2026 (2) TMI 356 - AT - Income Tax

Eligibility for investment fund exemption and indexation treatment upheld; separate scheme PAN does not bar passthrough relief

Exemption under section 10(23FBA) read with section 115UB is available where a scheme is floated under a SEBIregistered Category II AIF trust even if the ... Eligibility for exemption u/s 10(23FBA) read with section 115UB - SEBI registration certificate is in the PAN of the Trust and not in the PAN of the scheme - assessee’s principal plea is that it is a scheme launched under a SEBI registered Category II AIF, that a single AIF trust can launch multiple schemes, and that separate PAN for each scheme is taken due to regulatory and administrative requirements, though the AIF registration is of the Trust - assessee also pleaded that denial of exemption results in double taxation HELD THAT:- We hold that the exemption under section 10(23FBA) cannot be denied solely on the ground that the scheme has a separate PAN while the SEBI registration is of the Trust, when the scheme is stated to be floated under the SEBI registered Category II AIF trust and the statute itself recognises “scheme of the investment fund” in the context of section 115UB. Accordingly, the addition u/s 10(23FBA) is directed to be deleted. Once the exemption is held allowable, the assessee’s plea of double taxation becomes academic. Nevertheless, we observe that the CIT(A) rejected the double taxation argument on the reasoning that taxation in the investors’ hands under section 115UB presupposes that the fund qualifies as a registered investment fund. Since we have accepted the assessee’s foundational claim on eligibility for exemption under section 10(23FBA) read with section 115UB of the Act, this objection of the CIT(A) does not survive. Accordingly, Ground Nos. 1.1 and 1.2 raised by the assessee are allowed. Indexation under section 48 - characterisation of book surplus versus taxable capital gains - as argued difference represents indexation benefit on long-term capital gains on sale of unlisted equity shares and, therefore, does not constitute taxable income - HELD THAT:- In view of our finding that the assessee is eligible for exemption under section 10(23FBA) read with section 115UB of the Act, the very premise on which the Assessing Officer and the CIT(A) proceeded to tax the difference as business income does not survive. The addition was made by treating the surplus reflected in the profit and loss account as business income of the assessee and by carving out the difference with the income distributed to investors. Once the assessee is held to be governed by the pass-through framework, the income is required to be dealt with within that framework, and the character of income, including the computation leading to the distributable figure, cannot be altered merely because the book surplus reflects a different figure. Even otherwise, on merits, we find force in the contention of the assessee that the difference has arisen on account of indexation benefit available under section 48 of the Act in respect of long-term capital gains on unlisted equity shares. From the reply filed before the Assessing Officer, it is evident that the assessee had recorded the securities under the head “Investments” and not as stock-in-trade, and that the income from their disposal was returned as capital gains and income from other sources and was passed on to the investors in accordance with Rule 12CB read with Form 64D. Difference between the book surplus and the income passed on to the investors is only on account of statutory indexation provided under the Act and cannot be regarded as independent taxable income in the hands of the assessee. We also note that the Assessing Officer’s own record shows that the income during the year under consideration included long-term capital gains on unlisted equity shares. The addition has been sustained as “business income” without bringing on record any material to demonstrate that the gains arose from a business activity or that the statutory character of capital gains stood converted into business income. On these facts, taxation of the said difference under the head “Profits and gains of business or profession” is not sustainable. Accordingly, the addition is deleted. Ground No. 2 raised by the assessee is allowed. Issues: (i) Whether the assessee scheme is eligible for exemption under section 10(23FBA) read with section 115UB of the Income-tax Act, 1961 notwithstanding that SEBI registration is in the name of the Trust and the scheme holds a separate PAN; (ii) Whether the difference of Rs. 16,63,15,486/- (surplus over amount distributed to investors) is taxable as business income or attributable to indexation and not taxable in the hands of the assessee.Issue (i): Whether the assessee scheme qualifies for exemption under section 10(23FBA) read with section 115UB despite scheme-level PAN and SEBI registration being in the Trust.Analysis: The Tribunal examined the statutory recognition of a 'scheme of the investment fund' in Explanation 1 to section 115UB and the SEBI regulatory framework permitting multiple schemes under a single AIF trust. The Assessing Officer relied mainly on the existence of a separate PAN to treat the scheme as an independent trust; however, PAN is an administrative identifier and not conclusive of separate legal character. The Tribunal noted absence of any finding based on governing documents establishing the scheme as an independent trust distinct from the SEBI-registered Trust, and relied on contemporaneous scheme documentation (including the Private Placement Memorandum) and regulatory amendments showing that schemes of an AIF can obtain separate PANs while the AIF registration remains with the Trust. The Tribunal also found persuasive the coordinate Bench view that separate PAN and separate books are procedural and not determinative for entitlement to statutory exemption where the scheme is part of the registered fund.Conclusion: The exemption under section 10(23FBA) read with section 115UB is allowable to the assessee scheme; denial solely on account of separate PAN or SEBI registration in the Trust is not justified. (In favour of Assessee)Issue (ii): Whether the addition of Rs. 16,63,15,486/- as business income is sustainable or represents indexation benefit on long-term capital gains passed through to investors.Analysis: The Tribunal held that once the pass-through framework under section 115UB and section 10(23FBA) applies, the computation and character of income must follow that framework and cannot be altered by reference to book surplus. On merits, the Tribunal found that the difference arose from application of indexation under section 48 to long-term capital gains on unlisted equity shares, while the book surplus did not reflect statutory indexation; securities were recorded as 'Investments' and gains were reported as capital gains and passed to investors in Form 64D. The Assessing Officer did not produce material to show conversion of capital gains into business income.Conclusion: The addition of Rs. 16,63,15,486/- as business income is deleted; the difference is attributable to indexation and not taxable as separate business income. (In favour of Assessee)Final Conclusion: The Tribunal allowed the appeal, directing deletion of the additions and holding the assessee scheme entitled to exemption under section 10(23FBA) read with section 115UB; consequential interest to be recomputed and penalty proceedings to be dropped.Ratio Decidendi: A scheme formed under a SEBI-registered AIF trust is entitled to pass-through relief under section 10(23FBA) and section 115UB where governing documents and scheme records establish the scheme's linkage to the registered Trust; a separate PAN or separate books are administrative identifiers and do not, by themselves, negate entitlement to the statutory exemption, and differences between book surplus and distributable taxable gains arising from statutory indexation under section 48 cannot be treated as independent business income.