CA Paras K Savla – [2026] 186 taxmann.com 707 (Article)
“Prediction, not narration, is the real test of our understanding of the world.”
― Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable
1. Introduction
Section 56(2)(x)1 of the Income-tax Act, 1961 is one of the most far-reaching anti-avoidance provisions in the direct tax statute. In its broadest sweep, it taxes any receipt of money or property without adequate consideration as income from other sources. Its operation, if taken literally, would extend to the most common intra-family transfers and inter-generational wealth arrangements. Recognising this, Parliament built in a set of carve-outs through provisos to the section. One of the most practically significant is proviso (X) to Section 56(2)(x)2, which exempts from the charge ‘any sum of money or property received from an individual by a trust created or established solely for the benefit of relative of the individual.’
The words ‘solely for the benefit of relative’ carry enormous practical weight. Family trusts—private discretionary trusts settled by individuals for the benefit of their spouses, children, and descendants—are ubiquitous instruments of estate planning and wealth structuring in India. When a settlor transfers assets to such a trust, the trustee receives property of substantial value without payment of consideration. Whether such a transfer is exempt under proviso (X) or taxable under Section 56(2)(x) depends entirely on whether the trust qualifies as one ‘created or established solely for the benefit of relatives.’
Two coordinate bench decisions of the Income Tax Appellate Tribunal, pronounced within a fortnight of each other in early 2026, have placed this question at the centre of a live controversy. The Bangalore Bench, in Buckeye Trust v. Principal Commissioner of Income-tax [2026] 183 taxmann.com 381 (Bangalore – Trib.) [Decided 12 February 2026], and the Chennai Bench, in VS Trust v. Income-tax Officer [2026] 182 taxmann.com 842 (Chennai – Trib.) [Decided 28 January 2026], have reached outcomes that, while arising from somewhat different procedural postures reflect a genuine underlying tension on the central legal question: does a clause in the trust deed empowering the trustee to add non-relatives as beneficiaries, even if that clause has never been exercised, destroy the trust’s eligibility for the proviso (X) exclusion?
This article examines both decisions in depth, identifies where the benches agree and where they part ways, assesses the strength of each bench’s reasoning, and draws conclusions of practical relevance for tax professionals, trust advisors, and litigators.
2. Buckeye Trust v. PCIT—The Bangalore ITAT Decision
2.1 Background and Trust Structure
Buckeye Trust was a private discretionary trust constituted by a trust deed dated 23 January 2018. The settlor was Mr. Anand Nadathur; the trustee was Vervain Management Private Limited. On 31 March 2018, the settlor transferred to the trust assets worth Rs. 669.27 crores comprising interest in partnership firms and shares in unlisted companies, pursuant to a settlement deed executed out of natural love and affection for his beneficiaries. The trust filed its return for Assessment Year 2018-19 declaring nil income on the basis that the receipt was exempt under proviso (X).
The case was selected for complete scrutiny under CASS on multiple issues, one of which was specifically ‘Share Capital/Other Capital & Investments.’ Notices under Sections 143(2) and 142(1) were issued, the assessee furnished written explanations, and the Assessing Officer completed the assessment under Section 143(3) read with Sections 143(3A) and 143(3B) on 7 April 2021—without making any modification to the returned income. The assessment order consisted of a single paragraph acknowledging the submissions and concluding that the assessment is made without modification.
2.2 The Fiddly Clause and the PCIT’s Revision
On examining the assessment records, the PCIT noted that the trust had received Rs. 669.27 crores in assets and had claimed the benefit of proviso (X). The PCIT then examined the trust deed in detail. Clause 1.6 defined ‘Beneficiaries’ to mean:
(a) the Settlor;
(b) the spouse of the Settlor;
(c) the children and remoter issue of the Settlor; and
(d) ‘such other objects or persons as are added under Clause 6.’
Clause 6.1 gave the Trustee a sweeping power to ‘declare that any person or class of persons (whether or not in existence or ascertained) or Charity shall be added to the class of Beneficiaries.’
The PCIT held that, by virtue of Clause 6.1, the trust was not created or established ‘solely’ for the benefit of the relatives of the settlor. The language of Clause 6.1 was entirely unconstrained by any requirement of familial connection it could sweep in charities, corporates, unborn persons, or anyone else. The PCIT also held that the AO had not raised a single question about Section 56(2)(x) applicability during the assessment, making the order erroneous and prejudicial under Section 263.
2.3 Assessee’s Case and the Supplementary Deed
Before the ITAT, the assessee raised two lines of defence. On jurisdiction: the AO had in fact examined the issue (the assessee had furnished the trust deed, settlement deed, and ledger copies), and the AO had taken a plausible view, so Section 263 was not permissible on a mere difference of opinion. On merit: the receipt was not without consideration (the trust’s fiduciary obligation constituted consideration), the trust was not a ‘person’ under Section 2(31), and Clause 6.1 had always been intended only to add family members.
The assessee also produced, as additional evidence under Rule 29 of the ITAT Rules, a supplementary deed dated 13 May 2025. This deed deleted Clause 6 entirely, restricted beneficiaries to the Settlor, spouse, and descendants, and rewrote the variation power to prohibit benefiting any person outside this family circle. The ITAT admitted this document as evidence.
2.4 The ITAT’s Decision
The Tribunal dismissed the assessee’s appeal. On the Section 263 question, it held emphatically that the AO’s one-paragraph assessment order was ‘cryptic, unreasoned, and without forming any opinion.’ The Tribunal observed that ‘reasoning is the heart of an order, without which the order is lifeless.’ The AO had not asked even a single question about Section 56(2)(x) despite ‘Share Capital/Other Capital’ being a specific CASS parameter. This was not a difference of opinion—it was a complete absence of opinion.
On the supplementary deed, the Tribunal held that while it was admitted as evidence, it confirmed rather than cured the problem. The deed’s execution post-revision order merely established the significance of what the AO had failed to examine. It could not retroactively cure the AO’s failure to enquire during the original assessment.
The Tribunal also endorsed, for the purposes of Section 263, the PCIT’s reasoning that Clause 6.1—empowering the Trustee to add ‘any person or class of persons (whether or not in existence or ascertained) or Charity’—meant that the trust was not created ‘solely’ for the benefit of relatives. However, it expressly reserved all merit issues for the fresh assessment. The appeal was dismissed in favour of the Revenue.
3. VS Trust v. ITO—The Chennai ITAT Decision
3.1 Background and Trust Structure
VS Trust was a private discretionary trust settled on 1 September 2021 for the benefit of his family members. During Assessment Year 2022-23, the settlor contributed shares of various companies worth Rs. 15,78,40,400/- to the trust by way of settlement. The trust declared dividend income of Rs. 5,900/- from these shares as its only income and additionally claimed a refund of Rs. 12 crores (being advance tax erroneously deposited in the trust’s PAN by the settlor). The trust claimed that the contribution of shares was exempt under proviso (X) to Section 56(2)(x).
Clause 5.1 of the original trust deed listed the beneficiaries in two classes. Class A comprised Mr Venu Srinivasan himself (the settlor). Class B comprised Dr Lakshmi Venu (his daughter), Mr Sudarshan Venu (his son), and the descendants of both. All of these persons unquestionably fell within the definition of ‘relative’ in Explanation (e) to Section 56(2)(vii) of the Act.
3.2 The Fiddly Clause in Trust Deed
Clause 5.2 of the original deed, however, went further. It empowered the Trustees to add: (5.2.1) any member of the settlor’s family; (5.2.2) any trust settled for the benefit of the family or any member of the family; and (5.2.3) any entity which is majority-owned and/or controlled, directly or indirectly, either individually or collectively, by the settlor, his daughter, his son, and/or the Trust itself.
The Assessing Officer focused on Clause 5.2.3. His reasoning was that if a majority-relative-owned entity were added as a beneficiary, the minority of that entity—persons other than relatives—could potentially benefit indirectly from the trust. This speculative possibility of minority benefit flowing to non-relatives meant the trust could not be characterised as created ‘solely’ for relatives. The AO denied the exclusion and added Rs. 15,78,40,401/- as income from other sources.
3.3 The Supplemental Deed and the CIT(A)’s Ruling
Before the CIT(A), the assessee produced a supplemental trust deed dated 3 March 2022, expressly effective from the date of inception of the trust—1 September 2021. This supplemental deed substituted Clause 5.2 in its entirety. The new Clause 5.2 removed the trustees’ power to add any beneficiary; it now only empowered them to remove an existing beneficiary by written resolution, subject to a consent requirement for Class B beneficiaries.
The CIT(A) acknowledged the supplemental deed but held the substitution to be legally invalid. Relying on Clause 8.1.2(b) of the original deed which provided that ‘no amendment shall be effected to this deed which directly or indirectly results in or amounts to the Settler regaining the power over the Trust property or power of disposition over the Trust property or changing the objects of the Trust’ the CIT(A) held that the amendment to Clause 5.2 amounted to changing the objects of the trust and was therefore impermissible. The original Clause 5.2 was held to continue in force, and the addition was confirmed.
3.4 The ITAT’s Decision
The Chennai Bench allowed the assessee’s appeal in full. Its reasoning on the core issue proceeded in three analytically distinct steps.
First, the Tribunal carefully examined Clause 8.1.2(b) and found that the CIT(A) had fundamentally misread it. The clause contained three specific, disjunctive restrictions: the settlor must not regain power over trust property; no power of disposition over trust property must be conferred; and the objects of the trust must not be changed. The Tribunal found that the substitution of Clause 5.2 did none of these things. It did not vest any power in the settlor. It conferred no power of disposition. And it did not alter the objects of the trust which, as Clause 4 of the original deed expressly stated, were the benefit of the beneficiaries, i.e., the family. On the contrary, by restricting the beneficiary class exclusively to relatives, the amendment reinforced the objects of the trust.
Second, the Tribunal noted that Clause 8.1.2(d) of the original deed independently empowered the Trustees to ‘add any Person as Beneficiary or remove any Beneficiary from the benefits of this trust.’ This clause was also amended by the supplemental deed (renaming it the ‘Power to re-classify or remove beneficiaries’), and the CIT(A) had not disputed the validity of this amendment. The Tribunal therefore found that the substitution of Clause 5.2 was validly authorised by Clause 8.1.2(d).
Third, having established the validity of the amendment, the Tribunal reconstructed the operative trust deed, original deed dated 1 September 2021 read with the amended deed dated 3 March 2022 and found that the beneficiary class comprised solely the settlor and his relatives. No mechanism for minority benefit to non-relatives remained. The foundational basis of the addition stood vacated and the addition of Rs. 15,78,40,401/- was directed to be deleted.
On the Rs. 12-crore advance tax addition, the Tribunal found that the sum was an erroneous deposit made by the settlor in the trust’s PAN, unknown to the trust until the return-filing stage, recognised as a repayable liability in the accounts, and substantially repaid. The Tribunal held that the amount constituted a repayable liability and not a receipt without consideration, and directed deletion of that addition as well. The appeal was allowed in its entirety.
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