2020 (6) TMI 243 - AT - Income Tax

Exemption u/s 11 - property sold/asset sold were donated to the other public charitable trust/institutions - Society had purchased land which is held by the assessee for several years and on account of financial problems the Society could not establish the educational institute as a result of which a decision was taken to wind up the Society and land was sold and donated to the corpus fund of the other trust engaged in running educational institutes as a charitable Society - AO made the addition under capital gain - as per assessee income donated resulted into application of income liable for exemption under Section 11 - HELD THAT - Trust Deed of the assessee clearly explained that at the time of winding up what procedure has to be followed of the corpus fund and other funds including movable and immovable property. Sub Clause z of Clause 3 of the Trust Deed explains the process of winding up of the trust wherein it has been provided that at any point of time, the whole of corpus fund and other funds of movable and immovable properties belonging to the trust or the institution run by the trust shall only be transferred to any other public charitable trust or institution having the same aims and object for the public charitable purposes. The assessee at no point of time diverted any funds beyond the scope of its Trust Deed. In fact, the immovable property was sold and the amount of the sale proceeds were donated to the corpus of the other charitable society/trust. Section 11(1)(a) clearly sets out that the assessee is entitled to claim the benefit as the sale proceeds of property cannot be included in the total income of the assessee. The assessee has donated the sale proceeds to the corpus of another charitable society/trust. AR relied upon the decision of the Hon ble Delhi High Court in case of Bagri Foundations 2010 (7) TMI 85 - DELHI HIGH COURT which is also apt in the present case. AO as well as CIT(A) both wrongly applied Section 11(1A) as there is no acquisition of another capital assets. In fact, the assessee society invoked the winding up clause of the Trust Deed. CIT(A) was not right in confirming the additions made under Section 11(1A) of the Act by the Assessing Officer. The appeal of the assessee is allowed.

Summary

Issues:
1. Addition of long term capital gain to the income of the appellant.
2. Exemption under Section 11(1)(a) of the Act for income derived from the sale of land.
3. Denial of exemption under Section 11(1)(a) for donation made to another charitable trust.

Analysis:

1. Addition of Long Term Capital Gain:
The appellant, a registered Society, sold land and donated the income to another trust. The Assessing Officer added the income to the appellant's long term capital gain. The appellant argued that the donation qualifies as an application of income exempt under Section 11 of the Act. The Tribunal found that the Trust Deed clearly outlined the procedure for winding up, directing the transfer of funds to another charitable trust. As the appellant followed this provision by donating the sale proceeds to another trust, the Tribunal held that the Assessing Officer and CIT(A) wrongly applied Section 11(1A) as no new capital assets were acquired. The appeal was allowed.

2. Exemption under Section 11(1)(a):
The appellant contended that the donation from the land sale should be considered an application of income under Section 11(1)(a) of the Act. The Tribunal noted that the Trust Deed explicitly stated that funds, including proceeds from the sale of property, must be transferred to another charitable trust during winding up. As the appellant adhered to this provision by donating the sale proceeds, the Tribunal held that the appellant was entitled to claim the benefit under Section 11(1)(a). The Assessing Officer and CIT(A) erred in applying Section 11(1A) as no new capital assets were acquired. The appeal was allowed.

3. Denial of Exemption for Donation to Another Trust:
The appellant argued that the donation to another trust should be considered an application of income exempt under Section 11(1)(a). The Tribunal found that the Trust Deed mandated transferring funds, including sale proceeds, to another charitable trust during winding up. As the appellant complied with this provision by donating the sale proceeds, the Tribunal held that the Assessing Officer and CIT(A) wrongly applied Section 11(1A) as no new capital assets were acquired. The appeal was allowed.