In a recent ruling pronounced by the Hon'ble Delhi High Court in the case of Equity Intelligence AIF Trust vs the CBDT and Anr, the Court has provided the much-needed tax relief to Category III Alternative Investment Funds (‘AIF') whereby the Hon'ble Court has confirmed that AIFs structured as trusts can be treated as ‘determinate trust' even if the beneficiary names and the beneficial interests are not set out in the original trust deed, so long as they are identified post registration.
This would mean that the income earned by such AIFs need not be subject to tax at the maximum marginal rate of tax, which is otherwise applicable for ‘indeterminate trusts' under section 164 of the Income-tax Act, 1961 (‘Act').
The facts of the case and the Court's observations are summarized below for your reference
FACTS OF THE CASE
- The petitioner, a Category III AIF, had filed an application before the Authority of Advance Ruling (later transferred to the Board of Advance Rulings) to seek clarity with respect to its taxability.
- In the petitioner's case, the Board of Advance Ruling held that if the names of the beneficiaries are not set out in the original trust deed, then such trust would be treated as indeterminate and resultantly be subject to Maximum Marginal Rate of tax (‘MMR') under the provisions of section 164 of the Act.
- Aggrieved by the above impugned order, the petitioner filed the petition with the Hon'ble High Court.
OBSERVATIONS OF THE HON'BLE HIGH COURT
- The CBDT circular no. 13/2014 required that all beneficiaries be named in the original trust deed along with the beneficial interests, failing which the trust would be treated as “indeterminate” and taxed at the MMR
- Paragraph 6 of the CBDT circular itself states that the circular shall be inoperative in states where High Courts have taken a contrary view (like the Karnataka High Court in the case of CIT vs. India Advantage Fund-VII 1)
- Regulations 3(1) and 6(3) of the SEBI (AIF) Regulations, 2012 read with Section 12 of the SEBI Act 1992, prohibit an AIF from accepting investments or naming beneficiaries in the original trust deed without complying with these provisions and obtaining the SEBI registration.
- The Court commented that if the Court were to uphold the clarification issued under the CBDT Circular No.13/2014, the provisions of the SEBI regulations would be violated and this would lead to an anomalous situation. This would be an impossible situation for Category III AIF like the petitioner to comply with.
- Thus, based on the above facts and invoking the ‘doctrine of impossibility', the Hon'ble Court held that no entity can be compelled to perform the impossible, especially when regulatory frameworks have a conflict.
- Thus, it was held that AIFs structured as trusts can be considered ‘determinate' even if beneficiaries aren't named in the original deed, provided they are identified after registration
- With respect to the CBDT Circular No. 13/2014, the Hon'ble Court also held that the same be read down in the manner as constructed and interpreted by the Hon'ble Court in this case.
AURTUS COMMENTS
- This ruling delivers substantial tax relief for Category III AIFs by reaffirming their status as determinate trusts — even in cases where the beneficiaries and their beneficial interests are not explicitly named in the original trust deed.
- This clarification significantly reduces the ambiguity around the tax treatment of such funds and is expected to enhance investor confidence by providing greater regulatory and fiscal certainty.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
