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Six Tata trusts to challenge tax department order in tribunal
November, 20th 2019

Six Tata trusts had their registrations cancelled & will now challenge the order before ITAT.

The six Tata trusts that had their registrations cancelled by the income tax department in October will challenge the order before the Income Tax Appellate Tribunal (ITAT), arguing that they collectively hold less than 10% of Tata Sons, the conglomerate’s holding company. Top trust officials close to the development said the six entities did not breach the objectives listed in the trust deeds as claimed by the department.

One of the key reasons for cancellation is that the trusts allegedly violated Section 13 of the Income Tax (I-T) Act. This prohibits a trust from holding shares of a company, unless it has been doing so since June 1, 1973.

“It can be seen that the trusts, created for charitable purposes, are being utilised for controlling large business group through Tata Sons. Clearly this is not the intention of the trust deed,” the I-T department said in its show cause notice (SCN) that was sent earlier this year. The notice has been reviewed by ET.

A Tata trustee contested this and said philanthropy was the objective.

“We want to make it very clear that Tata Trusts is not here to do business,” the person said. “We are a charitable trust and do not influence business decisions of the Tata Group. We may be seen as a majority shareholder in Tata Sons but that does not mean we are in any way involved. Our role does not go beyond core ethical issues.”

“This level of shareholding does not confer any control,” the person said. “So, the department’s finding on the face of it is factually wrong. The same would be contested in the plea before ITAT.”

2015 Notice
“Each Tata trust is a separate entity. The other Tata trusts which hold shares in Tata Sons were not subject matter before the department. In any event, the shares held by those other trusts is not a ‘new’ development. They are being held for decades,” the person added.

As per the charter, the trustees have complete discretion on managing the trust fund so long as they utilise the money for the specified purpose, said this person.

“It is the trustees’ fiduciary duty to protect the trust fund and maximise it to do more and more charity,” the person said. “It is the trustees’ duty to protect the corpus and maintain it in a form which is in the best interest of the Trust. The department cannot substitute its own judgement as to how and in what form the trustee should maintain the trust’s assets or corpus.”

The person also pointed out that the trusts had concurred with show cause notices sent four years ago on cancellation of the registration.

“The other major point that the trusts argue is that the department has been sending SCNs since 2015,” the person said. “When the SCN was issued on March 10, 2015, as to why the registration shouldn’t be cancelled, on March 20, the trusts concurred with the department’s notice and agreed that the registration be cancelled/withdrawn. However, the 2019 notice doesn’t refer to the 2015 notice on the same issue.”

The amount that the I-T department wants the Tata trusts to pay is based on the accumulation of income of the last three assessment years — 2015-16, 2016-17 and 2017-18, said two officials with knowledge of the matter.

The six entities are the Jamsetji Tata Trust, RD Tata Trust, Tata Education Trust, Tata Social Welfare Trust, Sarvajanik Seva Trust and Navajbai Ratan Tata Trust. They together hold 39,000 shares of Tata Sons, said one of the persons. The main shareholding trusts are the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust.

While the Tata Trusts as a whole own 66% of Tata Sons, the six entities have less than 10%.

While the I-T department hasn’t raised a demand notice, based on a 10% holding this could amount to at least Rs 2,500 crore by a conservative estimate, said officials. The charity registration was cancelled for violating provisions of Section 115 (TD) that pertains to tax on accreted income. The trusts have six months to file an appeal before the ITAT. If the appeal goes against them, the trusts “shall be liable to pay tax on the accreted income within 14 days”, under the I-T Act.

The I-T department has also argued that the trusts were in violation of clause 4 of the trust deeds, which mandates its charitable nature. The Tata trusts have contended that the trustees acted in good faith.

Another tax official cited changes to the law in 2014. Under this, “the general exemption available for dividend income would not be available to the trust”, the person said.

I-T sources told ET that before 2015, the trusts were under the exemption wing. After that, they were sent to assessment wing and have been filing regular returns since then. The I-T department’s action is based on repeated queries from the Comptroller & Auditor General seeking an update on the action taken by them on its findings. In its 2013 report, CAG observed that the some of the Tata trusts were investing in certain avenues despite the law strictly forbidding public charitable trusts from holding such assets after 1973. This mainly pertains to the trusts holding shares of TCS and Tata Capital Ltd. A part of the TCS shares were subsequently divested and the proceeds were invested in the preference shares of Tata Sons.

“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 they ‘surrendered’ their registration,” said one of the IT officials. “However, last year when the CAG sent another reminder, the accounts were studied and a view was taken to reopen the case. The official said the I-T department will contest the Tata trusts in case they move the ITAT. “The I-T department’s demand is purely based on theirregularities flagged off by CAG and subsequently also mentioned by the PAC (Public Accounts Committee of Parliament),” the person said.

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