The dispute over the cancellation of tax registration of six Tata Trusts is set to be a protracted legal battle, as the trusts and tax officials differ over the end date of the registration, and whether it was a cancellation or a surrender.
While the charitable trusts said they surrendered their registration in February 2015, the tax department, which cancelled the registration in October 2019, said that there was no legal provision for surrendering the registration.
Also, if October 2019 is taken to be the end of the registration, the tax department can demand much higher tax from the trusts, because the Income Tax Act (I-T Act) did not permit taxing “accreted income" before 2016. Accreted income refers to the value by which the fair market value of assets exceeds the total liability of the trust. “Our limited point is, if we had surrendered our licence in February 2015, then the cancellation of registration should be effective from then," said a Tata Trust spokesperson.
The tax department did not agree. “There is no legal provision in the Act for voluntary ‘surrender’ of registration," a tax official said, requesting anonymity. “We are assessing the previous financial years based on the income accumulation in 2015-16, 2016-17 and 2017-18. The tax levy could be at 42% in addition to the interest levy," he added.
The department plans to levy the tax under Section 115TD of the Income Tax Act, which calls for levying additional income tax in case of withdrawal of registration. The accreted income of a trust, or an institution, as on the specified date, is also taxable.
The six trusts facing tax department action are Jamsetji Tata Trust, R.D. Tata Trust, Tata Education Trust, Tata Social Welfare Trust, Sarvajanik Seva Trust and Navajbai Ratan Tata Trust.
A press release issued by the Tata Trusts on 1 November stated: “The Trusts would like to clarify that this order of cancellation is a culmination of the decision taken by these six Trusts in 2015 to surrender, of their own volition, their registration under the Income Tax Act and to not claim the associated income tax exemptions. The decision to surrender the registration (an option available in law) was taken in the best interests of the Trust and to maximise the resources available to the Trust for their charitable work which is the principal object and focus of the Trusts."
The tax department began its investigation after the Comptroller and Auditor General (CAG) said in a 2013 report that Jamsetji Tata Trust and Navajbai Ratan Tata Trust had invested ₹3,139 crore in “prohibited modes of investment". It said the tax department had given “irregular tax exemptions" to these trusts, resulting in a loss of ₹1,066 crore to the exchequer.
The tax department’s 31-page order on 31 October said its 2013 fact finding team had discovered that in 2001, these trusts received a huge donation in the form of shares of Orchid Print India Ltd (now Tata Consultancy Services Ltd). These shares were later sold and re-invested.
In addition, the trusts held shares of TCS and Tata Capital, forming a part of the trust’s corpus. A part of the TCS shares were divested and proceeds were invested in the preferential shares of Tata Sons Ltd.
Mint has reviewed portions of the order.
This activity as per the Income Tax Act, amended in October 2014, made some of the assets of the trust non-compliant under Section 13(1)(d)(iii). The sections pertain to conditions under which charitable trusts can seek exemption from income tax. This, according to the order, makes the case that the surrender of licence was not voluntary, but a forced one.
“We are charitable trusts with or without tax exemptions. If we believe that certain investments are more crucial, then we would not seek exemptions. In this case, when we realized that our investment was more crucial for carrying out our functions, we decided to surrender our licence," said the Tata spokesperson. In March 2015, the I-T department had served a show cause notice to the Trusts asking why their registrations must not be cancelled.