Receipt from Private Discretionary Trust

[Harshavardhana Datar]

Facts of Case:
1. A grandfather formed a private discretionary trust to make his grandson its sole beneficiary upon 5th birthday of grandson. He gifts assets comprising a building, some bonds to trust. Trust has its own PAN and assessed as an AOP. (No assessment order passed by AO)

2. All these assets are to be transferred to his grandson upon his attaining 18 years of age.(Market value as on creation of trust Rs. 50 Lacs)

3. Till then father of grandson, i.e. son of founder of trust is trustee. He cannot dispose any property. He can only ensure smooth transfer of assets.

4. As on today, founder grandfather is no more and grandson has attained 18 years of age and all the assets are going to be transferred in name of grandson. (Current market Value 18 Crores)

Issue :

Whether receipt assets from such trust will be taxable u/s 56 in light of express provisions in hands of Grandson???

[ashutosh majumdar]

S. 56(2)(vii) reads as follows:

[(vii)  where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009,—

      (a)  any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;

76 [(b)  any immovable property, without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;]

      (c)  any property, other than immovable property,—

       (i)  without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;

      (ii)  for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration :

The key is that the sum of money or property should be received "without consideration". In the present case, the trust property already belongs to the grandson since he is the absolute beneficiary thereof. The trust is merely holding the money/property on behalf of the grandson.

When trust property is handed over to the beneficiaries, there is no "transfer" but it is a mere "giving to the person what he was always entitled to". See Trustees of H.E.H. Nizam's Family Trust [1977] 108 ITR 555 (SC) & related cases. There is also no "gift" and the concept of "consideration" is quite alien to the issue.

[Harshavardhana Datar]

but can it override literal interpretation? for section 56 it is still receipt of property for no consideration. I think beneficiary wasn't owner till majority.

[kkmalhotra08@gmail.com]

Till majority son was not the owner of the property but the grand-father has the exclusive control over the property, therefore we can show it as grandfather gift the property to the grandson. and we all know that gift from the relatives will not cover under the ambit of section 56

[Harshavardhana Datar]

Till majority son was not the owner of the property but the grand-father has the exclusive control over the property, therefore we can show it as grandfather gift the property to the grandson. and we all know that gift from the relatives will not cover under the ambit of section 56

1. How can it be proved that grandfather has the exclusive control over property even after transferring the same in favour of trust? What is basis?

2. How can it be proved that it is a gift from Grandfather to Grandson when actually it is different?

3. Property records and Security ownership certificate is in name of Trust