Sir Ratan Tata Trust Vs DCIT (ITAT Mumbai)
Conclusion: Commissioner was clearly in error in invoking powers under section 263 on the ground that the Assessing Officer failed to examine the investments of the trust complying with the provisions of Section 11(5) and Section 13(1)(d) as how the trust was treating the investment, i.e., in the capital field or not, was thus truly determinative of the investment being part of the corpus, the mere fact of these investments being held as capital for at least more than four decades-as conclusively established by the material before AO, and only income from these investments being applied for the purposes of the trust, clearly established the fact of these investments being part of the corpus of the trust.
Held: Assessee trust was registered as a charitable institution under section 12A, had filed its return of income and its assessment, under section 143(3) was completed determining ‘Nil’ taxable income. Subsequently, however, CIT (Exemptions) issued a show cause notice requiring assessee to show cause as to why this order not be subjected to revision under section 263. It was noticed that there was an investment of funds of assessee in shares which was in a prohibited mode of investment prescribed in the section 11(5) r.w.s. 13(1)(d) of the Act, unless it was covered by exceptions. This important aspect, however, had not been verified. It was held that what essentially followed was that it’s not the declaration of an investment being a corpus investment but the fact of its being treated as capital and rather than using the investment for the purposes of the trust, using the income from investment for the purposes of the trust, which was determinative of its being in the nature of corpus investment. How the trust was treating the investment, i.e., in the capital field or not, was thus truly determinative of the investment being part of the corpus. Viewed thus, the mere fact of these investments being held as capital for at least more than four decades-as conclusively established by the material before the Assessing Officer, and only income from these investments being applied for the purposes of the trust, clearly established the fact of these investments being part of the corpus of the trust. Thus, Commissioner was clearly in error in invoking powers under section 263 on the ground that the Assessing Officer failed to examine the investments of the trust complying with the provisions of Section 11(5) and Section 13(1)(d) of the Act.
1. By way of this appeal, the assessee appellant has challenged the correctness of the order dated 30th March 2019 passed by the learned Commissioner of Income Tax (Exemptions) under section 263 r.w.s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’), for the assessment year 2014-15.
2. Grievances raised by the appellant, which, being interconnected, will be taken up together, are as follows:
1. On the facts and under the circumstances of the case and in law, the learned Commissioner of Income-tax (Exemptions) [‘CIT(E)’] erred in initiating proceedings under section 263 of the Act against the Appellant
The Appellant prays that the order passed under section 263 of the Act be set aside.
2. On the facts and under the circumstances of the case and in law, the learned CIT(E) erred in holding that the assessment order passed by the Deputy Commissioner of Income-tax (Exemptions) — 2(1) (‘the learned Assessing Officer’) was erroneous as due verification was not undertaken by the learned Assessing Officer.
The Appellant prays that it be held that the assessment order passed was not erroneous since adequate verification had been undertaken by the learned Assessing Officer.
3. On the facts and under the circumstances of the case and in law, even assuming the assessment order was erroneous, the learned CIT(E) erred in exercising jurisdiction under section 263 of the Act by holding the assessment order was prejudicial to the interest of the Revenue without appreciating that there is no tax effect of the proposed directions given by the CIT(E).
The Appellant prays that it be held that assessment order was not prejudicial to the interest of the Revenue since there is no tax effect of the proposed directions / verifications.
4. On the facts and under the circumstances of the case and in law, the learned CIT(E) has erred in directing the learned Assessing Officer to pass a de novo assessment since the learned Assessing Officer had allegedly failed to verify the applicability of section 13(1)(c), 13(1)(d) and 13(2)(h) of the Act.
The Appellant prays that the aforesaid directions of the CIT(E) be held as bad in law and accordingly be quashed.
3. Shortly after concluding hearing of this appeal, we had heard another appeal in the same group of cases, dealing with all the above issues plus another additional issue dealing with the payments to trustees being reasonable and in accordance with the provisions of the trust deed and the Income Tax Act, 1961, in the case of Sir Dorabji Tata Trust Vs DCIT (ITA No. 3909/Mum/2019). The stand of the learned Commissioner, in the impugned order, is materially the same as in the said case, and, at many places, it’s a cut paste job except for the minor variations. The proceedings at the assessment stage and the background facts are also materially identical. The arguments made in this appeal were adopted in the said hearing as well, and in fact there were some additional arguments, because of an added issue having been included there. This appeal had to refixed for clarifications, as, within days of concluding the hearing of this case in March, 2020, the Covid-19 lockdown started, and when the office work begun its journey towards normalcy, one of us (i.e. the Vice President) had to proceed on medical leaves for almost two months due to a fracture. In the course of this clarification hearing, learned representatives appearing before us have fairly accepted that whatever we decide in the said case will apply mutatis mutandis in this case as well.
4. Vide our order of even date, in the case of Sir Dorabji Tata Trust (supra), we have held as follows:
3. Briefly stated, the relevant material facts are like this. The assessee before us is a public charitable trust, set up in the year 1932, registered under the Bombay Trusts Act, 1950. The assessee trust is also registered as a charitable institution under section 12A of the Income Tax Act, 1961. The assessee trust had filed its return of income on 30th September 2014, and its assessment, under section 143(3) of the Act, was completed on 30th December 2016 determining ‘Nil’ taxable income. Subsequently, however, learned Commissioner of Income Tax (Exemptions) [hereinafter referred to as ‘the Commissioner’] issued a show cause notice requiring the assessee to show cause as to why this order not be subjected to revision under section 263 of the Act…. …….
(Paragraphs 4,5 and 6 are not relevant in the present context, as the issues on which this show-cause notice was initially issued do not exist in this appeal)
6. Rather than yielding to these submissions, learned Commissioner issued a further show cause notice on 15th March 2019 which was as follows:
1. On verification of records, it is noticed that there is an investment of funds of assessee in shares which is in a prohibited mode of investment prescribed in the section 11(5) r.w.s. 13(1)(d) of the Act, unless it is covered by exceptions. Further the same may result into denial of exemption if such investment is not covered by exceptions. This important aspect, however, has not been verified as it comes out from the following:
(a) Vote letter dated 02.12.2016, the AO asked certain details of investment in shares. Vide letter dated 09.12.2016, it was stated that none of the investment are covered by section 13(1)(d) of the I.T. Act, Further, the details of investment in shares have been submitted in “Annexure-1”. It shows holding of shares in following companies,’
Quoted Share Unquoted Shares
i) Indian Hotel Co. Ltd. i) Tata Sons Ltd.
ii) Tata Steel Ltd.Weaving ii) Central Ind Spg And manufacturing Co. Ltd.
iii) Tata Motors Ltd. iii) Tata Mills Co. Ltd.
iv) Tata Powers Ltd.
v) Tata Chemical Ltd.
vi) Associated Cement Co. Ltd.
vii) State Bank of India
(b) In the details so provided, the shares were shown as held on 01 June, 1973 and subsequently, accretion of bonus shares it there. However, nowhere, it is mentioned that the shares were part of the corpus as on 01.04.1973. The only other facts mentioned in the column seeking details of consideration paid for acquisition/value are the amounts. The amounts so mentioned do not make it clear as to it represent cost of acquisition or Face Value and in any case does not show that the shares were part of corpus.
Thus, the above reply and details on records do not show as to whether the above investments are covered by exception provided in proviso (i) & (ia) to section 13(1)(d) or not. As the investment in shares such m above is normally a prohibited mode of investment and unless it is covered by exceptions, it results into denial of exemptions. It is clear that the AO has failed to make basic but necessary verification on this issue.
2. On perusal of records of A.Y.2014-15, it is also noticed that you have continued to hold investment in shares of Tata Sons Ltd and its group of companies. In-fact, in Tata Sons Ltd., you are holding 27.98% shares of the company. As per Article of Association of Tata Sons Ltd. (one of company where you are holding investments), your trustees and the trustees of Sir Ratan Tata Trust jointly also appoint non-executive directors on the board.
The clause (h) of sub-section (2) of section 13 provides that if any trust has invested in any concern in which any person referred to in sub-section (3) has substantial interest, it shall be deemed that the assessee trust has used or applied its income for the benefit of such person and thereby operation of section 11 or 12 would cease so as to exclude it from the total income. Despite, your holding of 27.98% shares of Tata Sons Ltd. and close relationship of trustees with the above company, the Assessing officer has not examined the applicability of provisions of section 13(2)(h) of the Act.
3. The AO during the assessment proceedings raised issue of holding & controlling shares of Tata Sons Ltd. by you and also your control in the business of the company. He also gathered certain information & evidences from third parties but failed to make proper verification & investigation and to reach to proper conclusion.
(a) In view of close relationship of trustees and investee company i.e. Tata Sons Ltd., the AO vide notice dated 02.12.2016 asked you about Veto/Special Right of benefits derived by the trustees from any of the investee companies and ought the subsidiaries. It was replied that the trustee of the assessee trust jointly with trustee of Sir Ratan Tata Trust only have power to appoint directors of board and Tata Sons Ltd. With reference to the query regarding benefit having derived by the trustee from the investee company. It was submitted that information is not available with the trust.
(b) The AO had sought certain details from Tata Sons Ltd. vide notice issued u/s 133(6) of the Act on 29.11.2016 such as names, Article of Association, details of shares holding, details of special voting right/veto rights in terms of share holder agreement and certain other documents as relationship of trustee of the assesses trust. On receipt of these basic details from Tata Sons Ltd. and its examination the AO ride another notice u/s. 133(6) dated 13.12.2016 asked for some more details and explanation citing various Article of Association of the company. This notice was issued to the company as well as by the e-mail to 4 directors. The details were received from Tata Sons Ltd. on 21.12.2016 and also from one of the directors on 22.12.2016.
(c) After receipt of this information, the AO again vide show notice dated 26.12.2016 raised the issue of close relationship of trustees of the trust and Tata Sons Ltd. through appointed directors seeking reply as to whether the activities are in accordance with the objects of the trust, what kind of control trust is exercising on business of Tata Sons Ltd. and also the issue that the trustee who were earlier directors/employees of Tata Sons Ltd. are taking benefit from the company because of through the control of directors appointed by the trust.
(d) In response to this show cause, a reply was submitted on 28.12.2016 by you. In the reply besides giving some explanation to the queries of AO, the material/factual basis of allegations in show cause was sought from the AO. On the same date, Tata Sons Ltd. also submitted details in response to notice u/s.133(6) of I.T. Act. He did not raise this issue and finalized the assessment.
Despite the material being available on records, which could lead to prima facie opinion that the trustees are having control over the affairs of Tata Sons Ltd. The AO has failed to take the issue to any logical conclusion. The above indicates that examination of such material was necessary in order to ascertain the facts as also whether any direct or indirect benefit as stated in section 13(1)(c) of the Act is being taken by the connected persons as referred in section 13(3) of the I.T. Act.
4. The AO has allowed you to accumulate unspent surplus u/s.11(2) amounting to Rs.10,04,61,710/- (which arises by virtue of the order u/s.143(3)) referring letter dated 29.12.2016 of assessee by noting that the assessee has filed form 10 and copy of Resolution along with it, for exercising its option u/s.11(2). However, neither there is reference of Form 10 in assessee’s letter dated 29.12.2016 nor it was found on record. Thus it appears that the benefit of exemption u/s.11(2) has been allowed without proper verification.
5. On perusal of records of A.Y.2014-15, it is also noticed that you have received interest of Rs.33,58,30,979/-. However, the AO has not obtained any details of investment despite the related details/schedule being not available on records from which it could have been ascertained that whether the interest income earned is from deposit in banks or from the investment in some companies. Further, as the income from dividend was being claimed as exempt, therefore, assessee has not claimed application of the same in its return of income. The assessing officer has not asked you to demonstrate that entire income of the trust was applied or being applied for the object of the Trust. The above facts also indicate that the Assessing Officer has not made some basic verifications on facts & circumstances of case were warranted.
6. Thus, the discussions on various made above also prima facie show that the order passed by the AO is erroneous is so far as it is prejudicial to the interest of the revenue and requires revision. In view of the above facts, you are requested to explain as to why above facts shall also not be considered in the ongoing proceedings u/s. 263 of I.T Act and order u/s. 263 of the Act should not be passed enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment in your case.
In this regard, you are requested to attend in person or through your authorized representative before the undersigned and file the written submission and ague the matter on 22.03.2019 at 12:15 PM in my office.
In case you fail the avail of this opportunity, the matter may be decided on merits.
7. Once again, the assessee made elaborate submissions in response to the show cause notice. His detailed reply, as set out in the letter dated 27th March 2019, is set out below:
Background
The Trust is one of India’s oldest philanthropic organizations was established to catalyse development across the nation through contemporary initiatives.
It supports an assortment of causes, institutions and individuals n a wide variety of areas including a whole range of community development programmes across the country.
As per the Trust Deed the objects of the Trust are briefly as under:
“From and after the death of the Settlor the Trustees shall apply the said net rents profits and income of the said immovable properties and Trust Funds and so much of the corpus thereof as to the Trustees at their discretion shall seem meet in all or any of the following purposes without any distinction of place nationality or creed, that is to say the institution, maintenance and support of schools educational institutions hospitals, relief of any distress caused by the elements of nature such as famine, pestilence, fire, tempest, flood, earthquake or any other calamity in advancement learning in all its branches especially research work in connection with medical and industrial problems or in giving further aid to the Indian Institute of Science at Bangalore by providing funds for instituting professorships or lectureships or giving scholarships or travelling fellowships in any branch of science or art in assisting students to study abroad either by payment of lump sum or by payment of periodical sums or in giving further aid to any other charitable institutions or objects endowed by the Settlor in his lifetime or by the grandfather father and brother of the Settlor.”
Since its inception, the Trust has played a pioneering role in transforming traditional ideas of charity ad introducing the concept of philanthropy to make a real difference to communities. Through grant-making, direct implementation and co-partnership strategies, the Trust supports and drives innovation in a variety of areas. The Trust engages with competent individuals and government bodies, international agencies and like-minded private sector organisations to nurture a self-sustaining eco-system that collectively works across all these areas.
The Trust has over 336 grants under execution for a financial outlay of Rs.714 crs. In addition, the Trust is also supporting a variety of cancer care initiatives for an outlay of Rs.66 crs.
The Trust has also played a pioneering role in the vision of the Government in Nation building and in partnership with the Central or State Governments and has undertaken several leading projects. The Trust has also entered into various MoUs with the Central Government, State Governments as well as other institutions on matters relating to the Trust objects. For example MoU signed with the State Government of Tripura to build capacities in various sectors including education, fisheries, dairy and upgradation of industrial training institutes etc. Further, some of the projects undertaken by the Trust with the Government are as under:
