Separate PAN Not Ground to Deny AIF Benefits: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that exemption under Section 10(23FBA) of the Income-tax Act cannot be denied merely because a scheme of an Alternative Investment Fund (AIF) holds a separate Permanent Account Number (PAN). The bench of Anikesh Banerjee (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) has allowed the appeal filed by Edelweiss Crossover Opportunities Fund for Assessment Year 2023–24, setting aside additions made by the tax authorities and reaffirming the pass-through taxation framework applicable to investment funds. Edelweiss Crossover Opportunities Fund, a scheme under the Edelweiss Alternative Investment Opportunities Trust, had filed its income tax return declaring nil income. The Trust is registered with the Securities and Exchange Board of India (SEBI) as a Category II Alternative Investment Fund. The return was initially processed accepting the declared income, and a refund was issued. However, the case was later selected for scrutiny. The Assessing Officer (AO) observed that the SEBI registration stood in the name of the Trust and not in the name of the scheme itself. Since the scheme possessed a separate PAN, the AO concluded that it did not qualify as an “investment fund” under Section 115UB and therefore was not eligible for exemption under Section 10(23FBA). The AO further noted that the fund had reported a surplus exceeding ₹468 crore and had distributed over ₹451 crore to investors. The remaining ₹16.63 crore was treated as taxable business income, and penalty proceedings were initiated. The Commissioner of Income Tax (Appeals) upheld the assessment order, agreeing that the scheme lacked independent SEBI registration and therefore could not claim the statutory exemption. The addition of ₹16.63 crore was also confirmed as taxable income. Before the Tribunal, the assessee contended that under SEBI’s AIF Regulations, a single trust may launch multiple schemes, and obtaining separate PANs for administrative purposes is standard practice. It argued that the scheme is “inextricably linked” to the SEBI-registered Trust and that denial of exemption would lead to double taxation since the distributed income was already taxed in investors’ hands. The assessee also relied on regulatory documents and a Private Placement Memorandum to demonstrate that it operated as a scheme of the registered AIF. The central question was whether a scheme floated under a SEBI-registered Category II AIF could claim exemption despite the registration being in the Trust’s name rather than the scheme’s PAN. The ITAT found that the Assessing Officer had himself acknowledged that the Trust could float multiple schemes. It emphasized that a separate PAN is merely a tax administration identifier and does not automatically establish the existence of a separate legal trust. Importantly, the Tribunal noted that the statute itself recognizes a “scheme of the investment fund,” indicating that independent SEBI registration for each scheme is not mandatory. The lower authorities had also failed to examine governing documents to determine whether the scheme was indeed part of the registered Trust, instead rejecting the claim primarily due to the absence of scheme-level registration. The ITAT held that exemption under Section 10(23FBA) cannot be denied solely because the scheme has a separate PAN when it is floated under a SEBI-registered AIF trust. Accordingly, the addition of ₹451.59 crore was directed to be deleted. Once the exemption was allowed, the Tribunal observed that the argument regarding double taxation became academic. On the second issue, the Tribunal ruled that the ₹16.63 crore difference arose from indexation benefits on long-term capital gains from unlisted equity shares. Since the fund followed the pass-through regime and the income retained its character as capital gains, taxing it as business income was unsustainable. The addition was therefore deleted. The Tribunal stated that the grounds relating to interest and penalty were consequential. With the substantive additions deleted, the penalty proceedings would not survive, and interest must be recomputed in accordance with law. Case Details Case Title: Edelweiss Crossover Opportunities Fund Versus ITO Case No.: ITA No. 7439/Mum/2025 Date: 03/02/2026 Counsel For Appellant: Madhur Agarwal, Ld. AR Counsel For Respondent: Ritesh Misra, Ld. DR Click Here To Read Order Read More: Broken DVD and Retracted Statement Unreliable Evidence: CESTAT Quashes Rs. 40 Lakh Penalty on IRS Officer

Separate PAN Not Ground to Deny AIF Benefits: ITAT

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