1. A charitable trust not registered under the Income-tax Act has received donations of  3,20,000, including corpus donations of 50,000. It has no other income. It has used the donations partly for the charitable purpose for which it is received, to the extent of 1,00,000, and has surplus as per its income and expenditure account of  1,70,000.

Is it required to pay any income tax?

Ans: The tax payable by a charitable or religious trust on income which is not exempt from tax is governed by section 164(2), which provides that tax shall be charged on such income which is not so exempt as if the relevant income were the income of an Association of Persons (AOP). Part I of Schedule I to the Finance Act of each year provides for slab rates of tax for individuals, HUFs, AOPs and BOIs. Therefore, the income of the trust would be exempt up to ₹ 2,50,000, and income between ₹ 2,50,000 and ₹ 5,00,000 would be taxable at 5%.

The income for this purpose would be computed under the head “Income from Other Sources”, and therefore only expenditure incurred for earning such income would be deductible from the gross income, and not expenditure incurred on objects of the trust.

As regards corpus donations, the Delhi High Court in the case of DIT v. Basanti Devi and Chakhan Lal Garg Education Trust – ITA 927/2009 dated 23-9-2009, and the Tribunal in a number of cases, including Sree Sree Ramkrishna Samity v. DCIT 64 taxmann.com 330 (Kol.), Chandraprabhu Jain Swetamber Mandir v. ACIT 82 taxmann.com 245 (Mum.) and ITO(E) v. Serum Institute of India Research Foundation 169 ITD 271 (Pune), has held that even in case of a charitable trust which is not registered under section 12AA, corpus donations would be a capital receipt, and would therefore not be taxable.

The income of the trust would therefore be the amount of donations, other than corpus donations, i.e. ₹ 2,70,000, and the tax payable would be 5% of ₹ 20,000, i.e. ₹ 1,000.

2. A was holding 50,000 equity shares in B Pvt. Ltd., which had cost  50,00,000 in 2008-09. The book value of the shares as per Rule 11UA as on 31st January 2018 was  325 per share. B Pvt. Ltd. has merged with a listed company, C Ltd., in December 2018, whereby shareholders of B Pvt. Ltd. have been allotted 1 share of C Ltd. for every 2 shares of B Pvt. Ltd. held by them. A currently holds 25,000 equity shares of C Ltd. The market price of shares of C Ltd. on 31st January 2018 was 1,200 per share.

A wishes to sell the shares of C Ltd. held by him. Will he be entitled to the benefit of grandfathering of the market value of shares as on 31st January 2018? If so, what would be the fair market value of the shares – the fair market value of shares of B Pvt. Ltd., or the market price of shares of C Ltd.?

Ans. Under section 55(2)(ac), in case of a long term capital asset, which is an equity share referred to in section 112A, acquired before 1st February 2018, the cost of acquisition is the higher of:

(i) The cost of acquisition of such asset; and

(ii) Lower of –

a. The fair market value of such asset; and

b. The full value of consideration received or accruing as a result of the transfer of the capital asset.

The equity share referred to in section 112A is a long term capital asset, on which securities transaction tax (STT) has been paid both on acquisition and transfer of the 
share (subject to notified exempt acquisitions).

Where the share is listed on a recognised stock exchange on 31st January 2018, “fair market value” is defined to mean the highest price quoted on the stock exchange on that date. This is effectively the concept of “grandfathering”, whereby the gains up to 31st January 2018 in respect of listed shares are effectively not taxed, by substituting the cost on that date for the actual cost. This concept of grandfathering applies only to shares which are listed on 31st January 2018. In this case, the shares of B Pvt. Ltd. were held by A on 31st January 2018, and not the shares of C Ltd. Therefore, substitution of fair market value of shares of C Ltd. as of 31st January 2018 will not be permissible.

Another clause of the definition of “fair market value” in the explanation to section 55(2)(ac) provides that in a case where the capital asset is an equity share in a company which is listed on the date of transfer, and which became the property of the assessee in consideration of a share which was unlisted on 31st January 2018 by way of an exempt transfer under section 47, the “fair market value” shall mean the indexed cost up to the financial year 2017-18.

In this case, listed shares of C Ltd. were acquired through a merger, which is an exempt transfer under section 47(vii). Therefore, the fair market value of the shares on 31st January 2018 would be the indexed cost of shares of B Pvt. Ltd. up to the financial year 2017-18. Since the cost of acquisition was ₹ 50,00,000 in financial year 2008-09, the indexed cost would be 
₹ 99,27,007 [50,00,000 x 272/137], which would be the fair market value for the purposes of section 55(2)(ac).

3. A had received shares of an unlisted company under a family settlement. The cost of the shares to the previous member of the family who held the shares, having acquired them in 2006, was  25 lakh. The fair market value of the shares on the date of the family arrangement was  40 lakh, and their current market value is  80 lakh.

A desires to sell the shares. What would be the value that he can adopt as the cost of his shares, and from which year would he be entitled to claim indexation of cost?

Ans. There is no specific provision under the Income-tax Act, 1961 dealing with the cost of acquisition in the case of assets received under a family arrangement. Courts have taken the view that a family arrangement is similar to the partition of a Hindu Undivided Family, and therefore the date of acquisition and cost of an asset received under a family arrangement should be taken in the same manner as in case of assets received under a family partition [CIT v. Shanthi Chandran (2000) 241 ITR 371 (Mad.)], ACIT v. Baldev Raj Charia [2009] 121 TTJ 366 (Delhi)], i.e., the cost of assets and date of acquisition to the previous owner should be taken.

Therefore, in this case, the cost of the shares would be ₹ 25 lakh, being the cost to the previous owner, and the indexation of cost would be available from 2006.

4. A charitable trust had filed an application for accumulation of income of the previous year 2013-14, relevant to Assessment Year 2014-15, under section 11(2) for  4,75,000, for a period of 5 years. It is unable to spend such accumulation by 31st March 2019.

In which year would such income be taxable – in Assessment Year 2019-20 or Assessment Year 2020-21? If the trust incurs a deficit by spending on purposes other than the purpose of accumulation in the year in which such unspent accumulation is taxable, can the trust set off such deficit against the income arising due to the unspent accumulation?

Ans. Under section 11(3), the unspent accumulation under section 11(2) is deemed to be the income of the previous year immediately following the expiry of the period of accumulation. Therefore, if accumulation for the year ended 31st March 2014 is accumulated for a period of 5 years up to 31st March 2019, the unspent portion is to be taxed in the following previous year, i.e., the sixth year, which is financial year 2019-20, corresponding to Assessment Year 2020-21, unless spent in that following year.

Such amount is deemed to be income, but is not deemed to be income from property held under trust for charitable or religious purposes. Therefore, spending of income for purposes other than the purpose of accumulation would not qualify as an application of income for charitable purposes for the purposes of section 11. Therefore, any deficit in the previous year relevant to assessment year 2020-21 would not be eligible for set off against such income taxable under section 11(3).

Publications for sale

Sr. No. Name of Publication Rate ()
Edition Members Non-Members Courier Charges
1. 311 – Frequently Asked Questions on Survey – Direct Taxes Dec., 2018 600.00 675.00 100.00
2. Handbook on FEMA – Taxation – Frequently Asked Questions Oct., 2018 600.00 675.00 100.00
3. “Income Tax Appellate Tribunal – A Fine Balance – Law, Practice, Procedure and Conventions – Frequently Asked Questions” Dec., 2017 1,000.00 1,050.00 100.00
4. AIFTP – Of Milestone and Beyond – History Book Nov., 2016 400.00 450.00 80.00

Notes: 1. The above publications are available for sale; those who desire to buy may contact the office of the Federation.

2. Local/Outstation members not collecting from office are requested to add courier charges, as mentioned above.

3. Please draw Cheque/Draft in favour of “All India Federation of Tax Practitioners” payable at Mumbai.

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