Tax implication on demolished capital assets, which created out of corpus funds in Charitable Trust, Income Tax

[PRIYAM KHAMBHATA]

Respected Sir

Charitable Trust has created capital asset of Rs.10,00,000/- from the corpus fund of Rs.10,00,000/-, both are standing in balance sheet. During the year 2024-25, charitable trust has demolished the capital assets. Now, there is no physical assets. But corpus funds and capital assets are shown in balance sheet. What would be the tax implication after demolished the capital assets, vis-à-vis corpus funds stand under liability in the balance sheet.

The Charitable Trust will plan create new asset out of regular fund received in future.

What will be the taken care by charitable trust, while filing the return of income of FY 2024-25 on demolishing the capital assets, created out of the corpus funds.

Please guide me

Posts / Replies

[YAGAY andSUN]

Legal Opinion on Tax Implications of Demolition of Capital Asset Created Out of Corpus Fund by a Charitable Trust (FY 2024–25).

I. Background

• A Charitable Trust, registered under Section 12AB of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), has created a capital asset valued at Rs. 10,00,000/- out of its corpus fund, which is also Rs. 10,00,000/-.
• Both the capital asset and the corpus fund are duly reflected in the Balance Sheet.
• During FY 2024–25, the capital asset has been demolished.
• There are no proceeds or gains realized from such demolition.
• The Trust plans to create a new capital asset from future regular income (i.e., non-corpus income).
• The corpus fund continues to be reflected as a liability in the Balance Sheet.
• The query pertains to the income tax implications, if any, in the hands of the Trust during the AY 2025–26, as well as reporting obligations in the Return of Income.

II. Legal Analysis

1. Nature and Treatment of Corpus Fund under the Income Tax Act

• Corpus donations received with a specific direction that they form part of the corpus are fully exempt under Section 11(1)(d) of the Act, provided the Trust is registered under Section 12AB.
• Application of corpus funds towards acquisition of a capital asset is not treated as application of income under Section 11(1)(a).
• However, CBDT Circular No. 14/2019 dated 26.06.2019 clarifies that if corpus funds are invested in specified modes (Section 11(5)), it is sufficient compliance, and depreciation on capital asset funded out of corpus is not separately allowable.

2. Demolition of Capital Asset Created from Corpus

• Demolition of a capital asset does not per se result in any taxable income unless the Trust realizes any proceeds from demolition (e.g., salvage value, sale of debris, etc.).
• In your case, no consideration is received. Hence, no capital gains or revenue income arises.
• Loss of asset (written off or demolished) created from corpus is also not a deductible application, since:
  • Original expenditure was not treated as application of income, and
  • There is no actual income or realization involved in demolition.

3. Balance Sheet Treatment

• From an accounting standpoint:
  • The capital asset should be written off from the asset side of the Balance Sheet.
  • Corresponding debit to income and expenditure account (or corpus adjustment), but not considered application under Section 11.
  • The corpus fund remains as a liability unless the Trust formally decides to reduce or utilize it as per amended provisions.

4. Tax Implications and Return Filing Considerations (AY 2025–26)

• No income arises due to demolition; hence no tax liability under normal provisions.
• However, the following must be taken care of:

III. Recommendations & Compliance Measures

A. For FY 2024–25 Return of Income (AY 2025–26)

1. Disclosure in Audit Report (Form 10B or 10BB):
   • Auditor should disclose the demolition of capital asset funded from corpus in Clause 4 and Schedule of assets.
   • Mention that no proceeds were realized and asset was written off.
2. Books of Account and Notes to Accounts:
   • Write off the demolished asset from the books.
   • Include a note on utilization of corpus for the asset and its demolition.
   • Confirm that no income or realization was received.
3. Corpus Fund Treatment:
   • Corpus fund continues to stand as liability until a formal decision is taken to:
     • Re-deploy for new capital asset, or
     • Reclassify (in case of change in donor intent or utilization).
   • Ensure donor direction for corpus is on record to maintain exemption.
4. Future Creation of Asset from Regular Income:
   • If new asset is created from non-corpus income, it shall be treated as application of income eligible under Section 11(1)(a).
   • Proper tracking of fund source and capitalization is required.

B. No Violation of Section 11(1)(d) or Section 13

• Demolition does not result in any misuse of corpus or application to prohibited persons.
• Hence, no violation of Section 13(1) conditions or exemption denial.

IV. Conclusion

Based on the facts provided, the demolition of capital asset created from corpus fund does not have any adverse tax implications, provided:

• There is no income or gain realized.
• Proper disclosure and accounting treatment is followed.
• Corpus fund remains invested or utilized in accordance with Section 11(5).
• Any new capital asset is created from regular income, which qualifies as application under Section 11.

The Trust may proceed to file its return of income for AY 2025–26 without any tax liability arising from the demolition, ensuring due compliance with the audit and disclosure requirements under the Income Tax Act.

Disclaimer: Please consult your statutory auditor or legal counsel to validate the above interpretation with your actual financial records and trust deed clauses.

 

Prepared by:
YAGAY & SUN

(Consultant, Cyclist🚴, Environmentalist🌍, & Proud Father)

 

[ruchi shah]

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