A family transferred ₹669 crores to their trust.
Tax department just denied the exemption under Section 56(2)(x) based on single sentence – “Trustees may add beneficiaries as they deem fit.”
This line was pretty standard from a trust law perspective. Gave trustees flexibility to add beneficiaries in the future. Makes sense, right? Grandchildren might be born. Daughters-in-law when sons marry. You want the flexibility.
But tax law sees it differently. “As they deem fit” implies trustees could theoretically add non-relatives. It didn’t matter that the family would never actually do that. The mere possibility was enough for the tax department to deny the exemption.
This is the Buckeye Trust case. ITAT ruled against the family. If you have a family trust, pull out the trust deed and read two clauses:
1. Beneficiary definition clause
2. Amendment powers clause
Ask yourself:
– Could a trustee theoretically add a non-relative based on this language?
– Does the deed explicitly restrict to “relatives as defined under Income Tax Act”?
– Are amendment powers clearly bounded?
If the answers make you uncomfortable, consider preemptive amendments in the trust deed.
What your trust deed should say: “Beneficiaries shall be limited exclusively to relatives as defined under Section 56(2) of the Income Tax Act, 1961, specifically spouse, siblings, siblings’ spouses, and lineal ascendants and descendants. Trustees shall have no power to add any beneficiary outside this defined class.”
Remember, timing matters.
– The VS Trust case shows that if your deed was properly drafted from the start, you’re protected.
– The Buckeye Trust case shows that if you try to amend after tax scrutiny begins, it’s too late