ITAT Bangalore’s Decision in Buckeye Trust Recalled
There were some observation for Private Trusts and Succession Planning which was rendered by Bangalore ITAT:
The Income Tax Appellate Tribunal (ITAT), Bangalore ruling in the Buckeye Trust case shed light on the taxability of private discretionary trusts. The judgment reinforces that trusts allowing non-relatives as potential beneficiaries cannot avail exemption under section 56(2)(x)(a) of the Income Tax Act, 1961 (“Act”).
The case involved a private trust established in 2018 with assets worth INR 669.27 crores, including partnership interests and shares. While the trust claimed it was created solely for the benefit of relatives, the deed granted the trustee the discretion to include any person as a beneficiary.
Initially, the Assessing Officer accepted the trust’s nil income declaration, but the Principal Commissioner of Income Tax (PCIT) subsequently revised this assessment, deeming it erroneous for lack of adequate inquiry.
In its ruling, the Tribunal emphasized that the broad wording of the trust deed disqualified the trust from claiming tax exemption.
Even if the settlor intended to benefit relatives, the possibility of including non-relatives was sufficient to deny the exemption under section 56(2)(x)(a). Furthermore, the Tribunal rejected the argument that the transfers were made in a fiduciary capacity, pointing out that the arrangement allowed the trust to receive partnership interests without any consideration.
Notably, the Tribunal also classified partnership interests as “shares,” bringing them within the definition of property under section 56(2)(x). This expanded interpretation could have far-reaching implications for similar trusts.
This decision underscores the critical importance of precise drafting in trust deeds, particularly when structuring them for succession and estate planning. It also highlights the need for robust compliance and careful alignment with tax laws to avoid potential litigation and reassessment risks.
However, the order is now recalled by the ITAT and let us sees what the final outcome of the case is.
The Copy of the original order is as under:
