Archives November 2022

WHAT IS A BUSINESS TRUST?

Section 2(13A) of Income Tax Act defines Business Trust as below: “Business trust” means a trust registered as, —

 (i)  an Infrastructure Investment Trust under the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992); or

 (ii)  a Real Estate Investment Trust under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992)

Business Trust act like a mutual fund that invest into real estate projects or infrastructure projects by raising resources from different investors. These trusts can raise capital by way of issue of units which are listed on a recognized stock exchange. Business trusts can also raise debt from people – both residents and non-residents. It is not necessary that the business trust must be listed, however it is mandatory for it to be registered with SEBI with effect from 1^st April, 2020.

REAL ESTATE INVESTMENT TRUST (REITs)

REITs are companies which owns, manages and finance few income-generating real estate and offers its units to public investors. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and even timberlands.

Globally, REITs invest primarily in completed, revenue generating real estate assets and distribute major part of the earning among their investors. Typically, most of such investments are in completed properties which provide regular income to the investors from the rentals received from such properties.

REITs are principally expected to invest in completed assets. Income would consist of rental income, interest income or capital gains arising from sale of real assets / shares of SPV. They are managed by professional managers which usually have diverse skill bases in property development, redevelopment, acquisitions, leasing and management etc. Listed REITs provide liquidity and therefore provide easy exit to the investors.

INFRASTRUCTURE INVESTMENT TRUSTS (InvITs)

Infrastructure Investment Trusts make direct investment in infrastructure facilities which are yielding income e.g., Toll Road, Railways, Inland waterways, Airport, Urban public transport. InvITs will allow infrastructure developers to monetize specific assets, helping them use proceeds for completing projects of theirs stalled for want of funds.

Structure of InvITs is quite similar to REITs. The main difference is InvITs make investment into infrastructure facilities whereas REITs make investment in commercial real estate properties.

TAXABILITY UNDER SECTION 115 UA:

1. IN THE HANDS OF THE UNIT HOLDERS:

The income of unit holders of Business Trust can be categorized into two parts.

Tax on Income Distributed by Business Trust:

There is a special taxation regime for taxability of income distributed by such business trusts in the hands of the unit holders. The 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 holders, as it had been received by, or accrued to the business trust. The person distributing the income on behalf of the business trust is required to furnish the statement of income distributed to the unitholder in Form No. 64B by the 30th June. Example Mr. Saurabh, a resident individual, has received the following ‘Form 64B – Statement of income distributed by a business trust to the unit holders’ for the Financial Year 2017-18.

S. No.	Amount Distributed	Date of Distribution	Amount of income in the nature of interest referred to in Section 10 (23FC)	Amount of Income in the nature of renting or leasing referred to in Section 10(23FCA)	Amount of Income in the nature of Dividend	Amount of Other Income
1	50,000	25/10/2020	30,000			20,000
2	75,000	16/11/2020		25,000	27,000	23,000

Let’s see how taxability of each of such income will be determined in the hands of Mr. Saurabh

• Income in the nature of Interest: The income in the nature of interest referred to in sub clause (a) of Section 10(23FC) is chargeable to tax in the hands of the unit holders. If the unit holder is non-resident the rate of tax on such income is 5% and for resident unit holders, it is chargeable to tax at slab rates. This income is exempt in the hands of the business trust. This interest received or receivable from a special purpose vehicle by the business trust is accorded a pass-through treatment and is taxable directly in the hands of the unit holders. The business trust is liable to deduct TDS on this interest income at the rate of 10% in the case of a resident unit holder and 5% in the case of Non-resident unit holders. Example Mr. Saurabh has to include the income of Rs.30,000 distributed by the business trust on 25/10/2017 as an interest income in his Income Tax Return.

• Rental Income: The rental income referred to in Section 10(23FCA) is taxable income in the hands of the unit holders. Any income of a business trust, being a real estate investment trust, 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 business trust. This income is chargeable to tax in the hands of the unit holders as rental income. The REIT is liable to deduct TDS on such distributed income at the rate of 10% for resident unit holders and at the rates in force for non-resident unit holders. Example Mr. Saurabh has to show the income of Rs.25,000 distributed on 16/11/2017 by the business trust as rental income in his Income Tax Return.

• Dividend Income: Earlier, the dividend component of the income distributed by the business trust is exempt in the hands of the unit holder. The business trust was also provided an exemption in respect of such income. However, with effect from April 1, 2020, there has been an overhaul of India’s dividend tax regime. Until now Indian companies were required to pay DDT and shareholders (except non-corporate residents) were exempt. Going forward, the tax incidence will shift from the company to the shareholders.

• Any Other Income: Any distributed income, referred to in section 115UA, received by a unit holder from the business trust is exempt in the hands of the unit holder as per Section 10(23FD). Example The income of Rs.20,000 received on 25/10/2017 and Rs.23,000 received on 16/11/2017 is exempt in the hands of Mr. Saurabh.

Tax on Income on Sale of Units

The profit from the sale of the units of the business trust is chargeable to tax under the head capital gains. The tax treatment will differ for the Short-term capital gains and long-term Capital gains. The period of holding of units of the business trust to qualify as a long-term capital asset is more than 36 months.

• Short-Term Capital Gain: The short-term capital gains on which STT is paid is chargeable to tax at the rate of 15% as per section 111A. The deductions under Chapter VI-A are not allowed from such capital gains.
• Long-Term Capital Gain: The long-term capital gains on which STT is paid were exempt in the hands of the Unit holders under Section 10(38) till the A.Y 2018-19. Exemption for long-term capital gains arising from the transfer of units of business trust has been withdrawn by the Finance Act, 2018 with effect from Assessment Year 2019-20 and a new section 112A is introduced in the Income-tax Act. As per Section 112A, long-term capital gains arising from the transfer of a unit of a business trust shall be taxed at 10% (without giving the benefit of indexation). The tax on capital gains shall be levied in excess of Rs.1 lakh. The deductions under Chapter VI-A are not allowed from such capital gains.

2. IN THE HANDS OF THE BUSINESS TRUST: 

REITs have been conferred as hybrid pass-through status for income tax purposes, meaning that the onward distribution of income by a REIT to its unit holders retains the same character as the underlying income stream received by the REIT. Interest income and rental income from property held directly by the trust, is not taxable in the hands of the REIT. However, any capital gains on the sale of assets/ shares of an SPV are taxable in the hands of the trust, depending on the period of holding whereas dividend income is not liable to tax. Further, any other income earned by a REIT shall be subject to tax at the maximum marginal rate. Business trust is compulsorily required to file return as per section 139(4E)

STATEMENT UNDER SUB-SECTION (4) OF SECTION 115UA:

(1) The statement of income distributed by a business trust to its unit holder shall be furnished to the Principal Commissioner or the Commissioner of Income-tax within whose jurisdiction the principal office of the business trust is situated, by the 30th November of the financial year following the previous year during which such income is distributed;

Provided that the statement of income distributed shall also be furnished to the unit holder by the 30th June of the financial year following the previous year during which the income is distributed.

(2) The statement of income distributed shall be furnished under sub-section (4) of section 115UA by the business trust to –

• the Principal Commissioner or the Commissioner of Income tax referred to in sub-rule (1), in Form No. 64A, duly verified by an accountant in the manner indicated therein and shall be furnished electronically under digital signature;
• the unit holder in Form No. 64B, duly verified by the person distributing the income on behalf of the business trust in the manner indicated therein.

FORM 64A

This form will comprise of the statement of income paid or credited by a venture capital company under section 115U of the Income Tax Act 1961. Any individual who is responsible of making payment of the income distributed on behalf of a business trust to a unit holder is required to furnish a statement to the authority within the prescribed time. This form can be submitted at the post offices and banks designated for this purpose. Form 64A can be found online on the official Income Tax filing website and can be downloaded from Forms download section or Directly download Form 64A. The form contains several details which need to be filled out before submission. It is important to fill out the correct details before submitting the form. Copy of certificate of registration under SEBI, copy of trust deed registered under the provisions of the registration act, 1908, Audited accounts including balance sheet, annual report and certifies copies of income shall be enclosed with the form 64A at the time of submission.

FORM 64B

The person distributing the income on behalf of the business trust is required to furnish the statement of income distributed to the unitholder in Form No. 64B by the 30th June.

SECTION 54 OF INCOME TAX ACT, 1961

Section 54 gives exemption to a taxpayer who sells his residential house and acquires another residential house property from the sale proceeds. Only an Individual/HUF can avail this benefit under this section.

Section 54 provides the exemption which will be the lower of the following:

• Amount of capital gains arising on transfer of residential house;
• Amount invested in purchase/construction of new residential house property including the amount deposited under Capital Gains Deposit Account Scheme.

Exemption is available in respect of only one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption can only be claimed for one house property under this section. No exemption is available in respect of house purchased outside India.

In order to control any misutilization of the exemption claimed under section 54, this section restricts the taxpayer to sell the new house property till 3 years. If the taxpayer sells the new house before 3 years the benefit received under this section will be withdrawn and the amount of capital gain which was earlier claimed as exempt, will be deducted from the cost of acquisition of the new house at the time of computation.

SECTION 54EC OF INCOME TAX ACT, 1961

Section 54EC provides exemption to any assessee for the capital gain arising on sale of land or building, if when the amount received on sale is invested in Specified Bonds. Specified Bonds refer to those bonds issued by the Rural Electrification Corporation, National Highway Authority of India, Power Finance Corporation Limited, Indian Railway Finance Corporation or bonds issued by the Central Government if specified, which are redeemable after 5 years and are issued on or after 01.04.2018.

The Capital gain arising should be invested in a long term specified Asset within 6 months from the date of transfer.

The exemption shall be the lower of:

• Actual Capital Gain; or
• Amount invested in Specified Bonds (less than Rs.50 Lakhs)

However, the maximum investment that can be made under this section is Rs.50 Lakhs
In case bonds are transferred or converted or availed loan or advance against these bonds before the expiry of 5 years, the Capital Gain exempted earlier shall be taxed as LTCG in the year of violation of the condition.

SECTION 54B OF INCOME TAX ACT, 1961

Section 54B provides the benefit of exemption to those Individuals/HUFs who wishes to sell their agricultural land and acquire another agricultural land from the sale proceeds. The old agricultural land acquired shall be used by him or his parents for at least 2 years before the transfer and the maximum period for the new investment to be made in agricultural land is 2 years from the date of such transfer.

Exemption under section 54B shall be lower of:

• Amount of capital gain arising on transfer of agricultural land; or
• Investment in new agricultural land including the amount deposited under Capital Gain Account Scheme.

The exemption shall be withdrawn if the new agricultural land is sold before the period of 3 years from the date of acquisition, and therefore the amount, earlier exempt, will be reduced from the cost of acquisition of agricultural land.

SECTION 54D OF INCOME TAX ACT, 1961

Section 54D gives the benefit to claim exemption to any assessee where capital gain arises on compulsory acquisition of land or building forming a part of industrial undertaking and reinvesting the amount for acquiring new land or building for the purpose of shifting or re-establishing the industrial undertaking.

Exemption under this section is available for both short term and long-term capital gain.

It is mandatory that the transferred asset should have been used for the industrial purpose for a period of at least two years before the date of acquisition. The transferor is required to invest the amount in purchasing any other land or building for the purpose of shifting or re-establishing the industrial units. The said amount needs to be invested within a period of three years from the date of receipt of the compensation

The exemption under section 54D would be lower of:

• Capital Gain on compulsory acquisition of land or building; or
• Amount of investment for acquisition of new land or building

The exemption would be retracted if the new land or building acquired is transferred before 3 years from the date of acquisition and hence, capital gain exempted under this section would be reduced from the cost of acquisition at the time of computation of capital gain.

SECTION 54F OF INCOME TAX ACT, 1961

Section 54F provides the exemption to an Individual/HUF on sale of any long-term capital asset (other than residential house property) and the proceeds shall be reinvested for purchasing or constructing a residential house property. Maximum period for investing in new residential property by purchase is one year before or two years after the date of transfer and by construction is 3 years from the date of transfer.

Exemption under this section shall be available as:

• Full amount of capital gain is exempt in case full consideration is invested.
• Although in case proportionate consideration is invested, exemption will be as

Exemption = Long term capital gain * Amount re-invested / Net consideration

Here, Net consideration refers to the value of consideration excluding any expenditure incurred exclusively for the purpose of transfer.

Exemption would be withdrawn if the taxpayer sells the residential property, whether purchased or constructed, before 3 years from the date of transfer. Exemption under Section 54F will not be available in certain cases:

• If the taxpayer already owns more than one residential house property at the date of transfer of the asset
• If the taxpayer purchases additional residential house (other than the new house purchased/constructed for exemption under Section 54F) within a time frame of one year from the date of transfer.
• If the taxpayer constructs additional residential house (other than the new house constructed/purchased for exemption under Section 54F) within a time frame of three years from the date of such transfer.

SECTION 54EE OF INCOME TAX ACT, 1961

Exemption under section 54EE is available only when the assessee has earned capital gain on the sale of long-term capital gain and reinvested the sale proceeds either partly or in whole in “long term specified assets”. Long Term Specified Assets refers to the unit of funds issued on or after 1^st April, 2019 as notified by the Government.

The investment must be made withing 6 months from the date of transfer of such specified asset. And, the total investment in such assets cannot exceed the limit of Rs.50 lakhs during the financial year and even in the subsequent financial year.

Exemption under section 54EE shall be lower of:

• Amount of capital gain arising on the transfer; or
• Rs.50 lakhs.

The amount so invested in the new specified asset cannot be transferred or converted within a period of 3 years. However, if the taxpayer transfer or converts the asset before the lock in period of 3 years, the exemption would be withdrawn and he/she would have to pay long-term capital gain on such transfer.

CAPITAL GAIN DEPOSIT ACCOUNT SCHEME:

To claim exemption under section 54 or under any other subsections as mentioned above, the taxpayer shall accept the conditions according to each section. If the capital gain arising on transfer of the asset is not utilized till the date of filing the return of income, then the benefit of exemption can be availed by depositing the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988 (hereafter referred as Capital Gains Account Scheme). The new asset can be acquired by withdrawing the amount from the said account within the specified time-limit as the case may be.

NON UTILIZATION OF AMOUNT DEPOSITED IN CAPITAL GAIN DEPOSIT ACCOUNT SCHEME:

 In case the amount deposited under the Capital Gains Account Scheme is not utilized within the specified period for acquisition of the asset, then the unutilized amount (for which exemption is claimed) will be taxed as long- term capital gain of the year in which the specified period gets over.

WHAT IS ADVANCE TAX?

Advance tax means income tax should be paid in advance instead of lump sum payment at year end. It is also known as pay as you earn tax. These payments have to be made in instalments as per due dates provided by the income tax department.

Total estimation is used for the calculation of advance tax.

WHO SHOULD PAY ADVANCE TAX?

• If the total tax liability exceeds Rs 10,000 in a financial year in case of salaried, freelancers and businesses, then advance tax shall be payable.
• Senior citizens whose income does not come out of any business or profession, are exempt from paying advance tax.
• In case of Presumptive income under Section 44AD for Businesses & for Professionals, the taxpayers have to pay the whole amount of their advance tax in one instalment on or before 15th March of any financial year. Although, they can pay all of their tax dues till 31st March.

ADVANCE TAX DUE DATES

Advance Tax has to be paid in different installments.  The due dates for payment of advance tax are as follows:

STATUS	By 15th June	By 15th September	By 15th December	By 15th March
All assessee (other than eligible assessee as referred to in section 44AD/44ADA)	Minimum 15% of Advance Tax	Minimum 45% of Advance Tax	Minimum 75% of Advance Tax	100% of Advance Tax
Taxpayers who opted for presumptive taxation scheme of section 44AD/44ADA	Nil	Nil	Nil	100 % of Advance Tax

INTEREST UNDER SECTION 234B

Interest under section 234B is applicable in two of the following cases:

1. When the tax liability after reducing TDS for the financial year is more than Rs.10,000 and advance tax hasn’t been paid, or
2. The advance tax is paid, but the amount paid is less than 90% of the ‘assessed tax’.

• Interest is calculated @ 1% on (Assessed Tax less Advance Tax).
• Part of a month is rounded off to a full month.
• The amount on which interest is calculated is also rounded off in such a way that any fraction of a hundred is ignored.

Example

Assume that Saurabh needs to pay a total tax of Rs.1,00,000. And, TDS of Rs 85,650 has already been deducted from his income. Saurabh paid Rs.5,000 on 25th March and he paid the balance amount at the time of filing his return on 17th July. Let’s check whether Saurabh needs to pay interest under section 234B.

• First let’s calculate assessed tax.
• Assessed tax = Rs 1,00,000 (total tax) – Rs 85,650 (TDS) = Rs 14,350
• Saurabh should have paid at least 90% of the assessed tax or 90% of Rs 14,350 which is Rs 12,915 before 31st March. However, he paid only Rs 5,000.
• Therefore, Saurabh is liable to pay interest under section 234B.
• Rs 14,350(Assessed Tax) – Rs 5000(Advance Tax) = Rs 9350.
• Interest will be calculated as : Rs 9350 x 1% x 4 months (April, May, June, July) = Rs 374
• Rs 374 is the interest payable under section 234B by Saurabh.

INTEREST UNDER SECTION 234C

Income Tax Department strives to make it as easy and convenient for citizens to comply with advance tax payments. So, one has the option of paying it in 4 instalments quarter-wise over the financial year.

However, if there is still any default, there are consequences in the form of interest penalty. Section 234C deals with the interest to be levied on the defaulters of payment of Advance Tax installment.

The interest for late payment is set at 1% on the amount of tax due. It is calculated from the individual cut-off dates shown above, till the date of actual payment of outstanding taxes.

The interest under this section is charged according to the scheduled installments. The taxpayer has to pay interest if he/she has paid the advance tax

• Less than 12% of assessed tax before 15th June
• Less than 36% of assessed tax before 15th September
• Less than 75% of assessed tax before 15th December
• Less than 100% of assessed tax before 15th March/31^st March

Example

Mr. X has the total tax liability of Rs.1,00,000. This tax is to be paid in 4 installments. The calculation of interest to be charged for delay will be calculated as follows:

Due Dates	Advance Tax to be paid	Advance Tax actually paid	Shortfall	Months for which interest is charged	Penal Interest
15th June	15,000 (15%)	5,000	10,000	3	10000*1%*3= 300
15th Sept	45,000 (45%)	25,000	20,000	3	20,000*1%*3 = 600
15th Dec	75,000 (75%)	35,000	40,000	3	40,000*1%*3 = 1200
15th March	1,00,000 (100%)	50,000	50,000	1	50,000*1%*1= 5000

CRITERIA UNDER WHICH ADVANCE TAX INTEREST IS NOT PAYABLE

In case, there is any shortfall in the payment of advance tax due if it is on account of underestimation or failure to estimate the amount of capital gains or speculative income (lottery income, gambling income, etc), then the interest would not be payable.

Also, interest would not be payable if the taxpayers pay his dues before the end of the financial year.

FAQs

Q1. Does an NRI have to pay advance tax?

• An NRI, who has an income accruing in India and the tax liability is in excess of Rs 10,000, is liable for payment of advance tax.

Q2. A senior citizen only has interest and pension income. Should he/she pay advance tax?

• Resident senior citizens who do not have income arising out of business or profession, are not liable for advance tax.

Q3. Can an assessee claim deduction under 80C while estimating income for determining my advance tax?

• Yes. An assessee can consider all the deductions under 80C (whichever applicable within the limit) while estimating the income for the financial year for computing your advance tax liability.

Q4. How can we make payment for advance tax?

• Advance tax payment can be made using Challan 280 just like any other regular tax payment.

Q5. What happens if an assessee misses the deadline for payment of the last installment of advance tax, i.e., on 15th March?

• Payment of advance tax can be made on or before 31st March of the year. Such payment will still be treated as advance tax only.