AIF Scheme Eligible for Pass-Through Exemption Despite Separate PAN

 In a recent ruling, the Mumbai Tribunal held that a scheme floated under a SEBI-registered Category II AIF trust can claim pass-through exemption, and such benefit cannot be denied merely because the scheme has a separate PAN while the SEBI registration stands in the name of the parent trust.

In this case, the assessee was a scheme of a SEBI-registered Category II AIF. The trust was based in India and permitted to launch multiple schemes, one of which was the assessee scheme. For administrative and regulatory purposes, the scheme had obtained a separate PAN and filed its return independently. During assessment proceedings, the Assessing Officer denied exemption claimed on income distributed to investors on the ground that the scheme itself did not hold SEBI registration as an AIF and therefore did not qualify for pass-through status. Consequently, the income distributed to investors was also sought to be taxed in the hands of the assessee, along with an additional amount treated as business income. The CIT(A) upheld the action of the Assessing Officer and confirmed the denial of exemption on the ground that the assessee scheme was not independently registered with SEBI as an AIF. The assessee aggrieved with this decision, approached the Tribunal.

The Tribunal observed that under the regulatory framework governing AIFs, a SEBI-registered trust is permitted to launch multiple schemes, and obtaining separate PANs for such schemes is merely an administrative requirement. It further noted that the statute recognises the concept of a “scheme of an investment fund”, and therefore, absence of a separate SEBI registration in the name of the scheme cannot be a basis to deny exemption. The Tribunal held that the approach of the lower authorities in treating the scheme as a separate taxable entity solely on account of a separate PAN was misplaced and not supported by the legal framework. Accordingly, it was held that exemption cannot be denied where the scheme is demonstrably part of a SEBI-registered Category II AIF and its linkage to the registered trust is established through contemporaneous documentation.

This ruling is a welcome development, providing clarity on the tax treatment of AIF structures. It also highlights the relevance of examining the underlying legal and regulatory framework when assessing eligibility for pass-through benefits, including in scenarios involving multiple schemes under a single registered vehicle