Kedaara Captial Fund II LLP Vs Assessment Unit (Bombay High Court)
In a significant judgment, the Bombay High Court has set aside a tax assessment order, along with its consequential demand and penalty notices, against Kedaara Capital Fund II LLP, a prominent Alternative Investment Fund (AIF). The court’s ruling provides clarity on a fundamental tenet of income tax law: an expense cannot be “added back” to an assessee’s income if it was never claimed as a deduction in the first place. The decision serves as a key precedent for entities with pass-through status, reinforcing the principle that tax authorities must adhere to legal provisions rather than being guided by mere accounting entries.
The case originated from an assessment order issued by the Assessment Unit for the assessment year 2022-23, which challenged the return of income filed by Kedaara Capital Fund II LLP. The petitioner, a SEBI-registered Category II AIF, functions as an ‘investment fund’ under Section 115UB of the Income-tax Act, 1961. This provision grants such funds a pass-through status, meaning any income from its investment activities is exempt under Section 10(23FBA) and becomes taxable in the hands of its unit holders. The petitioner’s role is primarily to act as a conduit for investments, not to engage in business activities. For the relevant assessment year, the petitioner declared a total income of Rs. NIL, as it had not sold any investments and its small amount of short-term capital gains (Rs. 0.99 Crores) was claimed as exempt, to be taxed in the hands of the unit holders.
