Kedaara Capital Fund II LLP v. NFAC

Case snapshot

Sections / provisions: 10(23FBA); 115UB

Questions before the Court / Tribunal

• AIF pass-through; disallowance of expenditure not claimed: The reported judgment concerns a Category II AIF and an assessment that disallowed expenditure said not to have been claimed in the return. The Court quashed the assessment, demand and consequential penalty action on the reported record.

Material facts and background

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 2684 OF 2025 Kedaara Captial Fund II LLP

Mr. Jehangir Mistry, Senior Counsel, a/w Mr. Harsh Kapadia and Mr. Sameer Dalal, for the Petitioner. Ms. Mamta Omle, for the Respondents.

March 2025 passed under Section 143(3) read with Section 144B of the Income-tax Act, 1961 (for short “the Act”) for A.Y. 2022-23; (ii) the consequential demand notice issued under Section 156; and (iii) the penalty show cause notice issued under Section 274 of the Act. Darshan Patil

appeal before the Commissioner of Income Tax (Appeals) under Section 246A of the Act was expiring, the Petitioner, out of abundant caution and in an earnest attempt to safeguard against any potential risks and prejudice, filed an appeal on 19th April 2025, i.e., after lodging the present Writ Petition. 4.

closed ended fund under the SEBI (AIF) Regulations, 2012. It carries on investment activities as permitted under the regulations, but does not undertake any business activities, either in India or outside.

‘investment fund’ as defined under Section 115UB. Resultantly, any income from investment activities earned is exempt under Section 10(23FBA). Such income is, however, taxable in the hands of the unit holders of the Petitioner. In other words, assessees like the Petitioner are granted a pass-through status under the Act.

aggregating to Rs. 1,300.27 Crores using the capital raised from its unit holders. The total portfolio investments of the Petitioner as on 31st March 2022 is Rs. 8,665.75 Crores. It is an undisputed fact that the Petitioner neither sold any of the investments during the year nor did it earn any income from such investment activities. The only income earned by the Petitioner during the year was short term capital gains of Rs. 0.99 Crores on cancellation of certain forward contracts.

Appellant / assessee submissions

The judgment copy does not separately set out this component in a distinct section; refer to the full order and the reasoning section below.

Revenue / respondent submissions

The judgment copy does not separately set out this component in a distinct section; refer to the full order and the reasoning section below.

Court / Tribunal analysis and reasoning

the above order and the consequential notices issued by the AO. Amongst other grounds, the primary challenge is on the ground that the AO has added expenses to the Petitioner’s total income despite the fact that no deduction in respect of such expenses has been claimed either by the Petitioner or the unit holders, and, therefore, the question of adding such an amount could never

have arisen. This aspect of the income tax law is fundamental. The addition made therefore, is wholly without jurisdiction, perverse and arbitrary. The AO miserably overlooked the fact that the Petitioner has been granted a passthrough status under the Act, and therefore, assuming for the sake of argument that the Petitioner incurred non-genuine expenses, nevertheless, such an addition could not have been made in the hands of the Petitioner. In any case, the AO has clearly misconceived and misjudged the provisions of law entirely. Firstly, the unrealised gains reported in the financial statements of the Petitioner as ‘surplus’ does not constitute ‘income’ of the unit holders and is not taxable in their hands under Section 115UB. Such unrealised gains allocated to the unit holders is a notional amount reported merely from an accounting standpoint, and such notional amount is not taxable in either the hands of the Petitioner or unit holders. Therefore, allocation of so-called surplus has no bearing on the income of the unit holders or the Petitioner. Secondly, in any case, it is a well-settled principle of income tax law that to determine the taxability of a particular item is not...

not to be entertained because there is an alternate remedy available to the Petitioner, we find that in the peculiar facts and circumstances of this case, this Court can exercise its discretion under Article 226 of the Constitution of

in entertaining the Writ Petition, despite alternate statutory remedies, is not affected in a case where the authority against whom the Writ is filed has usurped its jurisdiction without any legal foundation. Not entertaining a Writ Petition where statutory remedies are available, is really one of self-restraint, and it can never be argued that the Writ Petition is not maintainable. We, therefore, do not find any merit in the first argument canvassed on behalf of the Revenue.

Assessing Officer is concerned, we find that there is no conceivable ground that has been brought on record based on which the request for remand has been made by the learned Advocate appearing for the Revenue. It is not as if the Assessing Officer was unaware that no deduction has been claimed by the

Petitioner. During the assessment proceedings, on more than half a dozen occasions, the Petitioner had highlighted this fact. Nevertheless, the Assessing Officer proceeded to make the aforesaid addition, and that too by relying upon the treatment given in the books of account of the Petitioner/Assessee. Therefore, the addition made was a conscious act of the Assessing Officer and cannot be regarded as an error/oversight which would entail a remand. Accordingly, we are of the view that no purpose would be served if the matter is remanded to the Assessing Officer for a fresh consideration.

Operative decision and relief

Petitioner. During the assessment proceedings, on more than half a dozen occasions, the Petitioner had highlighted this fact. Nevertheless, the Assessing Officer proceeded to make the aforesaid addition, and that too by relying upon the treatment given in the books of account of the Petitioner/Assessee. Therefore, the addition made was a conscious act of the Assessing Officer and cannot be regarded as an error/oversight which would entail a remand. Accordingly, we are of the view that no purpose would be served if the matter is remanded to the Assessing Officer for a fresh consideration.

order dated 21st March 2025, passed for Assessment Year 2022-23, is hereby quashed and set aside along with the consequential demand notice (issued under Section 156 of the Act) and the penalty show cause notice (issued under Section 274 of the Act).

Petition is also disposed of in the terms thereof. However, there shall be no order as to costs.

Authorities and precedents appearing in the judgment

• Jute Manufacturing Company Ltd. v. CIT
• Taparia Tools Ltd. v. JCIT
• United Commercial Bank v. CIT

This list is machine-assisted from the judgment text and is not a substitute for checking the full citation chain in the PDF.

Ratio and legal principle

The decision turns on AIF pass-through; disallowance of expenditure not claimed. The operative result is classified as Quashed Or Set Aside. Read the rule only with the statutory version, factual findings and precedent chain recorded in the full judgment.

Why this judgment matters

The case is relevant to taxpayers, advisers and litigators dealing with AIF pass-through; disallowance of expenditure not claimed. Its practical value lies in the interaction between the statutory text, the evidentiary record and the procedural route followed in this case.

Practitioner action points

• Keep registration, audit-report, Form 10/10B/10BB and filing timestamps together; many exemption disputes are procedural and depend on when the form existed versus when it was uploaded.
• For litigation, attach the full judgment/order to the working paper and cite the paragraph/page supporting the proposition rather than relying on a headnote alone.

Full judgment and source trail

Read / download the clean local judgment copy

Related Finin2min guidance