Research and Articles

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• The Delhi HC read down CBDT Circular requiring AIFs to name beneficiaries in trust deed as contrary to SEBI regulations

• Tax circulars cannot override statutory limitations or be applied selectively across jurisdictions. 

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INTRODUCTION

The Hon’ble Delhi High Court delivered a landmark judgment in case of Equity Intelligence AIF Trust v. The Central Board of Direct Taxes & Anr¹, marking a significant development in the taxation of Category III Alternative Investment Funds (“AIFs”) in India. Deciding the issue in favor of the taxpayer, the Court ruled that Category III AIFs cannot be classified as ‘indeterminate trusts’ on the ground that the trust deed of the AIF does not name individual beneficiaries, thereby, shielding such AIFs from being subjected to taxation at the Maximum Marginal Rate (“MMR”).

While various high courts had earlier settled the issue, conclusively holding that the beneficiary shares in Category III AIFs are determinate and identifiable, the Delhi High Court adopts a distinct analytical lens. Going beyond a literal interpretation, the Court undertakes a holistic, harmonious, and conjunctive reading of the SEBI AIF Regulations, the trust deed, and the Income-tax Act, 1961 (“Act”). The judgment thus introduces a fresh judicial perspective to a dispute that had hitherto seen near consensus among courts and reinforces investor certainty.

The case centered on a long-standing conflict between SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) and the Income tax Department’s reliance on the CBDT Circular No. 13 of 2014² (“Circular”), which required naming of beneficiaries in the trust deed to qualify as ‘determinate trust’. The Court read down the Circular, holding that the law cannot compel what is procedurally prohibited by the regulatory framework, reaffirming the constitutional principle that legal compliance cannot be expected in cases of impossibility.

BACKGROUND

Category I and II AIFs have been accorded pass through status under Section 115UB of the Act and therefore lie outside the scope of the present controversy. However, Category III AIFs set up as private trusts are subject to tax framework applicable to trusts in India. Under Indian tax law, a trust is not a separate taxable entity. Taxation of trusts is laid out in sections 161 to 164 of the Act. The taxation of private trusts depends on whether the trust qualifies as a ‘determinate’ or ‘indeterminate’ trust under Sections 161 and 164 of the Act. In a determinate trust, where the beneficiaries and their respective shares are known, income is taxed in a manner and to the same extent as it would be leviable upon and recoverable from the beneficiaries. In contrast, an indeterminate trust, where such identification of beneficiaries is absent, is taxed at MMR.

This distinction is codified in Explanation 1 to Section 164, which provides that for a trust to be considered determinate:

• the beneficiaries should be expressly stated and identifiable as on the date of the trust deed; and

• their individual shares should be expressly stated and ascertainable on the same date.

The Circular was introduced before introduction of section 115UB to the Act. It stated that if investor names and their shares are not in the trust deed, the trust would be treated as ‘indeterminate’ and taxed at MMR. Paragraph 6 of the Circular stated that the Circular would not apply in jurisdictions where a High Court had taken or may take a contrary view, resulting in fragmented enforcement and legal uncertainty across different states.

Facts and Case Travel

Equity Intelligence India PMS Trust is a single open-ended scheme registered with SEBI as a Category III AIF for investment in listed equity shares (“Taxpayer”). The Taxpayer was set-up as a trust - although the trust deed did not name the beneficiaries, the identity of investors and their income share was identifiable through the Contribution Agreements, as expressly contemplated in the trust deed.

In 2018, the Taxpayer approached the Authority for Advance Rulings (“AAR”) under Section 245R of the Act to seek clarity on various issues. During the pendency of the application before the AAR, the assessing officer completed the assessment proceedings of the Taxpayer and accepted the returns filed by the Taxpayer.

Subsequently, following the statutory dissolution of the AAR and the creation of the Board for Advance Rulings (“BAR’), the matter stood transferred to the BAR. Amidst prolonged institutional delays in BAR’s functioning, the Taxpayer sought to withdraw pending applications. However, the BAR declined the withdrawal request and proceeded to adjudicate the matter. Relying on the Circular, the BAR held that the absence of named beneficiaries in the trust deed rendered the trust indeterminate, attracting tax at MMR. The Taxpayer then filed a writ petition before the Hon’ble Delhi High Court, challenging the validity of the Circular and the BAR’s order.

ANALYSIS

The key points addressed by the Hon’ble Delhi High Court are as follows:

Determinate Trust Need Not Name Beneficiaries

Manner of determination of whether a trust is determinate or indeterminate has been examined by several courts earlier. The Karnataka High Court in Commissioner of Income Tax & Anr. vs. M/s India Advantage Fund VII³, held that the trust should be considered ‘determinate’ if the beneficiaries' shares were ascertainable from other documents, such as contribution agreements, even if not expressly stated in the original trust deed. This position was subsequently affirmed by the Madras High Court in Commissioner of Income Tax, Chennai vs. TVS Shriram Growth Fund,⁴ which relied on the reasoning that “once the benefits are to be shared in the proportion to the investments made, any person with reasonable prudence would reach to the conclusion that the shares are determinable.” Although the Revenue challenged the Madras High Court ruling before the Hon’ble Supreme Court via a Special Leave Petition (“SLP”), the SLP was dismissed on grounds of low tax effect, leaving the core legal principle undisturbed.

In the present case, the Hon’ble Delhi High Court concurred with the views expressed in these earlier judgments. It clarified that the determinability of a trust does not hinge on whether beneficiary details are included in the original trust deed, but rather on whether such details can be reliably ascertained at a later stage. The Court further noted that this principle has been part of the legal framework since the insertion of Explanation 1 to Section 164 in CBDT Circular No. 281 of 1980 (“1980 Circular”), long before the issuance of the CBDT Circular in 2014.

The Court examined 1980 Circular, which had clarified that naming beneficiaries in the trust deed was not essential so long as they were identifiable from the instrument. Notably, this circular has not been withdrawn or superseded by the Circular. However, the Court found that the liberal language in the 1980 Circular was never enacted into law, and held that taxpayers cannot rely on circulars to read into the statute what Parliament chose not to enact.

Although earlier case law did not directly consider the Circular, the consistent judicial approach demonstrates that the Circular does not override the statutory position. The Court emphasized that what matters is whether the shares of beneficiaries are ultimately determinable, not whether they are named at the inception of the trust. Consequently, the Revenue’s insistence on identifying beneficiaries within the original deed was found to be legally unsustainable.

This decision reinforces the settled legal position for taxation of Category III AIFs – specifically for open-ended schemes which provide flexibility for investor entry and exit. Having said this, a specific clarification in statute will go a long way in boosting GP and investor confidence in this segment.

Impossibility of performance

A central pillar of the Hon’ble Delhi High Court’s judgment is its articulation and application of the doctrine of legal impossibility. In the present case, the Taxpayer was unable to record the identity of its beneficiaries in the trust deed at the time of its execution because SEBI regulations require the trust to first be registered before accepting any investments. Under Regulations 3(1), 4(c), and 6(5) of the AIF Regulations, and Section 12(1) and 12(1C) of the SEBI Act, 1992, AIF must register its trust deed and obtain SEBI approval before raising funds. Since investors can only be admitted after registration, it is not legally possible to include their names or shares in the original trust deed.

Despite this structural limitation, the Circular imposed a rigid requirement that the trust deed must contain the names and shares of beneficiaries at the time of execution, failing which, the trust would be treated as indeterminate and taxed at the maximum marginal rate under Section 164.

The Court found this requirement under the Circular unreasonable and legally impossible, holding that the failure to name investors was due to regulatory constraints. The Court expressly observed

“...it would be an impossible situation for Category III AIF like the petitioner to comply with. No entity under any enactment can be perceived or compelled to perform the impossible. ...the law does not compel a man to do that which he cannot possibly perform…”

“If this Court were to uphold the clarification issued under the Circular No.13/2014, particularly having regard to the aforesaid analysis revolving around the Regulation nos.3, 4, 6 and 7 of the SEBI Regulations, the provisions of section 12 of the SEBI Act and the aforesaid trite law, it would lead to an anomalous and incongruous situation…”

The ruling brings much needed alignment between tax law and SEBI’s regulatory framework, making it clear that statutory impossibility defeats mechanical conditions, and that compliance cannot be penalized when regulation makes the required act impermissible.

Tax Circulars cannot override constitutional uniformity

The Court held that paragraph 6 of the Circular to be incompatible with settled constitutional principles. The paragraph stated that the Circular would not apply in jurisdictions where a High Court had taken or may take a contrary view. The Court found this formulation to be “baffling”, observing that once a question of law is settled by a Constitutional Court and not overturned by a higher forum, it is binding on all Revenue authorities across the country. The law cannot be applied selectively based on geography.

The Court observed that such area specific enforcement introduces anomaly and incongruity into the tax regime and violates the mandate of uniform tax administration. It also took note that the clause appeared to have been inserted to sidestep earlier judgments. On this basis, the Court held paragraph 6 of the Circular to be contrary to constitutional discipline and ordered it to be read down accordingly.

The Court’s reading reinforces that tax circulars cannot operate as jurisdiction specific dispensations. Once a legal issue is settled by a Constitutional Court, the Revenue is bound to apply it uniformly across the country. The judgment draws a clear constitutional line against such selective enforcement. In doing so, the Delhi High Court has read down the Circular, holding that it cannot override the determinacy of beneficiary interests merely because the trust deed does not name individual investors.

Writ petition maintainable despite alternate remedy

The Court rejected the Revenue’s objection that the writ petition was not maintainable due to the availability of an appellate remedy under Section 245W of the Act. It clarified that while an alternate remedy may ordinarily weigh against exercising jurisdiction under Article 226 of Constitution of India, it does not act as an absolute bar, particularly where substantial questions of law, interpretation, and public interest are involved.

In this case, the Court noted that the challenge extended beyond a mere factual dispute or individual tax assessment. The Taxpayer had questioned the validity and continued enforceability of the Circular, which had far reaching implications for Category III AIFs across the country. The Court also observed that the BAR had ignored binding precedents from the India Advantage Fund VII (supra) and TVS Shriram Growth Fund (supra) while interpreting Section 164, raising concerns of inconsistency, uncertainty, and disregard for settled law.

Given the broader legal and constitutional issues at stake, the Court held that judicial review under Article 226 was warranted, despite the existence of a statutory appeal.

The Court’s decision to entertain the writ sends a clear message that when tax administration implicates broader questions of legal validity and uniform application, constitutional oversight remains essential.

CONCLUSION

Category III AIFs have emerged as a vital force in India’s capital markets, offering hedge style strategies, enabling liquidity, and attracting sophisticated pools of capital including offshore investors. SEBI data indicates that these funds have mobilized commitments exceeding ₹2.25 lakh crore⁵, underscoring their systemic relevance. Yet, despite their scale and institutional character, Category III AIFs remain outside the statutory pass-through regime under Section 115UB leading to chronic uncertainty on how their income is to be taxed.

The controversy stems from CBDT’s Circular, which directed that Category III AIFs be treated as indeterminate trusts taxable at the MMR, solely on the basis that the trust deed does not name beneficiaries upfront. This interpretation has long been viewed as legally and commercially untenable, particularly given that investor wise allocations are documented in the fund documents and determinable at all material times. Industry stakeholders, including Alternative Investment Policy Advisory Committee⁶, have consistently advocated for legislative parity with other AIF categories seeking explicit pass through treatment and rollback of the 2014 position.

Against this backdrop, the Delhi High Court’s judgment is a significant inflection point. It not only aligns with the views of other High Courts but goes further grounding its reasoning in a harmonious and conjunctive reading of the AIF Regulations, the trust law framework, and the Act. The ruling acknowledges the operational realities of pooled investment vehicles and rejects the Revenue’s insistence on form over substance. In doing so, it effectively dismantles the basis of the Circular, raising serious questions about its continued validity in law. Whether the CBDT now formally withdraws the Circular or chooses to test the ruling in appeal will be closely watched by the industry.

Interestingly, the judgment also brings into focus the early functioning of the BAR, which replaced the erstwhile AAR in 2021. Applications to erstwhile AAR were filed with an intent to get certainty on taxability of transactions with an intent to get a ruling in a time-bound manner. With respect to withdrawal, the Act permits withdrawal of an application within 30 days from date of its filing. The Memorandum to Finance Bill, 2024 noted that in case of all pending AAR applications transferred to the BAR, the period of 30 days has already lapsed. Recognizing the pendency and several changes in constitution of BAR forum, non-binding nature of ruling by the BAR, substantial passage of time and other commercial reasons, the Act was amended to permit withdrawal of pending applications transferred from AAR to BAR until October 31, 2024. The Act also provides that where an application for withdrawal is received by the BAR, the BAR may issue an order to officially reject the application as withdrawn. Having said this, one seems to wonder where the taxpayer hasn’t got certainty due to delays at AAR / BAR, does BAR have the power to reject the withdrawal application and adjudicate at such instance.  

In this case, despite the Taxpayers intent to withdraw, the BAR chose to proceed with adjudication. However, the High Court clarified that such administrative actions remain subject to judicial review under Article 226, reaffirming the judiciary’s role in overseeing institutional conduct and safeguarding taxpayer rights, particularly in matters involving statutory interpretation.

Taken together, the ruling is likely to bring much needed clarity to Category III AIF taxation, boost investor confidence, and possibly pave the way for long awaited legislative reform.

 

Authors

Dhairya Jain, Akash Shirore and Ipsita Agarwalla

You can direct your queries or comments to the relevant member.

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¹W.P.(C) 9972/2024 & CM APPL Nos.40840/2025, 69940/2024 & 1448/2025

²CBDT Circular No. 13/2024

³2017 SCC OnLine Kar 6857

⁴2020 SCC OnLine Mad 28112

⁵https://www.sebi.gov.in/statistics/1392982252002.html

⁶https://static.levocdn.com/WGLBUT82/6993213911579965519.pdf