Officials close to the trusts said the intent of these institutions has always been to carry out philanthropic activities, with or without tax exemptions. However, the trusts could find themselves in a precarious position if they lose the ongoing legal tussle with the I-T department, added the officials.
“…It is important to appreciate that in its essence the Trust was established for undertaking charitable activities. The Trust has not lost its character as a charity; it has only given up the registration. The Trust does not derive its identity as a charity from the Income Tax Act. The registration only confers certain benefits because the Trust is a charity,” said the reply filed by one of the six trusts, which was reviewed by ET.
On October 31, the office of the principal commissioner of income tax (Mumbai) cancelled the registration of six Tata trusts — Jamsetji Tata Trust, RD Tata Trust, Tata Education Trust, Tata Social Welfare Trust, Sarvajanik Seva Trust, and Navajbai Ratan Tata Trust — for alleged violation of the Income-Tax Act.
“If we are forced to pay the arrears after the long-drawn legal process, we might as well fold up. And that will be a big loss to our nation,” said an official close to the trusts.
Tax Dept Cited Two Main Grounds
While the tax department has not yet sent a demand notice, sources in the Trusts said they will have to pay upfront 20% of the estimated Rs 12,000-crore tax demand before approaching the Income Tax Appellate Tribunal (ITAT). These sources added that the grounds mentioned by the Trusts while contesting the I-T notice in October will also be mentioned in the appeal before ITAT. Officials close to the development said Tata Trusts will have to sell its shares in Tata Sons to meet the potential tax liability.
The Tata Trusts, chaired by Ratan Tata, is the largest shareholder in Tata Sons with 66% equity stake. The trusts include Sir Dorabji Tata Trust, Sir Ratan Tata Trust, JRD Tata Trust, RD Tata Trust, Tata Education Trust, Tata Social Welfare Trust and Sarvajanik Seva Trust. Vijay Singh, Venu Srinivasan and RK Krishna Kumar are the main trustees of these trusts.
Sir Ratan Tata Trust owns 23.56% stake in the conglomerate’s holding company Tata Sons, while Sir Dorabji Trust owns 27.98%.
In July, the I-T department had served notices on a set of Tata trusts, seeking to reopen assessment, and questioning their decision to surrender registrations in 2015. According to Section 115 (TD) of the I-T Act, a trust whose registration has been cancelled is required to pay tax on accumulated, or ‘accreted’, income.
The tax authorities have cited two main grounds for cancelling registrations of the trusts. One is the investments by the trusts in shares of group companies, which has been prohibited since 1971. The second is that the trusts were not functioning as per the terms of their deeds.
A Tata Trust spokesperson said: “We categorically state and underscore that all our actions adhere with the Trust deeds, and are in the best interest of the Trusts. The Trusts are meant for charity, and our actions maximise our ability to perform charity. There is no violation of the deeds, there is no breach of trust.”
According to I-T department sources, the licences — which have been cancelled for violating the provisions of Section 115 (TD) — allow the trusts six months to file an appeal before the ITAT. “Post the expiry of the period of filing an appeal or the order in any appeal confirming the cancellation is received by the Trusts, the Trust shall be liable to pay tax on the accreted income within 14 days,” states the Act.
The dispute dates back to 2013, when the Comptroller and Auditor General (CAG) pointed out that Jamsetji Tata Trust and Navajbai Ratan Tata Trust had invested Rs 3,139 crore in “prohibited modes of investment”. The CAG noted that the I-T department had given “irregular tax exemptions” to these trusts, resulting in loss of several crores of rupees to the exchequer.
The CAG report said some of the Tata trusts held shares of Tata Consultancy Services and Tata Capital Ltd. A part of the TCS shares were subsequently divested and proceeds invested in preference shares of Tata Sons Ltd. These actions, as per the CAG, violated norms governing investments by charities.
According to the persons cited above, the CAG has been writing to the tax department since 2013 seeking updates on action taken by the taxman on its findings. “Until 2015, the case was with the exemption wing (of I-T department). After the said trusts surrendered their licences, they started filing returns with the assessment wing. The newly added provision of Section 115 (TD) included in June 2016 — which allows them to claim ‘accreted income’ — wasn’t available in 2015 when the trusts ‘surrendered’ their registration. However, last year, when the CAG sent another reminder, the accounts were studied and a view was taken to reopen the case,” said a person privy to the developments.
“The I-T department’s demand is based purely on the irregularities flagged off by the CAG, and subsequently mentioned by Parliament’s Public Accounts Committee (PAC). It’s their (the trusts’) decision to stop charitable activities if they so desire. The department doesn’t have a say in it,” added the official, who asserted that the department will contest if Tata Trusts moves the ITAT.
The Trusts have clarified on their holdings of shares of group companies: “…with reference to shares of TCS and Tata Capital held by the Trust, the provisions of Section 13(2)(h) of the I-T Act would not be applicable as these shares were received by the Trust as corpus donation and there was no investment made by the Trust.”
The investment in preference shares of Tata Sons Ltd was with the permission of the charity commissioner and the same were redeemed by May 2016. The proceeds from the redemption flowed into the Trusts’ corpus. “Tata Sons had agreed to give the higher dividend rate specifically because the Trust is a public charitable Trust… the Trust has benefited from the investment. There is nothing to demonstrate that this investment was not in the interest of the Trust or to suggest that the Trust could have deployed its liquid funds in an alternate mode of investment which could have yielded higher return in such a short term,” added the reply.
Another major ground for cancellation of the registrations cited by the I-T department is the alleged violation of the Trusts’ deeds. In its show-cause notice, the department said, “The trust failed to abide by its own deed as the activities of the trusts are not being carried out in accordance with the objects of the Trusts.”
The Tata Trusts has contested this view, saying the I-T department made general and vague allegations, and failed to specify the exact activities that were not in accordance with the objects of the Trusts. “…the proviso to clause 4 of the Trust deed does not in any way limit the power of the trustee to surrender the registration if such an act would enable the Trust to have more funds available for pursuing its charitable objectives,” said the October filing by Tata Trusts.
“Dividend income being the main source of income of Trusts, the trustee decided in good faith to surrender the registration and claim benefit of general exemption,” said the reply.