Supreme Court Refuses To Interfere With Delhi HC Order Reading Down CBDT Circular On AIF Taxation
The Supreme Court on Wednesday refused to interfere with the Delhi High Court judgment reading down CBDT Circular No.13/2014 concerning taxation of Category-III Alternative Investment Funds (AIFs) at the Maximum Marginal Rate (MMR).
Allowing Equity Intelligence's writ petition, the Delhi High Court held that the SEBI framework itself made it impossible for a Category-III AIF to name its investors in the original Trust Deed before registration and investment. Applying lex non cogit ad impossibilia, the Court held that the law cannot compel an entity to perform an impossible act.
The High Court also held that the Karnataka High Court's decision in India Advantage Fund governed the issue and that the BAR had wrongly ignored settled law. It therefore set aside the June 27, 2024 BAR order and directed that CBDT Circular No.13/2014 be read down in accordance with its interpretation.
A Bench of Justices J.B. Pardiwala and K. Vinod Chandran was hearing the challenge against the Delhi High Court judgment, which had allowed a writ petition filed by Equity Intelligence AIF Trust.
Appearing for the Central Board of Direct Taxes, Additional Solicitor General Raghavendra Shankar submitted that the Revenue had earlier challenged the India Advantage Fund judgment before the Supreme Court.
“We had filed an SLP. My Lords had framed an issue and issued notice. Thereafter, we had to withdraw it because of low tax effect,” he submitted.
The Bench questioned the Revenue's decision to withdraw the earlier challenge on the ground of low tax effect when the matter involved a recurring question of law.
“What about this Commissioner of Income Tax versus India Advantage Fund? Is this judgment a subject matter of challenge?” the Bench asked.
Shankar responded that the Revenue had challenged the judgment but subsequently withdrew the challenge because of the low tax effect.
“We challenged this against which we had to withdraw it because of low tax effect, my Lords, but now that has been relied upon against us again. But I won't put it only on that point,” he submitted.
The Bench questioned why the Revenue had allowed the earlier matter to be disposed of on low tax effect despite the existence of a substantial question of law.
“Why did you allow the matter to be disposed of on low tax effect when there was a neat question of law? Today you are again agitating the very same issue because another judgment has gone against you, relying on that judgment,” the Bench observed.
Shankar explained that the Revenue had subsequently challenged a Madras High Court judgment which had relied upon the Karnataka High Court's decision.
“I tell my Lords exactly why. The assessee there filed an application correctly, saying that did you file appeals from Karnataka and Kerala? We filed an appeal against Madras, which relies on those are the. They have relied upon it,” the ASG submitted.
The Bench then sought to clarify the central issue arising in the case whether the trust should be treated as determinate or indeterminate.
“The short point is, is it a determinate trust or an indeterminate trust?” the Bench asked.
Shankar agreed that this was the central issue but argued that the question could involve an examination of the requirements under the Income-tax Act.
The Bench questioned whether the determination of the status of the trust would ultimately be a question of fact.
Shankar responded that there was no factual controversy in the present case and that the dispute concerned the interpretation of the statutory provision.
“No, besides, no, it isn't. There is no factual controversy here. The question is, under Explanation 1, what is your case?”
The Bench further pointed out that the Revenue had not challenged the relevant legal position in the manner suggested.
Shankar maintained that the Revenue had challenged the Madras High Court decision and sought to distinguish the effect of non challenge in another case.
The Bench referred to the Supreme Court's decision in Gangadharan, concerning the effect of non challenge to a judgment in another case.
Shankar sought permission to place the judgment before the Court.
The Court however, noted that the Karnataka High Court judgment in India Advantage Fund had held the field for several years and had been followed.
“The Karnataka High Court judgment has held the field for many years. They accepted it. They allowed it to be followed.”
After hearing the submissions, the Supreme Court declined to interfere with the Delhi High Court's judgment and the matter was accordingly disposed of.