In tax assessments of high-profile cases, disruption in the ‘status quo’ always garners public attention and brings with it, a whole new interesting and intriguing dimension to the otherwise routine tax practice and legal jurisprudence.
The recent cancellation of the Tata’s Six Charitable Trusts’ Registration by the Office of the PCIT Mumbai on October 31, 2019 is one such disruption, which has definitely caused tremors and vibrations in the tax circles, and has caught the attention and limelight in all the national dailies and print media.
The six Tata trusts, the registrations of which have been cancelled by the Revenue Authorities are Sir Dorabji Tata Trust, Sir Ratan Tata Trust, JRD Tata Trust, Tata Education Trust, Tata Social Welfare Trust and Sarvajanik Seva Trust.
Interestingly, the cancellation of the registration of these six charitable trusts is not the debatable and litigative issue here but the date from which the said cancellation has to be considered as operative and effective in law, is the main bone of contention between the Income-tax department and the Tata Group.
The Revenue Authorities are contending that the trusts’ registration as charitable organisations ought to be cancelled from the date of passing of the registration cancellation order dated 31.10.2019, whereas the Tata Trusts’ plea is the admissibility of voluntary surrender of the charitable status by these six trusts in the year 2015 only.
So, one would wonder as to why there is so much fuss about the effective date of cancellation of these trusts’ registrations when the Tata Group is in agreement with the closure of the charitable status of these six trusts and infact had suo-motto surrendered the registration of these six trusts in the year 2015 itself.
The moot question in point is the applicability or otherwise of section 115TD of the Income Tax Act, to these six trusts, and the consequential huge income-tax liability on the accreted income of these six trusts.
What does section 115TD of the Income Tax Act says?
According to Section 115TD of the Income Tax Act, a trust whose registration is cancelled is required to pay tax on its accumulated or ‘accreted’ income.
In order to ensure that the benefit conferred over the years to a charitable trust by way of exemption of its income u/s 11, is not being misused, section 115TD has been inserted with effect from June 1, 2016. This section provides for levy of additional income-tax on the accreted income of the charitable trust in case of its winding up, or conversion into, or merger with any non-charitable form or on transfer of assets of a charitable trust on its dissolution to a non-charitable institution.
Time of accreted income – The accretion in income (accreted income) of the trust or institution shall be taxable on-
- Conversion of trust or institution into a from not eligible for registration under section 12 AA; or
- Merger into an entity not having similar objects and which is not registered under section 12 AA; or
- Non–distribution of assets on dissolution to any charitable institution registered under section 12AA or approved under section 10(23C) within a period of 12 months for dissolution.
Deemed conversion – For the above purpose, a trust or institution shall be deemed to have been converted into any from (not eligible for registration under section 12AA) in a previous year, if-
- The registration granted to it under section 12AA has been cancelled; or
- It has modified its objects and not applied for fresh registration (or fresh registration application has been rejected).
Meaning of accreted income – Accreted income shall be the amount of aggregate of fair market value of total assets as reduced by the liability as on the specified date (i.e., the date of conversion, merger or dissolution).
Exclusions from accreted income – So much of the accreted income as is attributable to the undermentioned assets and liabilities, if any, related to such assets shall be ignored for the purpose of computation of accreted income:
1. Any asset which is established to have been directly acquired be the trust or institution out of agricultural income as is referred to in section 10 (1).
2. Any asset acquired by the trust/institution during the period beginning from the date of its creation and ending on the date from which the registration under section 12AA became effective or deemed effective (however , this rule is valid only if the trust/ institution has not been allowed any benefit of sections 11 and 12 during the said period). “Deemed “effective covers a case where due to first proviso to section 12 A(2), the benefit of section 11 and 12 have been allowed to the trust/ institution in respect of any previous year prior to the year of registration.
Further, the assets and the liabilities of the charitable trust, which have been transferred to another charitable trust within specified time, will be excluded while calculation accreted income.
Tax liability u/s 115TD: The taxation of accreted income shall be at the maximum marginal rate (i.e.35.535 per cent for the assessment year 2017-18 and onwards).
This levy shall be in addition to any income chargeable to tax in the hands of the entity and this tax shall be final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it shall be leviable even if the trust or institution does not have any other income chargeable to tax in the relevant previous year.
Backdrop of the Present Cases of these Six Tata Trusts:
In July 2019, the I-T department has served notices on these six Tata Trusts, seeking to reopen their assessments on the basis of alleged irregularities in the modes of making investments in shares of Tata Group concerns by these trusts and questioning the legal validity of voluntary surrender of their registrations in the year 2015 after being found guilty of these contraventions. These re-assessment proceedings have been concluded vide re-assessment orders dated 31.10.2019, wherein the registrations of these trusts have been cancelled w.e.f. 31.10.2019 and the tax liability on accreted income u/s 115TD of the Act is being determined on a rough estimate of Rs. 12000 crores.
As per several media reports and National dailies, the dispute dates back to the year 2013, when the Comptroller and Auditor General of India (CAG) pointed out that Jamshedji Tata Trust and Navajbai Ratan Tata Trust had invested Rs 3,139 crore in prohibited modes of investment. The CAG noted that the I-T department had given irregular tax exemptions to these trusts, resulting in atleast Rs 1,066 crore escaping the tax net.
The CAG report said some of the Tata trusts held shares of Tata Consultancy Services (TCS) and Tata Capital Ltd. A part of the TCS shares were subsequently divested and proceeds invested in preference shares of Tata Sons Ltd. These actions, as per the CAG, violated norms governing investments by charitable trusts. These six Tata Trusts, together hold the majority 66% equity stake in Tata Sons Ltd.
In March 2015, the Tata Trusts surrendered their registrations u/s 12AA of the I-T Act while admitting that some of their assets were not in compliance with the provisions of Section 13(1)(d) of the Act. However, following the CAG’s observations and subsequent remarks by a sub-panel of the Public Accounts Committee (PAC) in 2018, the matter was transferred to the I-T department’s assessment wing from the exemption wing that has now sought an explanation from the trusts by reopening their assessments. The trusts, according to the PAC report, were investing in prohibited modes of investment despite the law strictly forbidding public charitable trusts from holding such assets after 1973.
The Revenue Authorities have ‘refused’ to accept the Trusts’ contention that the cancellation should be with effect from 2015 and have cancelled their registration w.e.f. 31.10.2019 instead and have also pressed into service the provisions of Section 115TD to levy tax on their accreted income.
The Revenue Authorities have cited two main grounds for cancelling registrations of the trusts. One is the investments by the trusts in shares of group companies, which has been prohibited since 1973 u/s 13(1)(d) of the I-T Act. The second is that the trusts were not functioning as per the terms of their deeds.
On the other hand, these six Tata Trusts have contended that with reference to shares of TCS and Tata Capital held by these Trusts, the provisions of Section 13(1)(d) of the I-T Act would not be applicable as these shares were received by the Trusts as corpus donations and no investments has been made by these Trusts.
The investment in preference shares of Tata Sons Ltd was with the permission of the jurisdictional Commissioner of Income-tax and the same were redeemed in May 2016. The proceeds from the redemption flowed into the Trusts’ corpus. As per the contention of these six Trusts, Tata Sons Ltd. had agreed to give the higher dividend rate specifically because the Trusts were public charitable trusts. So, the Trusts have infact benefited from the investment. There is nothing to demonstrate that this investment was not in the interest of the Trusts or to suggest that the Trusts could have yielded higher return with any alternative investments.
Another major ground for cancellation of the registrations cited by the I-T department is the alleged violation of the Trusts’ deeds. In its show-cause notice, the department has mentioned that the trusts have failed to abide by their own trust deeds as the activities of the trusts are not being carried out in accordance with the objects of the trusts.
The Tata Trusts have refuted this ground also, stating that the I-T department has made general and vague allegations, and has failed to specify the exact activities that were not in accordance with the objects of the Trusts.
Analysis of the Legal Provisions:
The above-stated factual matrix in the cases of these six Tata Trusts makes it clear that the entire thrust of the Income Tax Department’s action of cancellation of the registration of these trusts is based purely on the irregularities flagged off by the CAG and the Parliament’s Public Accounts Committee (PAC) concerning the alleged irregularities concerning the investments by these Trusts’ in the Tata group concerns which are prohibited modes of investments as per provisions of section 13(1)(d) of the I-T Act.
Thus, it is but natural and desirable to consider the provisions of section 13(1)(d) of the Income-tax Act which provides as under:
“13. (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof—
(d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year—
(i) any funds of the trust or institution are invested or deposited after the 28th day of February, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11; or
(ii) any funds of the trust or institution invested or deposited before the 1st day of March, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 continue to remain so invested or deposited after the 30th day of November, 1983; or
(iii) any shares in a company, other than—
(A) shares in a public sector company;
(B) shares prescribed as a form or mode of investment under clause (xii) of sub-section (5) of section 11, are held by the trust or institution after the 30th day of November, 1983:
Provided that nothing in this clause shall apply in relation to—
(i) any assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1st day of June, 1973;
Thus, it is duly evident from the above legal provisions of section 13(1)(d)(iii) that the exemption in relation to income u/s 11 shall not be available to a charitable trust if it invests in any shares of a company other than a public sector company, except in the case of such investments forming the part of the corpus of trust since 1.6.1973,
Is the Registration of a Charitable Trust can be Cancelled on account of prohibited modes of Investments as per provisions of section 13(1)(d) of the I-T Act?
(i) Legal Position uptill 30.09.2014
Uptill 30.9.2014, the registration of a charitable trust could be cancelled only as per provisions of section 12AA(3) of the Income-tax Act, which provides as under:
Section 12AA(3): “Where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and subsequently the Principal Commissioner or Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution:
Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.”
Thus, a plain reading of the above legal provision of section 12AA(3) which was the only enabling provision uptill 30.9.2014 to cancel the registration of a charitable trust, makes it clear that the registration of a charitable trust could be cancelled only if the PCIT was satisfied that the activities of such trust or institution were not genuine or were not being carried out in accordance with the objects of the trust or institution.
There was no reference to section 13(1)(d) in section 12AA(3) and as such the fact of making of investments by the charitable trusts in the prohibited modes other than as provided u/s 11(5) of the I-T Act or in the shares of any company other than a public sector company, as per the provisions of section 13(1)(d) of the Act, can not be made a lawful ground to cancel the registration of such trusts.
So, uptill 30.9.2014, the implication of the applicability of the provisions of section 13(1)(d) of the I-T Act was the denial of exemption of income u/s 11 to the trust and not the cancellation of the trust’s registration.
Infact, in several judicial pronouncements and legal precedents it has been held that exemption in respect of only that particular income of the trust can be denied which is in relation to the prohibited modes of investments and exemption u/s 11 in respect of other income having no relation with the prohibited modes of investments, can’t be denied to the charitable trust.
In the judgement of the Hon’ble Karnataka High Court, in the case of CIT Vs Fr. Mullers Charitable Institutions [2014] 44 taxmann.com 275 (Karnataka), it was held that perusal of section 13(1)(d) of the Act makes it clear that it is only the income from such investment or deposit, which has been made in violation of section 11(5) of the Act, that is liable to be taxed and violation of section 13(1)(d) does not result in denial of exemption under section 11 to the total income of the assessee trust.
The aforesaid judgement of Karnataka High Court was based on the judgement of Hon’ble Bombay High Court, in the case of DIT(E) vs. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 114 Taxman 19 (Bombay).
Interestingly, in the case of one of these six Tata trusts namely Jamsetji Tata Trust Vs JDIT (E) [2014] 101 DTR (Trib) 305 (Mum), the Hon’ble Mumbai Tribunal held that violation of section 13(1)(d) and section 13(2)(h) deprives exemption only to the income from investments not permitted under section 11(5) and not to the entire income of the trust, if the other income of the trust, otherwise fulfils the condition for exemption.
Legal Position w.e.f. 1.10.2014
In order to plug the above lacunae, a new subsection (4) in section 12AA was inserted by the Finance Act, 2014 w.e.f. 01.10.2014. This sub-section (4) of section 12AA has expanded the scope for cancellation of registration of a charitable trust by the Commissioner.
In fact, the situation sought to be covered by section 12AA(4) of the Act revolves around the manner in which activities are carried out, including a case where the income or property of the trust is applied for specific persons like author of trust, trustees, etc; or investment of funds in prohibited modes, etc. The aforesaid are areas, which are contained in section 13 of the Act, which disentitles an assessee from the exemptions contained in section 11 and 12 of the Act.
In other words, violation of section 13 of the Act is also sought to be covered by the Legislature by insertion of sub-section (4) to section 12AA of the Act as a ground for cancellation of registration. However, the said provision is effective only from 01.10.2014.
For ready reference, the provisions of section 12AA(4) of the I-T Act are being reproduced as under:
Section 12AA(4)
“Without prejudice to the provisions of sub-section (3), where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and subsequently it is noticed that
(a) the activities of the trust or the institution are being carried out in a manner that the provisions of sections 11 and 12 do not apply to exclude either whole or any part of the income of such trust or institution due to operation of sub-section (1) of section 13; or
(b) the trust or institution has not complied with the requirement of any other law, as referred to in sub-clause (ii) of clause (a) of sub-section (1), and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality,
then, the Principal Commissioner or the Commissioner may, by an order in writing, cancel the registration of such trust or institution:
Provided that the registration shall not be cancelled under this sub-section, if the trust or institution proves that there was a reasonable cause for the activities to be carried out in the said manner.”
Application of the above legal provisions in the present case of the six Tata Trusts:
As has already been stated above that the CAG has pointed out in its Audit Report in the year 2013 that Jamshedji Tata Trust and Navajbai Ratan Tata Trust had invested Rs 3,139 crore in prohibited modes of investment and that the I-T department had given irregular tax exemptions to these trusts, resulting in atleast Rs 1,066 crore escaping the tax net.
In March 2015, the six Tata Trusts suo-motto surrendered their registrations u/s 12AA of the I-T Act while admitting that some of their assets were not in compliance with the provisions of Section 13(1)(d) of the Act.
So, now the contentions of these six Tata Trusts that with reference to shares of TCS and Tata Capital held by these Trusts, the provisions of Section 13(1)(d) of the I-T Act would not be applicable as these shares were received by the Trusts as corpus donations and no investments has been made by these Trusts and that the investment in preference shares of Tata Sons Ltd was with the permission of the jurisdictional Commissioner of Income-tax and the same were redeemed in May 2016, seems to be contradictory to the findings of CAG and the suo-motto surrender of the registration by these six trusts consequent to their own admission of making investments in prohibited modes, and as such, needs to be examined and verified based on the actual facts, and evidences on record.
“There is precious little that’s charitable about the world of charity.”- Richard Cohen
So…
“Do your little bit of good where you are; it’s those little bits of good put together that overwhelm the world.” –Desmond Tutu
The LEGAL TWIST:
However, even if the findings of facts confirm to the fact of making investments in the prohibited modes by these six trusts as per provisions of section 13(1)(d), even then the registration of these six trusts can be cancelled only after 1.10.2014 and not before that, in view of above discussed undisputed legal position of Law, concerning the applicability of section 12AA(4) of the I-T Act, only w.e.f. 1.10.2014 only.
Also, in view of the stated legal precedents, only the dividend income being earned by these six Tata Trusts on the prohibited modes of investments in shares of Tata Group concerns can be denied exemption and not the other income of these trusts provided that such other income fulfils the stipulated condition of application of atleast 85% of such income towards the charitable objectives of the trusts u/s 11 of the I-T Act. Interestingly such dividend income which can be denied exemption u/s 11, as per the application of section 13(1)(d) of the Act, in any case were fully exempt in earlier years and to the extent of Rs. 10 lakhs by the Finance Act 2016, u/s 10(34) read with section 115BBDA of the I-T Act. As per the media reports, these six Trusts have also not availed the benefit of exemption u/s 11 of the I-T Act since AY 2016-17 onwards, after voluntary surrender of their registrations.
Non-Applicability of the provisions of section 115TD of the I-T Act:
As has already been discussed above that in order to ensure that the benefit conferred over the years to a charitable trust by way of exemption of its income u/s 11, is not being misused, section 115TD has been inserted with effect from June 1, 2016.
So, it is duly evident that this section can be pressed into service only w.e.f. 1.6.2016 and not before.
In a very recent and very high-profile judicial pronouncement of the Hon’ble Delhi ITAT in the case of “Young Indian vs. CIT (Exemption), New Delhi” in ITA No. 7751/Del/2017 dated 15.11.2019, Citation: [2019] 111 taxman.com 235 (Delhi-Trib.), it has been observed and held by the Hon’ble Tribunal that the registration of a charitable trust ought to be cancelled from the date of contravention of any of the mandated conditions of granting registration.
Thus, in the present case of these six Tata Trusts, the registration of these six Trusts ought to be cancelled from the date when the prohibited investments in shares in the Tata Group concerns were being made by these six trusts as per provisions of section 12AA(4) read with section 13(1)(d) of the I-T Act.
However, since the provisions of section 12AA(4) of the I-T Act are applicable only w.e.f. 1.10.2014, therefore the cancellation of these six Tata Trusts can be lawfully made operative and effective w.e.f. 1.10.2014.
Therefore, the cancellation of these six Tata Trusts w.e.f. 31.10.2019 and the consequential pressing of service of the provisions of section 115TD of the I-T Act, by the Revenue Authorities, may not muster the tests of well settled and established legal jurisprudence in this regard. So, the correct, lawful and proper appreciation and understanding of the applicable legal provisions and legal jurisprudence in this regards could have prevented the pandora box of unproductive litigations which are eminent and unavoidable now, after the passing of the registration cancellation orders of these six trusts and the pressing of huge income tax demand u/s 115TD of the I-T Act.
“Less regulation plus less taxation plus less litigation always equals more innovation and job creation.” —Marsha Blackburn
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