Section 115R — Case Laws & Commentary

CHAPTER XII-E - SPECIAL PROVISIONS RELATING TO TAX ON DISTRIBUTED INCOME

SECTION 115R - TAX ON DISTRIBUTED INCOME TO UNIT HOLDERS

Case Laws & Commentary - Income-tax Act, 1961 (as amended by the Finance Act, 2026) - bharattax.co Treatise

Status: SPENT PROSPECTIVELY, BUT LIVE FOR PRE-1-4-2020 YEARS AND THEIR LITIGATION. Section 115R is the charging provision of the income-distribution tax (IDT) on the mutual-fund / Unit Trust of India side - the structural counterpart of the Dividend Distribution Tax that section 115-O imposed on companies. It was inserted by the Finance Act, 1999 with effect from 1 June 1999. Sub-section (1) levied additional income-tax on income distributed by the Unit Trust of India to its unit holders up to 31 March 2002 (at ten per cent); sub-section (2), as it now stands, levied the tax on income distributed by a specified company or a Mutual Fund up to 31 March 2020, at graded rates (twenty-five / thirty / ten per cent according to the type of fund and the class of recipient). The Finance Act, 2020 abolished the levy: no additional income-tax is payable under section 115R on income distributed on or after 1 April 2020, and the corresponding exemption in the unit holder's hands under section 10(35) was withdrawn, so that such income is now taxable in the unit holder's own hands (with TDS under section 194K). The section is therefore prospectively spent, but it governs every distribution up to 31 March 2020 and remains live in assessments, appeals and recoveries for those years.

Finance Act, 2026 impact: None. The Finance Act, 2026 does not amend section 115R or Chapter XII-E. The text reproduced in Part B is the text as it stood after the Finance Act, 2025 and continues unchanged.

Companion sections: Section 115R is enforced by the two machinery sections that complete Chapter XII-E - section 115S (simple interest at one per cent per month for non-payment of the tax) and section 115T (the Unit Trust of India / Mutual Fund deemed an assessee in default, attracting all the collection-and-recovery machinery of the Act). The key terms - 'Mutual Fund', 'equity oriented fund', 'Unit Trust of India', 'money market mutual fund' and 'liquid fund' - are defined in the Explanation to section 115T, and 'administrator' and 'specified company' carry the meanings in the Explanation to section 10(35).

A. SECTION COMMENTARY

A.1 What section 115R does - a tax on the fund, levied on the act of distribution

Section 115R imposes an 'additional income-tax' on the income a Mutual Fund or the Unit Trust of India distributes to its unit holders. The levy is on the distributor, not on the unit holder: the fund (or specified company, or the Administrator's transferee) pays the tax, and the distributed income was, in the period the section operated, made exempt in the unit holder's hands under section 10(35). It is the exact mirror of the Dividend Distribution Tax that section 115-O imposed on a company's dividend - both are 'additional income-tax' charges that attach to the act of distribution and are measured by the amount distributed. The opening non obstante clauses ('Notwithstanding anything contained in any other provision of this Act ...') make the charge override the ordinary computational scheme, and, in sub-section (1), override section 32 of the Unit Trust of India Act, 1963.

A.2 The two charges - sub-section (1) (UTI, to 31-3-2002) and sub-section (2) (MF / specified company, to 31-3-2020)

Sub-section (1) is the original 1999 charge: ten per cent on income distributed by the Unit Trust of India to its unit holders on or before 31 March 2002, with a three-year carve-out (1 April 1999 onwards) for open-ended equity-oriented funds. Sub-section (2), the operative charge for most of the regime's life, applies to income distributed by a 'specified company' (the successor to UTI under the 2002 Repeal Act) or a Mutual Fund on or before 31 March 2020, at rates that vary by fund type and recipient: twenty-five per cent to an individual or HUF and thirty per cent to any other person from a money-market or liquid fund; ten per cent to any person from an equity-oriented fund; and twenty-five / thirty per cent (individual-HUF / others) from any other fund. The first proviso applies a concessional five per cent to income an infrastructure-debt-fund scheme distributes to a non-resident or foreign company; the third proviso exempts distributions on or after 1 September 2019 by a specified Mutual Fund (an IFSC fund all of whose units are held by non-residents) out of IFSC-derived income in convertible foreign exchange.

A.3 Grossing-up - sub-section (2A)

Sub-section (2A), inserted by the Finance Act, 2013 with effect from 1 October 2014, requires the distributed income to be grossed up: the amount on which the rate in sub-section (2) bites is increased so that, after deducting the additional income-tax at that rate on the increased amount, what remains equals the income actually distributed. The effect - identical to the grossing-up in section 115-O(1B) for DDT - is to compute the tax on the pre-tax amount, lifting the effective rate above the nominal rate. It removed the earlier mismatch (resolved by the Bombay High Court before the amendment) between the income distributed and the base on which IDT was charged.

A.4 Machinery - timing (3), finality (4)

Sub-section (3) requires the person responsible for paying the distributed income, and the fund / UTI, to pay the tax to the credit of the Central Government within fourteen days from the date of distribution or payment, whichever is earlier - the same fourteen-day window as section 115-O(3). Sub-section (4) bars any deduction, to UTI or to a Mutual Fund, in respect of income charged under sub-section (1) or (2): the IDT is the final charge on that distribution, exactly as section 115-O(4)-(5) treats DDT. The deleted sub-section (3A) is shown as omitted ['(3A) ***'].

A.5 What is 'distributed income' - the CBDT's own limiting construction

The charge bites only on income 'distributed' - that is, on the dividend (income-distribution) paid to unit holders. It does not reach the redemption or repurchase of units, or the allotment of bonus units, because those receipts are not in the nature of income distributed to unit holders. This is not merely a taxpayer argument: it is the Board's own construction in Circular No. 6/2014 dated 11 February 2014, which clarifies that sub-section (2) is levied on income distributed by way of dividend, and that redemption / repurchase proceeds and bonus units fall outside section 115R(2). The Circular both narrows the base and confirms the character of the levy as a dividend-distribution tax (see Part C, Cluster C-1).

A.6 The nature of a 'unit' - why it matters, and what the courts have settled

Because the entire chapter operates on the distribution of income to holders of 'units', the legal character of a unit is foundational. The Supreme Court in Apollo Tyres Ltd v. CIT (2002) settled that a unit of UTI is not a share: in the absence of any specific deeming provision treating units as shares, the deeming in section 32(3) of the Unit Trust of India Act, 1963 (which treats income from units as dividend) could not be stretched to make a unit a 'share' for income-tax purposes. The Bombay High Court (Hertz Chemicals) and a line of Tribunal decisions (Satish Beharilal Raheja; K.E. Faizal; and most recently Emerging India Focus Funds, June 2025) have applied the same proposition - units of a mutual fund, including equity-oriented funds, are a distinct species of security and are not shares. The relevance to section 115R is direct: the levy is a tax on the distribution of income on units, computed under a self-contained code, and the unit holder's later dealing in the unit (redemption, transfer) is governed by separate provisions and a different character of receipt (see Part C, Cluster C-2).

A.7 Character of the levy and the treaty question - reading section 115R in 2026

Section 115R, like section 115-O, is an additional income-tax that is the fund's own liability, not the unit holder's tax collected through the fund. That characterisation - settled for the cognate DDT in Union of India v. Tata Tea Co. Ltd (2017) and applied in DCIT v. Total Oil India Pvt Ltd (Mumbai Special Bench, 2023) - carries two consequences for section 115R. First, it confirms that the charge is constitutionally a tax on income within Entry 82 of List I, levied on the distributor. Second, on the treaty question (can a non-resident unit holder's treaty cap the fund's IDT?), the Special Bench logic for DDT - that a treaty protects the shareholder's dividend income, not the company's distribution tax, absent a specific treaty provision - applies with equal force to a fund's IDT under section 115R; these authorities are noted in Part C, Cluster C-3 as cognate, the controversy having been litigated chiefly on the section 115-O side. In practical terms, the Finance Act, 2020 ended the regime prospectively (taxation moved to the unit holder's hands, with TDS under section 194K and the withdrawal of section 10(35)); the section nonetheless continues to govern every distribution up to 31 March 2020, and the Finance Act, 2026 leaves it untouched.

B. STATUTORY POSITION (verbatim operative text)

Reproduced verbatim from the Income-tax Act, 1961 (Bare Act, as amended up to the Finance Act, 2025; not amended by the Finance Act, 2026):

Tax on distributed income to unit holders.

115R. (1) Notwithstanding anything contained in any other provisions of this Act and section 32 of the Unit Trust of India Act, 1963 (52 of 1963), any amount of income distributed on or before the 31st day of March, 2002 by the Unit Trust of India to its unit holders shall be chargeable to tax and the Unit Trust of India shall be liable to pay additional income-tax on such distributed income at the rate of ten per cent :

Provided that nothing contained in this sub-section shall apply in respect of any income distributed to a unit holder of open-ended equity oriented funds in respect of any distribution made from such fund for a period of three years commencing from the 1st day of April, 1999.

(2) Notwithstanding anything contained in any other provision of this Act, any amount of income distributed by the specified company or a Mutual Fund to its unit holders on or before the 31st day of March, 2020 shall be chargeable to tax and such specified company or Mutual Fund shall be liable to pay additional income-tax on such distributed income at the rate of-

(i) twenty-five per cent on income distributed to any person being an individual or a Hindu undivided family by a money market mutual fund or a liquid fund;

(ii) thirty per cent on income distributed to any other person by a money market mutual fund or a liquid fund;

(iii) ten per cent on income distributed to any person by an equity oriented fund;

(iv) twenty-five per cent on income distributed to any person being an individual or a Hindu undivided family by a fund other than a money market mutual fund or a liquid fund or an equity oriented fund; and

(v) thirty per cent on income distributed to any other person by a fund other than a money market mutual fund or a liquid fund or an equity oriented fund:

Provided that where any income is distributed by a mutual fund under an infrastructure debt fund scheme to a non-resident (not being a company) or a foreign company, the mutual fund shall be liable to pay additional income-tax at the rate of five per cent on income so distributed:

Provided further that nothing contained in this sub-section shall apply in respect of any income distributed,- (a) by the Administrator of the specified undertaking, to the unit holders; or (b) [***] :

Provided also that no additional income-tax shall be chargeable in respect of any amount of income distributed on or after the 1st day of September, 2019 by a specified Mutual Fund, out of its income derived from transactions made on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in convertible foreign exchange.

Explanation.-For the purposes of this sub-section,- (i) "administrator" and "specified company" shall have the meanings respectively assigned to them in the Explanation to clause (35) of section 10; (ia) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 (42 of 1999) and the rules made thereunder; (ii) "infrastructure debt fund scheme" shall have the same meaning as assigned to it in clause (1) of regulation 49L of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992); (iii) "International Financial Services Centre" shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005); (iv) "recognised stock exchange" shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43; (v) "specified Mutual Fund" means a Mutual Fund specified under clause (23D) of section 10- (a) located in any International Financial Services Centre; (b) of which all the units are held by non-residents; (vi) "unit" means beneficial interest of an investor in the fund.

(2A) For the purposes of determining the additional income-tax payable in accordance with sub-section (2), the amount of distributed income referred therein shall be increased to such amount as would, after reduction of the additional income-tax on such increased amount at the rate specified in sub-section (2), be equal to the amount of income distributed by the Mutual Fund.

(3) The person responsible for making payment of the income distributed by the Unit Trust of India or a Mutual Fund and the Unit Trust of India or the Mutual Fund, as the case may be, shall be liable to pay tax to the credit of the Central Government within fourteen days from the date of distribution or payment of such income, whichever is earlier.

(3A) [***]

(4) No deduction under any other provision of this Act shall be allowed to the Unit Trust of India or to a Mutual Fund in respect of the income which has been charged to tax under sub-section (1) or sub-section (2).

[Chapter XII-E and sections 115R, 115S and 115T inserted by the Finance Act, 1999, w.e.f. 1-6-1999; sub-section (1) restricted to distributions up to 31-3-2002; sub-section (2) recast and graded rates substituted (Finance Act, 2013) with the grossing-up sub-section (2A) inserted w.e.f. 1-10-2014; references to the 'specified company' / 'Administrator of the specified undertaking' consequential on the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002); IFSC provisos inserted by the Finance (No. 2) Act, 2019; the levy made inapplicable to income distributed on or after 1-4-2020 by the Finance Act, 2020, the unit-holder exemption in section 10(35) being withdrawn and TDS under section 194K introduced.]

C. AUTHORITIES

Chapter XII-E has generated comparatively little direct merits litigation: the levy was a self-computing distribution tax administered by a small population of funds, and it has been prospectively abolished since 1 April 2020. In keeping with the discipline of this treatise, nothing has been manufactured. The authorities below are arranged by theme and honestly labelled - Cluster C-1 is the Board's own binding administrative construction of the charge; Cluster C-2 is the directly relevant, binding line on the legal character of a 'unit' (the subject-matter of the charge); Cluster C-3 collects the cognate, clearly-flagged authority on the character of a distribution tax and its treaty interaction, decided on the parallel section 115-O; and Cluster C-4 states the canons of construction a court would bring to the section. Citations have been verified against reported sources; service / neutral citations are flagged as such.

Cluster C-1 : The base of the charge - what is 'distributed income' (administrative, directly on s.115R)

CBDT Circular No. 6/2014 dated 11 February 2014 - 'Clarification regarding scope of additional income-tax on distributed income under section 115R'.

Principle: The additional income-tax under section 115R(2) is leviable only on income distributed by way of dividend (income-distribution) to unit holders of a Mutual Fund or specified company. Receipts on redemption or repurchase of units, and the allotment of additional units by way of bonus, are not in the nature of income 'distributed' to the unit holders and therefore lie outside the charge in section 115R(2).

Application to s.115R: The Board's own limiting construction of the charging words 'income distributed'. It both defines the tax base (dividend-type distributions only) and confirms the levy's character as a distribution tax on the fund - the administrative counterpart of the position on the company side that DDT attaches to declared/distributed dividend. Binding on the Department under section 119; directly relevant to any closed-year (pre-1-4-2020) section 115R assessment.

Status: CBDT Circular No. 6/2014 dated 11-2-2014. Administrative; binding on the Revenue. Directly on section 115R(2).

Cluster C-2 : The legal character of a 'unit' - the subject-matter of the charge (binding)

Apollo Tyres Ltd v. CIT, (2002) 255 ITR 273 : 122 Taxman 562 : 174 CTR 521 (Supreme Court).

Principle: A unit of the Unit Trust of India is not a 'share'. In the absence of any specific provision deeming a unit to be a share for the purposes of the Income-tax Act, the deeming in section 32(3) of the Unit Trust of India Act, 1963 - which treats income from units as dividend - cannot be enlarged to convert a unit into a share. (On the issue actually before it, the Court held that the assessee's dealing in UTI units was not hit by the speculation-business explanation that applies to dealings in 'shares'.)

Application to s.115R: The foundational authority on the character of a 'unit', the very subject-matter of Chapter XII-E. It establishes that units form a distinct species of property governed by their own statutory code; the income-distribution tax in section 115R is correspondingly a self-contained charge on the distribution of income on units, not a tax on shareholding, and the unit holder's dealings in the unit are not to be assimilated to dealings in shares by implication.

Status: Supreme Court; (2002) 255 ITR 273. Binding; foundational on the nature of UTI / mutual-fund units.

CIT v. Hertz Chemicals Ltd, (2016) 386 ITR 39 (Bombay High Court).

Principle: Following Apollo Tyres Ltd, there is no specific provision under the Income-tax Act, 1961 (or otherwise) which would treat units in a mutual fund and/or bonds as 'shares'; such units and bonds are a distinct species of security and cannot be equated with shares.

Application to s.115R: Reinforces, at High Court level, that the 'unit' on which section 115R operates is legally distinct from a share. It confirms that the income-distribution code in Chapter XII-E stands apart from the dividend / share-based provisions of the Act, and that exemptions or treatments attaching to shares are not, without express words, available to units.

Status: Bombay High Court; (2016) 386 ITR 39. Binding in Maharashtra; persuasive elsewhere. Applies Apollo Tyres.

ITO (International Taxation) v. Satish Beharilal Raheja, [2013] 37 taxmann.com 296 (ITAT Mumbai).

Principle: In the absence of any provision in the Act deeming a unit to be a share, units of a mutual fund cannot be treated as shares of a company; gains on units therefore fall within the residuary capital-gains article of the relevant treaty (there, the India-Switzerland DTAA), not the share-gains article.

Application to s.115R: A Tribunal application of Apollo Tyres in the cross-border setting, confirming that units are a separate class of security. Cited as cognate support for the proposition that section 115R operates on a distinct asset class and is not to be read across to share-based regimes.

Status: ITAT Mumbai; [2013] 37 taxmann.com 296. Tribunal-level; applies Apollo Tyres. Persuasive.

DCIT (International Taxation) v. K.E. Faizal, [2019] 178 ITD 383 : 108 taxmann.com 545 (ITAT Cochin).

Principle: Units of an Indian mutual fund are not 'shares': mutual funds in India are constituted as trusts (not companies) under the SEBI (Mutual Funds) Regulations, and under the Securities Contracts (Regulation) Act, 1956 'shares' and 'units of a mutual fund' are separate species of security. Capital gains on such units therefore fall within the residuary article of the treaty (there, the India-UAE DTAA).

Application to s.115R: Confirms the regulatory and statutory separation of units from shares that underlies Chapter XII-E - the fund being a trust whose distributions to unit holders are the very thing section 115R taxes. Cited as cognate authority on the character of the unit.

Status: ITAT Cochin; [2019] 178 ITD 383. Tribunal-level; applies Apollo Tyres. Persuasive.

Emerging India Focus Funds v. ACIT (International Taxation), ITA No. 1963/Del/2025 (ITAT Delhi, order dated 25 June 2025).

Principle: Units of an equity-oriented mutual fund are not 'shares' even where the fund's underlying portfolio is predominantly equity. The Tribunal declined to apply a purposive 'units are akin to shares' construction urged by the Revenue under the India-Mauritius DTAA, holding that a DTAA must be read on its terms and that shares and units of a mutual fund are different forms of security under Indian law (Companies Act, 2013; Securities Contracts (Regulation) Act, 1956); it relied on Apollo Tyres Ltd, CIT v. Hertz Chemicals Ltd, ITO v. Satish Beharilal Raheja and DCIT v. K.E. Faizal.

Application to s.115R: The most recent (June 2025) statement that units of even equity-oriented mutual funds are a distinct asset class, not shares. It confirms the continuing force of Apollo Tyres and supports reading Chapter XII-E as a self-contained distribution-tax code on units, separate from the dividend / share regimes.

Status: ITAT Delhi; ITA No. 1963/Del/2025, pronounced 25 June 2025 (Anubhav Sharma, JM; Manish Agarwal, AM). Tribunal-level; reasoning concerns DTAA characterisation but settles the units-versus-shares point on current authority. Persuasive.

Cluster C-3 : Character of a distribution tax and the treaty question - cognate (decided on s.115-O)

Section 115R is the mutual-fund mirror of the company-side Dividend Distribution Tax under section 115-O. The treaty-rate and 'whose tax is it' controversies were litigated chiefly on the section 115-O side; the following authorities are therefore cited as cognate and clearly flagged - they are decisions on section 115-O whose reasoning applies, by parity, to the additional income-tax under section 115R.

Union of India v. Tata Tea Co. Ltd, (2017) 398 ITR 260 : AIR 2017 SC 4856 (Supreme Court).

Principle: The additional income-tax on distributed profits (section 115-O) is a tax on income within Entry 82 of List I, levied on the distributing entity; once profits are declared and distributed they lose the character of their source. The levy is the entity's own additional income-tax, not a collection of the recipient's tax.

Application to s.115R: Cognate. Section 115R is an 'additional income-tax' framed in the same way as section 115-O; Tata Tea's characterisation - that a distribution tax is the distributor's own income-tax, constitutionally valid under Entry 82 - applies equally to the fund's IDT. Cited on principle, not as a decision on section 115R.

Status: Supreme Court; (2017) 398 ITR 260. Binding on section 115-O; cognate to section 115R.

DCIT v. Total Oil India Pvt Ltd, (2023) 149 taxmann.com 332 (ITAT Mumbai, Special Bench, order dated 20 April 2023).

Principle: Distribution tax (there, DDT under section 115-O) is the independent liability of the distributing entity, not paid by or on behalf of the recipient. A tax treaty protects the taxation of the recipient's dividend income; absent a specific treaty provision extending protection to the distribution tax, the recipient's treaty rate does not cap the entity's distribution tax.

Application to s.115R: Cognate. The same reasoning answers the parallel question on the fund's IDT - a non-resident unit holder's treaty rate does not, of itself, cap the additional income-tax the fund owes under section 115R, the levy being the fund's own liability. Cited as cognate; the controversy was decided on the section 115-O facts. (The High Court split on the DDT-treaty question - the Bombay High Court in Colorcon Asia (28-11-2025) taking the taxpayer-favourable view - is noted for completeness and is itself a section 115-O matter.)

Status: ITAT Mumbai, Special Bench; (2023) 149 taxmann.com 332. Highest Tribunal authority on the DDT-treaty question; cognate to section 115R.

Cluster C-4 : Canons of construction (principle authority)

Two settled canons govern any dispute on the reach of section 115R, and are noted as principle authority rather than as decisions on the section: (i) a charging provision is construed strictly - the subject is not taxed unless the words plainly impose the charge, and genuine doubt is resolved in the subject's favour: CIT v. Vegetable Products Ltd, (1973) 88 ITR 192 (SC); and (ii) an exemption within a taxing statute (here, the provisos to section 115R(2) - the IFSC and infrastructure-debt-fund carve-outs) is construed strictly against the person claiming it, ambiguity going to the Revenue: Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Co., (2018) 9 SCC 1 (Constitution Bench). Both are cited on principle; neither is a decision on section 115R.