Receipt Of Assets By A Private Trust Established Solely For Benefit Of Relatives Covered By Exception Under Clause (X) Of Proviso To Section 56(2)(x)

BACKGROUND

• The Assessee1 is a private trust settled on 01-Sep-2021 by Mr. Venu Srinivasan ('Settlor') for the benefit of his family members.
• During AY 2022-23, the Assessee received shares worth INR 15.78 crores by way of contribution from the Settlor. A dividend income of INR 5,900 was derived from these shares. The Assessee declared this dividend income in ITR filed and treated the receipt of shares as not taxable by virtue of exception under clause (X)2 of proviso to section 56(2)(x) of the Income-tax Act, 1961 ('the Act').
• During the course of assessment proceedings, the Assessing Officer ('AO') noted that clause 5.2 of the original Trust deed empowered the Trust to add any entity as a beneficiary which is majority owned or controlled, directly or indirectly, either individually or collectively, by the relatives of the Settlor.
• The AO therefore was of the view that the Trust could not said to have been created for the exclusive benefit of the relatives of the Settlor as the Trust deed permitted the Trust to add any entity as a beneficiary, which is majority owned/controlled by the relatives thereby meaning that a minority benefit could possibly accrue to any person who is not a relative of the Settlor.
• Accordingly, AO denied the exemption claimed by the Assessee under section 56(2)(x) of the Act and added the aggregate value of shares worth INR 15.78 crores by way of income under the head 'Other Sources' ('impugned addition)'.
• However, AO failed to take cognizance of the supplemental deed dated 03- Mar-2022 to the original Trust deed, which replaced clause 5.2 of the original Trust deed w.e.f. 01-Sep-2021. Clause 5.2 of the amended Trust deed no longer provided for addition of any new entity which was majority controlled by the relatives of the Settlor.
• Aggrieved by the AO's order, the Assessee carried the matter in appeal before Commissioner of Income-tax (Appeals) ['CIT(A)'].
• The CIT(A) took note of the original Trust deed as well as the amended Trust deed but was of the view that amendment to clause 5.2 of the original Trust deed was not legally permitted in terms of clause 8.1.2(b) as per which no amendment to the Trust deed could be made in certain cases.
• CIT(A) thus held that clause 5.2 of the original Trust deed continued to remain in effect, thereby creating a possibility of minority interest in the Trust of other persons who are not relatives of Settlor and upheld the AO's order.
• Aggrieved, the Assessee preferred an appeal before the Tribunal.

PROCEEDINGS BEFORE THE HON'BLE TRIBUNAL

Assessee Representative's Contentions-

• AO had erroneously relied upon clause 5.2 of the original Trust Deed to justify the impugned addition and failed to appreciate supplemental deed with amended clause 5.2.
• Amended clause 5.2 no longer empowered the Trust to add any new entity which was controlled / owned by the relatives of the Settlor and thus the benefits of the Trust exclusively accrued only to the relatives of the Settlor.
• Ld. CIT(A) had erred in holding that clause 5.2 of the original Trust deed could not be amended due to non-obstante clause 8.1.2(b).
• Amendment to clause 5.2 did not fall within any of the restrictions specified in clause 8.1.2(b) and therefore the substituted clause 5.2 was legally valid.
• No entity controlled by relatives of the Settlor were ever added as beneficiaries of the trust till date and beneficiaries in existence during the year comprised only of relatives of the Settlor.
• A conjoint reading of the preamble, clause 5 and clause 4 of the Trust deed established that the Trust was created for the sole benefit of the beneficiaries, which in the instant case, were Settlor's relatives only.

Departmental Representative's Arguments-

• Emphasized on clause 5.2 of the original Trust deed to submit that the Trustees enjoyed the discretion to later on add majority controlled / owned entities of the relatives, pursuant to which, minority benefits could possibly accrue to non-relatives as well.
• Therefore, the lower authorities had rightly taxed the receipt of shares without consideration by the Trust under section 56(2)(x) of the Act

TRIBUNAL'S OBSERVATIONS

• A discretion given to trustees in clause 5.2 of the original Trust deed suggested that non-relatives could be later on be added as beneficiaries of the Trust and hence the Trust cannot be said to be created solely for the benefits of relatives of Settlor/ donor.
• However, this clause 5.2 of the original Trust deed relied upon by lower authorities was substituted and replaced by supplemental Trust deed executed on 03-Mar-2022 with effect from inception date.
• Substituted clause 5.2 only specifies the procedure for removal of beneficiaries from benefits of the Trust and no longer provides for adding any entity which is majority controlled / owned by the relatives of the Settlor.
• AO omitted to consider the substituted clause 5.2 of the amended Trust deed and erroneously relied on clause 5.2 of the original Trust deed, which has been deleted since inception of the Trust i.e., 01-Sep-2021.
• Ld. CIT(A) took cognizance of this substituted clause but held it invalid due to violation of clause 8.1.2(b) of the original Trust deed.
• Amendment in clause 5.2 does not fall within the ken of restrictions set out in clause 8.1.2(b) as this clause did not vest any power back with the Settlor, nor did it confer any right to dispose off the Trust property, nor did it result in alterations of the objects of the Trust.
• Beneficiaries as set out in amended clause 5.2 comprises solely of relatives of the Settlor and there is no provision in any other terms of the trust deed by virtue of which minority benefits could possibly accrue to any non-relatives of Settlor.
• Therefore, case is squarely covered by the exception set out in clause (X) of proviso to section 56(2)(x) of the Act and Assessee's appeal is allowed.

AURTUS COMMENTS

• This ruling of Hon'ble Chennai Tribunal reinforces the principle that section 56(2)(x) cannot be invoked where a trust is, under its valid and operative deed, created exclusively for the benefit of relatives of the settlor/donor.
• Interestingly, this ruling accepts a retrospective amendment of the Trust deed to comply with the conditions under section 56(2)(x) and does not adopt a rigid approach of merely looking at the list of prospective beneficiaries at the inception of the Trust deed. The Tribunal has specifically held that by virtue of the retrospective amendment in the Trust deed, it should be considered that the Trust has been formed solely for the benefit of the relatives of the settlor/donor

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