INTRODUCTION
In this article, the applicability of section 50C in the case of a charitable trust has been deliberated upon. Before we proceed any further, a basic understanding of the method of computation of capital gains in the case of a charitable trust would be very helpful.
COMPUTATION OF ‘INCOME’ IN THE CASE OF A CHARITABLE TRUST
Section 11 of the Income-tax Act deals with computation of income from property held for charitable and religious purposes. Section 11(1) provides the incomes that shall not be included in the total income of the previous year of the person in receipt of the income.
It is well settled that the ‘income’ as referred to in section 11(1) must be computed in accordance with commercial principles and not in accordance with the ordinary provisions of the Act.
In this regard, reference may be made to the following materials:
• Board Circular No. 5P (XX-6), dated 19th June, 1968;
• CIT vs. Ganga Charity Trust Fund [1986] 162 ITR 612 (Guj);
• CIT vs. Trustee of H.E.H. the Nizam’s Supplemental Religious Endowment Trust [1981] 127 ITR 378 (AP);
• CIT vs. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad);
• CIT vs. Janaki Ammal Ayya Nadar Trust [1985] 153 ITR 159 (Mad) (para 13);
• CIT vs. Programme for Community Organisation [1997] 228 ITR 620 (Ker) upheld in CIT vs. Programme for Community Organisation [2001] 248 ITR 1 (SC);
• CIT vs. Rajasthan and Gujarati Charitable Foundation [2018] 402 ITR 441 (SC); and
• DIT(E) vs. Iskcon Charities [2020] 428 ITR 479 (Karn) (para 7).
Section 11(1A) and computation of capital gains in the hands of a charitable trust:
Section 11(1A) provides that for the purposes of section 11(1), where a capital asset held wholly for charitable or religious purposes is transferred and the whole or any part of the net consideration is utilised 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 or religious purposes to the extent specified thereunder.
Given that the exemption u/s 11(1)(a) is subject to condition of application or accumulation, the Legislature found that such condition mandating application or accumulation of capital gains could lead to eroding the corpus of the trust. Hence, with a view to ease the onerous condition of requiring application or accumulation of capital gains for religious or charitable purposes, the Legislature introduced section 11(1A) vide Finance (No. 2) Act, 1971 with effect from 1st April, 1962. This is forthcoming from the Circular No. 72, dated 6th January, 1972.
It may be noted that section 11(1A) only deems acquisition of another capital asset held for charitable or religious purposes as application for the purposes of section 11(1). This is clear from the preamble of section 11(1A), which uses the words ‘for the purposes of sub-section (1)’.
It may be noted that the computation of capital gains will also have to be made u/s 11(1) by applying commercial principles as capital gains is also an ‘income’ u/s 11(1) and cannot receive any different treatment. Reference may be made to the Board Circular No. 5P (XX-6), dated 19th June, 1968 which provides that even income under the head ‘capital gains’ will have to be computed under commercial principles in case of a charitable trust.
APPLICABILITY OF PROVISIONS OF SECTION 50C
For section 50C to apply, the following prerequisites must be satisfied:
i) Consideration received or accruing as a result of a transfer of a capital asset is less than the value adopted or assessed or assessable by any Authority of a State Government for the purpose of stamp duty in respect of such transfer; and
ii) The capital asset being transferred is land or building, or both.
Section 50C is a deeming provision which deems the Stamp Duty Value (SDV) adopted, assessed or assessable as the full value of consideration for the purpose of computation of capital gains u/s 48.
It is well settled that the scope of a deeming provision must be restricted to the purpose for which it is created and must not be extended beyond such purpose. Such legal fiction must be carried to its logical conclusion and must not be taken to illogical lengths. One should not lose sight of the purpose for which the legal fiction was introduced. In this regard, reference may be made to the judgments in CIT vs. Mother India Refrigeration Industries P. Ltd. [1985] 155 ITR 711 [SC] and CIT vs. Ajax Products Ltd. [1965] 55 ITR 741 [SC].
Thus, the provisions of section 50C, which deem the SDV as the full value of consideration for the purposes of section 48, cannot be extended to the case of a charitable trust, in whose case the capital gains must be computed in accordance with commercial principles.
Even otherwise, it may be noted that there can be no room for importing a deeming fiction of Chapter IV-E in computing the income of a charitable trust on commercial principles u/s 11(1).
In the following judgments it has been held that section 50C has no application in case of charitable or religious trusts:
• ACIT vs. Shri Dwarikadhish Temple Trust, Kanpur (ITA No. 256 & 257/Lkw/2011, dated 21st August, 2014) (paras 4.3-6.2);
• ACIT vs. The Upper India Chamber of Commerce [ITA No. 601/Lkw/2011, dated 5th November, 2014 (2014) 46-B BCAJ 282] (paras 4 & 5).
It would also be pertinent to note that section 50C was inserted into the Income-tax Act much after section 11(1A) was introduced. However, the Legislature has not chosen to make an amendment to section 11(1A) after insertion of section 50C, thereby indicating that the Legislature does not intend to take away the benefit of section 11(1A) in the case of a trust with the introduction of section 50C into the statute book.
Wherever the Legislature has sought to provide for application of normal provisions of the Act in the case of a charitable trust, it has expressly provided so. It has done so because it is aware that the income of a charitable trust is to be computed in accordance with commercial principles. [See Explanation (ii) to section 11(1A) and Explanation 3 to section 11(1).]
However, it has consciously chosen not to import the fiction of section 50C into sections 11(1) and 11(1A) and hence section 50C would not be applicable in the case of a charitable trust.
It is a settled principle of interpretation that law has to be interpreted in the manner that it has been worded. Nothing is to be read into and nothing is to be implied in it while reading the law. There is no intendment to law. In this regard, reference may be made to the judgment in CIT vs. Kasturi & Sons Ltd. (1999) 237 ITR 24 (SC).
Even otherwise, it may be noted that section 50C is incompatible with the scheme of sections 11(1) and 11(1A) as there cannot be an application or accumulation of any artificial income or consideration created by way of a deeming fiction.
In CIT vs. Jayashree Charity Trust [1986] 159 ITR 280 (Cal), it was held that though section 198 provides that the amounts deducted by way of income tax are deemed to be ‘income received’, what is deemed to be income
can neither be spent nor accumulated for charitable purposes. Hence, the deeming provisions of section 198 should not be construed in a way to frustrate the object of section 11.
It may also be noted that a charitable trust cannot be expected to do the impossible act of applying / accumulating / investing a notional consideration which it has neither received nor is going to receive. In this regard, reference may be made to the judgments in Krishnaswamy S. Pd. vs. Union of India [2006] 281 ITR 305 (SC) and Engineering Analysis Centre of Excellence Private Limited vs. CIT [2021] 125 taxmann.com 42 (SC).
The interpretation that section 50C does not apply to charitable trusts saves the provisions of section 11 from the vice of the absurdity of requiring the application / accumulation / investment of a notional consideration.
Thus, the provisions of section 50C do not apply to the case of a charitable trust.
NON-APPLICABILITY OF SECTION 50C BY APPLYING MISCHIEF PRINCIPLE
By applying the Mischief rule, or Heydon’s rule of interpretation, while interpreting the provision, the real intention behind the enactment of the statute needs to be gone into in order to understand what mischief it seeks to remedy. This principle of interpretation finds support of the judgment in
K.P. Varghese vs. ITO [1981] 131 ITR 597 (SC).
The overarching reason for insertion of section 50C would be to curb generation of black money by understating the agreed consideration on records. Under the erstwhile provisions, the A.O. without any evidence to the contrary could not question the consideration stated to have been agreed between the parties to a transaction by presuming the market value to be the full value of consideration. Hence, in order to plug evasion of taxes by understating consideration, section 50C has been inserted into the statute books. In
Gouli Mahadevappa vs. ITO [2013] 356 ITR 90 (Karn), it has been held that the ultimate object and purpose of section 50C is to see that the undisclosed income of capital gains received by the assessees should be taxed.
In the case of a charitable trust, there can be no motivation whatsoever to generate any black money as the entire income generated is exempt from taxation if the conditions u/s 11 are met.
In case of a charitable trust, deposit of sale consideration into a Fixed Deposit amounts to utilisation as envisaged in section 11(1A). In this regard, reference may be made to Board Circular No. 833 of 1975 dated 24th September, 1975 and the judgment of the Calcutta High Court in CIT vs. Hindusthan Welfare Trusts [1994] 206 ITR 138 (Cal). Hence, a mere investment in a Fixed Deposit could amount to utilisation.
Thus, when there is no motivation to generate black money in case of a charitable trust, the mischief sought to be remedied by section 50C does not arise.
It may be noted that even qua the buyer of the land or building, the provisions of section 56(2)(x) do not apply by virtue of exception provided in clause (VII) of proviso to section 56(2)(x). Therefore, neither party will have any tax advantage in fixing a consideration lower than the actual consideration.
As discussed earlier, section 11(1A) was brought into the statute to do away with the erosion of the corpus. Thus, when the intention of the Legislature was to ensure that there is no erosion of corpus by way of requiring application of actual income, it can never be the intention of the Legislature to import section 50C into section 11(1A) and require the application or utilisation of an artificial sum, thereby eroding the corpus.
It can never be the intention of the Legislature to give a benefit with one hand and then take the same away with the other. Hence, a sincere attempt must be made to reconcile the provisions to ensure that the benefit given by the Legislature is not taken away. In this regard, reference may be made to the judgment in Goodyear India Ltd. vs. State of Haryana [1991] 188 ITR 402 (SC).
Thus, even applying the mischief rule of interpretation, section 50C cannot be applied in the case of a charitable trust.
IMPACT OF DECISIONS RENDERED IN THE CONTEXT OF INTERPLAY BETWEEN SECTIONS 50C AND 54-54H ON SECTION 11(1A)
Under section 11(1A)(a)(i), if the entire net consideration is utilised in acquiring another capital asset, the whole of such capital gains arising from the transfer shall be deemed to have been applied to charitable or religious purposes.
It may be noted that the definition of ‘Net consideration’ in Explanation (iii) to section 11(1A) is similar to that contained in Explanation 5 to section 54E(1), Explanation (b) to section 54EA(1), Explanation to section 54F(1) and section 54GB(6)(c).
In certain judgments, it has been held that though section 50C must not be applied for the purposes of computing ‘net consideration’ as referred to in sections 54F and 54EC, the capital gains referred to therein will also have to be computed without giving effect to the provisions of section 50C. In the said judgments, it has been held that the capital gains for the purposes of section 45(1) will have to be computed in accordance with section 48 read with section 50C. Thus, the effect would be that though the exemptions under sections 54F and 54EC are based on capital gains computed without applying the provisions of section 50C, the capital gains for the purposes of section 45(1) would be determined after applying the provisions of section 50C, thereby effectively taxing the difference between the deemed consideration as determined u/s 50C and the actual consideration agreed between the parties to the sale.
The same may be demonstrated by way of an illustration:
|
Particulars
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Amount (Rs.)
|
Amount (Rs.)
|
|
Full value of consideration (actual sale consideration – Rs. 20 lakhs
or SDV – Rs. 36 lakhs, whichever is higher) [A]
|
|
36,00,000
|
|
Less: Indexed cost of acquisition [B]
|
|
(1,93,506)
|
|
Income chargeable under the head capital gains [C] = [A] – [B]
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|
34,06,494
|
|
Less: Exemption u/s 54F [D]
|
|
(18,06,494)
|
|
Actual sale value [D1]
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20,00,000
|
|
|
Less: Indexed cost of acquisition [D2]
|
(1,93,506)
|
|
|
Capital gain u/s 54F [D3] = [D1] – [D2]
|
18,06,494
|
|
|
Net consideration received
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20,00,000
|
|
|
Amount invested in new asset
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20,00,000
|
|
|
Deduction u/s 54F(1)(a) [since the net consideration is invested,
entire capital gains is exempt] [D4]
|
18,06,494
|
|
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Taxable long-term capital gains [E] = [C] – [D]
|
|
16,00,000
|
From the above illustration it is clear that though the assessee has invested Rs. 20,00,000 in the acquisition of a new asset which is equal to the net consideration of Rs. 20,00,000, the assessee is suffering tax on a long-term capital gain of Rs. 16,00,000 (Rs. 36,00,000 – Rs. 20,00,000), which is nothing but the difference between the deemed sale consideration u/s 50C of Rs. 36,00,000 and the actual sale consideration of Rs. 20,00,000.
The above implications have been approved in:
• Shri Gouli Mahadevappa vs. ITO [2011] 128 ITD 503 (Bang) upheld in Gouli Mahadevappa vs. ITO [2013] 356 ITR 90 (Karn);
• Jagdish C. Dhabalia vs. ITO [TS-143-HC-2019 (Bom)];
• Mrs. Nila V. Shah vs. CIT [2012] 21 taxmann.com 324 (Mum) / [2012] 51 SOT 461 (Mum).
Without going into the correctness of the said judgments, the ratios laid thereunder have no application in the context of charitable trusts for the following reasons:
• The same were laid down in the context of sections 54F and 54EC and not in the context of section 11(1A).
• Sections 54F and 54EC form part of Chapter IV, whereas section 11 forms part of Chapter III. Thus, section 11 is to be applied prior to the stage of computation of income under Chapter IV which deals with computation of total income, and hence section 50C which forms part of Chapter IV would have no application in the context of section 11.
• Unlike section 54F which deals with exemption from chargeability u/s 45, section 11(1A) provides for computation of capital gains deemed to be applied to charitable or religious purposes. As held by various courts, ‘Application’ can be only of real income.
• Even if one were to conclude that section 50C would be applicable to the case of a charitable trust, the fiction imported for determining the full value of consideration will necessarily have to be imported into the utilisation of such consideration. This is based on the principle of parity of reasoning, which has been upheld by the Supreme Court in CIT vs. Lakshmi Machine Works [2007] 290 ITR 667 (SC) and CIT vs. HCL Technologies Ltd. [2018] 404 ITR 719 (SC).
• The Board, vide Circular No. 5P (XX-6), dated 19th June, 1968, has itself stated that the income of the trust (including capital gains) must be computed by applying commercial principles. Thus, no notional income u/s 50C can be brought to tax in case of a charitable trust.
• The courts have reached the said conclusions keeping in mind the mischief sought to be remedied by section 50C. As discussed above, the mischief sought to be remedied by application of section 50C does not arise in the case of a charitable trust.
• Sections 11(1) and 11(1A) being exemption provisions with beneficial purposes, must be interpreted liberally. In this regard, reference may be made to the judgment in Government of Kerala vs. Mother Superior Adoration Convent [2021] 126 taxmann.com 68 (SC), wherein the five-judge Bench’s decision in Commissioner of Customs vs. Dilip Kumar & Co. [2018] 9 SCC 1 (SC), was distinguished on the ground that the said judgment did not refer to the line of authorities which made a distinction between exemption provisions generally and exemption provisions which have a beneficial purpose.
CONCLUSION
On the basis of the above, it may be argued that section 50C does not have any application in the case of a charitable trust. Hence, the capital gains as referred to in section 11(1A) will have to be computed without applying the provisions of section 50C. Any other interpretation will lead to the absurd result of requiring a charitable trust to apply / accumulate / invest notional gains which have never accrued or arisen to it, which can never be the intention of the Legislature.
