The senior counsel for the AIF argued that the original trust deed cannot contain the names of the investors and that if it did, it would be a major violation of the Sebi regulations.
The Delhi High Court has provided long-awaited tax clarity related to a 2014 Central Board of Direct Taxes (CBDT) circular, giving relief to Category III alternative investment funds (AIFs), which include hedge funds and those investing in complex trading strategies.
Industry players said due to the 2014 CBDT circular, AIFs had to pay a tax of around 40 per cent on the gains, while AIFs in Karnataka and Tamil Nadu paid only 12.5 per cent.
In an order dated July 29, the Delhi High Court quashed an order by the Board of Advance Rulings (BAR), which had rejected the application for withdrawal filed by Equity Intelligence AIF Trust.
The BAR had held that if the names of the beneficiaries were not set out in the original trust deed, then such a trust would be treated as indeterminate and would be subject to a ‘maximum marginal rate’.
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Sebi regulations mandate registration for AIFs before commencing business. For registration, AIFs have to submit their trust deed to Sebi.
The senior counsel for the AIF argued that the original trust deed cannot contain the names of the investors and that if it did, it would be a major violation of the Sebi regulations.
“No entity under any enactment can be perceived or compelled to perform the impossible. In the present case, the facts as noted and obtained above seem to be leading to such an impossibility,” noted the Delhi High Court in its order.
Further, the court also noted the contradiction in Paragraph 6 of the CBDT circular.
While the circular mandates naming or identifying the investors in the original trust deed, Paragraph 6 states that the circular will not be operative in states where the High Courts have taken a contrary decision on the issue.
“An issue of law, settled by a Constitutional Court, neither challenged nor set aside by a higher Constitutional Court, would be binding upon the Revenue authorities all over the country and cannot be implemented State specific or area specific,” states the Delhi High Court order.
“The clarification contained in CBDT Circular No.13/2014 dated 28.07.2014 is directed to be read down to conform to the above analysis and conclusion,” noted the court.
Industry players said that the decision may trigger a clarification from CBDT and may have an impact on pending applications.
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“Of all Indian AIFs, Category III AIFs have the highest rate of mobilisation, having invested more than two-thirds of the lifetime commitments made by the category. They faced massive headwinds due to the uncertainty of their taxation. With this win in Delhi HC, three jurisdictions in the country — Karnataka, Delhi and Tamil Nadu — have tax clarity for Category III AIFs,” said Siddarth Pai, founding partner of 3one4 Capital and co-chair, IVCA Regulatory Affairs Council.
As of March 2025, the total commitments to Category III AIFs stood at around Rs 2.30 trillion. Of this, Rs 1.63 trillion has been invested.
Category III AIFs do not enjoy a pass-through status like Category I and II AIFs, even if they follow long-only strategies.
“These funds have had to tread carefully to balance regulatory requirements and investor confidentiality without upsetting determinacy requirements of tax laws. Open-ended funds may have a dynamic LP base which will keep changing, and it was impractical for funds to have to keep updating the trust deed after every such subscription or redemption,” said Nandini Pathak, partner, Bombay Law Chambers.
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