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Assessee, a non-resident, filed its return of income by declaring income from rent and interest and claimed to carry forward of losses under the head' Capital Gains'. Further, the claim of carry forward of losses was enhanced by the assessee by filing a revised return. The return was processed under section 143(1), and the claim for carry forward of loss was denied contending the original return filed was invalid as the assessee failed to submit the acknowledgement of the original return to the Central Processing Centre (CPC).
The aggrieved assessee preferred an appeal to the CIT(A) but all in vain. The matter then reached the Pune Tribunal.
The Tribunal held that the assessee had furnished its original return well within the prescribed time, and the claim of carry forward of losses was denied only on the ground that the original return filed by the assessee was invalid for non-sending of acknowledgement to CPC.
The requirement of furnishing the return electronically had another procedural requirement of taking a printout of such electronically filed return and sending it to the CPC as an acknowledgement of having furnished the return electronically.
This second requirement of sending an acknowledgement of filed return to the CPC is only directory, and non-compliance, or late compliance of that cannot invalidate the compliance of the first mandatory requirement, to make an otherwise valid return a non-est.
Since the procedural requirement of furnishing the acknowledgement is only a directory requirement, one cannot equate its non-submission on the one hand with not filing the return at all.
Further, the assessee filed the request to condone the delay for non-furnishing acknowledgement in the material time, which was still pending before the board. Thus, the original return filed by the assessee can’t be treated as invalid.
Real Estate Infrastructure Trusts ('REITs) and Infrastructure Investment Trusts ('InvITs') have gained popularity in recent times among investors as they offer the opportunity to invest in alternate asset classes. Also, the Income Tax Act, 1961 ('Act' or 'ITA') provides for special tax regimes for REITs and InvITs (hereinafter referred to as 'Business Trust' collectively). The special regime was introduced in order to address the challenges of financing and investment in infrastructure and the real estate sector.
The Business Trust usually invests in special purpose vehicles ('SPV') through a combination of equity and debt. The provisions of ITA provide a pass-through status to a Business Trust in respect of the following income received by it:
The aforesaid income is taxable in the hands of unitholders, whereas any other distribution received by the unitholder from a Business Trust is not taxable in the hands of such unitholders but would be taxed at the Business Trust level.
The distributions received by the Business Trust also have an element of repayment of the debt, and such repayment is not taxable in the hands of the unitholder (as it is not covered under the aforesaid heads of income, which are accorded pass-through status). Further, for a Business Trust, the repayment of debt is a capital receipt and, therefore, cannot be considered income. Accordingly, the repayment of debt is not taxable in the hands of either the unitholder or the Business Trust.
The distribution of repayment of debt proceeds by a Business Trust to its unitholders was being made without any redemption of units, and thus the cost of the unitholders remained intact. This offered an undue advantage to the unitholders as they could claim higher costs based on subsequent redemption / secondary transfer of units. This has been plugged into the proposed amendment to Budget 2023.
According to the proposed amendment, any sum received by the unit holder of a Business Trust which is not in nature of interest, dividend or rental income (in the case of REIT) and is not chargeable to tax in the hands of the Business Trust, will be taxable as?income from other sources, in the hands of the unit holder.
However, where the sum received by a unitholder from a Business Trust is for the redemption of units or units held by him, the sum so received shall be reduced by the cost of acquisition of the unit or units to the extent such cost does not exceed the sum received.
The proposed amendment may now compel unitholders to evaluate their investments since previously untaxed distributions would now be taxed, thereby impacting the projected returns.
Below is an illustration providing simplified tax treatment under the existing and proposed regime:
Currently any gain on redemption of units is taxable as capital gains. However, pursuant to the proposed amendment, any distribution received from a Business Trust for the redemption of units (in excess of the cost of acquisition)?will be taxable under the head income from other sources instead of capital gains. This would mean that for a non-resident investor, such income would be taxed at 40% (plus applicable surcharge and cess) unless the rate is reduced / exempt under a tax treaty (which may not be the case, as most relevant tax treaties with India provide for source-based taxation for such income).
Even if the amendment was necessary to plug the loophole of the unintended benefit being availed by investors, the government could have proposed to tax the distribution received by the investors from Business Trust for the redemption of units as?capital gains,?instead of income from other sources; such a move would then be welcomed by all.
Technically, the redemption of units qualifies as a 'transfer' and should be taxable as 'capital gains'. Accordingly, investors should be able to tax the capital gains at concessional rates/claim loss on account of redemption (if any) which is restricted in the amendment proposed in the Finance Bill 2023. Given the denomination of the units in the case of Business Trust is generally high, i.e. INR 100,000. it is likely that the redemption of units would not exactly correspond to distribution proceeds. Hence there could be capital gain/loss arising on redemption of units. By according to the capital gain treatment, the investor would not be put in a disadvantageous position. In fact, in case of any gain on redemption, the investor would also be eligible for a beneficial rate of taxation/exemption under the relevant tax treaty.
If the government wants to ensure that Business Trusts remain lucrative, then the capital gain treatment should be accorded on the redemption of units, otherwise, the investment through this route would be majorly impacted.
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