By TIOL News Service

MUMBAI, MAR 27, 2019: THE ISSUE IS - Whether Revenue can tax capital gains when Sec 11(1) itself exempts such receipt if application of such gains is made for objects of Trust. NO IS THE ANSWER.

Facts of the case   

The assessee is a Charitable Trust. During the relevant period, the Trust had granted tenancy rights in relation to two of its immovable properties. By way of premium, the Trust had received sum of Rs. 1.69 crores. Such income was applied by the Trust for the purpose of its charitable objects. Thereafter, the Trust filed its return in which said receipt was not offered to tax. The AO thereafter passed the order of assessment u/s 143(3) r/w/s 147 in which he held that said receipt was in the nature of capital gain upon transfer of capital asset. He was of the opinion that the assessee had not invested such capital gain as provided in Section 11(1A) and therefore, such receipt was not exempt from tax.

On appeal, the CIT(A) noted that the assessee had applied a sum of Rs. 4.72 crores towards the objects of the Trust. This included the receipt of Rs. 1.69 crores received by way of premium. On further apeal, the Tribunal confirmed the view of the CIT(A) observing that the total income credited to the account of the Trust was Rs. 3.29 crores and the application towards objects of the Trust was Rs. 4.72 crores. The Tribunal, therefore, held that the assessee had applied the said sum of Rs. 1.69 crores for the objects of the Trust.

On apeal, the HC held that,

++ it is noticed notice that Section 11 pertains to income from property held for charitable or religious purposes. U/s 11(1), subject to the provisions of Sections 62 to 63, the incomes specified in various clauses contained therein would not be included in the total income of the previous year of the person in receipt of the income. Sub-section (1A) of Section 11 is enabling provision by which a Trust who has on transfer of capital asset made a capital gain, upon investment of such amount in another capital asset, would avoid payment of tax under a deeming fiction that such sum would be deemed to have been applied to charitable or religious purposes. This aspect clearly emerges from the explanatory notes to the provisions of Finance Act of 1971. Under these circumstances, it can be seen that the Revenue cannot target the assessee's capital gain with the aid of sub-section (1A) of Section 11 when in terms of subsection (1) to Section 11 itself, in view of the assessee's application of such gain for the objects of the Trust, there arose no tax liability.

(See 2019-TIOL-672-HC-MUM-IT )