VS Trust Vs ITO (ITAT Chennai)
Shares Settled in Family Trust Exempt under Section 56(2)(x); Erroneous Advance-Tax Payment Not Taxable as Income: ITAT Chennai
The Chennai Bench of the ITAT allowed the assessee-trust’s appeal for AY 2022-23 and deleted two major additions made under section 56(2)(x).
(i) Shares contributed by settlor to trust (₹15.78 crore):
The Tribunal held that shares settled by an individual settlor into a private trust were not taxable under section 56(2)(x) since the trust was created and existed solely for the benefit of the settlor’s relatives, falling squarely within clause (X) of the proviso to section 56(2)(x). The AO and NFAC had denied the exemption on the basis of a hypothetical possibility of non-relatives benefiting under an original clause of the trust deed. The ITAT found that this clause had been validly substituted ab initio by a supplemental deed, removing any such possibility. Relying on settled principles (including the Supreme Court ruling in H.E.H. Nizam’s Family (Remainder Wealth) Trust), the Tribunal held that actual beneficiaries during the year, not speculative future contingencies, determine taxability. Accordingly, the addition of ₹15.78 crore was deleted.
(ii) Advance-tax paid in trust’s PAN by mistake (₹12 crore):
The Tribunal deleted the addition treating it as “income from other sources”. It accepted the explanation that the settlor had erroneously paid advance tax in the trust’s PAN, which was later discovered; the trust recognized it as a repayable liability, claimed refund, and repaid most of the amount to the settlor. Such amount constituted a loan/liability, not income or a gratuitous receipt. Failure to pursue challan-correction could not convert a repayable amount into taxable income. Hence, section 56(2)(x) was held inapplicable.
Overall, the ITAT allowed the appeal in full and directed deletion of both additions.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This is an appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals), (hereinafter referred to as ‘Ld. CIT(A)’), NFAC, Delhi dated 05.08.2025 for the Assessment Year (hereinafter referred to as ‘AY’) 2022-23.
