Section 115UB — Tax on Income of Investment Fund and its Unit Holders (AIF Category I and II)

CHAPTER XII-FB - SPECIAL PROVISIONS RELATING TO TAX ON INCOME OF INVESTMENT FUNDS AND INCOME RECEIVED FROM SUCH FUNDS

Section 115UB - Tax on income of investment fund and its unit holders

Case Laws & Commentary - Income-tax Act, 1961 (as amended by the Finance Act, 2026) - bharattax.co Treatise

Provision: The sole section of Chapter XII-FB. It confers a statutory “pass-through” (tax-transparency) on a SEBI-registered Category I or Category II Alternative Investment Fund (AIF): income earned by the fund - other than business income - is not taxed at the fund level (it is exempt under section 10(23FBA)) but is taxed in the unit holder's hands, in the same character and proportion, as if the unit holder had himself made the fund's investments directly.

Origin: Inserted by the Finance Act, 2015, with effect from 1 April 2016 (assessment year 2016-17), replacing the narrower venture-capital pass-through in section 115U (Chapter XII-F) for the new “investment fund” population. The loss provisions in sub-sections (2) and (2A) were substituted/inserted by the Finance Act, 2016 and the Finance Act, 2019 respectively; the IFSC (Fund Management) Regulations, 2022 limb of Explanation 1(a) was inserted by the Finance Act, 2023, with effect from 1 April 2023.

Present status under FA 2026: Live and central. Section 115UB is the operative pass-through regime for Category I and II AIFs. The Finance Act, 2026 makes no amendment to section 115UB or to its linked exemptions in section 10(23FBA)/(23FBB) or the TDS machinery in section 194LBB. (The Finance Act, 2025 had separately clarified, with effect from assessment year 2026-27, that securities held by a Category I or II AIF are capital assets - a characterisation point that bears on the business-income boundary discussed in the commentary; it does not touch the text of section 115UB.)

Reading note: Section 115UB works only in tandem with the exemptions in section 10(23FBA) (fund-level exemption for non-business income) and section 10(23FBB) (unit-holder-level exemption for the business-income proportion already taxed in the fund's hands). The body of authority is correspondingly built around that linkage - (i) whether a fund (or a scheme of a fund) qualifies as an “investment fund” and keeps its section 10(23FBA) exemption, and (ii) the trust-law question of when a pooled AIF trust is a determinate “conduit” at all. Direct merits authority on section 115UB is still sparse (the regime is only a decade old); the candour rule below states, for each authority, the precise leg of the section it bears on.

A. SECTION COMMENTARY

A.1 What Chapter XII-FB does - a single-section pass-through for Alternative Investment Funds

Chapter XII-FB contains one section. Section 115UB is the income-tax counterpart of a deliberate policy choice taken in 2015: to give India's pooled private-capital industry - the SEBI-registered Alternative Investment Funds - a clean, single level of tax. For a Category I or Category II AIF, the fund is treated as fiscally transparent for everything except business income. Income that the fund earns - capital gains on exits, dividends, interest - is exempt in the fund's hands under section 10(23FBA) and is instead taxed in the hands of the investor (the “unit holder”) who put money into the fund, in the same manner, character and proportion as if that investor had himself made the fund's investments directly. The slogan for the scheme is the same as for its venture-capital predecessor: “one level of tax, in the investor's hands, with the fund as a transparent conduit” - but section 115UB is broader in reach and more elaborate in machinery than section 115U was.

The design is the mirror-image of the distribution-tax model used for companies (dividend-distribution tax, Chapter XII-D) and mutual funds (income-distribution tax, Chapter XII-E). There, a single tax was collected at the entity gate and the income flowed out exempt. Here, the opposite technique is used for non-business income - nothing is collected at the fund gate, and the whole charge is shifted to the investor. Sub-section (5) makes the contrast explicit by switching off Chapters XII-D and XII-E for income paid by an investment fund, so the two models never overlap. Where section 115UB departs sharply from section 115U is that it does not switch off the TDS machinery of Chapter XVII-B; instead, a dedicated withholding section, section 194LBB, sits alongside section 115UB and requires the fund to deduct tax on the income it passes through.

A.2 The mechanics of section 115UB - sub-section by sub-section

Sub-section (1) is the charging-cum-transparency rule. Subject to the rest of the Chapter, income “accruing or arising to, or received by, a person, being a unit holder of an investment fund, out of investments made in the investment fund” is chargeable “in the same manner as if” the investments made by the fund had been made directly by the unit holder. The non obstante clause overrides the ordinary rules of entity-level taxation; the “as if direct investment” fiction is the heart of the pass-through. Note the drafting advance over section 115U(1): section 115UB(1) deems the fund's investments to have been made directly by the unit holder (an investment-level fiction), which carries the character of the underlying income through more cleanly than the older “income out of investments” formula.

Sub-sections (2) and (2A) are the loss regime - the most intricate and most litigated machinery in the section, examined separately at A.6. In outline: a business loss of the fund stays at the fund level (carried forward by the fund, ignored for the pass-through), while a non-business loss passes through to the unit holder, but only if the unit was held for at least twelve months; sub-section (2A) deals with the one-time migration of losses accumulated at the fund level up to 31 March 2019.

Sub-section (3) preserves character and proportion: income paid or credited by the fund is “deemed to be of the same nature and in the same proportion” in the unit holder's hands as it had been in the fund's hands, subject to the loss rule in sub-section (2). Long-term capital gain remains long-term capital gain; dividend remains dividend; interest remains interest. The fund is a pane of clear glass, not a prism - it transmits the income's colour unchanged.

Sub-section (4) is the fund-level charge on the residue. The total income of the fund - which, after section 10(23FBA), means its business income - is charged to tax at the rates specified in the Finance Act where the fund is a company or a firm, and at the maximum marginal rate “in any other case” (typically a trust or body corporate). This is the structural asymmetry of the AIF regime (A.5): non-business income passes through, business income is trapped and taxed at the fund.

Sub-section (5) disapplies Chapters XII-D (DDT) and XII-E (mutual-fund IDT) to income paid by an investment fund, for the same structural reason as in section 115U(4): the model taxes the investor, not the vehicle, so a distribution tax at the vehicle would contradict the scheme. Unlike section 115U(4), it does not switch off Chapter XVII-B - withholding is preserved and is governed by section 194LBB (A.8).

Sub-section (6) is the anti-deferral rule: income earned by the fund but not paid or credited to the unit holder is nonetheless “deemed to have been credited” to the unit holder on the last day of the previous year, in his proportionate share (again subject to the loss rule in sub-section (2)). The transparency is therefore complete - the investor cannot escape or defer tax by leaving the income to accumulate in the fund.

Sub-section (7) is the reporting machinery: the person responsible for crediting or paying the income, and the fund, must furnish a statement (the prescribed forms are Form No. 64C to the unit holder and Form No. 64D to the prescribed income-tax authority, under Rule 12CB) giving the nature of the income paid or credited during the year. This is the document on which the unit holder builds the Schedule PTI (“pass-through income”) of his return. The two Explanations complete the section - Explanation 1 defines “investment fund”, “trust” and “unit” (the definitions on which the whole regime turns); Explanation 2 removes doubt by providing that income once taxed on accrual is not taxed again when actually paid out.

A.3 The two-leg architecture - section 10(23FBA)/(23FBB) and section 115UB read together

Section 115UB cannot be read in isolation; it is one leg of a carefully interlocked structure. Section 10(23FBA) exempts “any income of an investment fund other than the income chargeable under the head 'Profits and gains of business or profession'” - the fund-level exemption that makes the pass-through possible. Section 115UB then taxes that same income in the unit holder's hands. Section 10(23FBB) completes the circle from the other direction: it exempts, in the unit holder's hands, “that proportion of income which is of the same nature as income chargeable under the head 'Profits and gains of business or profession'” - because that business-income proportion has already borne tax at the fund level under section 115UB(4). Remove any leg and the scheme mis-fires: without section 10(23FBA) the non-business income would be taxed twice (fund and investor); without section 10(23FBB) the business income would be taxed twice (fund under section 115UB(4), and again in the investor's hands).

This linkage explains why the litigation is fought on the section 10(23FBA) front rather than on section 115UB directly. If the Revenue can deny the fund (or a scheme of the fund) its status as an “investment fund” - and so its section 10(23FBA) exemption - the entire surplus falls to be taxed at the fund level as business income, and the pass-through collapses. The Edelweiss decision in Cluster C-1 is precisely a defence of this first leg: the Revenue's attempt to deny exemption because the scheme held a separate PAN was rejected, and the section 115UB pass-through preserved.

A.4 Character and proportion preserved - the significance of sub-section (3)

Sub-section (3) is the provision that gives the pass-through its commercial value. AIF income is overwhelmingly capital gain on the eventual exit from a portfolio company, together with dividends and interest along the way. If that gain were re-characterised as the fund's business income on its way to the investor, two things would follow: the favourable capital-gains rates and the indexation/grandfathering reliefs would be lost, and - worse - the income would be trapped at the fund level under sub-section (4) instead of passing through. By deeming the income to retain “the same nature and ... the same proportion” in the investor's hands, sub-section (3) ensures the investor is taxed exactly as a direct co-investor would have been. The recurring Revenue strategy - to label the fund's gains as business income so as to defeat both the section 10(23FBA) exemption and the character pass-through - is, at bottom, an attack on this rule; in Edelweiss the Tribunal held that a book surplus difference arising purely from statutory indexation under section 48 on long-term capital gains could not be re-cast as business income.

A.5 The fund-level charge on business income - sub-section (4) and the AIF asymmetry

Section 115UB is not a pure pass-through; it is a hybrid. This is its single most important structural feature and the source of most disputes. Non-business income (capital gains, dividends, interest) is exempt at the fund (section 10(23FBA)) and passes through to investors (section 115UB(1)/(3)); but business income - “Profits and gains of business or profession” - is carved out of the exemption and taxed at the fund level under sub-section (4): at applicable rates if the fund is a company or firm, and at the maximum marginal rate “in any other case”, which captures the typical trust-form AIF. The boundary between capital gains and business income therefore decides not merely the rate but who bears the tax and whether the pass-through operates at all. This is why the characterisation of an AIF's securities transactions - investment yielding capital gains, or trading yielding business income - is the central battleground, and why the Finance Act, 2025 clarification that securities held by Category I and II AIFs are capital assets (with effect from assessment year 2026-27) is significant context for the section, even though it does not amend the section's own text.

A.6 The loss regime - sub-sections (2) and (2A): the most complex machinery in the section

A pure pass-through must answer an awkward question: if the fund's income flows out to investors, what happens to the fund's losses? Section 115UB answers it asymmetrically, and the practitioner must hold three rules in mind. First, a business loss of the fund is not passed through at all - it is “allowed to be carried forward and ... set off by the investment fund” itself under Chapter VI (sub-section (2)(i)(a)) and is “ignored for the purposes of sub-section (1)” (sub-section (2)(i)(b)). This mirrors the business-income asymmetry of sub-section (4): business profit is taxed at the fund, business loss is retained at the fund. Second, a non-business loss (a capital loss, or a loss under any other head) does pass through to the unit holder - but only if the unit has been “held by the unit holder for a period of atleast twelve months”; a non-business loss on a unit held for less than twelve months is “ignored” (sub-section (2)(ii)). This twelve-month holding condition is a deliberate anti-abuse rule preventing short-term investors from harvesting fund-level losses. Third, sub-section (2A) deals with the one-time transition: losses (other than business losses) accumulated at the fund level as on 31 March 2019 are deemed to be the loss of the unit holder who held the unit on that date and may be carried forward by him for the balance of the eight-year period, but - by the proviso - are no longer available to the fund on or after 1 April 2019. The 2019 amendment thus closed the fund-level accumulation of non-business losses and pushed the historic stock down to the unit holders in a single deeming.

The interaction of these rules with sub-sections (1), (3) and (6) is the reason the loss regime is the section's most intricate machinery: each of those operative sub-sections is expressly made “subject to the provisions of sub-section (2)”, so that the loss filter qualifies the charge, the character pass-through and the deemed-credit alike. In practice this means the Form 64C/64D statement must segregate income and loss by head and by holding period, and the unit holder's Schedule PTI must carry the same segregation.

A.7 The anti-deferral deeming and the reporting machinery - sub-sections (6) and (7)

Sub-section (6) closes the obvious loophole in any pass-through: if income could be left in the fund untaxed until some later distribution, investors could defer tax indefinitely. The sub-section meets this by deeming undistributed fund income (subject to the loss rule) to be credited to each unit holder on the last day of the previous year in his proportionate share. Coupled with Explanation 2 (no second tax when the income is later actually paid), the result is a clean accrual-based transparency: the investor is taxed once, in the year the fund earns the income, whether or not it is distributed. Sub-section (7) supplies the documentary spine - the fund must report the nature of the income paid or credited in the prescribed statement (Form 64C to the unit holder, Form 64D to the Department, under Rule 12CB), and section 139(4F) independently obliges every investment fund to file a return of its income or loss whether or not it is otherwise required to do so.

A.8 No distribution tax, but withholding under section 194LBB - sub-section (5) and the TDS contrast with section 115U

Sub-section (5) disapplies Chapters XII-D and XII-E to income paid by an investment fund. The point is structural: the AIF model taxes the investor, not the vehicle, so a distribution tax at the vehicle (DDT/IDT) would contradict the scheme. Here the AIF regime parts company with its venture-capital ancestor. Section 115U(4) switched off Chapter XVII-B (TDS) altogether; section 115UB(5) does not. Instead, the Finance Act, 2015 enacted a dedicated withholding section, section 194LBB, under which the fund must deduct tax on the income (other than the business-income proportion already exempt to the unit holder under section 10(23FBB)) that it credits or pays to a unit holder - at ten per cent for a resident payee, and at “rates in force” for a non-resident or foreign-company payee (with a proviso that no deduction is made on income not chargeable to tax in a non-resident's hands). The practitioner must therefore reconcile three numbers for every distribution: the pass-through income under section 115UB, the section 10(23FBB) business-income proportion exempt to the unit holder, and the section 194LBB withholding on the balance.

A.9 Section 115UB and its predecessor section 115U - the determinacy substrate

Section 115UB is the lineal successor of section 115U. When the SEBI (Alternative Investment Funds) Regulations, 2012 replaced the SEBI (Venture Capital Funds) Regulations, 1996, the venture-capital pass-through in Chapter XII-F was frozen for legacy funds (by section 115U(6)) and the wider AIF pass-through in Chapter XII-FB took its place from assessment year 2016-17. Much of the interpretive learning carries across. In particular, most AIFs are constituted as trusts, which brings into play the general scheme for taxing trusts - sections 160 to 164. A determinate (“specific”) trust, whose beneficiaries and shares are known or determinable, is a conduit taxed in the beneficiaries' hands; an indeterminate or discretionary trust is taxed at the maximum marginal rate under section 164(1). For a Category I or II AIF the statutory pass-through in section 115UB largely overrides this enquiry; but the determinacy question remains decisive for funds outside section 115UB (notably Category III AIFs, which have no pass-through and are taxed on ordinary trust principles), and the determinacy authorities are therefore an essential part of the AIF practitioner's toolkit. The decisions in Cluster C-2 - the Karnataka High Court in India Advantage Fund-VII, the Madras High Court in TVS Shriram Growth Fund, the Delhi High Court in Equity Intelligence AIF Trust, and the contrasting Chennai Tribunal decision in TVS Investments iFund - together map this field.

A.10 Reading section 115UB in 2026

For the practitioner today, section 115UB is the live, mainstream pass-through for the great bulk of India's private-equity, venture and debt funds (Categories I and II). Five themes dominate practice: (a) qualification - ensuring the fund, and each scheme launched under it, falls within the Explanation 1(a) definition of “investment fund” so that section 10(23FBA) and the pass-through apply (the Edelweiss 'separate scheme PAN' point); (b) characterisation - keeping the fund's gains on the capital-asset side of the line so they pass through rather than being trapped as business income under sub-section (4), now reinforced for Category I/II AIFs by the Finance Act, 2025 capital-asset clarification; (c) the loss regime - correctly applying the business-loss-stays / non-business-loss-passes-through-if-held-12-months rules of sub-sections (2) and (2A); (d) withholding and reporting - section 194LBB, Form 64C/64D and the unit holder's Schedule PTI; and (e) determinacy - the trust-law substrate that still governs any fund outside the section 115UB perimeter. The Finance Act, 2026 leaves the section, and its linked provisions, untouched. There is as yet no High Court or Supreme Court decision construing the charge in section 115UB itself; its meaning is being worked out at Tribunal level around the section 10(23FBA) qualification question, with the established trust-determinacy jurisprudence supplying the interpretive backdrop. The authorities below are presented on that candid footing.

B. STATUTORY POSITION (verbatim operative text)

Section 115UB, Income-tax Act, 1961 (Chapter XII-FB), as it stands on the statute book (Finance Act, 2025 text; unchanged by the Finance Act, 2026):

115UB. (1) Notwithstanding anything contained in any other provisions of this Act and subject to the provisions of this Chapter, any income accruing or arising to, or received by, a person, being a unit holder of an investment fund, out of investments made in the investment fund, shall be chargeable to income-tax in the same manner as if it were the income accruing or arising to, or received by, such person had the investments made by the investment fund been made directly by him.

(2) Where in any previous year, the net result of computation of total income of the investment fund [without giving effect to the provisions of clause (23FBA) of section 10] is a loss under any head of income and such loss cannot be or is not wholly set off against income under any other head of income of the said previous year, then,-

(i) out of such loss, the loss arising to the investment fund as a result of the computation under the head “Profits and gains of business or profession”, if any, shall be,-

(a) allowed to be carried forward and it shall be set off by the investment fund in accordance with the provisions of Chapter VI; and

(b) ignored for the purposes of sub-section (1);

(ii) the loss other than the loss referred to in clause (i), if any, shall also be ignored for the purposes of sub-section (1), if such loss has arisen in respect of a unit which has not been held by the unit holder for a period of atleast twelve months.

(2A) The loss other than the loss under the head “Profits and gains of business or profession”, if any, accumulated at the level of investment fund as on the 31st day of March, 2019, shall be,-

(i) deemed to be the loss of a unit holder who held the unit on the 31st day of March, 2019 in respect of the investments made by him in the investment fund, in the same manner as provided in sub-section (1); and

(ii) allowed to be carried forward by such unit holder for the remaining period calculated from the year in which the loss had occurred for the first time taking that year as the first year and shall be set off by him in accordance with the provisions of Chapter VI:

Provided that the loss so deemed under this sub-section shall not be available to the investment fund on or after the 1st day of April, 2019.

(3) The income paid or credited by the investment fund shall be deemed to be of the same nature and in the same proportion in the hands of the person referred to in sub-section (1), as if it had been received by, or had accrued or arisen to, the investment fund during the previous year subject to the provisions of sub-section (2).

(4) The total income of the investment fund shall be charged to tax-

(i) at the rate or rates as specified in the Finance Act of the relevant year, where such fund is a company or a firm; or

(ii) at maximum marginal rate in any other case.

(5) The provisions of Chapter XII-D or Chapter XII-E shall not apply to the income paid by an investment fund under this Chapter.

(6) The income accruing or arising to, or received by, the investment fund, during a previous year, if not paid or credited to the person referred to in sub-section (1), shall subject to the provisions of sub-section (2), be deemed to have been credited to the account of the said person on the last day of the previous year in the same proportion in which such person would have been entitled to receive the income had it been paid in the previous year.

(7) The person responsible for crediting or making payment of the income on behalf of an investment fund and the investment fund shall furnish, within such time as may be prescribed, to the person who is liable to tax in respect of such income and to the prescribed income-tax authority, a statement in the prescribed form and verified in such manner, giving details of the nature of the income paid or credited during the previous year and such other relevant details, as may be prescribed.

Explanation 1.-For the purposes of this Chapter,-

(a) “investment fund” means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022 made under the International Financial Services Centres Authority Act, 2019 (50 of 2019);

(b) “trust” means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force;

(c) “unit” means beneficial interest of an investor in the investment fund or a scheme of the investment fund and shall include shares or partnership interests.

Explanation 2.-For the removal of doubts, it is hereby declared that any income which has been included in total income of the person referred to in sub-section (1) in a previous year, on account of it having accrued or arisen in the said previous year, shall not be included in the total income of such person in the previous year in which such income is actually paid to him by the investment fund.

Linked provisions (reproduced for the reader's convenience; the operative text on which the authorities turn):

Section 10(23FBA): “any income of an investment fund other than the income chargeable under the head 'Profits and gains of business or profession'” - [exempt].

Section 10(23FBB): “any income referred to in section 115UB, accruing or arising to, or received by, a unit holder of an investment fund, being that proportion of income which is of the same nature as income chargeable under the head 'Profits and gains of business or profession'” - [exempt]. Explanation.-For the purposes of clauses (23FBA) and (23FBB), the expression 'investment fund' shall have the meaning assigned to it in clause (a) of the Explanation 1 to section 115UB.

Section 194LBB: “Where any income, other than that proportion of income which is of the same nature as income referred to in clause (23FBB) of section 10, is payable to a unit holder in respect of units of an investment fund specified in clause (a) of the Explanation 1 to section 115UB, the person responsible for making the payment shall ... deduct income-tax thereon,- (i) at the rate of ten per cent, where the payee is a resident; (ii) at the rates in force, where the payee is a non-resident (not being a company) or a foreign company ...”.

C. AUTHORITIES

Candour note: section 115UB is barely a decade old, and there is as yet no reported High Court or Supreme Court decision construing its charge in isolation. The live battleground is the section 10(23FBA) qualification of the fund (or a scheme of the fund) and the characterisation of the fund's income as business income versus capital gain; behind that sits the long-standing trust-law jurisprudence on when a pooled fund is a determinate “conduit” at all. The authorities below are grouped by the work they do: (C-1) the direct section 115UB / section 10(23FBA) authority; (C-2) trust determinacy and beneficiary-level taxation - the conduit principle, the line of decisions (Karnataka, Madras and Delhi High Courts) that underpins the AIF pass-through, including the contrasting case where pass-through was denied; (C-3) foundational and cognate principles relied on; and (C-4) the administrative and forward-looking context. Each entry states its precise relationship to section 115UB; tribunal-level and writ decisions are flagged as such.

Cluster C-1 : Direct authority on section 115UB and the section 10(23FBA) qualification

Edelweiss Crossover Opportunities Fund v. Income-tax Officer, Ward 22(1)(1) (ITAT Mumbai; ITA No. 7439/Mum./2025; order pronounced 3 February 2026; AY 2023-24).

Facts: The assessee, Edelweiss Crossover Opportunities Fund (PAN AAATE8456C), is a scheme launched under Edelweiss Alternative Investment Opportunities Trust, a trust registered with SEBI as a Category II Alternative Investment Fund. For assessment year 2023-24 the scheme filed a nil return, claiming exemption under section 10(23FBA) on income passed through to its investors under section 115UB. The scheme held its own (separate) PAN, while the SEBI certificate of registration stood in the name of the parent Trust. The Assessing Officer (assessment under section 143(3) read with section 144B, dated 18 March 2025) denied the exemption on the ground that the scheme was not itself registered with SEBI as an AIF and so did not qualify as an “investment fund” under section 115UB; he taxed the entire surplus of Rs. 468.22 crore as business income, and added a further Rs. 16.63 crore being the difference between the book surplus and the amount actually distributed to investors. The CIT(A) (NFAC, order dated 4 November 2025) upheld the assessment.

Held: The Tribunal allowed the appeal. (i) Exemption under section 10(23FBA) cannot be denied merely because the scheme holds a separate PAN while the SEBI registration is in the name of the Trust: PAN is only a tax-administration identifier and does not, by itself, create a separate trust or legal entity. (ii) The statutory framework of section 115UB itself recognises a “scheme of the investment fund” (Explanation 1(c) defines a “unit” by reference to “the investment fund or a scheme of the investment fund”), and the SEBI (AIF) Regulations, 2012 permit a registered AIF trust to launch multiple schemes under a single registration - each scheme being capped at 1,000 investors, with a new scheme launched for further investors. (iii) The Assessing Officer had not demonstrated, from the governing documents, that the scheme was an independent trust distinct from the registered AIF; the scheme was inextricably linked to the registered AIF and entitled to the pass-through exemption. The addition of Rs. 451.59 crore was deleted. (iv) The further addition of Rs. 16.63 crore was deleted: the difference arose solely from statutory indexation under section 48 on long-term capital gains and could not be treated as business income. Interest was directed to be re-computed; penalty proceedings were held not to survive.

Application to s.115UB: The leading direct authority on the section. It vindicates the first leg of the two-leg architecture (A.3) - a scheme of a SEBI-registered Category II AIF qualifies as an “investment fund” and keeps its section 10(23FBA) exemption, so that the section 115UB pass-through operates and the surplus is taxable in the investors' hands, not at the fund. It is also a direct application of the character-preservation rule of sub-section (3) (A.4): a book difference produced by section 48 indexation on long-term capital gain retains its capital-gains character and cannot be re-labelled as business income to trap it at the fund under sub-section (4).

Status: ITAT Mumbai; appeal allowed in favour of the assessee. Tribunal-level merits decision on section 10(23FBA) read with section 115UB. Appeal number, dates and figures stated as recorded in the order and the contemporaneous professional reports of the decision.

Cluster C-2 : Trust determinacy and beneficiary-level taxation - the conduit principle behind the AIF pass-through

Equity Intelligence AIF Trust v. Central Board of Direct Taxes, W.P.(C) No. 9972 of 2024 (Delhi High Court, Division Bench; judgment dated 29 July 2025; Neutral Citation 2025:DHC:6170-DB; reported as [TS-979-HC-2025(DEL)]).

Facts: The petitioner, Equity Intelligence AIF Trust, is a SEBI-registered Category III Alternative Investment Fund, constituted under an irrevocable trust deed and sponsored by Equity Intelligence India Pvt. Ltd. It launched an open-ended scheme (“EQ India Fund”) investing in listed equity, issuing units of Rs. 1,000 each post-registration under contribution agreements. In compliance with the SEBI (AIF) Regulations, 2012 - which prohibit accepting investor funds before registration - the trust deed did not name the investors or specify their beneficial interests; from inception (FY 2017-18) the trust filed returns as a determinate trust, allocating income by units held per NAV. The Board for Advance Rulings (27 June 2024), relying on CBDT Circular No. 13/2014, held that absent the beneficiaries' names in the original trust deed the trust was indeterminate and taxable at the maximum marginal rate under section 164. The trust challenged both the ruling and the circular by writ.

Held: Allowing the writ petition and setting aside the BAR's order, the Division Bench (Yashwant Varma and Purushaindra Kumar Kaurav JJ.) held: (i) CBDT Circular No. 13/2014, in mandating disclosure of beneficiaries' names and interests in the original trust deed, directly conflicts with the SEBI (AIF) Regulations, 2012 and the SEBI Act, 1992, under which no AIF can accept funds or name investors before registration; (ii) compliance with both the circular and the SEBI regime is legally impossible, and lex non cogit ad impossibilia - the law does not compel the impossible - protects the taxpayer; (iii) following the Karnataka High Court in India Advantage Fund-VII and the Madras High Court in TVS Shriram Growth Fund, subsequent identification of beneficiaries from contribution agreements and unit holdings is sufficient to render a trust “determinate”; (iv) the circular ignored the earlier binding Circular No. 281/1980 (identification of beneficiaries at the time of distribution suffices); and (v) the circular's attempt to confine itself to jurisdictions where the local High Court had not ruled otherwise was “baffling and contrary to settled legal principles.” The non-mention of investors in the original trust deed does not, by itself, render the trust indeterminate under section 164, so long as the shares are determinable through subsequent agreements or unit-based allocations.

Application to s.115UB: The most authoritative recent statement of the determinacy/conduit principle that underlies the entire AIF pass-through (A.9). Although the fund before the Court was a Category III AIF (which has no section 115UB pass-through and is taxed on ordinary trust principles), the judgment settles the trust-law substrate on which the Category I/II regime also rests: a pooled AIF trust whose shares are ascertainable from contribution agreements is a determinate conduit, not an indeterminate trust taxable at the maximum marginal rate. It is the High Court anchor for treating an AIF as transparent and for reconciling the SEBI registration sequence with the determinacy test.

Status: Delhi High Court, Division Bench; writ petition allowed; CBDT Circular No. 13/2014 read down. Binding High Court authority on trust determinacy and on the limits of administrative circulars; not itself a section 115UB charge decision (the fund being Category III).

CIT v. India Advantage Fund-VII, [2017] 78 taxmann.com 301 (Karnataka High Court, judgment dated 1 February 2017).

Facts: A fund settled by ICICI Venture Funds Management Co. Ltd. as a trust, in which the contributors were also the beneficiaries, their shares fixed by a pre-determined formula in the trust deed. The Revenue sought to assess the trust as an association of persons at the maximum marginal rate under section 164(1), arguing that the beneficiaries' shares were indeterminate on the date the trust deed was executed.

Held: Dismissing the Revenue's appeal: (i) the Explanation to section 164 cannot be read to require the beneficiaries' shares to be ascertained, as a fixed quantum, on the date the trust deed is executed; the test is whether the shares are determinable - at the time of, or after, the formation of the trust. (ii) Where beneficiaries share in proportion to their investment, “any person with reasonable prudence” would conclude the shares are determinable, so the trust is outside section 164(1). (iii) Once the shares are determinable, the income is taxable in the beneficiaries' hands, not the trustees'.

Application to s.115UB: The leading High Court statement of the conduit principle that underlies the AIF pass-through, decided on a fund managed by a venture/PE manager. While framed on sections 161/164 rather than section 115UB, it establishes that a determinate pooled trust is taxed in the investors' hands - precisely the result section 115UB secures by statute for Category I/II AIFs - and it is the authority the Delhi High Court in Equity Intelligence followed. It is the doctrinal anchor for treating an AIF trust as transparent.

Status: Karnataka High Court; Revenue's appeal dismissed. Binding High Court authority on trust determinacy (sections 161/164).

CIT v. TVS Shriram Growth Fund (Madras High Court; cited and followed in Equity Intelligence AIF Trust, above).

Facts: A fund registered with SEBI whose determinacy was challenged: the Revenue contended that, the beneficiaries not being named with fixed shares on the date of the trust instrument, the trust was indeterminate and taxable at the maximum marginal rate under section 164.

Held: Following the Karnataka High Court in India Advantage Fund, the Madras High Court held that subsequent identification of the beneficiaries on the basis of the contribution agreements is sufficient to treat the trust as “determinate”; the shares being capable of determination from the trust deed and the contribution records, section 164 was not attracted and the income was assessable on a beneficiary (pass-through) basis. Being a SEBI-registered fund, it was also eligible for the pass-through benefit under the then-applicable section 10(23FB).

Application to s.115UB: A second High Court endorsement of the determinacy/conduit principle (A.9), expressly relied on by the Delhi High Court in Equity Intelligence. It confirms, at High Court level, that a SEBI-registered pooled fund whose investors are ascertainable from contribution agreements is a determinate conduit - the trust-law foundation on which the section 115UB pass-through is built.

Status: Madras High Court; decided in the assessee's favour on trust determinacy. Cited here as relied upon by the Delhi High Court in Equity Intelligence AIF Trust; citation stated as reported.

TVS Investments iFund v. ITO, [2017] 81 taxmann.com 296 (ITAT Chennai) - contrast: pass-through denied to a non-SEBI trust.

Facts: A fund (TVS Investments iFund) mobilised contributions from 656 high-net-worth individuals but was not itself registered with SEBI as a venture capital fund (a separate vehicle was the SEBI-registered fund). The trust deed did not set out the beneficiaries' names, nor were their individual shares ascertainable on the date the deed was instituted. The fund, as representative assessee, claimed that interest income on bank deposits should pass through to its contributors.

Held: Pass-through was denied. (i) Only the income of a SEBI-registered fund is exempt under section 10(23FB); there is no such exemption for other funds, whose taxation depends on their legal form. (ii) A trust is taxed under sections 161/164; to be a determinate (pass-through) trust the beneficiaries must be ascertainable. (iii) On the facts the beneficiaries were neither named nor ascertainable at inception, so the fund was an indeterminate trust taxable at the maximum marginal rate under section 164(1). (iv) Crucially, the only exception extending pass-through to such a trust is the statutory one for SEBI-registered funds; were every trust ipso facto a pass-through, the specific exemptions would be “rendered nugatory.”

Application to s.115UB: The decision that most sharply locates the AIF pass-through within the trust-taxation map (A.9), and the necessary counterpoint to the determinacy cases above. It holds that statutory pass-through (now section 115UB read with section 10(23FBA) for Category I/II AIFs) is a special exception for SEBI-registered funds, and that a fund outside that perimeter must satisfy the ordinary determinacy test to be transparent - a result confirmed for Category III AIFs by the structure of the present regime. (Its strict 'ascertainable on the date of the deed' view of determinacy sits in tension with the later High Court line in India Advantage Fund-VII, TVS Shriram Growth Fund and Equity Intelligence; for funds within section 115UB the tension is immaterial because the statutory exception applies regardless.)

Status: ITAT Chennai; merits decision on sections 161/164 read with section 10(23FB). Cited as the leading contrast authority delineating the boundary of the pass-through.

Cluster C-3 : Foundational and cognate principles relied on

Gestetner Duplicators (P) Ltd. v. CIT, [1979] 117 ITR 1 (Supreme Court).

Principle: A registration, recognition or certificate granted by the competent authority continues to subsist, and the assessee continues to enjoy the benefits flowing from it, until it is duly withdrawn or cancelled by that authority; a tax officer cannot, collaterally, treat the recognition as non-existent.

Application to s.115UB: Supplies the answer to the recurring Revenue strategy of attacking the section 10(23FBA) exemption (and hence the section 115UB pass-through) by questioning the fund's or scheme's SEBI status. So long as the SEBI certificate of registration as a Category I or II AIF subsists and SEBI has taken no adverse action, the Assessing Officer cannot deny the exemption by treating the fund as unregistered - the reasoning underlying the Edelweiss conclusion that a scheme “inextricably linked” to a registered AIF cannot be denied pass-through for a PAN technicality. Cited on principle.

Status: Supreme Court. A foundational authority of general application; not itself an AIF or section 115UB decision.

CIT v. Kamalini Khatau, [1994] 209 ITR 101 (Supreme Court) and the section 160-164 representative-assessee scheme.

Principle: Under the representative-assessee scheme (sections 160 to 164), the income of a trust may be assessed either in the hands of the beneficiary whose income it is, or in the hands of the trustee as representative assessee; a determinate trust is a conduit, while an indeterminate or discretionary trust is taxable at the maximum marginal rate under section 164(1).

Application to s.115UB: States the general trust-taxation backdrop against which section 115UB operates as a statutory short-cut for Category I/II AIFs (A.9), and against which any fund outside the section 115UB perimeter (notably a Category III AIF) continues to be assessed. It is the framework the determinacy decisions in Cluster C-2 apply. Cited on principle.

Status: Supreme Court. Foundational authority on the representative-assessee scheme; not an AIF-specific decision.

Cluster C-4 : Administrative and forward-looking context

CBDT Circular No. 13/2014 dated 28 July 2014 (read down by the Delhi High Court in Equity Intelligence AIF Trust).

Effect: The circular took the position that, unless the names and beneficial interests of the investors were set out in the original trust deed, an AIF-trust would be treated as an “indeterminate” trust and taxed at the maximum marginal rate under section 164. It was the administrative lever the Revenue used to deny pass-through/determinate status to AIF trusts.

Application to s.115UB: Directly relevant context for the determinacy disputes (A.9, Cluster C-2). The Delhi High Court in Equity Intelligence AIF Trust held the circular to be in conflict with the SEBI (AIF) Regulations and read it down; it can no longer be applied to treat an AIF trust as indeterminate merely because investors are not named in the original deed. For Category I/II AIFs the point is largely academic (the statutory section 115UB pass-through applies), but it remains important for the wider AIF population. Cited as administrative material, now judicially curtailed.

Status: CBDT circular; read down by the Delhi High Court (29 July 2025). The earlier Circular No. 281 of 1980 (identification of beneficiaries at the time of distribution suffices) was preferred.

Finance Act, 2025 - securities held by Category I and II AIFs treated as capital assets (with effect from assessment year 2026-27).

Effect: The Finance Act, 2025 clarified that securities held by a Category I or Category II Alternative Investment Fund are capital assets, so that gains on their transfer are taxable as capital gains rather than as business income. This addresses, at the level of the underlying characterisation, the very business-income / capital-gains boundary that determines whether income passes through under section 115UB or is trapped at the fund under sub-section (4).

Application to s.115UB: Forward-looking context, not an amendment to section 115UB itself. It strengthens the capital-asset characterisation that the pass-through depends on (A.5, A.4) and aligns with the result in Edelweiss that indexed long-term capital gains cannot be re-cast as business income. The Finance Act, 2026 makes no change to this position or to section 115UB.

Status: Statutory clarification by the Finance Act, 2025; operative from assessment year 2026-27. Stated as context.

SEBI (Alternative Investment Funds) Regulations, 2012 and the prescribed reporting machinery (Forms 64C/64D, Rule 12CB; section 139(4F); section 194LBB).

Effect: The 2012 Regulations are the regulatory foundation of the entire regime: “investment fund” in Explanation 1(a) is defined by reference to a Category I or II registration under these Regulations (or the IFSCA (Fund Management) Regulations, 2022). The Regulations permit a registered AIF to launch multiple schemes under one registration - the feature decisive in Edelweiss. The income-tax machinery sits on top: section 139(4F) compels every investment fund to file a return; section 115UB(7) with Rule 12CB requires the fund to issue Form 64C to the unit holder and Form 64D to the Department; and section 194LBB requires withholding on the pass-through income.

Application to s.115UB: Defines the perimeter and the compliance spine of the section (A.2, A.7, A.8). The regulatory characterisation of a fund as Category I/II (and the scheme structure beneath it) is the threshold fact on which section 10(23FBA) and the section 115UB pass-through depend. Cited as the governing regulatory and procedural framework.

Status: SEBI Regulations and Income-tax Rules/sections; the regulatory and procedural backdrop to the chapter.

Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced verbatim from the Income-tax Act, 1961. Citations stated as reported; tribunal and interim orders are flagged as such. This material is for professional reference and is not legal advice.