As per the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’), an alternative investment fund (‘AIF’) means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate, which: (i) is a privately pooled investment vehicle; and (ii) is not covered under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Securities and Exchange Board of India (‘SEBI’) to regulate fund management activities. In accordance with the AIF Regulations, no entity or person can act as an AIF, unless it has obtained a certificate of registration from SEBI and in a case where the entity seeking such registration is a trust, the deed of trust must be first registered as per the Registration Act, 1908. As per Regulation 6(5) of the AIF Regulations, an AIF that has been granted an in-principle approval may accept commitments from investors but is prohibited from accepting any money till it has been registered with SEBI. Furthermore, an AIF can be registered as either a Category-I, Category-II or Category-III AIF.

As per the Income-tax Act, 1961 (‘IT Act’), while Category-I and Category-II AIFs are provided a pass-through status, a Category-III AIF is taxable in its own hands. Furthermore, as per Section 164(1) of the IT Act, where any income in respect of which a trustee is liable as a representative assessee is not specifically receivable on behalf of, or for the benefit of any one person or is receivable on behalf of persons, where individual shares of such persons are indeterminate or unknown, tax is chargeable on such income at the maximum marginal rate. Further, as per Explanation 1 to Section 164 of the IT Act, and in the context of income of a trust:

i.    income in such a case would be deemed to be ‘not specifically receivable’, unless the person on whose behalf or for whose benefit such income would have been otherwise receivable is expressly stated in the trust deed; and

ii.   individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is received will be deemed to be ‘indeterminate or unknown’, unless the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable, are expressly stated in the trust deed.

Given the confusion regarding the registration requirement under the AIF Regulations and taxability of AIFs registered as non-charitable trusts, the Central Board of Direct Taxes (‘CBDT’) by way of Circular No. 13/2014 issued on July 28, 2014 (‘CBDT Circular’), clarified that where the trust deed neither mentions the name of investors nor specifies their beneficial interests, Section 164(1) of the IT Act would be applicable and the entire income of such AIFs would be liable to be taxed at the maximum marginal rate of income tax in the hands of the trustees of such AIFs in their capacity as ‘representative assessee’.

The CBDT Circular was challenged before the Delhi HC as being ultra vires of Sections 160 and 164 of the IT Act. While entertaining such challenge and while following a decision by the Karnataka High Court,^[1] the Delhi HC in Equity Intelligence AIF Trust v. Central Board of Direct Taxes^[2] has read down the CBDT Circular and held that even where shares of investors are determinable after the AIF has been duly registered, Section 164(1) of the IT Act would not be applicable. Furthermore, the Delhi HC also invoked the doctrine of impossibility given that an AIF, which is a trust, could not have specified the names of the investors or their share at the time of registration of trust deed in accordance with the applicable law.

On a separate note, the Delhi HC also observed that an issue of law, settled by a constitutional court, and 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 in a manner which is state specific or area specific. This observation was made in light of paragraph six of the CBDT Circular, which provided that the clarification provided by the said CBDT Circular would not be operative in an area falling in the jurisdiction of a High Court which has taken or takes a contrary view. Therefore, it will be interesting to see the outcome of a challenge to this decision of the Delhi HC, if any.

[1] Commissioner of Income Tax, Bengaluru v. India Advantage Fund-VII – (2017) 89 taxmann.com 209 (DB) (Karnataka HC); Commissioner of Income Tax, Chennai v. TVS Shriram Growth Fund – (2020) 121 taxmann.com 238 (DB) (Madras HC).

[2] Equity Intelligence AIF Trust v. Central Board of Direct Taxes (DB) – (2025) 176 taxamnn.com 903 (Delhi HC).