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Treatment of capital loss in charitable trust

Hedwig Moras (Practice) (44 Points)

16 February 2013

Capital gain on sale of capital asset or investment asset is treated as income while computing the total income of charitable trust. What is the treatment if there is capital loss. Whether it is deducted from income or it is treated as application of income? or is there any other treatment?

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5 Replies

Dhawal Mohnot (Practicing) (449 Points)
Replied 16 February 2013

Ideally when Capital Gain is considered for computation of Income of trust U/s.11. Capital loss should also be considered as it is factually money forgone by the trust.

However, let us wait for a expert opinion.

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CA Ashish Pathak (Employed at Cipla Ltd.) (2779 Points)
Replied 16 February 2013

Thats a good question. I tried digging my mind and browsed through the section 11(1A). Even i have same opinion as Dhaval but still not confident. Come on Income tax experts help us.

Jimmitt (Student CA Final ) (44 Points)
Replied 17 February 2013

For a Trust, When capital asset is sold we have to check three main aspects-

1) Whether FULL VALUE OF NET CONSIDERATION RECEIVED is applied for purchasing new asset?

2) or whether only PART VALUE OF NET CONSIDERATION RECEIVED is applied for

purchasing new asset?

3) or NOTHING IS PURCHASED but WHOLE AMOUNT IS HELD BACK OR RETAINED

IF ANSWER IS-

NO. 1 - THEN WHOLE CAPITAL GAIN IS DEEMED TO APPLIED

NO. 2 - THEN SUCH GAIN AS IS EQUAL TO AMOUNT UTILIZED EXCEEDS COST OF ASSET

NO. 3 - THEN NOTHING IS APPLIED AND FULL AMOUNT IS TAXABLE AS INCOME OF TRUST

NOW LETS COME TO THE POINT...

THE WORDS IN QUESTION ARE - "VALUE OF NET CONSIDERATION" AND "CAPITAL GAIN"

THE LAW TALKS ABOUT APPLYING " NET CONSIDERATION " AND NOT ABOUT APPLYING THE "GAINS" IN PURCHASING THE NEW ASSET.

(THE LAW DOES NOT SPEAK THAT IF U DONT APPLY YOUR GAIN IT WILL BE INCOME, HENCE WE CANT CONCLUDE THAT IF U HAVE A LOSS THAN SINCE THERE IS NO INCOME SO NO TAX - IT WOULD BE UNFAIR)

SO IN CASE OF "SALE" IF CONSIDERATION IS NOT APPLIED (AS DISCUSSED IN 3 ABOVE) THEN WHOLE SUCH SUM IS TAXABLE.

IF PART IS APPLIED PART IS TAXABLE

IF FULL IS APPLIED NOTHING IS TAXABLE

SO CAN LOSS BE TAXED IF SUCH CONSIDERATION IS NOT APPLIED OR PARTLY APPLIED?

YES IT CAN BE TAXED AS WELL IF THE NET CONSIDERATION APPLIED IS LESS THAN THE COST OF ORIGINAL ASSEET / OLD ASSET SOLD / TRANSFERRED

SEE THIS EXAMPLES-

FOR GAINS/PROFIT

SALE CONSIDERATION 980000

COST 600000

EXPENSES ON TRF 20000

CAP GAINS 360000

NET CONSIDERATION 960000 (980000-20000) <<< APPLY THIS AMOUNT

FOR LOSS

SALE CONSIDERATION 980000

COST 1100000

EXP ON TRF 20000

CAP LOSS 140000

AGAIN NET CONSIDERATION 960000 (980000-20000) <<< APPLY THIS AMOUNT

IN BOTH CASE- APPLY MINIMUM 600000/- OR 960000/- RESPECTIVELY

ELSE PAY TAX ON DIFFERENCE OF AMOUNT APPLIED OUT OF 960000/- BEING NET SALE CONSIDERATION AND THE COST 600000/- OR BETWEEN AMOUNT APPLIED AND 960000/- RESPECTIVELY

SAY IN FIRST CASE U APPLY

IF U APPLY 960000- THEN FULL 360000 IS EXEMPT (960000-600000 COST)

IF U APPLY 700000- THEN 1 LAC IS EXEMPT (700000-600000 COST) REST 260000 IS TAXABLE

IF U APPLY 500000- THEN NOTHING IS EXEMPT (500000 IS LESS THAN COST) FULL 360000 IS TAXABLE PLUS 100000 (600000-500000) IS ALSO TAXABLE SINCE IT WAS PREVIOUSLY EXEMPT WHEN THIS ASSET WAS PURCHASED. SO TOTAL 460000 TAXABLE

SAY IF IN SECOND CASE U APPLY

IF U APPLY 960000 NO EXEMPTION SINCE NO GAIN BUT ALSO NO TAX

IF U APPLY 700000 THEN 260000 IS TAXABLE (960000-700000) AND SO ON

THIS IS BECAUSE AT THE TIME OF INVESTING IN ASSET THAT INCOME WAS DEEMED TO BE APPLIED FOR PURPOSE OF TRUST NOW WHEN ONE SELLS SUCH ASSET WHICH WAS PREVIOUSLY EXEMPTED, THEN SUCH AMOUNT WITHELD AND NOT INVESTED FURTHER SHALL BE TAXED OBVIOUSLY.

GAIN OR LOSS WILL NOT DECIDE WHETHER PROCEEDS RECEIVED WILL BE TAXED. WHAT WILL DECIDE IS THE AMOUNT APPLIED OR INVESTED IN BUYING ANOTHER ASSET.

2 Like

Hedwig Moras (Practice) (44 Points)
Replied 18 February 2013

Is there any other view on the subject?

Take for example the investment was sold at a loss and the net consideration was not invested in any capital assets. In this case the trust has lost on investment in the form of capital loss and top of it it has to pay tax on net consideration.

I feel it is not fair, though law is law.

Jimmitt (Student CA Final ) (44 Points)
Replied 18 February 2013

Not its not at all unfair.... infact it is very very fair....

say you received money in trust in 2005 and that time tax was not leived on it ALTHOUGH the money wasnt used for a charitable purpose, but since the money was used in buying or invested in ANY ASSET....

Law deemed that u have utilized the money for Charitable purpose...

now u want to sell that asset... and get the liquid money back in ur trust...what this means? some may misuse the trust as a vehicle to transfer funds etc from one pocket to another and avoid tax... to curb this the law has such provision and it uses the WORDS .... APPLICATION OF NET CONSIDERATION RECD..

SAY THE ABOVE EXAMPLE WAS NOT ABOUT CAPITAL ASSET BUT INVT IN GOVT SEC / SHARES ETC

So what if ur cost was higher than the sale value u received right now,,,, in our above case cost OF INVESTMENT was 1100000 and sale value was 980000 but JUST THINK where is the law demanding Tax on the difference between cost and sale value... i mean law is not taxing you on Rs 120000 (1100000-980000) ...

in fact the law is asking tax on Rs 260000/- i.e. (960000 net sale consideration after allowing expense of 20000 and between 700000 being amount applied out of monies recd)...

NOTHING IS UNFAIR.... ONE CANNOT AVOID TAX MERELY ON UNDER THE SHIELD OF BEARING A CAPITAL LOSS... WOULDNT THIS BE MISUSED IF IT WAS ALLOWED OTHERWISE... WOULDNT EVERY BODY START CLAIMING LOSSES AND EVADE TAXES ON MONEYS INTRODUCED IN TRUST...?? NOW THIS WOULD BE UNFAIR.... NOT THE ONE DISCUSSED ABOVE... THINK!!!

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