Delhi High Court Ruling on CBDT Circular 13/2014: A New Chapter for Category III AIFs

On July 29, 2025, the Delhi High Court delivered an important verdict in Equity Intelligence Equity Intelligence AIF Trust v. Central Board of Direct Taxes & Anr¹ quashing the order passed by the Board for Advance Rulings’ (“BAR”) and “reading down” CBDT Circular No. 13/2014 (“CBDT Circular”)². The judgment addresses and settles a long-standing controversy on the tax treatment of Category III Alternative Investment Funds (“AIFs”) structured as trusts and governed by the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“SEBI AIF Regulations”).

The Indian Trusts act, 1882 (“Trusts Act”) regulates the formation and governance of private trusts in India. Indian law does not treat a trust as a separate legal entity with its own legal personality. Instead, Section 3 of the Trusts Act defines a trust as “an obligation annexed to the ownership of property”. Legally, the property of the trust vests in the trustee, who holds it for the benefit of the beneficiaries. Proceedings relating to trust property are generally in the name of the trustee rather than the trust itself. 

However, under the Income Tax Act, 1961 (“IT Act”), trusts are recognised and taxed as entities that are distinct from the trustee or beneficiaries of the trust. Section 2(31) of the IT Act defines “person” to include “every artificial juridical person not falling within any of the preceding sub-clauses” and a trust is a person for the purpose of taxation. Sections 161 and 164 of the IT Act provide specific rules for the assessment and taxation of trusts (including through the trustee in a representative capacity).

Category I and II AIFs have been accorded pass through status under Section 115UB of the IT Act and therefore lie outside the scope of the present controversy. As per Section 164 of the IT Act, the taxation of all other AIFs set up in the form of a trust i.e., Category III AIFs, would depend on whether such trust qualifies as a “determinate trust” or an “indeterminate trust”.

The terms “determinate trust” and “indeterminate trust” are not to be found in the Trusts Act. 

• Indeterminate Trusts 

Section 164 of the IT Act expressly states that in situations where the beneficiaries of the trust are not explicitly identified in the trust deed itself, the trust would be an ‘indeterminate trust’ (discretionary) and hence be taxed at the maximum marginal rate (“MMR”). Even if some beneficiaries are non-residents or exempt entities, the entire income would be taxed at MMR, unless specific exclusions apply.

CBDT Circular 13/2014, issued in 2014, again states that AIFs whose trust deeds do not explicitly name investors or specify their beneficial interests would be considered as an “indeterminate trust” under Section 164 of the IT Act leading to taxation at MRR, which is currently fixed at 40% (forty percent).

• Determinate Trusts

In the case of determinate trusts, Section 166 of the IT Act empowers the Assessing Officer to levy tax either in the hands of the trustee (as representative assessee under Section 161 of the IT Act) or directly in the hands of the beneficiaries. In either case, the trust itself is not regarded as a separate taxable unit, and taxation follows the applicable slab rate for each beneficiary.

Interestingly, some High Courts, including Karnataka³ and Madras⁴, had previously held that trusts could still be regarded as “determinate” if the shares of beneficiaries were ascertainable through other formal documents (such as contribution agreements), even if not named in the deed. This led to a situation wherein similar AIFs in the aforementioned two states were being charged at a lower tax rate of 12% (twelve percent), due to paragraph 6 of the CBDT Circular (detailed below).

Conflict with SEBI Regulations

However, pursuant to Regulations 3(1), 4(c), and 6(5) of the SEBI AIF Regulations, and Section 12(1) and 12(1C) of the SEBI Act, 1992, an AIF must register its trust deed and obtain Securities and Exchange Board of India (“SEBI”) approval before receiving investments from its investors, as a result of which the trust which constitutes the AIF cannot name its beneficiaries in the trust deed, thereby not meeting the CBDT Circular’s requirements to qualify as a determinate trust.

Equity Intelligence India PMS Trust (“Equity”) is a single open-ended scheme registered with SEBI as a Category III AIF with the objective of investing in listed equity shares. Equity had entered into contribution agreements with its investors, but such investors however were not named in its trust deed. Equity had made an application to the Authority of Advance Ruling (“AAR”), which it sought to withdraw. Such withdrawal was refused by AAR’s successor- BAR, which further held that Equity was an “indeterminate” trust by virtue of beneficiaries not being listed in the trust deed and was hence to be taxed at MRR. Equity filed the current writ petition before the Hon’ble Delhi High Court, challenging the validity of the CBDT Circular and the BAR’s order.

Harmonizing SEBI and Income Tax Laws: The Court recognized that SEBI AIF Regulations prohibit AIFs from receiving investment commitments or finalizing beneficiary lists before obtaining a certificate of registration from SEBI. This made it impossible to specify investor names in the trust deed at the time of registration of the trust, which precedes the application to SEBI seeking registration as an AIF. The Court invoked the legal maxim lex non cogit ad impossibilia, i.e., the law does not compel the impossible (doctrine of impossibility), finding that requiring AIF trust deeds to name beneficiaries at inception was unworkable for regulatory and practical reasons and reaffirmed that what makes a trust “determinate” for the purposes of Section 164 of the IT Act was not whether the original trust deed included the beneficiaries’ details. Instead, the courts depended on whether such beneficiaries were ultimately determinable in any manner.

Prevailing High Court Precedents: The Court, held that para 6 of the CBDT Circular was contrary to the settled principles of law by stating that the CBDT Circular would not apply in jurisdictions where High Courts had a contrary view, as it created a fragmented and uncertain compliance environment for funds operating nationally, violating the mandate of uniform tax administration. The Court therefore ordered for the CBDT Circular to be construed in the manner interpreted by them and the Karnataka and Madras High Court in the precedents, while clearly holding for para 6 to be untenable in law.

• This decision by the Delhi High Court supports the demand long advocated for by Category III AIFs, whose business model critically depends on periodic additions of investors and confidentiality obligations towards such investors. Trusts can now demonstrate that beneficiary shares are ascertainable through contribution agreements executed after the trust deed, in compliance with SEBI AIF Regulations. AIF Managers, however, now must ensure robust contribution agreements and clear audit trails are established to determine the beneficiaries of the trust and the shares of such beneficiaries.
• By reading down the CBDT Circular’s “geographic carveout” for contrary High Court rulings, the judgment seeks to end the anomalous and arbitrary position wherein a central law was interpreted differently across states. This enhances predictability and legal consistency for Category III AIFs and investors irrespective of their domicile within India, while making India a more tax-friendly jurisdiction for fund houses.
• With this view now having been endorsed by three different High Courts, the CBDT can be expected to issue a nationwide clarification in line with these rulings to officially settle this issue once and for all. However, until such a pan-India clarification is issued by CBDT or the Supreme Court affirms the Delhi High Court’s view in this case, other states might not apply the same by default, thereby continuing to tax Category III AIFs at MRR.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.comor write to our authors: 

Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com

Saloni Khaitan, Advocate – Email – salonikhaitan@elp-in.com

¹W.P. (C) 9972/2024)

²Circular No. 13/2014 dated 28th July 2014 (F.No.225/78/2014-ITA.II)

³Commissioner of Income Tax & Anr. vs. M/s India Advantage Fund VII: 2017 SCC OnLine Kar 6857

⁴Commissioner of Income Tax, Chennai vs. TVS Shriram Growth Fund: 2020 SCC OnLine Mad 28112