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

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