Delhi HC ruling on Section 164 and AIF Taxation

Background

In a recent ruling, the Delhi High Court (“The Court”), in the case of Equity Intelligence AIF Trust¹, examined the taxability of Category III AIFs (Alternative Investment Funds) under Section 164 of the Income Tax Act, 1961 (“IT Act”). The key issue pertained to whether the absence of investor names or their beneficial interests in the original Trust Deed mandated by CBDT Circular No. 13/2014 renders the trust “indeterminate,” thereby attracting taxation at the Maximum Marginal Rate (MMR). The Court critically examined the conflict between this requirement and the regulatory framework under the SEBI Act and SEBI (AIF) Regulations, which prohibit such disclosures prior to registration.

Further, the Court scrutinized the validity of the impugned order passed by the Board of Advance Rulings (“BAR”), wherein it disregarded the law settled by the Madras and Karnataka High Courts and failed to consider the legal impossibility of complying with Para 6 of the CBDT Circular No. 13/2014.
The judgment underscores that administrative instructions cannot override statutory and regulatory constraints, reaffirms the doctrine of impossibility, and aligns with settled jurisprudence.

Facts of the case

• Equity Intelligence AIF Trust is a company incorporated under the Companies Act, 2013 and engaged in the business of rendering Portfolio Management Services in accordance with SEBI guidelines/regulations.
• The Trust filed a petition before the Authority of Advance Ruling (“AAR”) seeking advance rulings on various issues. Later, the application was transferred from AAR to BAR.
• BAR rejected the application on the ground 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 under Section 164 of the IT Act.

Key Issues

1. Whether the absence of investor names in the original Trust Deed makes the trust indeterminate under Section 164.
2. Whether CBDT Circular No. 13/2014 is ultra vires the IT Act and contrary to SEBI Regulations.
3. Whether the doctrine of impossibility applies due to regulatory conflict between SEBI norms and CBDT’s circular.

Key Takeaways

1. Indeterminacy of Trust under Section 164

• The Court held that the absence of investor names in the original Trust Deed does not render the trust indeterminate under Section 164 of the IT Act.
• It clarified that the determinability of beneficiaries’ shares is not contingent upon the date of execution of the Trust Deed, nor does Explanation 1 to Section 164 mandate quantum-based identification at inception.
• The real test, as affirmed by the Karnataka and Madras High Courts, is whether the shares of beneficiaries are determinable either at formation or at any point during the existence of the trust.
• On facts, the Court noted that beneficiaries were entitled to share benefits in proportion to their investments, satisfying the test of determinability.

2. Validity of CBDT Circular No. 13/2014

• The Court held that CBDT Circular No. 13/2014 is contrary to settled principles of law and must be read down to align with the statutory framework and judicial interpretation of Section 164.
• It observed that Para 6 of the Circular, which exempts jurisdictions with contrary High Court rulings, undermines legal uniformity and was described as “abhorrent and baffling”.
• The Court held that the Circular’s requirement to name investors in the original Trust Deed directly conflicts with SEBI Regulations prohibiting such disclosures prior to registration, creating an impossibility of compliance.
• Accordingly, the Court directed that the Circular be read down consistent with its analysis and relevant precedents.

3. Applicability of the Doctrine of Impossibility of Performance

• The Court noted that SEBI Regulations including Regulations 3(1), 4(c), 6(3), and 6(5) strictly prohibit acceptance of funds or commitments from investors before registration, making compliance with CBDT Circular No. 13/2014 legally impossible.
• Enforcing the Circular’s requirement would create an anomalous situation where one statutory framework mandates disclosure while another prohibits it, resulting in a regulatory contradiction.
• Thus, the Court applied “lex non cogit ad impossibilia” (the law does not compel the impossible) and held that the trust cannot be penalized for failing to perform an act forbidden by SEBI regulations.

Conclusion

In conclusion, the Delhi High Court reaffirmed that administrative circulars cannot override statutory provisions or sectoral regulations. It applied the doctrine of impossibility to prevent enforcement of conflicting regulatory obligations. The judgment also upheld the maintainability of writ jurisdiction in cases involving ultra vires actions despite alternate remedies. Overall, it reinforces principles of legality, fairness, and regulatory coherence in tax administration.

1. TS-979-HC-2025(DEL) ↩︎