanoon.org/doc/64850385/); the sub-clause (a)/(b) structure and the s.115BAA switch confirmed on incometaxindia.gov.in/w/section-194lba-10 (Year 2024 No. 2) and /w/section-194lba-5 (Year 2019 No. 2). This is the hinge of the whole business trust regime, and it is where readers most often go wrong by treating the trust as tax-free. It is not tax-free: section 115UA(2) charges the trust's total income at the maximum marginal rate, and clause (23FC) is one of the two carve-outs that keep specified streams out of that total income so that they can be taxed one level up instead. Four points decide live disputes. First, the exemption is confined to income from a special purpose vehicle as defined in the clause — an Indian company that the trust controls in the manner the SEBI regulations require. Interest from a bank deposit, from a loan to an outsider, or from a company that is not an SPV in that sense is not within clause (23FC) at all and stays in the trust's own total income under section 115UA(2). Second, the two limbs behave differently downstream: the interest limb is always taxable in the unit holder's hands, while the dividend limb is taxable in his hands only if the SPV has opted into the concessional corporate rate in section 115BAA, and is otherwise exempt to him under section 10(23FD). Third, the withholding machinery mirrors that split exactly — section 194LBA(2) deducts five per cent on the sub-clause (a) stream and ten per cent on the sub-clause (b) stream for a non-resident unit holder, and section 194LBA(2A) switches deduction off altogether for the sub-clause (b) stream where the SPV has not exercised the section 115BAA option. That is the cleanest independent confirmation available that the clause has two sub-clauses and which is which. Fourth, nothing in clause (23FC) touches a distribution that is repayment of shareholder debt; that stream falls outside clause (23FC) and outside clause (23FCA), and since 1 April 2024 it is caught in the unit holder's hands by section 56(2)(xii). If it applies to you, the first step is this: Test the payer against the definition inside the clause before claiming the exemption: is it an Indian company, does the business trust hold controlling interest in it, and does it hold whatever specific percentage of shareholding or interest the SEBI regulation under which the trust is registered requires? Keep the shareholding pattern and the regulation on file.
Clause (23FC) was inserted into section 10 by section 5(b) of the Finance (No. 2) Act, 2014 with effect from 1 April 2015, in a single-limb form covering only interest, together with an Explanation defining "special purpose vehicle". By 2019 the clause had been split into sub-clauses (a) and (b): the departmental section 194LBA page stamped Year 2019 (No. 2) refers throughout to "sub-clause (a) of clause (23FC) of section 10", which it could not do unless sub-clauses existed. Section 7(II)(b) of the Finance Act, 2020 then provided that in clause (23FC), in sub-clause (b), for the words, brackets, figures and letter "referred to in sub-section (7) of section 115-O", the words "received or receivable from a special purpose vehicle" shall be substituted, with effect from 1 April 2021 — the same Finance Act having abolished dividend distribution tax. The departmental section 194LBA page stamped Year 2024 (No. 2) prints sub-section (2) as deducting "five per cent in case of income of the nature referred to in sub-clause (a) and ten per cent in case of income of the nature referred to in sub-clause (b), of the said clause", and sub-section (2A) as switching off sub-sections (1) and (2) for income of the nature referred to in sub-clause (b) of clause (23FC) where the special purpose vehicle has not exercised the option under section 115BAA. The matter was decided on 2021-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Statutory position — no holding is asserted; this entry reproduces statutory text. Income of a business trust by way of interest received or receivable from a special purpose vehicle, and income of a business trust by way of dividend received or receivable from a special purpose vehicle, are not included in the trust's total income, so they are not charged in the trust's hands under section 115UA(2). "Special purpose vehicle" means, for this clause, 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 the trust is granted registration. The charge on the interest limb, and on the dividend limb where the special purpose vehicle has exercised the option under section 115BAA, falls instead on the unit holder, by section 115UA(3) read with the exclusion in section 10(23FD).
Not applicable — statutory text. In the words reproduced by the source cited on this page: "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;"
It was decided by the CBDT Circulars & Instructions on 2021-04-01 and is reported as Clause (23FC) as inserted by s.5(b) of the Finance (No. 2) Act, 2014 (indiankanoon.org/doc/151046659/); sub-clause (b) as substituted by s.7(II)(b) of the Finance Act, 2020 (indiankanoon.org/doc/64850385/); the sub-clause (a)/(b) structure and the s.115BAA switch confirmed on incometaxindia.gov.in/w/section-194lba-10 (Year 2024 No. 2) and /w/section-194lba-5 (Year 2019 No. 2). Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 10(23FC), section 10(23FCA), section 10(23FD), section 115UA, section 115UA(2), section 115UA(3), section 194LBA, section 194LBA(2A), section 115BAA, section 2(13A), section 56(2)(xii), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Statutory position — no holding is asserted; this entry reproduces statutory text. Income of a business trust by way of interest received or receivable from a special purpose vehicle, and income of a business trust by way of dividend received or receivable from a special purpose vehicle, are not included in the trust's total income, so they are not charged in the trust's hands under section 115UA(2). "Special purpose vehicle" means, for this clause, 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 the trust is granted registration. The charge on the interest limb, and on the dividend limb where the special purpose vehicle has exercised the option under section 115BAA, falls instead on the unit holder, by section 115UA(3) read with the exclusion in section 10(23FD). It arises in Charitable Trusts & Exemption, Capital Gains Exemptions and TDS Defaults matters, on section 10(23FC), section 10(23FCA), section 10(23FD), section 115UA, section 115UA(2), section 115UA(3), section 194LBA, section 194LBA(2A), section 115BAA, section 2(13A), section 56(2)(xii) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Split the receipt into the interest limb and the dividend limb at source, in the trust's books and in the Form 64A statement, because everything downstream — the unit holder's exemption, the rate of deduction, and whether any deduction is made at all — turns on that split. For the dividend limb, obtain from each special purpose vehicle a written confirmation whether it has exercised the option under section 115BAA and for which year. That single fact decides both the unit holder's charge under section 10(23FD) and whether section 194LBA(2A) switches the deduction off. Do not treat interest earned by the trust on anything other than an SPV as exempt. Park it expressly in the section 115UA(2) computation at the maximum marginal rate rather than leaving it in the exempt column for the Assessing Officer to find. Where the year under assessment is before 2021-22, read the dividend limb in its earlier form: until Act No. 12 of 2020 took effect on 1 April 2021 sub-clause (b) covered dividend referred to in sub-section (7) of section 115-O, which was the dividend distribution tax exemption then in force, and not dividend received or receivable from a special purpose vehicle at large.
Validity check could not be completed. Validity check could not be completed. The clause as it now stands could not be read on any consolidated departmental page, because nine departmental section 10 URLs were fetched and none reached clause (23FC), the furthest any of them reaching clause (23DA); what is stated here is built from the enacting words of the Finance (No. 2) Act, 2014, the amending words of the Finance Act, 2020 and the cross-references in two year-stamped departmental section 194LBA pages, one of 2019 vintage and one of 2024. Whether any Finance Act after 2020 has further amended clause (23FC) was not established, and no judicial treatment was searched for. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
A limit on this entry that the reader should know about. The consolidated departmental page for section 10 could not be read as far as clause (23FC): nine departmental section 10 URLs were fetched and none reached it. /w/section-10-65 (Year 2025) truncated at clause (12C); /w/section-10-64 (Year 2024 No. 2), /w/section-10-63 (Year 2024 No. 1), /w/section-10-62, /w/section-10-60 (Year 2021) and /w/section-10-58 (Year 2020) truncated at clause (23C); /w/section-10-57 (Year 2017), /w/section-10-66 (Year 2018) and /w/section-10-67 (Year 2019 No. 1) got furthest, truncating at clause (23DA). Each fetch was required to answer "NOT REACHED — page ends at <clause>" rather than "absent", which is what each did. The suffixless /w/section-10 serves section 10 of the Bharatiya Nagarik Suraksha Sanhita, 2023; /w/section-10-68 serves section 10 of the Finance Act, 1997 and /w/section-10-70 section 10 of a Finance Act stamped Year 1999. The suffixless URL is the eighteenth departmental /w/ URL this project has caught serving a different instrument. Because of that, sub-clause (b) is NOT quoted in full anywhere in this entry: what is established is that sub-clause (b) exists, that from 1 April 2021 it ends with the words "received or receivable from a special purpose vehicle", and that it is the dividend limb. That comes from the amending words in section 7(II)(b) of the Finance Act, 2020, read verbatim, and is confirmed independently by the departmental section 194LBA pages, which distinguish sub-clause (a) from sub-clause (b) of clause (23FC) and, in sub-section (2A), tie sub-clause (b) to the section 115BAA option. The interest limb and the Explanation are quoted from the enacting words of section 5(b) of the Finance (No. 2) Act, 2014. The intermediate amendment that split the clause into sub-clauses (a) and (b) could not be identified on this pass. What is established about sub-clause (b) is this. It existed by 2019, because the departmental section 194LBA page stamped Year 2019 (No. 2) refers to "sub-clause (a) of clause (23FC)"; it cannot pre-date sub-section (7) of section 115-O, because until 1 April 2021 it read "referred to in sub-section (7) of section 115-O", and the departmental section 115-O page at /w/section-115-o, stamped Year 2015, prints only six sub-sections and no sub-section (7), while /w/section-115o-9, stamped Year 2019 (No. 2), prints it. So the split was made between 2015 and 2019 by the Act that inserted section 115-O(7), which was not named on this pass. That the limb is the DIVIDEND limb is established by section 7(II)(b) of the Finance Act, 2020, read verbatim, and by sub-section (2A) of section 194LBA, which ties sub-clause (b) to the special purpose vehicle's section 115BAA option; the sub-clause is nonetheless not reproduced here as a single consolidated sentence. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Statutory position — no holding is asserted; this entry reproduces statutory text. Income of a business trust by way of interest received or receivable from a special purpose vehicle, and income of a business trust by way of dividend received or receivable from a special purpose vehicle, are not included in the trust's total income, so they are not charged in the trust's hands under section 115UA(2). "Special purpose vehicle" means, for this clause, 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 the trust is granted registration. The charge on the interest limb, and on the dividend limb where the special purpose vehicle has exercised the option under section 115BAA, falls instead on the unit holder, by section 115UA(3) read with the exclusion in section 10(23FD).
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