Karnataka High Court (2015)
Tax on income in the case of a venture capital undertaking; liability of a representative assessee; charge where shares are unknown
Yes. Where the contributors and their proportionate interests can be ascertained, the trust is determinate. Income is assessable in the contributors' hands and the fund is not chargeable at the maximum marginal rate.
Is a SEBI-registered venture capital fund constituted as a trust, whose contributors are identifiable from its records, a determinate trust whose income is taxable in the contributors' hands?
The assessee was a venture capital fund registered with the securities regulator and constituted as a contributory trust. Investors subscribed to units and their contributions, and the proportion each bore to the total, were recorded in the fund's registers and in the contribution agreements, though the trust deed itself did not name them. The Revenue took the view that because the beneficiaries were not named in the deed and could change as units were issued and transferred, their shares were indeterminate, and assessed the fund at the maximum marginal rate as an indeterminate trust rather than treating the income as passing through to the contributors.
The Tribunal decided in the fund's favour, holding the trust to be determinate. The Revenue appealed to the Karnataka High Court, which affirmed. Similar questions arose across a number of funds in the same group and were decided on the same reasoning.
For the assessee
Every contributor was identifiable and each one's proportionate interest in the fund was ascertainable from the contribution agreements and the register of unit holders. The statutory test asks whether the beneficiaries and their shares are capable of being ascertained, and they plainly were. The regulatory framework governing venture capital funds and the pass-through provision both proceed on the footing that income reaches the investors.
For the Revenue
The trust deed did not name the beneficiaries or state their shares, and the composition of the investor body could change over the life of the fund. On the face of the constituting instrument, therefore, the shares were indeterminate, and the provision charging the maximum marginal rate applied.
The Court applied the settled test of whether the beneficiaries and their shares were capable of being ascertained, and held that they were. The contributors were identified in the contribution agreements and the fund's records, and the proportion of each investor's interest followed arithmetically from the amount contributed relative to the total. That the trust deed did not name them individually was held not to matter, since the deed together with the documents it contemplated supplied the means of ascertainment. The Court held that the possibility of the investor body changing over time does not render a trust indeterminate, because the test is one of ascertainability rather than immutability, and at any given time the entitlements could be worked out with precision. It also had regard to the statutory and regulatory scheme for venture capital funds, which is built on the premise that income earned by the fund is passed through to and taxed in the hands of investors, and held that treating such a fund as an indeterminate trust would be inconsistent with that premise. The income was accordingly assessable in the contributors' hands.
The most directly relevant judicial authority on pooled fund vehicles, applying to Section 222 of the IT Act 2025 for venture capital undertakings and, by the same reasoning, to investment funds under Section 224 and business trusts under Section 223. The statutory pass-through provisions have since reduced the scope for this dispute by designating who is chargeable, but the determinate-trust analysis remains the fallback wherever a vehicle falls outside the conditions those provisions impose. Verify the precise citation before relying on it in a filing.