Previous Year Question
Consider the following statements:
Statement-I: Interest income from the deposits in Infrastructure Investment Trusts (InvITs), distributed to their investors, is exempted from tax, but the dividend is taxable.
Statement-II: InvITs are recognised as borrowers under the ‘Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’.
Which one of the following is correct in respect of the above statements?
Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.
Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I.
Statement-I is correct, but Statement-II is incorrect.
Statement-I is incorrect, but Statement-II is correct.
Correct Answer: D
Detailed Solution
Statement-I is incorrect.
An Infrastructure Investment Trust or InvIT is a SEBI-registered trust. It mobilises funds from investors and invests in income-generating infrastructure assets, or in their Special Purpose Vehicles, such as roads, power-transmission systems, gas pipelines and telecommunications infrastructure.
Unit holders may principally receive the following types of distributions from an InvIT:
Interest income received from an SPV
Dividend income
Repayment of debt or loans
Other income of the InvIT
The basic tax principle applicable here is pass-through taxation. The character of an item of income in the hands of the InvIT is generally retained when it is distributed to unit holders.
Interest received by an InvIT from its SPV may be exempt at the InvIT level, subject to the applicable conditions. However, when the same interest income is distributed to unit holders, it is generally taxable in the hands of the unit holders. Therefore, it is incorrect to state that the interest income distributed to investors is exempt from tax.
The taxation of dividends may depend upon the tax regime exercised by the concerned SPV and the applicable statutory provisions. Consequently, the statement’s general proposition—“interest is exempt, but dividend is taxable”—is incorrect.
Statement-II is correct.
The Finance Act, 2021 introduced provisions relating to a Pooled Investment Vehicle into the SARFAESI Act, 2002. The definition of a Pooled Investment Vehicle includes a Business Trust registered under SEBI regulations. An InvIT is a category of Business Trust under the Income-tax Act.
As a result of this amendment, an InvIT:
can legally be treated as a borrower;
can borrow through debt securities or other permitted instruments;
can create a security interest over its assets or receivables; and
may become subject to the enforcement provisions of the SARFAESI Act in the event of default to a secured creditor.
The amendment thus provides InvITs with a formal debt-raising framework instead of treating them merely as equity-like investment vehicles.