ITAT Allows Section 10(23FBA) Exemption to Edelweiss Despite Separate PAN

The assessee, Edelweiss Crossover Opportunities Fund, is a scheme launched under Edelweiss Alternative Investment Opportunities Trust, a SEBI-registered Category II Alternative Investment Fund. For AY 2023-24, the assessee filed a nil return and claimed exemption under Section 10(23FBA) on income passed through to investors under Section 115UB. The Assessing Officer noted that while the Trust held SEBI registration, the assessee scheme had a separate PAN and no independent SEBI registration.

The Assessing Officer denied exemption, taxed the entire surplus of Rs. 468.22 crore as business income, and further added Rs. 16.63 crore being the difference between book surplus and income distributed to investors. The CIT(A) upheld the assessment, holding that the assessee scheme did not qualify as an “investment fund” under Section 115UB due to lack of SEBI registration in its own name

Issue Raised: Whether a scheme of a SEBI-registered Category II Alternative Investment Fund is entitled to exemption under Section 10(23FBA) read with Section 115UB of the Income-tax Act, 1961, notwithstanding that the scheme holds a separate PAN and the SEBI registration stands in the name of the parent trust.

High Court Held: The Mumbai Bench of the ITAT allowed the appeal, holding that exemption under Section 10(23FBA) cannot be denied merely because the scheme holds a separate PAN while SEBI registration is in the name of the Trust. The Tribunal observed that PAN is only a tax administration identifier and does not, by itself, determine the existence of a separate trust or legal entity. The statutory framework under Section 115UB itself recognises a “scheme of the investment fund,” and the governing SEBI Regulations permit a registered AIF trust to launch multiple schemes under a single registration.

The Tribunal noted that the Assessing Officer failed to demonstrate, based on governing documents, that the assessee scheme was an independent trust distinct from the registered AIF. The Tribunal held that the assessee scheme was inextricably linked to the registered AIF and entitled to pass-through exemption. Therefore, the addition of Rs. 451.59 crore was deleted. The further addition of Rs. 16.63 crore was also deleted, with the Tribunal holding that the difference arose solely due to statutory indexation under Section 48 on long-term capital gains and could not be treated as business income. Interest and penalty proceedings were held to be unsustainable.

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