Taxation of Capital Gain in the hands of Trust
When any capital asset being property held under trust is transferred resulting in any capital gain, it may not be possible for the trust to use the entire capital gain during the year for charitable or religious purposes to fulfill the conditions of section 11 for exemption.
In such scenario, section 11(1)(a) provides that if such sale proceeds are utilized for acquiring another capital asset, the capital gain shall be deemed to be applied for the objects of the Trust.
If not full but only part of the sale consideration is invested then the excess of the re-investment over the cost of the transferred asset is deemed to be applied and is eligible for exemption.
Though sub-section does not mention any time limit for reinvestment it should be within the same year or the next year, as per the explanation of section 11(1).
The reason for this time limit is that the capital gain is deemed to be applied for charitable purposes to the extent of cost of the capital asset acquired & resultantly the time limit can be same as the time limit for application of income under section 11(1).
The Calcutta High Court, in the case of CIT vs. East India Charitable Trust (1996) 206 ITR 152 has expressed the same views.
More interestingly, as per the instruction of the board, even fixed deposit with banks for a period exceeding six months can be considered to be capital asset. (Instruction no. 883 – F. No. 180/34/72 – IT (Al) of 25.9.1975).
Judiciary have have also that even F.D. with banks less than 6 months are also capital asset but F.D. with company is not a capital asset