TaxTMI 
TaxTMI 
2026 (2) TMI 67
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....ideo conferencing to the Appellant despite Appellant's request and accordingly impugned Order is violative of principles of natural justice and deserves to be quashed. 3. On the facts and in the circumstances of the case and in law, the NFAC erred in confirming the action of the learned assessing officer ("Ld. AO") in making an addition of INR 15,78,40,401/- on account of shares of various companies settled/ contributed to the Appellant as 'Income from other sources' under section 56(2)(x) of the IT Act. 4. On the facts and in the circumstances of the case and in law, the NFAC ought to have appreciated that at the time of the transfer of the Assets by the settlor, the beneficiaries of the Trust were only 'Relatives' within the definition of the term under proviso I to sec 56(2)(x) read with Explanation (e) to section 56(2)(vii) and hence the transfer is exempt by the virtue of the Explanation. 5. On the facts and in the circumstances of the case and in law, the NFAC ought to have appreciated that the characterisation and assessment of trust should be on the basis of the actual beneficiaries of Trust during the year and possible or potential beneficiaries.....
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....made by the AO amounting to Rs. 15,78,40,401/- on account of the shares of several companies settled/contributed to the assessee-Trust by its settler. The facts as noted are that, the assessee is a private trust settled on 01.09.2021 by one, Mr. Venu Srinivasan [hereinafter referred to as the 'settler'] for the benefit of his family members. During the relevant year, the assessee-Trust had received shares worth Rs. 15,78,40,400/- by way of contribution from the settler. The assessee had treated this receipt of assets not to be taxable by virtue of the exception set out in Section 56(2)(x) of the Income Tax Act 1961 (herein after 'the Act'). The assessee had derived dividend of Rs. 5900/- from these shares, which was declared by way of income in the return of income filed for the relevant AY 2022-23. The case of the assessee was selected for scrutiny by issue of notice u/s 143(2) of the Act dated 01.06.2023. The AO, in the course of assessment, took note of the shares received by the assessee-Trust by way of contribution from the settler and thereafter issued a show cause notice dated 27.02.2024 proposing to add the receipt of such assets by way of income from 'other sources' u/s 56....
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....ny minority benefits qua any nonrelatives. According to the assessee therefore, the AO had wrongly relied on the erstwhile Clause 5.2 of the original-deed to justify the impugned addition, which had since been deleted and replaced by the supplemental-deed with effect from 01.09.2021. The assessee thus claimed before the Ld. CIT(A) that, the assessee-Trust was exclusively for the benefit of relatives of settler and thus the receipt of property [shares, in this case] was exempt from tax by virtue of clause (X) of proviso to Section 56(2)(x) of the Act. It is observed that, the Ld. CIT(A) had taken note of the original Trust-deed as well as the amended Trust-deed, but he was of the view that, the amendment of Clause 5.2 of the original Trust-deed was not valid. The Ld. CIT(A) referred to Clause 8.1.2 of the Trust-deed, in terms of which, amendment could have been made only to certain clauses of the deed. The Ld. CIT(A) observed that, Clause 8.1.2(b) inter alia provided that, no amendment to the Trust-deed could be made which would affect the power of disposition over the Trust property or changing the objects of the Trust. The Ld. CIT(A) was therefore of the view that, the amendment t....
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....ies, which in the instant case, was the relatives of the Trustee. The Ld. AR thus argued that, the lower authorities had made the impugned addition by assuming a hypothetical scenario that minority benefits could have accrued to any person who was not a relative of the settler. The Ld. AR showed us that no such entities were ever added as beneficiaries of the assessee-Trust from its inception till date. He therefore submitted that, when the beneficiaries who was actually in existence during the relevant year solely comprised of the relatives of the settler, the lower authorities could not have denied the benefit of exemption set out in clause (X) of proviso to Section 56(2)(x) of the Act. The Ld. AR in this regard referred to the decision of the Hon'ble Supreme Court in the case of CIT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (108 ITR 555 SC). 4.4 Per contra, the Ld. DR for the Revenue vehemently supported the orders of the lower authorities. He emphasized on Clause 5.2 of the original-Trust-deed and submitted that the Trustees enjoyed the discretion to later on add majority controlled/owned entities of the relatives, pursuant to which, minority benefits cou....
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....ided that this clause shall not apply to any sum of money or any property received- ..... (X) from an individual by a trust created or established solely for the benefit of relative of the individual;" 4.7 Reading of the above, shows that, where any property [shares, in this case] is received from an individual [settler, in this case], by a Trust [assessee, in this case] which is created or established solely for the benefit of relative of such individual, then the provision of Section 56(2)(x) will have no application and hence, such receipt of property by the Trust will not be liable to income-tax. The language employed in clause (X) of proviso to Section 56(2)(x)(c) of the Act is abundantly clear that the benefit of exemption is available only to those Trusts, which is established solely for the benefit of relative of the individual. The term 'relative' as defined in Explanation (e) to Section 56(2)(vii)which reads as follows: "(e) "relative" means,- (i) in case of an individual- (A) spouse of the individual; (B) brother or sister of the individual; (C) brother or sister of the spouse of the individual; (....
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.... with Clause 9 of this Deed [Distributions]). 5.2 The Trustee(s) may add any: 5.2.1 member of the Family; or 5.2.2 trust settled for the benefit of the Family or any member of the Family; or 5.2.3 entity, which is majority owned and/or controlled, directly or indirectly, either individually or collectively (two or more) by below-mentioned Person/s: (a) Mr Venu; (b) Dr Lakshmi; (c) Mr Sudarshan; and/or (d) the Trust, as a Beneficiary or re-classify from one class of Beneficiary to another, and/or remove any Person as a Beneficiary. In the context of removal of Beneficiaries, the Trustee(s) may remove any Beneficiary from the class of the Trust with or without making any Distributions of Trust Property (subject to Clause 9 of this Deed [Distributions]) to such removed Beneficiary." 4.9 Perusal of the above reveals that, the beneficiaries of the assessee- Trust comprised of the settler himself, his daughter, his son and the descendants of his son & daughter. It is not in dispute that, the list of beneficiaries comprised of the contributor and his relatives, all of whom fell within the meaning of Explan....
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....e but held such substitution to be invalid due to violation of Clause 8.1.2(b) of the original trust deed, which read as under:- "(b) Power to make Amendments The Original Trustee 1 (and the immediate successor to his office) may at any time amend or modify or supplement the terms of the Deed, by way of a written instrument. All the Trustee(s) of the trust at the time of making the amendment shall be mandated to sign such written instrument. In case the Original Trustee 1 (and the immediate successor to his office) ceases to be a Trustee of this Trust, then the Trustee(s) may amend or modify or supplement the terms of the Deed, by way of a written instrument duly signed by the Trustee(s). Notwithstanding anything herein contained, no amendment shall be effected to this deed, which directly or indirectly results in or amounts to the Settler regaining the power over the Trust property or power of disposition over the Trust property or changing the objects of the Trust." 4.11 Having perused the above Clause 8.1.2(b) of the original trust deed, we find that the above provision in fact supports the case of the assessee. The said clause expressively....
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....gs therefore, the inescapable conclusion is that the Clause 5.2 of the original trust deed relied upon by the AO to justify the impugned addition had been deleted and substituted by the amendment deed dated 03.03.2022 applicable from 01.09.2021 and such amendment is found to have been validly made. It is held that, the interpretation accorded by the Ld. CIT(A) that, the substituted Clause 5.2, was not permitted under Clause 8.1.2 of the original deed, is held to lack any textual or legal foundation and is therefore set aside. For the sake of clarity therefore, in our view, the Clause 5 of the trust deed [original deed dated 01.09.2021 read with amended deed dated 03.03.2022] correctly reads as under:- "5 BENEFICIARIES 5.1 The Beneficiaries, which are divided into 2 (two) classes, viz., Class A and Class B, are as follows: Sr no Class A Beneficiary Sr no Class B Beneficiary (i) Mr Venu Srinivasan, aged about 68 years, presently residing at West Side House, Old No 2 New No 3, Adyar Club Gate Road, Raja Annamalaipuram, Chennai - 600 028 ("Mr Venu"); (i) Dr Lakshmi Venu, daughter of Settlor ("Dr Lakshmi"); [This space is intentionally left b....
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....ion. The assessee is noted to have submitted that, the settlor had erroneously paid the advance tax in the PAN of the assessee trust, which came to notice only at the time when the assessee was filing the return of income. With a view to avoid any confusion or further omission, the assessee trust had passed journal entries reflecting the advance tax paid under its PAN as sum repayable back to the settlor and thus it had claimed refund of the same in the income tax return filed for AY 2022-23. The AO however, disbelieved this explanation by observing that, the assessee could have approached the AO for challan correction rather than claiming refund. The AO further observed that, this amount was not reflected by way of liability due to the settlor, as on 31.03.2022. The AO thus concluded that, the settlor had parted with this amount to the assessee trust and there was no liability for the trust towards the settlor. Since the AO had already held that the assessee was not eligible for the exemption set out in clause (X) of proviso to Section 56(2)(x)(c) of the Act, the AO added the impugned sum being amount received for NIL consideration, by way of 'Income from Other sources' u/s 56(2)(....
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.... accounts for the year ended 31.03.2022, does lend credence to the assessee's explanation that, it was unaware about the impugned advance tax erroneously deposited by the settlor in their PAN until the year-end and that it was discovered only later on at the time of filing of return of income. It is observed that, when this error was discovered, the assessee and the settlor had mutually decided that, the assessee would claim refund of this amount erroneously deposited in its PAN and refund the same back to the settlor. We find that, necessary entries were also passed in the books of accounts in FY 2022-23, when the return of income was filed. It is seen that, the assessee had not only recognized the advance-tax by way of asset, but it had correspondingly recognized equivalent liability of Rs. 12 crores payable to the settlor. The facts brought on record shows that, the assessee had also repaid the admitted liability to the extent of Rs. 10.11 crores back to the settlor and the balance was reflected as liability due to him. Having regard to the foregoing facts put forth before us, we are unable to countenance the order of the lower authorities dismissing the explanation of the asses....