Tata Trusts face I-T queries over 'surrender' of registration
Taxman says trusts’ registrations can only be cancelled; Tatas say they will appeal.
The department, which sent the notices last month, is seeking to tax the accumulated income of the trusts for certain years. The department believes the trusts were not in a position to ‘surrender’ their registrations, which can only be ‘cancelled’ by the tax office, three persons familiar with the matter told ET.
According to Section 115 (TD) of the Income Tax Act, a trust whose registration is cancelled is required to pay tax on its accumulated, or ‘accreted’, income.
In this case, the tax will amount to at least Rs 1,800 crore, after considering the fair market value of the trusts’ total assets net of liabilities.
‘Investments in Prohibited Modes’
“The particular Section provides for levy of additional income tax if a charitable trust converts into or merges with a non-charitable trust or transfers its assets on dissolution to a non-charitable institution. The department is currently evaluating a possible cancellation of registration of the two trusts and imposing tax on ‘accreted income’,” said one of persons.
Declining to comment on the I-T notice, a Tata Trusts spokesman said, “The trusts have always acted in compliance with the tax laws and applicable judicial rulings, and if the need arises, will avail of the available appellate channels to settle issues in dispute.”
If the registration of the trusts is cancelled with effect from the date on which these offered to surrender their registration, tax will be imposed on their earnings. However, if the registration is deemed to have been cancelled from June 2016, when Section 115 (TD) became applicable, the ‘accreted income’ will attract tax.
The dispute dates back to 2013, when the Comptroller & 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 had noted that the I-T department had given “irregular tax exemptions” to these trusts, resulting in Rs 1,066 crore escaping tax.
In March 2015, the Tata trusts moved the tax department to surrender their registrations (under 12AA of the I-T Act) while admitting that some of their assets were not in compliance with the provisions of Section 13(1)(d) of the Act. However, following the CAG’s observations and subsequent remarks by a sub-panel of the Public Accounts Committee (PAC) in 2018, the matter was transferred from the division looking into tax exemptions to the I-T department’s assessment wing that has now sought an explanation from the trusts. The trusts, according to PAC report, were investing in prohibited modes of investment despite the law strictly forbidding public charitable trusts from holding such assets after 1973.
An August 2017 audit report of Jamsetji Tata Trust, seen by ET, says the trust has remained invested in shares. This is contrary to Section 35 of the Maharashtra Public Trusts Act, 1950.
Under the circumstances, if the trusts lose ‘12AA status’, the tax implications will be significant, and the date on which this happens will decide the extent of the liability.
“The department focused on two issues. First, in 2008, Tata Trusts sold a chunk of its shares in Tata Consultancy Services (TCS), which were gifted by Tata Sons in 2000. The money thus raised was invested in preference capital of Tata Sons. This, according to the tax department, is not allowed under the law on trusts. Second, the trust law mandates 85% of all income earned must be spent for charitable purposes,” said a government official.
The dispute between the Tatas and the taxman had moved to courts after Tata Trusts filed a writ petition in the Bombay High Court challenging the I-T department’s show-cause notice.