A life interest in trust refers to a limited and determinable right to enjoy income or benefits from a property during the lifetime of the holder, without conferring ownership of the underlying property (corpus). Such an interest automatically ceases upon the death of the holder, whereupon the property devolves on the remainder beneficiaries. Importantly, a life interest does not grant absolute or perpetual rights over the property.
In a recent decision, the Hon’ble Mumbai Tribunal adjudicated on whether the assignment of a life interest in property owned by the trust constitutes a transfer of land or building, and accordingly, whether the deeming provisions of section 50C of the Income-tax Act, 1961 could be invoked. The Tribunal held that section 50C is not applicable to the transfer of a life interest, as such interest does not amount to land or building per se.
In this case, the taxpayer held life interest along with an undivided share in an immovable property owned by a family trust. During the relevant year, the taxpayer assigned a portion of his life interest in the property owned by the trust to his nephew for consideration. The Assessing Officer (‘AO’) invoked section 50C and substituted the actual consideration with the stamp duty value. The Commissioner (Appeals) upheld the action of the AO, holding that section 50C could apply to the transfer of life interest.
Aggrieved, the taxpayer appealed to the Tribunal, contending that what was transferred was only a limited life interest under a trust, and not land or building itself. It was argued that section 50C, being a deeming provision, must be strictly construed and cannot be extended to transfers of limited or beneficial interests that do not confer ownership over land or building.
The Tribunal, after examining the trust deed, assignment documents, valuation records, and the relevant legal framework, ruled in favour of the taxpayer. It observed that the ownership of the immovable property continued to vest with the trust, and that the assessee merely assigned a non-perpetual, non-heritable, and determinable life interest, which extinguishes upon death. The Tribunal further distinguished the decision of the Bombay High Court in Vidarbha Veneer Industries Ltd. (In Liquidation) v. ITO (ITA No. 34 of 2022), holding that the said ruling was factually distinguishable, as it dealt with the transfer of leasehold or ownership rights that are commercially exploitable, unlike a life interest, which does not confer dominion over the corpus of the property. Finally, emphasising that deeming provisions must be applied strictly, the Tribunal deleted the addition made under section 50C.
This decision clarifies that the assignment of a life interest in trust property does not trigger section 50C, as it does not involve the transfer of land or building. The ruling reinforces the principle that deeming provisions, such as Section 50C, must be applied strictly.
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