Consider the following statements:
Statement-I : Interest income from the deposits in Infrastructure Investment Trusts (InvITs) distributed to their investors are exempted from tax, but the dividend is taxable.
Statement-II : InvITs are recognized as borrowers under the 'Securitization 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?
- A.Both Statement-I and Statement-II are correct and Statement II is the correct explanation for Statement-I
- B.Both Statement-I and Statement-II are correct but Statement II is not the correct explanation for Statement-1
- C.Statement-I is correct but Statement-II is incorrect
- D.Statement-I is incorrect but Statement-II is correct
▶ Answer & Explanation
Correct answer: D. Statement-I is incorrect but Statement-II is correct
Income distributed by an InvIT to its investors, whether in the form of interest or dividend, is generally taxable in the hands of the investors as per their respective applicable rates. InvITs themselves, as entities, are treated as pass-through entities for tax purposes regarding income earned from underlying assets, but distributions to investors are not automatically tax-exempt. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) allows for the securitisation and reconstruction of financial assets. InvITs, being investment vehicles involved in infrastructure financing and asset management, are indeed recognized entities that can engage in financial transactions governed by such acts, including potentially being recognized as borrowers or participants in securitization processes for their underlying assets.
Source: UPSC gs1 2023