JANUARY 30, 2020

By Lukose Joseph, (CA) & Anil P Nair, (CA)

SECTION 2(15) defines Charitable Purpose and Sections 11 to 13 of the Income Tax Act, 1961 deal with the scheme of exemption in respect of income of charitable/religious trusts/institutions which are registered under Section 12A of the Income Tax Act, 1961.

Application of Income and Options for Trusts or Religious Institutions:

As per section 11(1), 85 percent of income derived from property or voluntary contribution in a financial year is to be applied for charitable purpose during that year for exemption. However if the same cannot be used for charitable purpose during the year due to reasons like whole or any part of the income not received during the year or the institution wants to set apart or accumulate for future, it may go for given options under the Act.

Vide virtue of explanation to section 11(1), if the institution selects such options, it has to file Form No.9A/10 respectively and if the amount is set apart for future such amount should be kept apart in investments specified under section 11(5) which includes bank deposits. In due course the amounts are to be utilized for the purpose for which they are set apart.

By virtue of Section 11(1A), if a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and whole or any part of net consideration is used for again acquiring capital assets, then such acquisition will be deemed as utilization for charitable purpose.

When one goes through Section 2(14), being definition for capital asset, capital asset also includes bank deposit. That means if capital asset sold is invested in bank deposit, it will be deemed as utilization for charitable purpose and there is neither stipulation for filing of Form No 10 nor any time limit for continuing the investment.

INSTRUCTION NO 883 / CBDT, Dated: September 24, 1975.

This instruction stipulates that fixed deposit is to be for a minimum period of 6 months and reads as follows:

Section 11(1A) of the Income-tax Act, 1961 provides that where a capital asset, being property held under trust wholly for charitable or religious purposes is transferred and the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held, then the capital gain arising from the transfer shall be deemed to have been applied to charitable and religious purposes to the extent specified therein.

The Board considered whether investments of the net consideration in fixed deposits with a bank would be regarded as utilization of the amount of the net consideration for acquiring "another capital asset" within the meaning of section 11(1A) of the Income-tax Act, 1961. The emerged view was that investments of the net consideration in fixed deposit with a bank for a period of 6 months or above would be regarded as utilization of the net consideration for acquiring another capital asset within the meaning of section 11(1A) of the Income-tax Act, 1961.

Does this hold well?

Various Courts looked into the law and decided otherwise.

See this one for example -

Commissioner of Income-Tax vs Hindusthan Welfare Trust on 25 September 1991

The Calcutta High Court in the above case decided that once a deposit is accepted to be an asset, the larger or lesser duration of the term is an immaterial consideration. The circular of the Board that is not consonant with the general principles of law cannot hold sway. The restrictive stipulation of the minimum period of six months has the effect of mutilating the concept of asset as obtaining under the Act and its cognate Act, viz., the  Wealth-tax Act. What in the said circular can be called into aid is its acknowledgment of a deposit in a bank as a capital asset for the purpose of Sub-section (1A) of Section 11.

Outcome:

Charitable or religious institutions may have to deal in capital asset as part of their operations. Taxability of capital gain arising there from was a hazard faced by such institutions.

As per the above analysis with reference to Notification 883 and based on High Court decision discussed supra we can safely conclude that wherever income accrues from transfer of capital assets, institutions can safely deposit the money in another capital asset including fixed deposit with a bank and keep it as capital asset and claim exemption from capital gains tax without filing Form No 10. Such deposits have no minimum period before they can be used for the purposes of the Institution.

A notification restricting the freedom of the assessee acted as a blessing in disguise that it clarified without ambiguity that proceeds of sale of capital asset invested in fixed deposit with a bank is an application and need not comply with any cumbersome procedures stipulated in Explanation to subsection 1 of Section 11.

[The views expressed are strictly personal.]