The Delhi High Court has struck down a controversial interpretation of a 2014 Central Board of Direct Taxes (CBDT) circular, offering significant tax relief to Category-III Alternative Investment Funds (AIFs) — including hedge funds and PIPE (private investment in public equity) funds — long burdened with a punitive tax rate of nearly 40%.
The bench of Chief Justice Devender Kumar Upadhyay and Justice Tushar Rao Gedela quashed a ruling by the Board of Advance Rulings (BAR) that had denied the withdrawal application of Equity Intelligence AIF Trust on technical grounds. The BAR had claimed that since the original trust deed did not list the names of beneficiaries, the trust was “indeterminate” and thus liable for taxation at the maximum marginal rate. However, the Delhi High Court firmly disagreed, terming such a requirement “legally impossible” under existing Securities and Exchange Board of India (SEBI) rules.
“No entity under any enactment can be perceived or compelled to perform the impossible,” the court stated bluntly. SEBI mandates that AIFs be registered before launching operations, and trust deeds must be submitted — but crucially, the names of investors are not to be disclosed in these documents, in keeping with confidentiality norms and regulatory restrictions.
The High Court also called out a glaring contradiction within the CBDT’s own Circular No. 13/2014. While it imposed the harsh tax regime nationwide, its Para 6 exempted jurisdictions where local High Courts had ruled differently. This, the bench held, created an unconstitutional disparity in tax treatment. “An issue of law settled by a constitutional court… cannot be implemented state-specific or area-specific,” the judgment asserted, directing the circular to be “read down” in line with constitutional principles.
Until now, Category-III AIFs — which use complex trading strategies such as hedging, leveraging, and arbitrage to generate short-term returns — were taxed at 40% in most of India, while similar funds in Tamil Nadu and Karnataka faced only 12.5%. Industry leaders say this fragmented policy hampered fundraising and operations.
“This is a turning point. Category-III AIFs have the highest capital mobilisation among all AIF categories, having deployed more than two-thirds of their commitments. Yet they were hit hardest by tax confusion,” said Siddarth Pai, Founding Partner at 3one4 Capital and Co-chair of the IVCA Regulatory Affairs Council. “With this Delhi High Court decision, we now have clarity in three critical jurisdictions — Karnataka, Tamil Nadu, and Delhi.”
As of March 2025, total commitments to Category-III AIFs stood at a staggering ₹2.3 trillion, with ₹1.63 trillion already deployed. These funds remain excluded from pass-through taxation benefits available to Category-I and -II AIFs, even if they follow conservative “long-only” strategies.
Case Details
Case Title: Equity Intelligence AIF Trust Versus CBDT
Case No.: W.P.(C) 9972/2024 & CM APPL Nos.40840/2025, 69940/2024 & 1448/2025
Date: 29.07.2025
Counsel For Petitioner: S. Ganesh, Sr. Advocate
Counsel For Respondent: Puneet Rai, Sr. Standing Counsel
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