Chennai Tribunal held that where a trust has been retrospectively amended to eliminate the possibility of adding non-relatives as beneficiaries, contribution of shares by the settlor to the trust would not attract the gift tax provisions.
A private family trust was settled on 01.09.2021 by an
individual settlor for the benefit of his immediate family members being
relatives under Income-tax, which was later amended by the supplementary trust
deed on 03.03.2022 with a retrospective effect from 01.09.2021 to eliminate the
possibility of adding non-relatives as beneficiaries. During the FY 2021-22,
the settlor contributed shares of multiple companies to the trust, Revenue held
that the said receipt of shares from settlor should be taxed as gift tax is
attracted (Section 56(2)(x) of the Income-tax Act, 1961). The Revenue contended
that the original trust deed contained provisions to add non-relative as
beneficiary of the trust, thereby it not solely for the benefit of relatives of
the settlor, hence exemption benefit not available. However, at no point in
time, any non-relative was added as beneficiary.
The Tribunal held that the supplementary trust deed being
effective from the trust’s inception validly substituted the earlier clause to
remove the provision permitting addition of non-relative entities as
beneficiaries. The Tribunal concluded that the beneficiaries comprised only the
settlor and his relatives considering the amended trust deed and the main
object of the trust, thereby satisfying the exemption condition under gift tax
provisions. Consequently, the addition relating to shares should be deleted.
The ruling affirms that exemption under the gift tax
provisions is available where a trust is clearly established solely for the
benefit of the settlor’s relatives, and that any subsequent valid amendments
clarifying the scope of beneficiaries must be given due legal effect.
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