Circular No.
06/2014, F.No. 225/182/2013-ITA.II, dated 11th February, 2014
Clarification
regarding scope of Additional Income-Tax on Distributed Income under Section
115R of the Income-tax Act –regarding
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’).
2. It has been reported that some field
authorities are taking a view that mutual funds/specified companies are
required to pay additional income tax under sub-section (2) to section 115R of
the Act 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.
3. 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.
4. Sub-section (2) of section 115R of
the Act 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 income 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 of units or repurchase of units would
not attract levy of tax under sub-section (2) to section 115R of the Act as
such income is not of the nature of income ‘distributed” to the unit holders
and hence lies outside the purview of this section.
5. 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 under section 10(35) of the Act. Proviso
to section 10(35) of the Act 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 gains tax, if applicable,
on transfer of such units as per relevant provisions of the Act and shall not
be subject to additional income tax under section 115R of the Act.
6. Similarly, bonus units at the time
of issue would not be subjected to additional income tax under section 115R of
the Act 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 of the Act
which prescribes that ‘cost of acquisition’ of bonus units shall he treated as
nil for purposes of computation of capital gains tax.
7. In view of above position, Central
Board of Direct Taxes, in exercise of its powers under section 119 of the Act
hereby clarifies that additional income-tax under sub-section (2) of section
115R of the Act is to be levied on income distributed by way of dividend to
unit-holders of mutual funds 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.
8. This may be brought to the notice of
all concerned.
9. Hindi version to follow.
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