CBDT clarify that section 115R is applicable only in respect of income distributed by way of dividend.
No additional income tax is required to be paid by a specified company or a mutual fund in respect of redemption/repurchase of units as well as at the time of allotment of bonus units to existing units.
Consequently CBDT also clarify that the benefit of exempt income under section 10(35) is only available in respect of dividend distribution and normal tax shall be payable by assessee on redemption/repurchase/allotment of bonus units as per Income Tax Act.
Circular no. 6/2014
Dated The 11th February, 2014
Subject: – 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 s (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 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 units.
3. Then 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 T0 TAX ON DISTRIBUTED IN COME “and prescribed special provisions for taxing ‘distributed income’, which is not taxed under any of the provision 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 incomes distributed by such entities are 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 holders 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 gain tax, if applicable, on transfer of such units as per relevant provision of the Act and shall not be subject to additional income tax act 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 are not akin to distribution of income by way of dividend. This may be inferred from provision of section 55 of the Act which prescribed that ‘cost of acquisition’ of bonus units shall be treated as nil for the purpose of computation of capital gains tax.
7. In view of above Position, Central Board of Direct Taxes, in exercise of its power 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.