If a capital asset held by a registered Non-profit organization is sold, and the net consideration is reinvested into a new capital asset for the organization, then the capital gain is considered as applied to charitable or religious purposes.
Section 341(9) provides special situations under which capital gains are deemed to have been applied for charitable purposes when the net consideration is reinvested in another capital asset. The same are explained in detail as under.
Cases Where Capital Gains Are Deemed to Be Applied for Charitable Purposes [Section 341(9)]
Section 341(9) applies in two situations:
A. Transfer of capital asset held wholly for charitable or religious purposes.
Where any such capital asset is transferred and:
• The whole of the net consideration is utilized to acquire another capital asset, or
• Part of the net consideration is utilized to acquire another capital asset,
the capital gain shall be deemed to have been applied as follows:
Scenario (i): Where the whole of the net consideration is utilized: The entire capital gain is deemed to have been applied for charitable purposes.
Scenario (ii): Where only part of the net consideration is utilized: Capital gain deemed to be applied = Amount utilized – Cost of the transferred asset (Restricted to actual capital gain).
B. Transfer of capital asset held partly for charitable or religious purposes:
This situation applies only to trusts created before the commencement of the Income-tax Act, 1961.
When such a capital asset is transferred, whether the whole or any part of the net consideration is utilised for acquiring another capital asset, the appropriate fraction of the capital gain shall be deemed to have been applied as follows:
Scenario (i): If the cost of acquisition of the new capital asset acquired is not less than the net consideration in respect of the capital asset transferred, the whole of appropriate fraction of such capital gain.
Scenario (ii): In any other case, deemed application = Appropriate fraction × (Amount utilized – Cost of transferred asset).
Definitions:
- Appropriate Fraction: The fraction that represents the proportion of income from the asset that was applied to charitable or religious purposes immediately before transfer.
- Cost of the Transferred Asset: Cost of acquisition + cost of improvement, as defined in Sections 72, 73, and 90(1)(b).
- Net Consideration: Full value of consideration received/accrued minus expenses wholly and exclusively in connection with the transfer.
Key points to be noted:
