Taxation of trust
This query is : Resolved
14 June 2013
The assessee is a society registered under Indian Societies Act, 1860 formed for charitable purpose & accordingly registered under sec. 12A of Income Tax Act.
During the A.Y 2013-14, the assessee has sold its land, receiving Net Sales consideration of Rs. 1 crore.
The cost of land purchased in F.Y 2001-02 was Rs. 2 Lac.
During the year assessee incurred Rs. 40 L as land development expenses.
These expenses were incurred to construct boundary wall and filling up the land sold during the year.
The society donated Rs. 50 Lac to a separate trust having charitable object of providing medical facilities.
The donee trust is also registered u/s 12A and 80 G of Income Tax Act 1961.
Please advice, how the sale consideration will be treated.
During the A.Y 2013-14, the assessee has sold its land, receiving Net Sales consideration of Rs. 1 crore.
The cost of land purchased in F.Y 2001-02 was Rs. 2 Lac.
During the year assessee incurred Rs. 40 L as land development expenses.
These expenses were incurred to construct boundary wall and filling up the land sold during the year.
The society donated Rs. 50 Lac to a separate trust having charitable object of providing medical facilities.
The donee trust is also registered u/s 12A and 80 G of Income Tax Act 1961.
Please advice, how the sale consideration will be treated.
17 June 2013
The sales consideration is Capital Gains.
U/s 11(1A)capital gain must be applied for charitable purpose in order to be exempt from income tax u/s 11.15% can be accumulated or set apart for charitable purpose.The balance should be utilised for charitable purpose.
Applied to charitable purpose includes donations to charitable trust registered under section 12AA.
It also includes,depreciation,revenue expenses,purchase of capital assets,repayment of loans taken for the purchase of capital assets.
U/s 11(1A)capital gain must be applied for charitable purpose in order to be exempt from income tax u/s 11.15% can be accumulated or set apart for charitable purpose.The balance should be utilised for charitable purpose.
Applied to charitable purpose includes donations to charitable trust registered under section 12AA.
It also includes,depreciation,revenue expenses,purchase of capital assets,repayment of loans taken for the purchase of capital assets.
19 June 2013
In support of your answer please sight case laws and also elaborate your views..
26 July 2025
Here's a detailed explanation of the **tax treatment** of **capital gains** for a **society registered under the Societies Registration Act, 1860** and **having 12A registration** under the **Income Tax Act**, with **reference to Section 11(1A)** and **relevant case laws**.
---
### ✅ **1. Capital Gains and Section 11(1A)**
Since the **society is registered under Section 12A**, it is eligible for exemption under **Sections 11 and 12**, provided the income is **applied to charitable purposes** or **accumulated as per law**.
#### ✳ Section 11(1A) – Capital Gains:
If a **capital asset is transferred**, and the **net consideration** is **used for acquiring another capital asset**, then the **capital gains** are considered to be **applied for charitable purposes**, and thus **exempt**.
> 📌 **Key rule**:
> **Exemption = Capital Gain, to the extent the net consideration is reinvested in another capital asset.**
---
### 🔍 **Facts Recap** (A.Y. 2013-14):
* Sale proceeds (net) = ₹1 crore
* Cost of land (FY 2001-02) = ₹2 lakh
* Indexed cost (assumed inflation index) = Let's say \~₹4.26 lakh
* LTCG = ₹100 lakh – ₹4.26 lakh = ₹95.74 lakh (approx)
* Development expenses (boundary wall etc.) = ₹40 lakh
* Donation to another registered trust = ₹50 lakh
---
### 🧾 **Tax Treatment Step-by-Step:**
#### ✅ a) Is this income taxable?
* Under **Section 11(1A)**, **capital gain** will **not be taxable** if:
* It is applied for **charitable purposes**, or
* The **net consideration** is used to acquire another **capital asset**.
#### ✅ b) Treatment of development expenses (₹40 lakh):
* If the land sold was **held as an investment (capital asset)** and the development expenses (boundary, filling, etc.) were incurred **to enhance the asset’s value**, these may be treated as **cost of improvement** and deductible from sale value while computing **capital gain**.
So:
* Indexed cost of acquisition (approx) = ₹4.26 lakh
* Add development expenses = ₹40 lakh
* Total cost = ₹44.26 lakh
* Capital Gain = ₹100 lakh – ₹44.26 lakh = ₹55.74 lakh (approx)
#### ✅ c) Treatment of ₹50 lakh donation to another trust:
* **Donation to another 12A-registered trust for charitable purposes** qualifies as **application of income** \[CBDT Circular No. 100, dated 24.01.1973 and confirmed by several case laws].
* Thus, **₹50 lakh donation is treated as application of income**.
#### ✅ d) Accumulation of remaining 15%:
* Section 11(1)(a) allows **15% accumulation** of income without any condition.
* Total income (net of cost) = ₹55.74 lakh
* Applied = ₹50 lakh
* Accumulated = ₹5.74 lakh
→ Within 15% limit → **fully exempt**
---
### ✅ **Conclusion**:
✔ **Entire capital gain** will be **exempt from tax** under **Section 11(1A)** and **11(1)(a)** as:
* ₹40 lakh = spent on improvement (deductible from capital gain)
* ₹50 lakh = donation to charitable trust = **application of income**
* Balance ₹5.74 lakh = **within 15% accumulation limit**
---
### ⚖️ **Supporting Case Laws**:
1. **DIT (Exemptions) v. Al-Ameen Charitable Fund Trust** (2016) 382 ITR 516 (Karnataka HC)
* Donation by one 12A-registered trust to another 12A-registered trust is valid application of income.
2. **CIT v. Matriseva Trust** \[242 ITR 20 (Mad)]:
* Donation to another trust registered u/s 12A is allowed as application of income.
3. **CIT v. Janmabhoomi Press Trust** \[242 ITR 457 (Mad)]:
* Capital gains reinvested into other capital assets for charitable purposes exempt under Section 11(1A).
---
### 🧾 Which ITR Form?
* Since the society is **registered u/s 12A**, it must file **ITR-7** under Section **139(4A)**.
---
Let me know if you want help with the **actual capital gains calculation** using **indexed cost**, or **drafting a disclosure note** in the return.
---
### ✅ **1. Capital Gains and Section 11(1A)**
Since the **society is registered under Section 12A**, it is eligible for exemption under **Sections 11 and 12**, provided the income is **applied to charitable purposes** or **accumulated as per law**.
#### ✳ Section 11(1A) – Capital Gains:
If a **capital asset is transferred**, and the **net consideration** is **used for acquiring another capital asset**, then the **capital gains** are considered to be **applied for charitable purposes**, and thus **exempt**.
> 📌 **Key rule**:
> **Exemption = Capital Gain, to the extent the net consideration is reinvested in another capital asset.**
---
### 🔍 **Facts Recap** (A.Y. 2013-14):
* Sale proceeds (net) = ₹1 crore
* Cost of land (FY 2001-02) = ₹2 lakh
* Indexed cost (assumed inflation index) = Let's say \~₹4.26 lakh
* LTCG = ₹100 lakh – ₹4.26 lakh = ₹95.74 lakh (approx)
* Development expenses (boundary wall etc.) = ₹40 lakh
* Donation to another registered trust = ₹50 lakh
---
### 🧾 **Tax Treatment Step-by-Step:**
#### ✅ a) Is this income taxable?
* Under **Section 11(1A)**, **capital gain** will **not be taxable** if:
* It is applied for **charitable purposes**, or
* The **net consideration** is used to acquire another **capital asset**.
#### ✅ b) Treatment of development expenses (₹40 lakh):
* If the land sold was **held as an investment (capital asset)** and the development expenses (boundary, filling, etc.) were incurred **to enhance the asset’s value**, these may be treated as **cost of improvement** and deductible from sale value while computing **capital gain**.
So:
* Indexed cost of acquisition (approx) = ₹4.26 lakh
* Add development expenses = ₹40 lakh
* Total cost = ₹44.26 lakh
* Capital Gain = ₹100 lakh – ₹44.26 lakh = ₹55.74 lakh (approx)
#### ✅ c) Treatment of ₹50 lakh donation to another trust:
* **Donation to another 12A-registered trust for charitable purposes** qualifies as **application of income** \[CBDT Circular No. 100, dated 24.01.1973 and confirmed by several case laws].
* Thus, **₹50 lakh donation is treated as application of income**.
#### ✅ d) Accumulation of remaining 15%:
* Section 11(1)(a) allows **15% accumulation** of income without any condition.
* Total income (net of cost) = ₹55.74 lakh
* Applied = ₹50 lakh
* Accumulated = ₹5.74 lakh
→ Within 15% limit → **fully exempt**
---
### ✅ **Conclusion**:
✔ **Entire capital gain** will be **exempt from tax** under **Section 11(1A)** and **11(1)(a)** as:
* ₹40 lakh = spent on improvement (deductible from capital gain)
* ₹50 lakh = donation to charitable trust = **application of income**
* Balance ₹5.74 lakh = **within 15% accumulation limit**
---
### ⚖️ **Supporting Case Laws**:
1. **DIT (Exemptions) v. Al-Ameen Charitable Fund Trust** (2016) 382 ITR 516 (Karnataka HC)
* Donation by one 12A-registered trust to another 12A-registered trust is valid application of income.
2. **CIT v. Matriseva Trust** \[242 ITR 20 (Mad)]:
* Donation to another trust registered u/s 12A is allowed as application of income.
3. **CIT v. Janmabhoomi Press Trust** \[242 ITR 457 (Mad)]:
* Capital gains reinvested into other capital assets for charitable purposes exempt under Section 11(1A).
---
### 🧾 Which ITR Form?
* Since the society is **registered u/s 12A**, it must file **ITR-7** under Section **139(4A)**.
---
Let me know if you want help with the **actual capital gains calculation** using **indexed cost**, or **drafting a disclosure note** in the return.
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