Contrary to claims made by the Tata Trusts that it had surrendered its registration voluntarily, the tax department has clarified that the move was a forced one after six trusts run by the Tatas were found flouting the provisions of the Income Tax rules.

“This act (surrender of registration) on the part of the Trust, was not a voluntary act but was a fait accompli . There is nothing on record to show that, but for this, the Trust would have suo motu surrendered the benefits of exemption under Sections 11 and 12 of the Act,” said an order issued by the Principal Commissioner of Income Tax on October 31.

Rule violation

Registration is a pre-condition to get the tax 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 – were registered in the mid-1970s.

However, in 2013, it was found that in 2001, the trusts had received corpus donation from Tata Sons Ltd in the form of shares of Orchid Print India Ltd (later known as Tata Consultancy Services Ltd). These shares were later sold and re-invested by way of acquisition of redeemable preference shares of Tata Sons Ltd.

This amounted to a violation of the provisions of Section 13(1)(d) of the Act. This section specifies the circumstances where tax exemptions would not be available for a trust. In 2015, the six trusts approached the tax department seeking to surrender their registrations and gave up tax benefits from then onwards.

“Once the final fact-finding authority had confirmed the Trust’s violation of the aforesaid provisions, this Trust was left with no other alternative but to give up the benefits of registration. Therefore, it is obvious that this act (of surrendering registration) was not a voluntary act,” said the order cancelling the trusts’ registration, adding that it would be effective from October 2019 and not 2015. The tax department has taken the view that there is no provision to surrender registration but can only be cancelled.

2015 or 2019?

The key question now is whether the cancellation should be effective from 2015, when the Trusts offered to surrender the registration or 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. The tax department has ordered that the cancellation will be effective October 2019.

The trust was called for a hearing in March 2015 when the trust confirmed its agreement to the withdrawal of registration. The trust is of the view that it surrendered its registration in 2015, after which the trust filed its income-tax return without claiming tax exemption. In 2016, the trust again wrote a letter mentioning that “as over fourteen months have elapsed after our meeting on 20th March, 2015, we presume our request has been noted and accepted.”

Tata Trusts argued that where the cancellation process has already been initiated by the tax payer, there is no such requirement of passing a formal order. It also said that if an application for registration is not responded to within six months, the registration is deemed granted and, therefore, the same principle applies when it comes to cancellations even though the tax law is silent on this aspect.

Additional tax burden

According to Tata Trusts, the tax department should not be permitted to take advantage of its own delay and cancel the trusts’ registration prospectively at this stage, so as to unfairly 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 an erring trust or institution, the accreted income of the trust or the institution as on the specified date will also be taxable. The accreted income for the purposes of Section 115 TD(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 accreted income means the amount by which the aggregate fair market value of the total assets of the Trusts on the specified date.

This is at the centre of the dispute between the Tata Trusts and the tax authorities. The market value of the assets held by Tata Trusts is multiple times higher now than it was 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. Therefore, by taking the effective date of cancellation as October 2019, the tax department is planning to serve a higher tax demand notice, which could be in thousands of crores.

Differing views

According to the tax department, “there is no legal provision in the Act for voluntary ‘surrender’ of registration.”

“Contrary to what has been stated by the Trust about its ‘voluntary’ surrender of registration, the fact is that correspondence shows that it was never confident in its belief that its registration stood cancelled. This becomes evident from its letter of May, 2016 addressed to the Commissioner of Income-Tax (Exemption), Mumbai stating that it was their ‘understanding’ that their registration was cancelled, and it sought confirmation of the same from the Commissioner,” the order stated.

According to tax experts, the trusts will take legal recourse because the tax department should have cancelled the registration in 2015 itself. “The delay in passing the order cannot be parked at Tata Trusts’ door. The additional tax under Section 115 D was inserted in 2016. Why did it take nearly 5 years for the tax authorities to cancel the registration?” asked a tax expert.