2025 (8) TMI 61 - HC - Income Tax

Section 164: Circular No. 13/2014 Read Down to Exempt Determinable Trusts from Max Marginal Tax Rate

Equity Intelligence Aif Trust Versus The Central Board Of Direct Taxes & Anr.

The HC set aside the impugned order of the respondent/BAR, holding that Circular No. 13/2014 issued by CBDT under section 164 of the Act must be read ... Determinate Trust - Measures to plug loopholes for tax avoidance through the medium of private trusts – Section 164 - Validity of Circular No. 13/2014 dated 28.07.2014 issued by CBDT Order passed by the respondent no. 2/BAR holds that if the names of the beneficiaries are not set out in the original Trust Deed then such Trust would be treated as “indeterminate” and resultantly be subject to Maximum Marginal Rate under the provisions of section 164 - Legality of instructions contained in Circular no. 13/2014 dated 28.07.2014 Petitioner contended that the provisions of Regulation 3(1) and Regulation 6(3) of the SEBI Regulations read with provisions of section 12 of the SEBI Act would prohibit the petitioner from accepting any investment or mentioning the name of the beneficiaries in the original Trust Deed unless the said provisions were scrupulously complied with and that too, only after obtaining the certificate of registration from SEBI HELD THAT:- Circular NO. 13/2014 [F.NO. 225/78/2014-ITA.II] pertains to clarification issued by the CBDT in respect of section 164 of the Act particularly as to how the charge of tax, where the share of beneficiaries is unknown, is to be ascertained and determined. Apparently, this clarification is in respect of AIF entities having status of non-charitable Trusts. The Circular clarifies that where the Trust Deed either does not name the investors or does not specify their beneficial interests, provisions of sub-section (1) of section 164 of the Act would be applicable and the entire income of the fund would be liable to be taxed at the Maximum Marginal Rate of income tax in the hands of the trustees of such AIFs in their capacity as “Representative Assessee”. Interpretation and construction of the requirement of mentioning the names of the investors or their beneficial interests in the original Trust Deed was engaging the attention of the Courts. The said interpretation and construction of such a requirement has no bearing in respect of which of the assessment years were in question. This opinion is further strengthened by the fact that even before Circular no. 13/2014 was notified, Explanation 1 to section 164 of the Act was on the statute book with effect from 01.04.1980 having identical restrictions. Karnataka High Court in India Advantage Fund [2017 (2) TMI 722 - KARNATAKA HIGH COURT] has succinctly tested the proposition and set out its opinion. The Court was interpreting the provisions of section 164 of the Act and considering whether shares are determinable even when even or after the trust is formed or may be in future when the Trust is in existence; and on the facts of that case had concluded that once the benefits are to be shared in the proportion to the investments made, any person with reasonable prudence would reach to the conclusion that the shares are determinable. Consequently, on such reasoning, the Karnataka High Court concluded that once the shares were determinable, it would meet the requirement of law to come out of the applicability of section 164 of the Act. We respectfully concur with such reasoning. Thus, the said submission is unmerited and untenable both on law as well as on facts. Thus, in view of the ratio decidendi in the judgements of India Advantage Fund (supra) and TVS Shriram Growth Fund [2020 (10) TMI 665 - MADRAS HIGH COURT] coupled with our own analysis above, we find the impugned order dated 27.06.2024 of the respondent no. 2/BAR unsustainable and is accordingly set aside. CBDT Circular No. 13/2014 is concerned we direct that the same be read down in the manner as constructed and interpreted by us hereinabove. Non-maintainability of the present writ petition on the premise that a statutory appeal under section 245W of the Act is available to the petitioner - We are not quite convinced with the said submission. This is for the reason that existence of an alternate efficacious remedy though may bar exercise of discretionary jurisdiction under Article 226 of the Constitution of India, 1950, however, is not a complete prohibition to exercise judicial review in such cases where it is deemed appropriate by the High Court. In the present case, though statutory appeal is available, yet, since the impugned order of BAR overlooks and ignores the interpretation and construction of section 164 of the Act by learned Division Bench of Karnataka and Madras High Court, this by itself would propel this Court to interfere with the impugned order. Since the issue would have a wide impact on Category III AIFs all over the country, the remedy of an appeal specific to the petitioner may not be in public interest. The public interest as also the interest of the revenue would be sub-served, in our considered opinion, by exercising our jurisdiction under Article 226 of the Constitution of India, 1950. For the same reason, the impugned CBDT Circular No. 13/2014 also would be amenable to exercise of jurisdiction under Article 226 of the Constitution of India, 1950 since the recitals of Para 6 are contrary to the well settled principles of law. Writ petition is allowed, the impugned order of the respondent no. 2/Board for Advance Rulings is quashed and set aside and simultaneously, the clarification contained in CBDT Circular No. 13/2014 dated 28.07.2014 is directed to be read down to conform to the above analysis and conclusion. ISSUES: Whether Circular No. 13/2014 dated 28.07.2014 issued by CBDT is ultra vires sections 160 and 164 of the Income Tax Act, 1961.Whether a Category III Alternative Investment Fund (AIF) trust must have the names of beneficiaries explicitly mentioned in the original Trust Deed to avoid being treated as an 'indeterminate' trust under section 164 of the Income Tax Act, 1961.Whether the provisions of SEBI Regulations and SEBI Act prohibit mentioning names of investors in the original Trust Deed prior to registration and obtaining certificate from SEBI.Whether the impugned order of the Board for Advance Rulings (BAR) relying on Circular No. 13/2014 to treat the petitioner trust as 'indeterminate' is sustainable.Whether the doctrine of impossibility applies to the conflict between SEBI Regulations and Circular No. 13/2014 regarding naming beneficiaries in the original Trust Deed.Whether the petitioner's writ petition under Article 226 is maintainable despite availability of statutory appeal under section 245W of the Income Tax Act. RULINGS / HOLDINGS: The impugned Circular No. 13/2014 is to be read down and is not to be applied in a manner that conflicts with SEBI Regulations and the SEBI Act, particularly regarding the requirement to name beneficiaries in the original Trust Deed of Category III AIFs.A trust is not 'indeterminate' under section 164 of the Income Tax Act merely because the names of beneficiaries are not set out in the original Trust Deed; the determinability of beneficiaries' shares at or after the formation of the trust is the real test.The SEBI Regulations and section 12 of the SEBI Act prohibit an entity from accepting investments or naming beneficiaries in the original Trust Deed prior to obtaining registration and certificate from SEBI, making the requirement in Circular No. 13/2014 impossible to comply with for Category III AIFs.The impugned order of the BAR is unsustainable as it overlooks binding judicial precedents and the legal impossibility created by the conflicting statutory provisions and Circular No. 13/2014.The doctrine of impossibility ('lex non cogit ad impossibilia') applies, excusing compliance with the requirement to name beneficiaries in the original Trust Deed when such compliance is prohibited by SEBI Regulations and the SEBI Act.The writ petition under Article 226 is maintainable notwithstanding availability of statutory appeal, given the wide impact of the issue and the BAR's failure to consider settled law and the conflict in Circular No. 13/2014. RATIONALE: The Court examined the provisions of sections 160, 161, 164, 115U, 115UB, and 43(5) of the Income Tax Act, 1961, the SEBI (Alternative Investment Funds) Regulations, 2012, and section 12 of the SEBI Act, 1992.The Court analyzed CBDT Circular No. 13/2014, which clarifies tax treatment of AIFs as non-charitable trusts under section 164, particularly regarding taxation at the Maximum Marginal Rate where beneficiaries are unnamed in the original Trust Deed.The Court considered earlier CBDT Circular No. 281/1980 and judicial precedents including Division Bench judgments of Karnataka and Madras High Courts, which held that beneficiaries' shares need not be named in the original Trust Deed if they are determinable subsequently, thus excluding application of section 164.The Court identified a conflict between Circular No. 13/2014's requirement to name beneficiaries in the original Trust Deed and SEBI Regulations that prohibit accepting investments or naming investors before registration, leading to an 'impossibility' in law.The Court applied the doctrine of impossibility ('lex non cogit ad impossibilia'), supported by authoritative Supreme Court precedents, excusing compliance with impossible statutory requirements.The Court found paragraph 6 of Circular No. 13/2014, which limits its applicability based on High Court jurisdictional decisions, to be contrary to settled constitutional principles of binding precedent and uniform application of law.The Court held that the BAR erred in ignoring binding precedents and the legal impossibility created by conflicting statutory provisions and Circular No. 13/2014, warranting judicial interference under Article 226.