Court decision in Delhi may provide substantial tax break for Category III Alternative Investment Funds
Delhi High Court Ruling Brings Clarity to Category III Alternative Investment Funds
In a recent judgement made on July 29, 2020, the Delhi High Court has quashed a June 2020 order of an unnamed Board, potentially providing relief for Category III Alternative Investment Funds (AIFs). These funds, which include hedge funds and funds that make private investments in public equities (PIPE), have been operating under a tax ambiguity due to a 2014 CBDT circular that treated them as taxable at the maximum marginal rate.
The court's ruling clarifies that Category III AIFs cannot be classified as "indeterminate trusts" merely because the trust deed does not name beneficiaries upfront. This decision aligns Category III AIFs closer to Category I and II AIFs, which have pass-through tax status, and rejects the Revenue's insistence on a form-over-substance approach to taxation.
The operational realities of these funds, such as investor-wise allocations that are determinable at all material times despite no upfront naming of beneficiaries in trust deeds, were recognised by the court. As a result, Category III AIFs are now to be treated as determinate, rather than indeterminate, trusts.
This ruling is significant for Category III AIFs, which have a substantial presence in India’s capital markets, with commitments exceeding ₹2.25 to ₹2.3 trillion as of mid-2025. The Court’s decision is expected to support further capital mobilisation and investor confidence in these funds, potentially leading to increased activity in India’s alternative investment sector.
It remains to be seen whether the CBDT will withdraw the 2014 circular or challenge the decision on appeal. For those interested in accessing more detailed information about this premium content, we invite you to become a Premium member and log in to our platform.
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Investing in business can now be more financially beneficial for Category III Alternative Investment Funds (AIFs) following the Delhi High Court's ruling. This decision has brought clarity to the taxation of Category III AIFs, classifying them as determinate trusts instead of indeterminate, aligning them with the tax status of Category I and II AIFs.
