Equity Intelligence AIF Trust Vs Central Board of Direct Taxes & Anr. (Delhi High Court)
In a significant judgment that could shape the future of tax treatment for India’s hedge funds, the Delhi High Court has read down a 2014 circular issued by the Central Board of Direct Taxes (CBDT), offering long awaited relief to Category III Alternative Investment Funds (AIFs). These funds, known for their complex investment strategies including leverage, short selling, and hedging, had long suffered from a lack of tax clarity due to conflicting interpretations of the circular. While courts in Karnataka and Tamil Nadu had offered some respite, other jurisdictions, notably Delhi, remained bound by the strict application of the circular. That has now changed.
The controversy arose from CBDT Circular No. 13/2014, which stipulated that if the names of beneficiaries were not included in the original trust deed of an AIF, the trust would be treated as “indeterminate” and taxed at the maximum marginal rate (MMR), nearly 40 percent. This interpretation disproportionately impacted Category III AIFs, which, unlike Category I and II funds, do not enjoy pass through tax status and are thus more vulnerable to direct tax burdens. The implications were stark: while funds in Karnataka and Tamil Nadu paid as little as 12.5 percent tax on gains, their counterparts in Delhi and other states were subjected to more than triple that amount.
