ITAT’s Young Indian ruling may aid Tata Trusts’ tax battle

Thomas K Thomas Mumbai | Updated on November 18, 2019 Published on November 18, 2019

The Income Tax Appellate Tribunal’s ruling in the case of Young Indian, an entity controlled by the Congress leadership, could end up saving thousands of crores for Tata Trusts.

The tribunal’s Friday ruling that registration for tax exemption can be cancelled with retrospective effect will help Tata Trusts buttress its position against the order issued by the Principal Commissioner of Income Tax on October 31.

The critical question in the Tata Trusts case is whether the cancellation should be effective from 2015, when the Trusts offered to surrender the registration, or from October 2019, when the order was passed.

According to Tata Trusts, the effective date should be 2015 when it initiated the process of surrendering the registration. But the Tax Department has ordered that the cancellation will be effective from October 2019. The date is important because if it is effective 2015, then Tata Trusts will not be liable to pay additional tax per a 2016 amendment to the tax laws.

Also read: How the tax department cancelled Tata Trusts registration

This is why the ITAT observation in the Young Indian case that registration can be cancelled from the date when an entity has been found in violation of the provisions of the I-T Act assumes importance.

ITAT observed in the Young Indian case: “Nowhere the statute envisages that the cancellation cannot be retrospective or it has to be necessarily prospective. If from the date when registration has been granted, the assessee has not carried out any activity in line with its objects or the activities carried out are not genuine, then from that date itself, the registration can be cancelled because it is only when the knowledge of such breach come to the notice of the Commissioner, then he has the power to cancel the registration from the date he notices the infringement.”

‘A benevolent order’

Infringement in the Tata Trusts’ case was first highlighted in 2013, but the registration has been cancelled only now, in 2019.

“All orders have to date back to the date of cause of action and not any other arbitrary date chosen by Authorities. Further, the Supreme Court order cited in the Tata case to justify prospective cancellation was actually meant to protect the vested rights of Trusts having enjoyed exemption over so many years and hence a benevolent order,” said a tax expert.

“This cannot be used against a Trust willing to forgo the exemption from an earlier date and that has actually paid tax for the earlier years by not claiming exemption,” he added.

Both Young Indian and Tata Trusts had taken benefits of exemption under Sections 11 and 12 of the Income Tax Act. Sections 11 and 12 of the Income Tax Act provide tax exemptions to NGOs, including Trusts and Societies. Registration is a pre-condition to avail of this benefit. Six Tata Trusts -- Jamsetji Tata Trust, RD Tata Trust, Tata Education Trust, Tata Social Welfare Trust, Sarvajanik Seva Trust and Navajbai Ratan Tata Trust had taken registration sometime in the mid-1970s. However, unlike Young Indian, the Tata Trusts had voluntarily stopped taking the benefits, after it was found that the Trusts had invested their funds with an aim to make profits.

In 2015, the six Trusts approached the tax department seeking to surrender their registration and gave up the tax benefits from then onwards.

The Principal Commissioner of Income Tax took a view that registration given to NGOs cannot be surrendered and it can only be cancelled. It also refused to cancel the Tata Trusts licence with retrospective effect.  While the ITAT ruling in the Young Indian case upholds the view on surrendering registration, it has allowed the tax authorities to cancel registration with retrospective effect.

Cancellation of Tata Trusts registration prospectively would justify the levy of tax under Section 115TD of the Act. Section 115TD was inserted with effect from June 1, 2016 and provides for levy of additional income-tax in case of withdrawal of registration. In addition to the income-tax chargeable in respect of the total income of such trust or institution, the accreted income of the trust or the institution as on the specified date shall be charged to tax. The accreted income for the purposes of Section 115TD(1) means the amount by which the aggregate fair market value of the total assets of the trust or the institution, as on the specified date. The market value of the assets held by Tata Trusts is several times higher now compared to in 2015. In fact, since the amendment related to additional tax came in June 2016, there would be no need to pay tax on fair market value if the effective date of registration cancellation is taken as 2015.


Published on November 18, 2019
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