| 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 fulfilment 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: (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:
Illustration : 1 - Showing treatment of capital gains
The computation of capital gain deemed to have been applied for the purposes of section 11(1)(a) is as under :
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 th at 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.
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]
The computation of capital gain deemed to have been applied for the purposes of section 11(1)(b) is as under :
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. |
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