Weekly Round-up on Tax and Corporate Laws | 28th July to 02nd Aug 2025

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from July 28nd to Aug 02nd 2025, namely:

1. AIFs can’t comply with Sec. 164 & CBDT Circular requiring investor names in trust deed due to SEBI regulations: HC;
2. SEBI proposes to broaden the definition of ‘Strategic Investor’ under REITs and InvITs Regulations.
3. Refund of ITC can’t be denied on inputs taxed higher than output, even if principal input rate isn’t higher than output: HC;
4. Initiation of proceedings u/s 74 valid even if proceedings u/s 61 were dropped on the basis of response filed by assessee: HC;
5. ICAI issues updated guidelines and revised Guidance Note on Tax Audit under Section 44AB; and
6. ICAI issues FAQs on Guidelines for Merger, Demerger of CA Firms and Aggregation of LLPs.

1. AIFs can’t comply with Section 164 & CBDT Circular requiring investor names in trust deed due to SEBI regulations: HC

The assessee, an Alternative Investment Fund (AIF), filed the instant writ petition, seeking to declare the Circular no. 13/2014 dated 28.07.2014 as ultra vires the provisions of sections 160 and 164 and further seeks to quash the order passed by the Board for Advance Rulings (BAR) under section 245R(4).

BAR, relying upon circular no. 13/2014, holds that if the names of the beneficiaries are not set out in the original Trust Deed, then such Trust would be treated as “indeterminate” and resultantly be subject to Maximum Marginal Rate (MMR) under the provisions of section 164.

The High Court held that the CBDT’s clarification that the entire income of the fund would be taxed at the maximum marginal rate if the trust deed does not name the investors or specify their beneficial interests is contrary to the well-settled principles of law.

The Court applied the doctrine that the law does not compel the doing of impossibilities, holding that Category III AIFs cannot be mandated to name beneficiaries in their original Trust Deeds. This is due to SEBI regulations prohibiting the acceptance of investments or identification of specific beneficiaries prior to SEBI registration, which itself requires prior Trust Deed registration.

A Category III AIF cannot comply with the provisions of Section 164 and the SEBI Act simultaneously. Section 164 mandates the necessary mentioning of the names of the investors or their beneficial interests in the original Trust Deed, and the SEBI Act and Regulations prohibit the same. Thus, it would lead to an anomalous and incongruous situation.

The CBDT’s clarification was issued in response to a request for a ruling, and as per Para 6 of the circular, it would not be operative in the jurisdiction of a high court that has taken or takes a contrary decision on the issue, which is baffling and contrary to the well-settled judicial principles of law.

An issue of law settled by a Constitutional Court, neither challenged nor set aside by a higher Constitutional Court, would be binding upon the Revenue authorities all over the country and cannot be implemented State-specific or area-specific. Moreover, it appears that the said paragraph has been deliberately inserted keeping in view the judgments in the case of India Advantage Fund [2017] 89 taxmann.com 209 and TVS Shriram Growth Fund [2020] 121 taxmann.com 238.

Consequently, the writ petition was allowed, the order of the Board for Advance Rulings was quashed, and simultaneously the clarification contained in CBDT Circular No. 13/2014 was directed to be read down to conform to the above analysis and conclusion.

Read the Ruling

 

2. SEBI proposes to broaden the definition of ‘Strategic Investor’ under REITs and InvITs Regulations

In a move aimed at strengthening the capital raising ecosystem for REITs and InvITs, SEBI vide Consultation paper dated August 1, 2025, had proposed to expand the definition of ‘Strategic Investor’ under the REITs and InvITs Regulations. The proposal seeks to include qualified institutional buyers (QIBs) and certain categories of foreign portfolio investors (FPIs) under this category. Accordingly, an entity classified as a QIB under the ICDR Regulations may apply as a ‘Strategic Investor’. Public Comments may be submitted by August 22, 2025.

2.1 Background and Rationale

Currently, the definition of Strategic Investor is limited to a narrow set of entities. It excludes many institutional investors such as public financial institutions, insurance funds, provident funds, and pension funds, entities that are actively investing in REIT and InvIT units but are not eligible to apply under the Strategic Investor category.

Further, the definition of QIBs under the ICDR Regulations is broader in scope than the current definition of strategic investor under the REIT and InvIT Regulations. Accordingly, to promote ease of doing business by enabling REITs and InvITs to attract capital from more investors under the Strategic Investor category, SEBI proposes amending the definition of strategic investor to allow entities considered QIBs under the ICDR Regulations to apply as strategic investors.

2.2 Who are Strategic Investors?

Strategic Investors are allotted units before the public issue opens. They are required to invest at least 5% of the total offer size and can invest up to 25% of the total offer size. These investors are required to enter into a binding unit subscription agreement with the Manager of REIT/Investment Manager of the InvIT, and the units subscribed by such investors are subject to lock-in period of 180 days from the date of listing.

Regulation 2(1)(ztb) of the REIT Regulations and Regulation 2(1)(zza) of the InvIT Regulations define the term ‘Strategic Investor’ as follows –

The term ‘strategic investor’ means –

• An infrastructure finance company registered with the RBI as a Non-Banking Financial Company

• A Scheduled Commercial Bank

• A multilateral and/or bilateral development financial institution

• A systemically important Non-banking Financial Company registered with the RBI

• A foreign portfolio investor

• An insurance company registered with the Insurance Regulatory and Development Authority of India

• A mutual fund

who invest, either jointly or severally, not less than 5% of the total offer size of the REIT or such amount as may be specified by the Board from time to time, subject to the compliance with applicable provisions, if any, of the FEMA, 1999 and the rules or regulations or guidelines made thereunder.

2.3 Proposal to broaden the definition of ‘Strategic Investor’

SEBI has proposed to broaden the definition of ‘Strategic Investor’ under REITs and InvITs Regulations, by allowing select foreign portfolio investors and QIBs under the ICDR Regulations to participate as strategic investors.

However, FPIs that are individuals, corporate bodies or family offices must not be considered under the Strategic Investor Category, as they do not qualify as QIBs under the ICDR Regulations.

2.4 Conclusion

SEBI’s proposal to broaden the definition of ‘Strategic Investor’ is a practical move towards aligning the REIT and InvIT frameworks with the evolving needs of the capital market. In recent years, several categories of institutional investors, who are otherwise active participants in public markets, have been unable to participate as strategic investors due to regulatory technicalities.

The proposed change is expected to make public issues by REITs and InvITs more attractive and better subscribed, especially in the early stages of the issuance. For institutional investors seeking long-term returns, this move offers a clearer and more accessible path to participate.

Read the Report

3. Refund of ITC can’t be denied on inputs taxed higher than output, even if principal input rate isn’t higher than output: HC 

The Karnataka High Court held that refund of unutilised input tax credit under an inverted duty structure cannot be denied merely because the principal input is taxed at a lower rate than the output. Such restriction has no legal basis under Section 54 of the CGST Act or Rule 89 of the CGST Rules. 

3.1 Facts 

The Petitioner, a manufacturer and dealer of refined vegetable oil, utilised multiple inputs in the course of manufacture, one of which was crude sunflower oil. Input tax credit was initially sanctioned but was later curtailed in revision by the jurisdictional officer under GST, who restricted the refund under the inverted duty structure to the tax rate applicable on the principal input, namely crude sunflower oil. The Petitioner contended that the manufacturing process also involved other ingredients and inputs taxed at rates higher than that applicable to the principal output, and that refund of unutilised input tax credit could not be confined solely to the rate on the principal input. It was submitted that such restriction was contrary to section 54 of the CGST Act and the Karnataka GST Act and Rule 89 of the CGST Rules and Karnataka GST Rules. The matter was accordingly placed before the Karnataka High Court. 

3.2 Held 

The Karnataka High Court held that refund of unutilised input tax credit under an inverted tax structure cannot be denied on other inputs taxed at a higher rate merely because the principal input is not taxed at a rate exceeding that of the principal output. It was observed that the issue had already been settled in multiple cases, including by the same High Court in the case of ‘Indian Oil Corporation Ltd. v. Assistant Commissioner of Central Tax [2025] 174 taxmann.com 1 (Karnataka)’, and the legal principle laid down therein was fully applicable to the present matter. The writ petition was accordingly allowed and a writ of certiorari was issued quashing the earlier order by jurisdiction officer. 

Read the Ruiling 

4. Initiation of proceedings u/s 74 valid even if proceedings u/s 61 were dropped on basis of response filed by assessee: HC 

The Calcutta High Court held that proceedings under Section 74 of the CGST Act can validly be initiated even if scrutiny under Section 61 was earlier dropped. Section 74 operates independently and applies upon subsequent detection of fraud or suppression. 

4.1 Facts 

The petitioner, a registered person under the CGST Act, was subjected to scrutiny of returns under Section 61 of the CGST Act, which culminated in the proceedings being dropped by the jurisdictional officer based on the petitioner’s written response. Thereafter, proceedings were initiated under Section 74 of the CGST Act for the same period, on the ground that fraudulent availment of ITC had been detected. The petitioner challenged the validity of the notice under Section 74, contending that the dropping of proceedings under Section 61(3) without consequential action precluded any fresh proceedings for the same period. It was argued that the officer, having failed to proceed under Section 61, was barred from invoking Section 74 in the absence of new material. The matter was accordingly placed before the High Court of Calcutta. 

4.2 Held 

The Calcutta High Court held that Section 74 deals specifically with cases involving fraud, willful misstatement, or suppression, and that its invocation is not contingent upon the outcome of proceedings under Section 61. The Court observed that the proper officer may not be in a position to identify fraudulent conduct at the stage of scrutiny, and such detection may occur only upon further investigation. It was held that the legislature, in its wisdom, incorporated Section 74 precisely for this purpose. A specific case of fraud having been made out in the show cause notice based on investigation findings, the Court ruled that initiation of proceedings under Section 74 was justified. It was further clarified that while closure of scrutiny under Section 61(3) may be a bar for action under Section 73, it is not an impediment to proceedings under Section 74. Accordingly, the writ petition was dismissed. 

Read the ruling

 

5. ICAI issues updated guidelines and revised Guidance Note on Tax Audit under Section 44AB 

The Institute of Chartered Accountants of India (ICAI) has recently issued two significant updates concerning tax audit under Section 44AB of the Income-tax Act, 1961. 

Firstly, effective from April 1, 2026, new guidelines cap the number of tax audit assignments that a Chartered Accountant in practice can accept and sign in a financial year to 60. For firms, this cap applies per partner. The revised limit aims to ensure quality of audit and equitable distribution of assignments among professionals. These guidelines clarify inclusions and exclusions for counting assignments, define audit engagements that are outside the purview of the cap (e.g., audits under presumptive taxation schemes), and supersede all previous guidelines in this regard. 

Secondly, the Direct Taxes Committee of the ICAI has released the Revised (2025) edition of the Guidance Note on Tax Audit under Section 44AB. This comprehensive revision aligns with recent amendments made through the Finance (No. 2) Act, 2024 and Finance Act, 2025, along with consequential changes in Form No. 3CD notified in March 2024 and March 2025. The updated edition serves as an authoritative resource for members, offering practical guidance on evolving reporting requirements, detailed explanations of statutory provisions, and clarity on technical issues. It aims to assist Chartered Accountants in maintaining professional diligence and adapting to the dynamic regulatory environment. 

Together, these initiatives reaffirm ICAI’s commitment to strengthening audit quality and supporting members through up-to-date technical resources. 

Read the Guidance Note 

Read the Notification 

6. ICAI issues FAQs on Guidelines for Merger, Demerger of CA Firms and Aggregation of LLPs 

In a major step towards enabling growth and consolidation within the Chartered Accountancy profession, the Institute of Chartered Accountants of India (ICAI), through its Committee for Aggregation of CA Firms (CACAF), has issued two focused publications: FAQs on ICAI (Merger and Demerger of CA Firms) Guidelines, 2024 and FAQs on ICAI (Aggregation of LLPs) Guidelines, 2024. These documents provide much-needed clarity on the updated frameworks by explaining eligibility criteria, merger and demerger procedures, freezing and unfreezing of firm names, and filing requirements through the ICAI’s Self-Service Portal. A Model Merger Deed has also been included to guide firms on legal terms, management roles, client transition, and other key matters. 

These publications are highly relevant for firms looking to scale operations, improve governance, and strengthen professional presence. While the merger and demerger guidelines provide structure for smooth transitions, the aggregation guidelines for LLPs help firms collaborate while maintaining individual identity and professional standards. Together, they offer a forward-looking framework for CA firms to expand their reach, pool resources, and operate with better efficiency in a more regulated and competitive environment. 

Read the Story