Equity shares received by private trust for relatives’ benefit are exempt from income tax, ITAT Chennai rules
Mar 23, 2026
Synopsis
A private trust received shares worth Rs 15.78 crore from its creator for family benefit. The Income Tax Appellate Tribunal ruled this transfer tax-exempt. The tribunal considered a supplemental deed that clarified beneficiaries were exclusively relatives. This decision reinforces tax exemptions for family trusts and clarifies treatment of advance tax deposits.
On September 1, 2021, Mr Srinivasan had set up a private trust for his family. Throughout the year, the trust received shares worth Rs 15.78 crore as a contribution from Mr Srinivasan, and because of this, the trust treated this transaction as not taxable due to an exception in Section 56(2)(x) of the Income Tax Act 1961.
From these shares, the trust earned a dividend of Rs 5,900 and reported this income in its income tax return (ITR) for AY 2022-23. However, the case was flagged for scrutiny with a tax notice issued under Section 143(2) dated June 1, 2023.
The Income Tax officer, in the course of assessment, noted the shares received by the private trust through contribution from Mr Srinivasan and thereafter issued a show-cause notice on February 27, 2024, suggesting that the receipt of these assets should be classified as income from ‘other sources’ u/s 56(2)(x).
In response to this tax notice, the trust clarified to the tax officer that the shares in question fell under the exception outlined in clause (X) of the proviso to Section 56(2)(x), which states that this clause does not apply to any property received from an individual by a Trust which is created or established solely for the benefit of the relatives of the individual.
The income tax officer pointed out that, the beneficiaries of the trust, as defined in Clause 5 of the trust-deed, comprised the relatives of Mr Srinivasan, but, Clause 5.2 of the trust deed also permitted (a) Srinivasan himself to be a beneficiary and (b) empowered the trust to add any entity as a beneficiary which is majority owned or controlled, directly or indirectly, whether individually or collectively, by his relatives.
The tax officer therefore was of the view that the Trust couldn’t be considered to have been created for the exclusive benefit of Mr Srinivasan’s relatives as the trust-deed permitted the trust to add any entity as a beneficiary, which is majority owned/controlled by the relatives. This meant there was a possibility of a minority benefit to go to someone who is not Srinivasan’s relative.
With these points in mind, the tax officer concluded that the Trust was not eligible to the exception stated in Clause (X) of proviso to Section 56(2)(x) of the Act. Consequently, he included the total value of shares worth Rs 15.78 crore as income under the head ‘other sources’. Feeling aggrieved, the trust filed an appeal before the Commissioner of Appeals (CIT A) which ruled against the trust. Following this, the trust appealed to the Income Tax Appellate Tribunal (ITAT Chennai).
On January 28, 2026, the trust won the case in ITAT Chennai. Advocate Vikram Vijayaraghavan represented the trust in ITAT.
Summary of the judgement
Chartered Accountant Suresh Surana explained to ET Wealth Online: “In this case the Income Tax Appellate Tribunal examined whether the assets received by a private family trust from its settlor were taxable under Section 56(2)(x) of the Income-tax Act, 1961.
The assessee, the Trust, was a private one set up on September 1, 2021 by an individual settlor for the benefit of his family members. During the relevant assessment year, the settlor contributed shares of various companies having an aggregate value of approximately Rs. 15.78 crore to the trust. The trust treated the receipt of these shares as non-taxable, relying on the exemption under clause (X) of the proviso to Section 56(2)(x), which excludes from taxation any property received by a trust created solely for the benefit of the relatives of the individual settlor.
During the assessment proceedings, the Assessing Officer (“AO”) held that the trust did not qualify for the exemption. According to the AO, a clause in the original trust deed permitted the trustees to add entities controlled by the settlor’s relatives as beneficiaries. This, in the AO’s view, it created a possibility that non-relatives could indirectly benefit from the trust. On this basis, the AO concluded that the trust was not created exclusively for the benefit of relatives, and therefore included the value of the shares received (Rs. 15.78 crore) as income from other sources under Section 56(2)(x). The Commissioner (Appeals) upheld the addition.
The ITAT examined the trust deed and the supplemental deed executed subsequently, which had amended the relevant clause relating to beneficiaries. The Tribunal observed that the amendment deleted the earlier provision allowing addition of entities and replaced it with a clause that only permitted the removal of beneficiaries, without allowing the inclusion of non-relatives. The Tribunal further held that this amendment was validly made under the amendment powers contained in the trust deed and did not violate any restriction relating to the objects of the trust or control over trust property.
After considering the amended provisions, the Tribunal found that the beneficiaries of the trust consisted exclusively of the settlor, his children, and their descendants, all of whom fall within the definition of “relative” under Explanation (e) to Section 56(2)(vii).
Since the trust was created solely for the benefit of the relatives of the settlor, the receipt of shares from the settlor fell squarely within the exemption under clause (X) of the proviso to Section 56(2)(x). Consequently, the addition of Rs. 15.78 crore made by the AO was held to be unsustainable and deleted.
The Tribunal also dealt with a second issue regarding Rs. 12 crore of advance tax deposited by the settlor in the trust’s PAN. The Revenue treated this as income under Section 56(2)(x). However, the Tribunal accepted the trust’s explanation that the amount was erroneously deposited by the settlor and represented a repayable liability, which had subsequently been returned to the settlor. As the amount did not represent a receipt without consideration, the provisions of Section 56(2)(x) were held to be inapplicable and the addition was deleted.
Accordingly, both additions made by the tax authorities were deleted and the appeal of the assessee trust was allowed.
Importance of this judgement
CA Parul Aggarwal, a tax expert and founding partner of Parul Aggarwal & Associates, said to ET Wealth Online: "The Chennai Tribunal rightly held that exemption under Section 56(2)(X) applies where the trust is actually and legally structured solely for the benefit of relatives, and hypothetical possibilities should not override valid amendments. By recognizing the validity of the “supplemental deed” and rejecting a mechanical reading of the original clause, the ITAT has reinforced the legal principle or substance over form.
Importantly, the reliance on Trustees of H.E.H. Nizam’s Family (Remainder Wealth) Trust principles, highlights that taxability depends on real beneficiaries and not remote contingencies. Further, this ruling has pragmatically clarified that an erroneous advance tax deposit by the settlor, when treated as a repayable liability by the trust, cannot be taxed under Section 56(2)(x)."
Overall, this judgment strengthens certainty for private family trusts and curbs over-extension of the “receipt without consideration provision."
How Section 56(2)(x) applies to trusts and its beneficiaries?
Surana says that under Section 56(2)(x) of the Income-tax Act, 1961 taxes the receipt of money or property without consideration or for inadequate consideration where the value exceeds Rs. 50,000. Since a trust qualifies as a “person” under Section 2(31), the provision may apply where a trust receives assets without consideration.
However, the proviso to Section 56(2)(x) provides an important exception. The provision does not apply where property is received from an individual by a trust created solely for the benefit of the relatives of that individual. In such cases, the transfer of assets by the settlor to the trust would not be taxable in the hands of the trust.
For this exemption to apply, the beneficiaries of the trust must fall within the definition of “relative” under Explanation (e) to Section 56(2)(vii).
Surana says: "If the trust structure allows non-relatives to benefit from the trust, the exemption may not be available and the receipt could be taxable under Section 56(2)(x)."
[The Economic Times]
