A report by the Public Accounts Committee (PAC) just tabled in Parliament, has recommended the charitable registration of Tata Trusts’ — under Section 12AA of the Income Tax (IT) Act — be cancelled since they do not conform to the norms of investments or expenditure. If the Trusts loses its12AA status, the tax implications will be significant, and the date on which this happens will decide the extent of the tax liability.
The PAC says, “the Committee is aghast to note that the Trusts is investing money in prohibited modes of investment despite the law which strictly prohibiting Public Charitable Trusts from holding such assets post 1973…the Committee is again perturbed to find that Tata Trusts has been claiming dividend income which forms the majority of its income, is exempt from the requirement of applying 85% of Trust income towards charitable purpose.”
This matter is also under litigation in the Bombay High Court where the I-T department has sought to cancel the Tata Trusts licence.
Tata Trusts has argued that it had, in any case, surrendered its 12AA registration in March, 2015 itself and had, in fact, filed its returns for 2015-16 without claiming the tax benefits available under the trust law.
If 12AA is cancelled from the date on which the Tatas applied for cancellation, they will have to pay income tax on their earnings. If, however, the registration is deemed to have been cancelled after Section 115 (TD) became applicable – June 2016 – they will have to pay taxes on their “accreted income”.
This is defined as “the aggregate fair market value of the total assets of the trust or the institution, as on the specified date, exceeds the total liability of such trust or institution”.
There are two main issues around which the case in the Bombay High Court revolves. The first relates to the shares of Tata Consultancy Services (TCS), called Orchid Print at that point, which were gifted to Tata Trusts by Tata Sons in 2000.
Tata Trusts sold these shares in 2008 and invested the bulk of this money in preference capital of Tata Sons. Under the Trust law, no investments can be made in private companies — they need to be made in government securities, bank deposits, specified PSUs etc.
In addition, under the Trust law, 85% of all income earned must be spent for charitable purposes. As the I-T department argued, and the PAC agrees, Tata trusts is in violation of both these principles.
In March, 2014, while accepting some of the arguments made by Tata Trusts, the Income Tax Appellate Tribunal had also said “the assessee (Jamsetji Tata Trust) before us undisputedly has not complied with the condition of application of 85% of the income during the year”. It also said holding the TCS shares was “in contravention of section 13(1)(d)(iii)”.
The PAC has also come down on the donation of $100 million by the Tata Educational and Development Trust (TEDT) to Cornell University and Harvard Business School since it says, under Trust law, this did not “amount either to charity or international welfare in which India was interested…”
The PAC also criticised the government for its flip flop on the issue. The PAC notes that the CDBT had, in June 2014, rejected the TEDT claim for a tax exemption since it said that these investments were not justified — public charitable trusts are supposed to invest money only where the public interest is involved. However, this position was reversed by the CBDT in November 2015 and the TEDT was given a clearance for $100 million of overseas donations to cover the assessment years 2009-10 to 2016-17.
The PAC notes “there was no reason for reversing the decision taken in 2014, in November 2015 for grant of exemption as there was no change in the provisions of the Act nor the purpose of the grant of exemption underwent any change so as to attract international welfare in which India was interested”.
The issue of Tata Trusts not conforming to the norms for investment or spending has been raised by the CAG (Comptroller and Auditor General) as well. In its Performance Audit Report of 2013, it noted that the I-T department “allowed irregular exemptions to Jamshetji Tata Trust and Navajbai Ratan Tata Trust who invested `3,139 crore in prohibited modes arising from accumulations of capital gains which involved tax effect of `1,066.95 crore”. The CAG said the assessing officer “should have brought investment aggregating `3,139 crore to tax at maximum marginal rate”.