Applicability of section 56(2)(x)

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

13 December 2018 Sir/Madam,
The Governing Body members gifted immovable property to an AOP Education Society not covered under Section 10(23)(C) and also not covered under 12A registration filing ITR 5 and paying Taxes on surplus income. The gift was immovable property necessitated by compulsion to retain recognition of the institution. The case apparently falls under Section 56(2)(x) read with Section 2(24)(xviia). Please inform if the case is otherwise?

Z (Expert)
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14 December 2018 Can you elucidate on "The gift was immovable property necessitated by compulsion to retain recognition of the institution."

When was this gift received?

prateek63@yahoo.co.in

Querist : Anonymous

Querist : Anonymous (Querist)

14 December 2018 Yes. The gift is land forming part of the corpus of the society which is required for retention of recognition of educational institution. It was after 01.04.2017 after the amendment came in Section 56(2)(x)

Z (Expert)
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14 December 2018 Can you provide the exact date?
I still did not clearly understood by what you meant as "required for retention of recognition of educational institution."

Querist : Anonymous

Querist : Anonymous (Querist)

14 December 2018 It was in May 2017. My intention in stressing the phrase is to find if there is any way out for the gift either as capital receipt or corpus fund donation from being treated as income under 56(2)(x) in view of the amendment in Section 2(24) w.e.f.1.04.2017

Querist : Anonymous

Querist : Anonymous (Querist)

14 December 2018 Normally education department prescribes certain extent of land for according recognition to the institution without which the institution cannot function.

Z (Expert)
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14 December 2018 "My intention in stressing the phrase is to find if there is any way out for the gift either as a capital receipt or corpus fund donation from being treated as income under 56(2)(x) in view of the amendment in Section 2(24) w.e.f.1.04.2017"

At the outset, I'd like to state that yes, S.56(2)(x) has been attracted but let's analyze a few provisions first.
As per S.2(24)(xviia), any sum of money or value of property referred to in clause (x) of sub-section (2) of section 56, is considered as an income of a trust.

S.12. (1) Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.

Further, sum/property received u/s 56(2)(x) is also a voluntary contribution. Therefore the benefit could have been possible easily if you got that trust registered later on by 31/03/18, that's why I have been emphasizing on the date.

Now, u/s 11, the clauses a,b & c excludes the income derived from property held under trust, and as per S.12(1), Any voluntary contributions received by a trust shall for the purposes of section 11 be deemed to be income derived from property held under trust.

S.11 states-
S.11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—
(a) income derived from property held under trust ...
(b) income derived from property held under trust ...
(c) income derived from property held under trust ...

(d) is in respect corpus

Therefore, if you had got the trust registered by 31.03.18, things would have been much better. If, after registration, any proceeding becomes pending before the AO then provisions of S.11 & 12 shall become applicable and hence it might not have been necessary to pay the tax thereon.

Anyhow, there still is hope.
Get the trust registered and if, after registration, any proceeding becomes pending before the AO then provisions of S.11 & 12 shall become applicable and hence it may not be necessary to pay the tax thereon.

As per the proviso to sub-section 2 to S.12A,
Where registration has been granted to the trust or institution under section 12AA, then, the provisions of sections 11 and 12 shall apply in respect of any income derived from property held under trust of any assessment year preceding the aforesaid assessment year, for which assessment proceedings are pending before the Assessing Officer as on the date of such registration and the objects and activities of such trust or institution remain the same for such preceding assessment year:

THEREFORE, if the case becomes pending before the AO, then the assessee is eligible to claim the benefit u/s 11 & 12

Kindly also note that the second proviso has Provided further that no action under section 147 shall be taken by the Assessing Officer in case of such trust or institution for any assessment year preceding the aforesaid assessment year only for non-registration of such trust or institution for the said assessment year.

Therefore, notice cannot be issued i.r.o. 147 (u/s148) merely on the ground that the trust was unregistered. And if a case is pending then the benefit of S.11 & 12 is available.

prateek63@yahoo.co.in

Querist : Anonymous

Querist : Anonymous (Querist)

15 December 2018 Thank you very much for your valuable suggestion. This has enlightened me very well.
regards,
ss panth