EDELWEISS CROSSOVER OPPORTUNITIES FUND,SANTACRUZ EAST, MUMBAI, MAHARASHTRA vs. WARD 22(1)(1), PIRAMAL CHAMBERS

Before the Assessing Officer, the assessee submitted that it is a scheme launched under Edelweiss Alternative Investment Opportunities Trust, which is registered with the Securities and Exchange Board of India as a Category II Alternative Investment Fund under the SEBI (Alternative Investment Funds) Regulations, 2012. It was submitted that under the SEBI Regulations, a single AIF trust is permitted to launch multiple schemes and that separate PANs are obtained for each scheme for administrative and taxation purposes.

The assessee contended that, being a scheme of a SEBI registered AIF, it is inextricably linked with the Trust and, therefore, the exemption available under section 10(23FBA) read with section 115UB of the Act to the Trust should flow to the assessee scheme as well. It was also submitted that the income of Rs. 4,51,59,13,961/- had already been distributed to investors and taxed in their hands and that denial of exemption would result in double taxation.

It was further submitted that the difference of Rs. 16,63,15,486/- represented indexation benefit on long-term capital gains on sale of unlisted equity shares and did not constitute income chargeable to tax in the hands of the assessee.

The Assessing Officer did not accept the explanation of the assessee. It was held that the assessee scheme, having a separate Edelweiss Crossover Opportunities Fund PAN and a separate legal identity, did not itself possess registration as a Category I or Category II Alternative Investment Fund under the SEBI (AIF) Regulations, 2012 and, therefore, did not qualify as an “investment fund” within the meaning of section 115UB of the Act. Consequently, the exemption claimed under section 10(23FBA) of the Act was withdrawn.

Without prejudice to the above, the Assessing Officer held that the surplus of Rs. 4,68,22,29,447/- as per the Profit and Loss Account represented business income of the assessee. After deducting income of Rs. 4,51,59,13,961/- claimed as exempt, the balance of Rs. 16,63,15,486/- was treated as taxable business income. Accordingly, the total income of the assessee was assessed at Rs. 4,68,22,29,447/-. Penalty proceedings under section 270A of the Act were initiated separately and interest was charged as per law.

Aggrieved by the assessment order, the assessee carried the matter in appeal before the CIT(A). The assessee reiterated that it is only a scheme of Edelweiss Alternative Investment Opportunities Trust, which is registered with SEBI as a Category II AIF and that separate registration of each scheme with SEBI is not required under the SEBI Regulations. It was submitted that denial of exemption under section 10(23FBA) results in double taxation since the same income has already been taxed in the hands of investors under section 115UB.The assessee further submitted that another scheme of the same Trust, namely Edelweiss Crossover Opportunities Fund – Series II, had been

The CIT(A) upheld the action of the Assessing Officer. It was held that the assessee scheme did not itself possess SEBI registration as an Alternative Investment Fund and, therefore, was not eligible for exemption under section 10(23FBA) of the Act. The CIT(A) further held that the surplus reflected in the accounts was rightly treated as business income and that the difference of Rs. 16,63,15,486/- was taxable in the hands of the assessee. Grounds relating to penalty and interest were held to be consequential. The appeal of the assessee was accordingly dismissed.

Aggrieved by the order of the CIT(A), the assessee is in appeal before us raising following grounds of appeal:

The AO erred in taxing Rs. 16,63,15,486/- being difference between net revenue of Rs. 468,22,29,447/- credited to the profit and loss account of the Appellant and an amount of Rs. 451,59,13,961/- taxable in the hands of investors. The Appellant submits that the amount of Rs. 16,63,15,486/- represents indexation cost of long-term investments sold during the year resulting into passing on the surplus to the investors. Therefore, the said amount does not constitute an income. Hence, the addition thereof by the AO shall be deleted. The Appellants craves leave to add, amend, alter, delete or modify any of the grounds of appeal

To substantiate the aforesaid contentions, the learned AR placed reliance on the registration certificate issued by SEBI in favour of the Trust, which was filed at page 237 of the paper book. Reliance was also placed on the relevant provisions of the SEBI (Alternative Investment Funds) Regulations, 2012 explaining the concept of “scheme”, as placed at page 257 of the paper book. Reference was further made to the amendments to the SEBI Regulations permitting an AIF to launch multiple schemes under a single AIF registration. The learned AR also pointed out that, as mandated by the SEBI Regulations, all managers of an AIF are required to maintain separate bank accounts and separate securities accounts for each scheme and, for this purpose, separate Permanent Account Numbers are obtained for each scheme, though the registration as an AIF continues to remain in the name of the Trust.

The learned AR further drew our attention to paragraph 2.3.2 of the amendment issued by SEBI, a copy of which has been placed on record, to demonstrate that even SEBI itself recognises the practical and legal position that separate schemes of an AIF operate with separate Permanent Account Numbers. It was pointed out that SEBI, while dealing with representations Edelweiss Crossover Opportunities Fund from the AIF industry, has recorded that majority of SEBI registered AIFs are set up as trusts and that many such AIFs have multiple schemes under the same trust. SEBI has further acknowledged that, based on the industry representation and information submitted by AIFs, schemes of an AIF generally obtain separate Permanent Account Numbers from the Income- tax Department for each of their schemes and that, accordingly, each scheme of an AIF is understood to be assessed separately for taxation purposes, even though they are set up under the same AIF trust.

The learned AR further placed on record the Private Placement Memorandum dated 13 November 2017 relating to Edelweiss Crossover Opportunities Fund in support of the contention that the assessee is a scheme of M/s. Edelweiss Alternative Investment Opportunities Trust. Our attention was invited to the opening pages of the said Memorandum, wherein it is expressly stated that Edelweiss Crossover Opportunities Fund is “a scheme of Edelweiss Alternative Investment Opportunities Trust, a trust organised in India and registered with the Securities and Exchange Board of India as a Category II Alternative Investment Fund under the SEBI (Alternative Investment Funds) Regulations, 2012, vide SEBI Registration No. IN/AIF2/17-18/0502”.

The learned AR, therefore, submitted that when the governing document of the Fund itself characterises the assessee as a scheme of a SEBI registered Category II AIF, the claim of the Edelweiss Crossover Opportunities Fund assessee that it is entitled to be treated as part of the same AIF structure for the purposes of section 115UB and section 10(23FBA) of the Act cannot be rejected merely on the ground that the scheme is holding a separate Permanent Account Number for administrative and regulatory purposes. It was thus contended that the regulatory framework itself recognises the existence of multiple schemes under a single AIF registration and the obtaining of separate PANs for such schemes is not a deviation but a regulatory and administrative necessity.

The learned AR also placed reliance on the decision of the coordinate Bench of the Tribunal in the case of M/s. UTI India Fund Unit Scheme 1986 in to 1862/Mum/2023 and C.O. No. 92/Mum/2023, order dated 24.11.2023. It was submitted that though the said decision pertains to section 10(23D) of the Act, the factual matrix involved therein is identical, inasmuch as the issue in that case also related to denial of statutory exemption on the ground that the scheme had a separate PAN and the SEBI registration stood in the name of the parent fund and not in the name of the scheme.

Per contra, the learned Departmental Representative supported the orders of the Assessing Officer and the Commissioner of Income Tax (Appeals).

We have heard the rival submissions and perused the material placed on record. The short controversy arising from Ground Nos. 1.1 and 1.2 is whether the assessee, Edelweiss Crossover Opportunities Fund (PAN: AAATE8456C), which is Edelweiss Crossover Opportunities Fund stated to be a scheme of Edelweiss Alternative Investment Opportunities Trust (SEBI Registration No. IN/AIF2/17- 18/0502), is eligible for exemption under section 10(23FBA) read with section 115UB, notwithstanding that the SEBI registration certificate is in the PAN of the Trust and not in the PAN of the scheme. Ground No. 2 challenges the addition of Rs. 16,63,15,486/- taxed as business income, being the difference between the surplus reflected in the profit and loss account and the pass-through income shown in Form 64D/income distributed to investors.

The assessee’s principal plea is that it is a scheme launched under a SEBI registered Category II AIF, that a single AIF trust can launch multiple schemes, and that separate PAN for each scheme is taken due to regulatory and administrative requirements, though the AIF registration is of the Trust. The assessee also pleaded that denial of exemption results in double taxation. These contentions are also reflected in the grounds. The Assessing Officer denied the exemption holding, inter alia, that the assessee is “a trust in itself with a separate PAN and a separate legal entity” and, therefore, to claim benefit of section 115UB and section 10(23FBA), it must itself possess a SEBI certificate of registration as Category I/II AIF. The Assessing Officer also observed that the assessee cannot take cover behind the SEBI registration of the “parent Trust”, particularly if selected for scrutiny assessment. The CIT(A) upheld the denial holding that the assessee (PAN AAATE8456C) is not registered as an AIF Edelweiss Crossover Opportunities Fund and hence does not qualify as an “investment fund” under section 115UB; consequently, the assessee is not entitled to exemption under section 10(23FBA).

We find that the Assessing Officer himself recorded that Edelweiss Alternative Investment Opportunities Trust may float multiple schemes (as per paragraph 4.2 of the Trust Deed). This is an important admission of the structural position that the Trust is the AIF vehicle and schemes can be floated thereunder.

The Assessing Officer denied exemption primarily on the premise that because the scheme has a separate PAN, it becomes a separate trust/legal entity which must independently obtain AIF registration. In our considered view, this approach proceeds on an assumption. A separate PAN, by itself, is not determinative of the existence of a separate trust. PAN is an identifier for tax administration. Whether an arrangement constitutes a separate “fund established in the form of a trust” (as contemplated for the purpose of section 115UB) is a matter of substance and governing documents, not PAN alone.

Significantly, the Assessing Officer also noticed the assessee’s reliance on the statutory language in Explanation 1 to section 115UB, and, in that context, recorded that “unit” means beneficial interest of an investor in the investment fund or a scheme of the investment fund. This statutory recognition of a “scheme of the investment fund” fortifies the assessee’s plea that the Act contemplates schemes operating under an investment Edelweiss Crossover Opportunities Fund fund framework, and does not, by that recognition alone, require each scheme to obtain an independent AIF registration.

The lower authorities have not brought on record any finding, based on the governing documents, that the assessee scheme is constituted as an independent trust distinct from the SEBI registered Trust, apart from repeatedly emphasising separate PAN and “separate legal identity”. Once it is accepted that the Trust is permitted to float multiple schemes, the crucial test for the present controversy is whether the scheme under consideration is indeed floated under the SEBI registered Trust. On this aspect, the assessee has placed reliance on contemporaneous documentation (including the Private Placement Memorandum) to contend that it is a scheme of the SEBI registered Trust. The Assessing Officer, instead of examining this aspect on the touchstone of the Trust Deed and scheme documentation to ascertain linkage, proceeded to reject the claim mainly for want of scheme-level SEBI registration.

In addition, the assessee relied upon the coordinate Bench decision in DCIT (E) v. UTI India Fund Unit Scheme 1986 (supra). In that case, the dispute arose on similar reasoning, namely that the registration certificate was of the parent mutual fund and not of the scheme with separate PAN. The coordinate Bench, after noting the factual setting, held that a scheme need not have separate registration when it is part of the registered fund and approved as such; separate PAN and separate books were treated as procedural/administrative, not determinative.

In view of the foregoing, we hold that the exemption under section 10(23FBA) cannot be denied solely on the ground that the scheme has a separate PAN while the SEBI registration is of the Trust, when the scheme is stated to be floated under the SEBI registered Category II AIF trust and the statute itself recognises “scheme of the investment fund” in the context of section 115UB.Accordingly, the addition of Rs. 4,51,59,13,961/- u/s 10(23FBA) is directed to be deleted.

Once the exemption is held allowable, the assessee’s plea of double taxation becomes academic. Nevertheless, we observe that the CIT(A) rejected the double taxation argument on the reasoning that taxation in the investors’ hands under section 115UB presupposes that the fund qualifies as a registered investment fund. Since we have accepted the assessee’s foundational claim on eligibility for exemption under section 10(23FBA) read with section 115UB of the Act, this objection of Edelweiss Crossover Opportunities Fund the CIT(A) does not survive. Accordingly, Ground Nos. 1.1 and 1.2 raised by the assessee are allowed.

Regarding addition of Rs. 16,63,15,486/- taxed as business income, the assessee’s contention is that the difference represents indexation benefit on long-term capital gains on sale of unlisted equity shares and, therefore, does not constitute taxable income. The assessee also stated during the course of assessment proceedings that it had earned long-term capital gains on unlisted equity shares and that indexation benefit under section 48 of the Act was considered while passing on the income to the investors. The Assessing Officer treated the surplus as business income and taxed the difference of Rs. 16,63,15,486/- .The CIT(A) confirmed the addition holding that the assessee had not furnished a satisfactory reconciliation and further observed that indexation under section 48 is a deduction allowable to the person chargeable to capital gains. According to the CIT(A), once ineligibility under section 10(23FBA) was confirmed, indexation at the investor level became irrelevant.

In view of our finding that the assessee is eligible for exemption under section 10(23FBA) read with section 115UB of the Act, the very premise on which the Assessing Officer and the CIT(A) proceeded to tax the difference as business income does not survive. The addition of Rs. 16,63,15,486/- was made by treating the surplus reflected in the profit and loss account as business income of the assessee and by carving out the difference with the income distributed to investors. Once the assessee is Edelweiss Crossover Opportunities Fund held to be governed by the pass-through framework, the income is required to be dealt with within that framework, and the character of income, including the computation leading to the distributable figure, cannot be altered merely because the book surplus reflects a different figure.

Even otherwise, on merits, we find force in the contention of the assessee that the difference of Rs. 16,63,15,486/- has arisen on account of indexation benefit available under section 48 of the Act in respect of long-term capital gains on unlisted equity shares. From the reply filed before the Assessing Officer, it is evident that the assessee had recorded the securities under the head “Investments” and not as stock-in-trade, and that the income from their disposal was returned as capital gains and income from other sources and was passed on to the investors in accordance with Rule 12CB read with Form 64D. The assessee has further explained that, while computing taxable capital gains, indexation benefit as per section 48 of the Act was applied, whereas the surplus reflected in the profit and loss account represents book results without such statutory adjustment. Thus, the difference between the book surplus and the income passed on to the investors is only on account of statutory indexation provided under the Act and cannot be regarded as independent taxable income in the hands of the assessee. We also note that the Assessing Officer’s own record shows that the income during the year under consideration included long-term capital gains on unlisted equity shares. The addition has been Edelweiss Crossover Opportunities Fund sustained as “business income” without bringing on record any material to demonstrate that the gains arose from a business activity or that the statutory character of capital gains stood converted into business income. On these facts, taxation of the said difference under the head “Profits and gains of business or profession” is not sustainable. Accordingly, the addition of Rs. 16,63,15,486/- is deleted. Ground No. 2 raised by the assessee is allowed.

The remaining grounds raised