Does The “Gift-Tax” Provision Extend To The Transfer Of Beneficial Interest In Trusts?

Section 56(2)(x) of the Income Tax Act taxes the receipt of "specified property" for inadequate consideration. However, this provision does not apply to the transfer of a beneficial interest in a trust. Under the Indian Trusts Act and affirmed by Supreme Court precedents, a beneficiary holds only a right against the trustee, not legal ownership of the trust property. Since "specified property" enumerates assets like real estate and shares—excluding mere "interests" or "rights"—beneficial interests fall outside its scope. Furthermore, conflating the two would trigger severe unintended tax consequences for Mutual Funds and REITs.

1. BACKGROUND

Section 56(2)(x) of ITA, often referred to as the 'gift-tax' provision, seeks to bring to tax under the head 'Income from Other Sources' any sum or specified property received by a person without consideration or for inadequate consideration. Specifically, section 56(2)(x)(c) provides that where any person receives any specified property (other than immovable property) for a consideration less than its fair market value ("FMV") determined in accordance with Rule 11UA, the difference between the FMV and the consideration actually paid (if any) shall be deemed to be the income of the recipient.

The legislative history of this provision tracing its lineage from sections 56(2)(vii)