Section 56(2)(xii) of the Income-tax Act, 1961, provides that any sum received by a unit holder from a business trust, which is not an income of the business trust as defined under section 10(23FC) or 10(23FCA) and is not chargeable to tax under section 115UA, shall be charged to income tax under the head “Income from other sources”.

In simple terms, any income received by a unit holder from a business trust, other than dividends, interest, rent, long-term and short-term capital gains, will be taxed under Section 56(2)(xii). This is a new provision that was introduced in the Finance Act, 2023, to plug a loophole in the income tax law.

Examples of income that would be taxed under Section 56(2)(xii) include:

• Profit element in repayment of loan by business trust
• Income from sale of business trust units by unit holder
• Income from other investments made by business trust

It is important to note that the above list is not exhaustive. Any other income received by a unit holder from a business trust, which is not specifically covered by any other provision of the income tax law, will be taxed under Section 56(2)(xii).

Case laws

In the case of CIT v. C.N. Ramanathan (2015) 372 ITR 392 (Madras HC), the court held that the sum received by a partner on dissolution of partnership is taxable as capital gains, and not as income from business or profession. The court reasoned that the dissolution of a partnership is a winding-up process, and the sum received by a partner on dissolution is in the nature of a capital repayment.

In the case of ACIT v. M/s. A.R. Engineering Works (2008) 309 ITR 144 (Delhi HC), the court held that the sum received by a shareholder on liquidation of a company is taxable as capital gains, and not as income from business or profession. The court reasoned that the liquidation of a company is a winding-up process, and the sum received by a shareholder on liquidation is in the nature of a capital repayment.

Based on these case laws, it is likely that the sums received by a unit holder from a business trust will also be taxable as capital gains, and not as income from other sources under Section 56(2). However, it is important to note that this is just a hypothetical interpretation, and there is no definitive answer until a case law specifically on this issue is decided by the courts.

Examples

• Income distribution: This is the most common type of sum received by a unit holder. It is a distribution of the business trust’s income to its unit holders.
• Capital gain distribution: This is a distribution of the business trust’s capital gains to its unit holders.
• Return of capital: This is a repayment of a portion of the unit holder’s investment in the business trust.
• Bonus distribution: This is a special distribution made by the business trust to its unit holders.
• Special distribution: This is a distribution made by the business trust to its unit holders for a specific purpose, such as to repay debt or to finance a new project.

In addition to the above, the following sums received by a unit holder from a business trust may also be taxable under Section 56(2):

• Interest on loans made to the business trust: This interest is taxable as income from other sources.
• Reimbursement of expenses incurred by the unit holder on behalf of the business trust:This reimbursement is taxable as income from other sources.
• Any other sum received by the unit holder from the business trust which is not in the nature of income or capital gains: This sum is also taxable as income from other sources.

FAQ QUESTIONS

Q: What is a business trust?

A: A business trust is a type of trust that is created to hold and manage assets and to generate income for its unit holders. Business trusts are typically used to invest in real estate, infrastructure, and other assets.

Q: What is Section 56(2) of the Income-tax Act, 1961?

A: Section 56(2) of the Income-tax Act, 1961, deals with the taxation of any sum received by a unit holder from a business trust. It states that any such sum shall be chargeable to tax as income from other sources, unless it is in the nature of interest income or dividend income (in a case where the SPVs have opted for special tax regime introduced under section 115BAA of the Act) or any income by way of leasing or renting, which is exempt in the hands of unitholder.

Q: What are the types of sums that are received by unit holders from a business trust?

A: The following types of sums are received by unit holders from a business trust:

• Distributions on units
• Redemption proceeds
• Bonus units
• Other payments received in connection with the holding of units

Q: How are sums received from a business trust taxed under Section 56(2)?

A: Sums received from a business trust are taxed under Section 56(2) as income from other sources in the year in which they are received. The taxpayer is required to pay tax on the gross amount of the sum received, without any deductions.

Q: What are the exceptions to Section 56(2)?

A: The following sums are exempt from Section 56(2):

• Sums received in the nature of interest income or dividend income (in a case where the SPVs have opted for special tax regime introduced under section 115BAA of the Act) or any income by way of leasing or renting.
• Sums received on redemption of units, to the extent of the cost of acquisition of the units.
• Sums received on bonus units, to the extent of the face value of the units.
• Sums received on account of the liquidation of the business trust, to the extent of the cost of acquisition of the units.

Q: What if I receive the sum from a business trust in installments?

A: If you receive the sum from a business trust in installments, the tax is levied on the total amount received, irrespective of the number of installments.