Clarification
Regarding Scope of Additional Income Tax on Distributed Income u/s 115R of the
Income Tax Act
Circular :
06/2014
Dated:
11/02/2014
Section 115R of the Income-tax
Act, 1961 (‘Act’) provides for levy of additional income tax on
distributed income to unit holders (hereinafter
referred to as 'additional income tax’).
It has been reported that some field
authorities are taking a view that mutual fund/specified companies are required
to pay additional income tax u/s 115R(2) not only on income distributed by way
of dividend but also on payments made at the time of redemption/ repurchase of
units as well as at the time of allotment of bonus units to existing investors.
The matter has been examined by the
board. Section 115R is placed under Chapter XII-E of the Act, which is titled
as "SPECIFIC PROVISIONS RELATING TO TAX ON DISTRIBUTED INCOME” and
prescribes special provisions for taxing ‘distributed income’, which is not
taxed under any other provisions of the Act.
Section 115R provides that any
amount of income distributed by (i) a specified company, or (ii) a mutual fund to its unit holders shall
be chargeable to tax and such entities shall be liable to pay additional
tax on such distributed income at the rates prescribed
therein. The income so distributed by such entities is the dividend paid to the unit holders and is liable to
tax under this section.
However, redemption/repurchase
of units would not attract levy of tax under section
115R(2) as such income is not of the nature of income ‘distributed’ to
the unit holders and hence lies outside the purview of this section.
Further, the income so distributed by the mutual fund or specified company
in the hands of the recipient unit holder is specifically exempt from tax u/s 10(35).
Proviso to section 10(35) stipulates that exemption of income under this
section is not applicable to those cases where transfer of units takes place. The
recipient of such income is liable to pay capital gain tax, if applicable on transfer
of such units as per the relevant provisions of the Act and shall not be subject
to additional income tax u/s 115R.
Similarly, bonus units at the time
of issue would not be subjected to additional income tax u/s 115R since issue
of bonus units is not akin to distribution of income by way of dividend. This may
be inferred from provisions of section 55 which prescribes that ‘cost of acquisition’
of bonus units shall be treated as nil for purposes of
computation of capital gain tax.
In view of the above position, CBDT,
clarifies that additional income tax u/s 115R is to be levied on income distributed
by way of dividend to unit holders of mutual fund or specified companies and
receipts from redemption/repurchase of units or allotment of additional units by
way of bonus units would not be subjected to levy of additional income tax
under that section.
Regards
CA. Mona Singhal
Partner
Arpit Gupta & Associates
Chartered Accountants
701, Nirmal Tower,
26, Barakhamba Road,
Connaught Place, Delhi-110001
Mobile:- 8130711885
Blog: www.arpitguptaassociate.blogspot.in
