The Supreme Court on Wednesday declined to interfere with a Delhi High Court judgment that had read down a 2014 Central Board of Direct Taxes (CBDT) circular prescribing taxation of Category-III alternative investment funds (AIFs) at the maximum marginal rate.
A bench of Justice J B Pardiwala and Justice K Vinod Chandran dismissed the challenge to the Delhi High Court ruling, which had provided relief to Equity Intelligence AIF Trust.
The dispute arose from CBDT Circular No. 13/2014, which dealt with the tax treatment of Category-III AIFs constituted as trusts. The Delhi High Court had held that the circular could not be applied in a manner that required such an AIF to specify its beneficiaries in the trust deed before its registration and commencement of investments.
The high court had relied on the legal principle lex non cogit ad impossibilia: that the law does not require a person to do something that is impossible to perform.
It had also relied on a Karnataka High Court ruling in CIT v India Advantage Fund, holding that the decision had been allowed to operate for several years and had been followed in subsequent cases. The high court consequently set aside the June 27, 2024 order of the Board of Advance Rulings and directed that the CBDT circular be read down in line with its interpretation.
During Wednesday’s hearing, Additional Solicitor General, appearing for the Revenue, referred to the earlier challenge to the India Advantage Fund judgment.
He told the bench that the Revenue had filed a special leave petition against the Karnataka High Court ruling but later withdrew it on account of the low tax effect.
The Supreme Court questioned the decision to withdraw the challenge despite the case involving an important recurring question of law.
The bench pointed out that the Revenue was now contesting the same legal issue after another court had relied upon the Karnataka judgment.
He submitted that the Revenue had subsequently challenged a Madras High Court ruling which had relied on the Karnataka decision.
The bench then narrowed the dispute to whether the trust in question was determinate or indeterminate for income-tax purposes.
The ASG agreed that this was the central question but maintained that its determination required consideration of the relevant provisions of the Income-tax Act.
The judges, however, observed that there was no factual dispute in the case and that the issue essentially concerned interpretation of the statutory provision.
The bench also referred to the Supreme Court’s ruling in Gangadharan, concerning the implications of a party not challenging a judgment in another case.
The judges noted that the India Advantage Fund ruling had remained undisturbed for several years and had subsequently been followed.
“Why did you allow the matter to be disposed of on low tax effect when there was a neat question of law?” the bench asked the Revenue.
After hearing the parties, the Supreme Court declined to interfere with the Delhi High Court’s judgment and disposed of the matter.
