The capital gains tax applicable to Charitable Institutions pertains to the assessment of the disparity between the ‘sale price’ and the ‘original purchase’ price of an asset. This also pertains explicitly to the Long-term capital gain tax, which imposes a tax on the profits derived from the sale of assets held for a duration exceeding one year. As defined in section 2(24), Capital Gains are encompassed within the broader definition of income. In alignment with section 11, Capital Gains of charitable institutions must be considered part of the income, treated similar to any other income under section 11.
Circulars Concerned with Capital Gains of Charitable Institutions
Circulars relevant to Capital Gains of charitable institutions are outlined in ‘Circular No. 2-P (LXX-5), dt.15-05-1963’. This circular specifies that when capital assets are transferred as part of the corpus to acquire further capital assets for the benefit of the Trust, the amount of Capital Gains of charitable institutions should be considered as applied for charitable purposes.
Furthermore, according to ‘CBDT Circular No. 52, dt. 30-12-1970’, the intent of the legislature is not in favour of imposing tax liabilities when Capital Gains are applied for the acquisition of new Capital Assets.
Regarding the classification of fixed deposits as capital assets, as per ‘Instruction no. 883 – F. No. 180/34/72 –IT (Al) of 25.9.1975‘, fixed deposits with banks for a period exceeding six months are considered capital assets. Courts have ruled that even fixed deposits with banks for less than six months are also capital assets, but fixed deposits with a company are not considered capital assets.
There is no specific time limit mentioned for reinvestment in the provision. It could be within the same year or the next year, as explained in section 11(1). This time limit is linked to the concept that Capital Gains of charitable institution are considered applied for charitable purposes up to the cost of the acquired capital asset. The decision in ‘CIT vs. East India Charitable Trust (1996) 206 ITR 152 (Kol)‘ supports this view.
In the case of ‘Asstt CIT v. Upper India Chamber of Commerce,’ it was held that section 11(1A) is self-contained, and the computation of eligible exemption should be carried out within its framework.
Provisions Related to Capital Gains of Charitable Institution
Section 11(1A) outlines provisions related to Capital Gains of charitable institution, specifying two primary situations:
1. The first situation stipulates that the capital asset is the property held under a Trust exclusively for charitable or religious purposes.
2. The second situation states that the capital asset is held under a Trust, but only a portion of it is dedicated to such charitable or religious purposes.
Within these main situations, the provision further delineates sub-situations:
1. In the first sub-situation, the entire net consideration is utilised to acquire the new capital asset.
2. In the second sub-situation, only a portion of the net payment is used to obtain the new capital asset.
Is It Possible For Capital Gains of Charitable Institutions To Get Applied For Charitable Purposes?
Yes, it is possible for Capital Gains of charitable institution to be applied for charitable purposes. Organisations have the discretion to decide whether to utilise Capital Gains for charitable activities or for acquiring new Capital Assets. The determination of income, as per section 2(24), includes Capital Gains, and consequently, revenue for section 11(1)(a) encompasses Capital Gains of charitable institution.
The historical context leading to the enactment of section 11(1A) before April 1, 1971, establishes that Capital Gains have been considered part of the income available for application under section 11(1)(a). Circulars such as ‘Circular No.2-P(LXX-5), dt. 15-05-1963’ and ‘Circular No. 72, dt. 06-01-1972’ highlight the challenges faced by institutions before the insertion of section (1A) and the gradual erosion of corpus factors.
The intention behind introducing section (1A) was to provide organisations with an option to maintain their corpus intact. However, it’s important to note that the option mentioned above does not imply the removal of the exemption of Capital Gains under section 11(1)(a).
Therefore, organisations have the flexibility to use Capital Gains for charitable objectives under section 11(1)(a). Even the portion of Capital Gains that is not deemed to have been utilised for charitable purposes under section 11(1A) can still be applied for philanthropic or charitable objectives under section 11(1)(a).
Meaning of Appropriate Fraction, Transferred Cost, And Net Consideration
The meaning of these terms are give below:
1. Appropriate Fraction:
· It represents the proportion or percentage of income derived from the capital assets before transfer that is applicable to charitable purposes of the institution.
· This fraction is used to determine the portion of income from the capital assets that is considered applied for charitable purposes.
2. Transferred Assets (or Transferred Cost):
- It refers to the aggregate of the cost of acquisition for ‘section 48 and 49’ of the capital asset which is the subject of the transfer or giveaway.
- This term is relevant in the calculation of capital gains for tax purposes, specifically in determining the cost associated with the transferred capital asset.
3. Net Consideration:
- It signifies the full value of the consideration received or accruing as a result of the transfer of the capital asset. This value is then reduced by any expenditure incurred wholly and entirely in association with such transfer.
- Net consideration is a crucial factor in calculating the actual gain or loss from the transfer of a capital asset for tax purposes. It takes into account the total value received and deducts the relevant expenses associated with the transfer.
These terms are integral to the understanding and computation of capital gains in the context of charitable organisations and their utilisation of assets for charitable purposes.
Treatment Of Capital Gains of Charitable Institution In Case Of Application Of 85% Of Income To Charitable Trusts
In the case of a charitable trust and the application of 85% of income from Capital Gains of charitable institution, the treatment is as follows:
1. Profit or Gain from Transfer of Capital Asset:
Any profit or gain resulting from the transfer of a capital asset held under a trust is treated as capital gain. This capital gain, whether short-term or long-term, is considered part of the income as per section 2(24).
2. Inclusion in Section 11 Exemption:
To claim exemption under section 11, the charitable trust must apply the income from such capital gain for charitable purposes during the previous year. This application is similar to how any other income is utilised for charitable purposes.
3. Application of 85% of Income:
The specific requirement for capital gains is that the charitable trust should apply at least 85% of the income from this capital gain for charitable purposes during the preceding year. This stipulation is subject to any objection given under section 11(2).
Basics Of Taxability of The Charitable Trust Income In Terms Of Capital Gains of Charitable Institution
The basics of the taxability of charitable trust income in terms of Capital Gains of charitable institution include the following aspects:
1. Capital Gains Tax for Trusts:
Capital gains tax applies to trustees as a body of persons, treating them similarly to other taxpayers. Trustees can make both actual and considered disposals of trust property, and any disposal occurs when trustees sell trust property to a third party.
2. Business Asset Disposal Relief for Trusts:
Trustees can claim business asset disposal relief on the transfer of business assets held by them, similar to individuals. However, there are differences that trustees need to consider when making a disposal. Other Capital Gains Tax reliefs may also apply, including relief on the replacement of business assets, incorporation relief, and deferral reliefs.
3. Private Residence Relief for Trusts:
Capital gains on the sale of a residential property held in trust may be wholly or partly exempt if the beneficiary of the trust has used the property as their only or principal residence, and the beneficiary is entitled to hold the property under the trust.
4. Trusts for Disabled Persons:
If any beneficiary of the trust is a disabled person, trustees may request or apply for special income tax and Capital Gains Tax treatment.
5. Restructuring Trusts:
The Capital Gain Tax position during the restructuring of a trust depends on whether the trustees are deemed to make a disposal. If the property remains in the same settlement, there is no disposal for Capital Gain Tax purposes.
6. Trust Tax Return and Compliance:
The income and capital gains of trusts are charged under the self-assessment administration. Trustees are required to file a return, even if they have not declared, especially if they have received gains not reported on any other return.
Final Thoughts
Section 11(1A) of the Income Tax Act governs the treatment of capital gains of charitable institution. It mandates that capital gains arising from the transfer of assets held under trust should be applied for charitable purposes to claim exemption under Section 11. The provision allows flexibility in utilising the gains, emphasising the importance of preserving the corpus of charitable trusts. By requiring the application of at least 85% of capital gains income for charitable objectives during the previous year, the section strikes a balance between maintaining financial sustainability and fulfilling the philanthropic goals of charitable institutions, contributing to the overall welfare of society.
