Madras HC holds that sum of money received by a trust without consideration will be subject to gift taxation under the Income Tax Act, 1961

 

This Tax Alert summarizes a ruling of the Madras High Court (HC), dated 8 December 2020, in the case of Shriram Ownership Trust  (Taxpayer/Trust) on the issue of applicability of the gift tax provision of the Income Tax Laws (ITL), which was applicable to individuals/Hindu Undivided Families (HUFs).

 

The Taxpayer is a private discretionary trust settled for distribution of retirement benefit to the owners, senior leaders and top-level executives chosen from Shriram group entities when they attain superannuation.

 

During tax year 2013-14, the Trust received a sum of INR250m from Shriram group of companies. Considering that the amount was received without any consideration and all the beneficiaries of the Trust were individuals, the tax authorities held that the sum of money received by the Trust was income and, hence, subject to tax under the gift tax provision of the ITL.

 

The various contentions raised by the Taxpayer viz., (i.) It is an Association of Persons (AOP) and not an individual. (ii.) In any case, gift tax is applicable only to living persons. (iii.) For the tax year under reference, no amount was received by the individual beneficiaries, were rejected.

 

The HC upheld gift taxation on the premise that: (i.) The status of the Taxpayer was that of an individual considering that all the beneficiaries were individuals. (ii.) The status of the Taxpayer was not that of an AOP as neither the trustees nor the beneficiaries had come together with the common purpose of earning income–an element essential for emergence of an AOP. (iii.) The gift tax provision is not restricted to living persons but extends to artificial persons also.