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TMI Blog2012 (11) TMI 346X X X X Extracts X X X X X X X X Extracts X X X X ..... ,50,322 2002-03 Rs.1,20,00,000 Rs. 90,55,186 2003-04 Rs.1,22,73,125 Rs. 15,05,697 2005-06 Rs. 67,26,875 Rs. 67,26,875 Total Rs.4,00,00,000 Rs.2,78,38,080 Amount deemed to have been utilized for Charitable purpose (Cost of New Asset - Cost of Original Asset) (27838080 - 13301891 = Rs.1,45,36,189 Taxable Long Term Capital Gains Rs.3,41,169.33 The assessee declared taxable long term capital gains on sale of one of its property for Rs.3,41,169/-. The return was processed u/s 143(1) of the Income Tax Act, 1961 (the Act). 3. Later on the AO issued a notice u/s 148 of the Act on 30-11-2007 for the reason that the net consideration received on sale of the property had not been invested in capital assets by the assessee and therefore, computation of capital gain by the assessee had to be determined afresh. In the re-assessment proceedings, the AO worked out the LTCG as follows; "The assessee has sold land for Rs.4,00,00,000/- and has invested Rs.2,78,38,080/- in acquiring new capital asset and thus, declared a sum of Rs.3,41,169/- being taxable long term capital gain. The assessee has claimed exemption u/s 11(1A) of the Income-tax Act for investing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2002-03 and therefore, the capital gain cannot be brought to tax in assessment year 2002-03, though wrongly declared by he assessee in the return of income for the assessment year 2006-07. The asseseee further submitted that the computation of LTCG has to be done in accordance with the provisions of sec.45 to 55A of the Act and the assessee should be entitled to the benefit of indexation of the cost of acquisition of the capital asset. The assessee also submitted that the order of the AO accepting the claim of the assessee cannot be said to be erroneous and prejudicial to the interest of revenue. 6. The DIT(E) however, did not accept the plea of the assessee and he held as follows; "In the return of income filed for the assessment year 2006-07, the assessee has determined the 'capital gains' at Rs.3,41,169/-. The computation of capital gain as per the assessment order in question is as under; 1 Sale proceeds Rs.4,00,00,000 2 Less: Indexed cost of acquisition Rs.2,51,22,642 3 Long term capital gain Rs.1,48,77,358 4 Cost of new asset Rs.2,78,38,080 5 Exemption of capital gain due to investment in new asset Rs.1,03,53,927 6 Taxable capital ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on relating to transfer. It is such amount, which is required to be invested. The question of calculation of capital gains with indexed cost and other requirements of sec.48 could have no application for this purpose in the case of charitable entities. 5(d) With regard to assessee's contention that the transfer of the asset in question took place in the FY: 2001-02 and no capital gain is taxable in the current year is not acceptable, as the assessee itself has chosen to offer the capital gain to tax in the current year. Raising the issue at this stage is not warranted. 5(e) Further, he exemption u/s11(1A)(a)(ii) is not allowable as the investment of Rs.67,26,875/- in new capital asset during the year does not exceed the cost of acquisition of Rs.1,33,01,892/- 5(f) According to the provisions of section 11(1A), the computation of capital gain would be as under; 1 Net consideration Rs.4,00,00,000 2 Cost of acquisition as per return of income Rs.1,33,01,892 3 Amount utilized for acquisition of new capital asset during the year under consideration Rs. 67,26,785 4 Capital gain exempt u/s11(1A)(a)(ii) (Amount utilized for acquisition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hamanda Dass Vs. ACIT 68 TTJ (Asr.) 244, wherein the Amritsar Bench held that even in the case of Trusts capital gain has to be taxed and calculated in accordance with the provisions of Sec.45 to 55A of the Act and that all exemptions, exceptions, deductions and benefits specified in those provisions will be available even to a charitable trust. 10. On point (ii) above, the learned counsel for the Assessee relied on the decision of the Mumbai Bench of ITAT in the case of Trustees of Shri Ramanagar Trust Vs. Third ITO 13 ITD 426 (Mum) wherein it was held that advances received by a trust in the period earlier to the previous year in which transfer of a capital asset by a trust takes place, if invested in purchase of capital asset should be considered as application of capital gain for charitable purpose. 11. Thus it was argued that the view taken by the AO while accepting the claim of the Assessee in the order of assessment was a possible view as the same was in consonance with the view expressed by the Tribunal in the cases referred to above. The CIT in exercise of powers u/s.263 of the Act cannot exercise powers u/s.263 of the Act just because according him another view was poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; (i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of the appropriate fraction of such capital gain; (ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset. Explanation.-In this sub-section,- (i) "appropriate fraction" means the fraction which represents the extent to which the income derived from the capital asset transferred was immediately before such transfer applicable to charitable or religious purposes; (ii) "cost of the transferred asset" means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within the meaning assigned to that expression in sub-clause (b) of clause (1) of section 55; (iii) "net consideration" means the full ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its income if the trust funds, constituting its corpus or income, are invested in a concern in which the author or founder of the trust or any substantial contributor to it or any relative of such author, founder or contributor is substantially interested. Where the investment of the trust funds in such concern exceeds 5 per cent of the capital of the concern, exemption is forfeited in respect of the whole of the income of the trust, while in a case where the investment does not exceed 5 per cent, the exemption is lost only in respect of the income from such investment, the other income continuing to enjoy tax exemption. In order to enable charitable and religious trusts to change their investments suitably, without forfeiting exemption from tax, a specific provision was also made in the Income-tax Act to the effect that the aforesaid provisions would not apply in a case where the investment of the trust funds in the prohibited concerns does not continue after 31-12-1970. In order to avail of the benefit of this relaxation, many charitable or religious trusts divested themselves of investments in prohibited concerns before 1-1-1971. If the provisions of the law were construed stri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cost of acquisition of the new asset exceeds the aggregate of the cost of acquisition of the capital asset transferred and the cost of any improvements made to such asset, will be regarded as having been applied to such purposes." 15. The above provisions can be explained in the form of the following example. If the entire net consideration is used to acquire new asset then there is no difficulty as nothing will be taxable (Sec.11(1A)(a)(i) of the Act). When cost of acquisition and improvement of the asset transferred is say Rs.10 lakhs, the net consideration is say Rs.20 lakhs and the cost of the new asset is Rs.11 lakhs then Rs.1 lakh will be deemed as income applied for charitable purposes u/s.11(1A) of the Act (Section 11(1A)(a)(ii)). If the cost of acquisition of the new asset is only Rs.10 lakhs or less than the benefit of exemption u/s.11(1A)(a) of the Act cannot be availed of. 16. The provisions of Sec.11(1A)(a)(ii) of the Act contemplates a computation of capital gain under the normal provisions of the Act. This is clear from the expression used in Sec.11(1A)(a) of the Act which refers to "where a capital asset, being property held under trust wholly for charitable or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod earlier to the previous year in which transfer of a capital asset by a trust takes place, if invested in purchase of capital asset in the period earlier to the previous year in which transfer of the capital asset takes place such purchase should also be considered as application of capital gain for charitable purpose. If that decision is applied then the difference between the sum of Rs.2,78,38,080/- which is the investment out of net sale consideration received on transfer of capital asset made by the Assessee and the cost of the transferred asset would be deemed to have been applied to charitable or religious purposes. The expression "Cost of the transferred asset" is defined in Expln. (ii) to Sec.11(1A) of the Act, and it lays down that "Cost of the transferred asset" means the aggregate of the cost of acquisition (as ascertained for the purposes of Sec.48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within meaning assigned to that expression in sub-clause (b) of Clause (1) of Section 55. Thus the difference between the capital gain utilized in acquisition of new assets viz., Rs.2,78, 38,080 and the indexed cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen it cannot be taxed as the conditions mentioned in Sec.11(1) are satisfied. In this regard it was pointed out that in the order of assessment u/s.143(3) read with Sec.148 of the Act dated 30.12.2008 which was revised in the impugned order passed u/s.263 of the Act, the AO has computed total income of the Assessee as follows: Total income as per Income & Expenditure Statement Rs.8,77,27,132 Less: surplus on sale of capital Asset (Rs.4,00,00,000 - Rs.1,33,01,892) Rs.2,66,98,108 Gross Income Rs.6,10,29,024 Less: Application towards the objects Of the Trust Revenue Expenditure Rs.4,94,30,071 Capital Expenditure as per Depreciation Chart Rs.3,86,22,578 Rs.8,80,52,649 Rs.2,70,23,625 Less: Depreciation as discussed above Rs.1,10,00,167 Net Deficit Rs.1,60,23458 21. It was argued that the above application over and above the income should be considered as application of capital gain for charitable purposes and therefore capital gain cannot be brought to tax. In this regard, reliance was placed on the decision of the Hon'ble Calcutta High Court in the case of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property; (b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of twenty-five per cent. of the income from such property;.... Explanation.-For the purposes of cls. (a) and (b),- (1) in computing the twenty-five per cent. of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in s. 12 shall be deemed to be part of the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided such option is exercised in writing before the expiry of the time allowed under sub-s. (1) of s. 139 for furnishing the return. Therefore, the amount of Rs. 7 lakhs utilised in acquiring fixed deposits with the Bharat Petroleum Corporation Ltd. and the Bharat Electronics Ltd. should also be allowed exemption under the said provision for the asst. yr. 1982-83." (emphasis supplied) 21. It is clear from the aforesaid decision of the Ho'ble Calcutta High Court that capital gain is also income of the trust and Sec.11(1A) of the Act is not the only way in which capital gain has to be applied for charitable purposes. It is one of the way of applying capital gain for charitable purpose. If capital gain is applied for charitable purpose of the Assessee not by acquiring a new asset but for other charitable purpose, then there is no reason why it should not be considered as application of income for charitable purpose enabling the Assessee to claim exemption u/s.11(1) of the Act. In the present case there is no question of application for accumulation of income for being spent for charitable purpose in future because such application is already deemed to have been made in the previ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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