The Delhi High Court, in Equity Intelligence AIF Trust v. Central Board of Direct Taxes & Anr. (W.P.(C) 9972/2024), examined the validity of CBDT Circular No.13/2014 dated 28.07.2014 and the consequential order passed by the Board of Advance Rulings holding a Category III Alternative Investment Fund (AIF) to be an indeterminate trust taxable at the maximum marginal rate under Section 164 of the Income-tax Act, 1961, solely on the ground that the names of investors were not mentioned in the original trust deed.

The petitioner, a SEBI-registered Category III AIF constituted as a trust, contended that under the SEBI (Alternative Investment Funds) Regulations, 2012 read with Section 12 of the SEBI Act, 1992, no AIF can accept investments or even identify investors prior to registration, and therefore it is legally impossible to name beneficiaries in the original trust deed at the time of its execution and registration. The petitioner further contended that the identity and share of investors are determinable with certainty through contribution agreements and NAV-based allocation once investments are made.

The impugned order of the Board of Advance Rulings relied entirely on CBDT Circular No.13/2014 to conclude that absence of beneficiary names in the original trust deed renders the trust indeterminate and taxable at the maximum marginal rate under Section 164. The petitioner challenged both the circular and the ruling as being contrary to the statutory scheme, SEBI regulations, and binding judicial precedents.

The High Court undertook a detailed analysis of Sections 160, 161 and 164 of the Income-tax Act, the SEBI AIF Regulations, and the doctrine of impossibility embodied in the maxim lex non cogit ad impossibilia. The Court held that a statutory or administrative requirement cannot compel performance of an act which is prohibited by law. It found that SEBI regulations expressly prohibit acceptance of investments or identification of investors prior to registration, making compliance with the requirement suggested in the CBDT circular impossible for Category III AIFs.

The Court further relied upon and reaffirmed the principles laid down by the Karnataka High Court in CIT v. India Advantage Fund-VII and the Madras High Court in CIT v. TVS Shriram Growth Fund, wherein it was held that a trust does not become indeterminate merely because beneficiaries are not named in the trust deed, so long as their identity and shares are determinable by objective criteria. The Court observed that the attempt in CBDT Circular No.13/2014 to apply a contrary interpretation, and to make it jurisdiction-specific depending on High Court rulings, was legally untenable.

Accordingly, the Delhi High Court held that the petitioner AIF could not be treated as an indeterminate trust under Section 164 merely because investor names were not mentioned in the original trust deed, when such mention was legally impermissible at that stage. The Court applied the doctrine of impossibility, set aside the impugned order of the Board of Advance Rulings, and read down the applicability of CBDT Circular No.13/2014 to Category III AIFs in such circumstances.

The writ petition was allowed in favour of the petitioner.

Source- https://delhihighcourt.nic.in/app/showFileJudgment/59429072025CW99722024_173302.pdf

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