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 scheme carries a separate PAN distinct from the trust; denial of exemption solely for differing PANs is not permissible, and the addition under 10(23FBA) is deleted. Treating the difference between book surplus and amounts distributed to investors as business income is unsustainable where the fund operates under a passthrough framework; the difference arose from indexation benefit under section 48 on longterm capital gains from unlisted equity and therefore does not constitute taxable business income, so the addition is deleted.

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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.

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