Addition under gift tax rules for trust-held shares and mistaken advance tax: amendment upheld, additions deleted.

Interpreting additions under the gift-tax provision, the tribunal found a trust deed amendment replacing Clause 5.2 to be valid and held that beneficiaries are exclusively settlor relatives; therefore the transfer of shares falls within the proviso exception for transfers to relatives and the addition under the provision is deleted. Separately, an alleged receipt of advance tax was treated as an erroneously deposited repayable liability to the settlor, supported by absence of FY 2021-22 ledger entries, subsequent accounting recognition and partial repayment; consequently no income accrued and the Rs. 12 crore addition was disallowed.

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Issues: (i) Whether the addition of Rs. 15,78,40,401 under section 56(2)(x) for shares contributed to the trust is sustainable, having regard to whether the trust was created or established solely for the benefit of relatives and the validity of the substituted Clause 5.2 of the trust deed; (ii) Whether the addition of Rs. 12,00,00,000 under section 56(2)(x) in respect of advance tax paid in the trust's PAN is sustainable or is a repayable liability/loan.

Issue (i): Whether the receipt of shares valued at Rs. 15,78,40,401 by the trust is taxable under section 56(2)(x) or exempt by proviso (X) because the trust was created solely for the benefit of relatives, and whether the supplemental deed substituting Clause 5.2 is valid.

Analysis: The issue turns on the terms of the trust deed as amended and the proviso to section 56(2)(x)(c) which excludes from tax property received by a trust created solely for benefit of relatives (definition in Explanation (e) to section 56(2)(vii)). The substituted Clause 5.2 (effective from inception) removed the original power to add entities that could create minority benefits for non-relatives and limited trustees' actions to removal of beneficiaries by written resolution with specified consent for Class B removals. The amendment mechanism in Clause 8.1.2 permits amendments except those returning power of disposition to the settlor or changing objects; the substituted clause did not violate these restrictions. The substituted Clause 8.1.2(d) also authorized adding/removing beneficiaries. There is no provision creating a pathway for minority non-relatives to obtain benefits under the amended deed. Therefore the trust, as constituted (original deed read with valid amendment), is established solely for benefit of relatives within the meaning of Explanation (e).

Conclusion: Addition of Rs. 15,78,40,401 under section 56(2)(x) is deleted; the exemption under proviso (X) applies in favour of the assessee.

Issue (ii): Whether the advance tax of Rs. 12,00,00,000 deposited in the trust's PAN constituted income under section 56(2)(x) or was a repayable liability/loan to the settlor.

Analysis: The facts show no accounting entries in the trust's books for the transaction in the year ending 31.03.2022; on discovery, the trust treated the amount as repayable to the settlor, recorded corresponding liability entries in the year of return filing, repaid a portion (Rs. 10.11 crores) and reflected the balance as payable. The contemporaneous and subsequent accounting treatment, repayment, and absence of indicia of a gratuitous transfer support characterization as an erroneous advance/repayable liability rather than a contribution without consideration. The chosen remedy of claiming refund instead of challan correction does not convert the transaction into taxable income.

Conclusion: Addition of Rs. 12,00,00,000 under section 56(2)(x) is deleted; the amount is a repayable liability and not taxable income, in favour of the assessee.

Final Conclusion: The appeals on the decided issues are allowed; the additions of Rs. 15,78,40,401 and Rs. 12,00,00,000 made under section 56(2)(x) are deleted and the trust succeeds on both grounds.

Ratio Decidendi: Where a trust receives property from an individual, the proviso to section 56(2)(x)(c) exempts such receipt only if the trust is created or established solely for benefit of the individual's relatives; validity of a supplemental trust deed effective from inception must be determined by its terms and permissible amendment clauses, and an erroneous advance tax deposited in a trust's PAN that is subsequently recorded as a repayable liability and partially repaid is not taxable as income under section 56(2)(x).

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