BACKGROUND
01 The definition of income under section 2(24) includes Capital Gains and therefore for the purposes of section 11, Capital Gains should form part of the income and consequently it should be treated at par with any other income under section 11. Section 11(1A), which deals with treatment of Capital Gains, was not there during the inception of the Act. In the absence of any provision related with capital gains, all Charitable or Religious Organisations were required to apply the Capital Gains for charitable purposes under the provisions of section 11(1)(a).
The requirement of utilising capital gains on fulfillment of the objects of the organisation resulted in depletion of the corpus. Necessity was felt to allow an option to the Charitable and Religious Organisations, whereby they can re-invest the sale proceeds from Capital Assets in new Capital Assets, so that, in the long run, the corpus would remain intact. The concerns of Charitable Organisations were recognised in Circular No. 2-P(LXX-5), dt.15-05-1963. In this circular, it was stated that when the capital assets, sothat forming part of the corpus are transferred with a view to acquire further capital assets for the use and benefit of the Trust, the amount of Capital Gains should be regarded as having been applied for religious and charitable purposes within the meaning of section 11(1). Further, CBDT Circular No. 52, dt. 30-12-1970, clarified that the intent of the legislature was not in favour of imposing tax liabilities in cases where the Capital Gains as well as the consideration is applied for acquisition of new Capital Assets. The Charitable Organisations were afforded an advantage in getting an option of claiming benefits of re-investment with regard to Capital Gains.
INSERTION OF SECTION 11(1A)
02 The Finance (No.2) Act, 1971, inserted sub-section (1A) in section 11 regarding the treatment of Capital Gains. It provided that the Capital Gains will be deemed to have been utilised for the purposes of section 11(1)(a), if the net consideration received is re-invested in another capital asset. The insertion of section 11(1A) seemed to be the logical outcome of the two circulars issued earlier, as discussed above. More so, because the newly inserted sub-section (1A) in 1971 was made retrospectively effective from 01-04-1962 i.e. the date of commencement of the Act.
THE PROVISIONS RELATED WITH CAPITAL GAINS
03 Section 11(1A) first caters to two main situations, viz.
(i) where the capital asset is property held under a Trust wholly for charitable or religious purposes;
(ii) where the capital asset is held under a Trust in part only for such purposes
Within these main situations, the provision also caters to the following sub-situations:
(i) where the whole of the net consideration is utilised in acquiring the new capital asset;
(ii) where only a part of the net consideration is utilised for acquiring the new capital asset.
In respect of each of these sub-situations under the main situations, the section spells out the quantum of income which will be deemed to have been applied to charitable or religious purposes.
QUANTUM OF GAINS DEEMED TO HAVE BEEN APPLIED
04 The computation will depend upon whether the property is wholly held under the Trust or partially held under the Trust.
05 Where property is wholly held under the trust : Under clause (a) of sub-section (1A), Capital Gains arising from transfer of Capital Assets shall be deemed to have been applied for charitable or religious purposes as indicated in the chart given below:
| Situation | The quantum of capitail gains deemed to have been applied for charitable or religious purpose |
| Whole of net consideration is utilised in acquiring the new capital assetOnly a part of the net consideration is utilised in acquiring the new capital asset |
The whole of capital gains Capital gains equal to excess of utilised amount over cost of the transferred asset. [In effect, capital gains minus shortfall in reinvestment.] |
Illustration : 1 – Showing treatment of capital gains
The following illustration clarifies the treatment of capital gains under section 11(1A).
| Cost of the Asset | Rs. 40,000/- |
| Sale Proceeds/Net consideration | Rs. 1,00,000/- |
| Re-investment in Capital Assets | (i) Rs. 80,000/- |
| (ii) Rs. 1,00,000/- |
The computation of capital gain deemed to have been applied for the purposes of section 11(1)(a) is as under :
| (i) | (ii) | (iii) | (iv) |
| (i) | Net consideration | 1,00,000 | 1,00,000 |
| (ii) | Cost of the Asset | 40,000 | 40,000 |
| (iii) | Capital gains | 60,000 | 60,000 |
| (iv) | Investment in New Asset | 80,000 | 1,00,000 |
| (v) | Shortfall in re-investment (i) – (iv) | 20,000 | Nil |
| (vi) | Capital gains deemed to have been applied for charitable purposes (iii) – (v) |
40,000 | 60,000 |
06 Where property is partly held under the trust – As per clause (b) of section 11(1A), when Capital Gain is derived out of property partly held for charitable or religious purposes, then appropriate fraction of the net consideration is required to be re-invested in new capital assets. Here, it may be noted that income from Trust property partly held for religious or charitable purposes is eligible for exemption under section 11(1)(b) provided such Trust was created before the commencement of the Act.
| Situation | The quantum of capital gains deemed to have been applied for charitable or religious purpose |
| Whole of net consideration is utilised in acquiring the new capital asset Only a part of the net consideration is utilised in acquiring the new capital | The whole of capital gains Capital gains equal to excess of appropriate of utilised amount over appropriate fraction of cost of transferred asset. |
Illustration : 2 – Showing treatment of capital gains
The following illustration clarifies the treatment of Capital Gains under section 11(1A). [It has been assumed that 50% of the income from the asset was used for charitable purposes]
| Cost of the Asset | Rs. 40,000/- |
| Sale Proceeds/Net consideration | Rs. 1,00,000/- |
| Re-investment in Capital Assets | (i) Rs. 80,000/- |
| (ii) Rs. 1,00,000/- |
The computation of capital gain deemed to have been applied for the purposes of section 11(1)(b) is as under :
| (i) | (ii) | ||
| (i) | Net consideration | 1,00,000 | 1,00,000 |
| (ii) | Cost of the Asset | 40,000 | 40,000 |
| (iii) | Capital gains | 60,000 | 60,000 |
| (iv) | Investment in New Asset | 80,000 | 1,00,000 |
| (v) | Appropriate fraction of (ii) | 20,000 | 20,000 |
| (vi) | Appropriate fraction of (iii) | 30,000 | 30,000 |
| (vii) | Appropriate fraction of (iv) | 40,000 | 50,000 |
| (viii) | Capital gains deemed to have been applied for charitable purposes (vii) – (v) |
20,000 | 30,000 |
CAN CAPITAL GAINS BE APPLIED FOR CHARITABLE PURPOSES
07 The Capital Gains can also be applied for charitable purposes. It is at the discretion of the organisation to apply the Capital Gains for charitable purposes or towards purchase of a new Capital Asset. The definition of income under section 2(24), includes Capital Gains and therefore, income for the purposes of section 11(1)(a) includes Capital Gains. The historical background under which section 11(1A) was enacted and the statute as it existed before 01-04-1971 provides ample testimony to the fact that capital gains form a part of the income available for application under section 11(1)(a). Circular No.2-P(LXX-5), dt. 15-05-1963 and Circular No. 72, dt. 06-01-1972 discussed the problems faced by the organisations and the gradual erosion of the corpus, prior to the insertion of section (1A). The purpose behind insertion of section (1A) was to provide an option to the assessee, in order to keep its corpus intact. This option did not imply withdrawal of exemption of Capital Gains under section 11(1)(a). An organisation, therefore can utilise the Capital Gains for charitable purposes under section 11(1)(a). The portion of Capital Gains which was not considered as deemed to have been applied for charitable purposes under section 11(1A), can also be applied for charitable purposes under section 11(1)(a).
OVERALL SUMMARY
08 To Sum up the discussion :
i) ‘Income’, as defined under section 2(24), includes Capital Gains,. Therefore, for the purposes of section 11(1)(a), Capital Gains are also considered as a part of the income.
ii) Since, Capital Gains are also considered as a part of the income, therefore, they can be applied for charitable or religious purposes.
iii) But, if Capital gains are also applied for charitable and religious purposes, then it will amount to depletion of the Corpus of the organisation. In order to overcome this disadvantage, the Income tax act has provided another option under section 11(1A),by virtue of which Capital Gains can be re-invested in another Capital Asset without loosing exemptions.
iv) Under section 11(1A), if the entire amount of net consideration is invested in another Capital Asset then, the entire Capital Gain will be deemed to have been applied for Charitable or Religious purposes.
v) Under section 11(1A), if a part of the entire amount of net consideration is invested in another Capital Asset then, the appropriate fraction of the Capital Gain will be deemed to have been applied for charitable or Religious Purposes.
vi) The Capital Gain have to be re-invested in another Capital Asset in the same year, unless the assessee exercises the option available under explanation to section 11(1), to apply the income in subsequent year.
vii) Investment in fixed deposit is considered as an investment in Capital Asset. The CBDT instruction no. 883, dated 24.09.1975, specifies that, such fixed deposits should be for 6 months or more. But, various High Courts have held that, such 6 months time limit is legally not valid. The nature of asset is important and not the time frame.
viii) No time limit has been provided under section 11(1A), for retention of the new asset. Under the prevailing provisions each year’s income and application are treated separately for the purposes of exemptions. Therefore, if the asset is held till the end of the relevant previous year and is disposed of in the subsequent year, then the exemptions cannot be denied nor can they be withdrawn in the next year.
Republished with Amendments
WHETHER INDEXATION FOR LONG TERM CAPITAL GAIN APPLIED OR NOT TO TRUST WHO REGD. UNDER SECTION 12A.
what will be capital gain on sale of trust land.
if there is a loss on sale of a long term asset
how is it to be treated in charitable trust account while filling up forms
How to calculate capital gains if, according to the terms of a will, its executioners are have to give half the sale proceeds of the property to a charitable trust registered in sections 12(A) and 80(G)? How will the tax liability of the other beneficiary be calculated? Will the trust attract capital gains tax?
Can NGO invest their corpus fund in Mutual Funds? If so whether the income received out of Mutual Fund is taxable? How much percentage tax to be paid?
Can exemption u/s 11(1A) be claimed by a Charitable Trust on capital gain arises on Mutual Fund Sales
Whether sale proceeds of assets(Land), charitable institution registered u/s 12A, can be utilised to repay the loans to secretary or not ?
When any organisation is registered under 12A , the application of income for revenue expenses will it be considered , as 85% needs to be spent and the residual can be carried a head to spent in subsequent year.Please put some light on the issue.
Thanks
what will be treatment of assets transferred to other trust having 12a in gift . please clarify the same for capital gain
WHETHER INDEXATION FOR LONG TERM CAPITAL GAIN APPLIED OR NOT TO TRUST WHO REGD. UNDER SECTION 12A.
WHETHER ANY INCOME TO TRUST IS EXEMPTED TO TRUST WHICH ARE REGD UNDER SECTION 12A
PL CLARIFY AND INFORM IMMLY