The Bangalore Bench of the Income Tax Appellate Tribunal ( ITAT ) dismissed an appeal filed by the assessee, upholding the Principal Commissioner of Income Tax ( PCIT )’s order under Section 263 of the Income Tax Act 1961.
The assessee, Buckeye Trust, is a private discretionary trust established under the Indian Trust Act of 1882. It received substantial investments amounting to ₹669 crore from its settlor, Mr Anand Nadathur. These included interests in partnership firms and shares of private companies. In the Income Tax Return ( ITR ), the assessee declared its income as nil, claiming that the funds were received in a fiduciary capacity and for the benefit of family members who qualify as relatives under the Act.
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The case was initially assessed under Section 143(3) of the Act, accepting the trust’s claims. The PCIT changed this, invoking Section 263, stating that the assessment conducted by the AO was erroneous and prejudicial to the interest of revenue. The PCIT argued that the trust deed allowed the inclusion of non-relatives as beneficiaries, disqualifying the receipts from exemptions under Sectio 56(2)(x) of the Income Tax Act.
The Counsel for the assessee questioned the validity of the PCIT’s jurisdiction under Section 263 and further submitted that the trust was created for the benefit of the settlor’s family members, who qualify as “relatives” under Section 56(2)(x). They contended that an additional clause in the trust deed, which allowed the addition of other benefits, was meant only for additional family members.
The Counsel further argued that the money received by the trust is not without consideration as the same had been obtained in a fiduciary capacity and was not owned by the trust. Such
receipts were for the beneficiary’s benefit.
The Departmental Representative of the revenue contested that it is a case where the assessee has received an amount of ₹669 Crores and has been received by the assessee without any consideration and that the contention by the assessee that the same was received in a fiduciary capacity is factually incorrect as it is mentioned in the trust deed that this amount can be utilised for the outsiders also.
After hearing arguments from both sides, the ITAT noted that the AO failed to investigate the main issues, including the broad scope of beneficiaries and the nature of the receipts. The Tribunal found that the AO did not examine whether the trust fulfilled the conditions for exemption under Section 56(2)(x) of the Income Tax Act.
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The trust deed’s clause allowing non-relatives and charitable entities to be added as beneficiaries shows that the trust was not established solely for the benefit of relatives, which violated the conditions for exemptions under Section 56(2)(x). The Tribunal rejected the assessee’s claims that the funds were received in a fiduciary capacity, stating that the receipts proved that they directly benefited the trust.
The two-member bench consisting of Prashant Maharishi ( Vice President ) and Prakash Chand Yadav ( Judicial Member ) upheld the PCIT’s order, which invoked Section 263 of the Income Tax Act, asserting that the AO’s lack of inquiry into key issues made the original assessment order erroneous and prejudicial to the Revenue and as a result the appeal filed by the trust was dismissed.
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