Section 56(2)(xii)

Section 56(2)(xii) — the law in short

What the courts have decided on section 56(2)(xii), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Statutory position — section 56(2)(xii): a business trust distribution that is neither 10(23FC)/(23FCA) income nor taxed under 115UA(2) is taxable above the issue price from 1 April 2024 CBDT Circulars & InstructionsCuts both ways
  My client's InvIT distributes most of its payout as 'repayment of debt' and the annual statement shows it as a return of capital. Is that still tax-free?
  No, not for distributions falling in the previous year 2023-24 or later. The Finance Act 2023 inserted clause (xii) in section 56(2) with effect from 1 April 2024, so a 'specified sum' received by a unit holder from a business trust is chargeable as income from other sources, and the Explanation defines the specified sum by the formula A minus B minus C — the cumulative distributions to that unit which are neither income referred to in section 10(23FC) or 10(23FCA) nor chargeable under section 115UA(2), less the amount at which the unit was issued by the trust, less anything already taxed under the clause in an earlier year.
• Statutory position — s.10(23FC): the business trust's own exemption for interest and for dividend from a special purpose vehicle, and what a "special purpose vehicle" is CBDT Circulars & InstructionsCuts both waysNo later treatment found
  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.
• Statutory position — s.10(23FD): the unit holder's exemption for the rest of a business trust distribution, and the s.115BAA switch that decides whether SPV dividend is taxed in his hands CBDT Circulars & InstructionsCuts both waysNo later treatment found
  My client holds units in a listed REIT. The Form 64B shows several components. Which of them does he actually pay tax on, and on what basis is the rest exempt?
  Clause (23FD) of section 10 exempts, in the unit holder's hands, any distributed income referred to in section 115UA received by him from the business trust — but not the proportion of it that is of the same nature as the income referred to in sub-clause (a) of clause (23FC), or clause (23FCA), or sub-clause (b) of clause (23FC) in a case where the special purpose vehicle has exercised the option under section 115BAA. So the interest component and the direct-rent component are always taxable to him; the special purpose vehicle dividend component is taxable to him only if that vehicle is on the concessional corporate rate in section 115BAA, and is otherwise exempt; and everything else the trust distributes out of income that has already borne tax at trust level under section 115UA(2) is exempt. The words carrying the section 115BAA condition were put into the clause by section 7(II)(c) of the Finance Act, 2020 with effect from 1 April 2021.
• Statutory position — s.2(13A): a "business trust" is a trust registered as an InvIT or a REIT, and since 1 April 2021 its units need not be listed CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer says my client cannot be a "business trust" because its units are not listed on any stock exchange, so the whole of Chapter XII-FA is denied to it. Is that still the law?
  No. Section 2(13A) now defines a business trust simply as a trust registered as an Infrastructure Investment Trust under the SEBI (Infrastructure Investment Trusts) Regulations, 2014, or as a Real Estate Investment Trust under the SEBI (Real Estate Investment Trusts) Regulations, 2014, both made under the Securities and Exchange Board of India Act, 1992. The closing words that used to require the units to be listed — "the units of which are required to be listed on recognised stock exchange in accordance with the aforesaid regulations" — and the word "and" that carried them were both omitted by Act No. 12 of 2020 with effect from 1 April 2021. For any previous year from 2020-21 onwards, listing is irrelevant to the definition; registration is everything.
• Statutory position — section 115UA: what a REIT or InvIT passes through, what it pays at the maximum marginal rate, and the 2023 carve-out CBDT Circulars & InstructionsCuts both ways
  My client holds units in a listed REIT. Which part of what the trust distributes is taxable in his hands, and what does the trust itself pay tax on?
  Section 115UA(1) makes the distributed income of a business trust retain, in the unit holder's hands, the same nature and proportion it had in the trust's, and section 115UA(3) charges to tax in the unit holder's hands the distributed income which is of the nature referred to in clause (23FC) or clause (23FCA) of section 10 — broadly, interest and dividend from the special purpose vehicle, and rent from directly held property. Everything else forming the trust's own total income is charged in the trust's hands at the maximum marginal rate under section 115UA(2), subject to sections 111A and 112; and since 1 April 2024 sub-section (3A) removes the character-retention rule altogether for a sum charged under section 56(2)(xii).

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.