CBDT quizzes senior officers over cancellation of Tata Trusts' registration

The Central Board of Direct Taxes (CBDT) has summoned senior officials, who were till recently handling the case linked to cancellation of Tata Trusts registration. The tax department is seeking explanation from these officials over the cancellation date to find out if there were lapses. 

Tata Trusts, the largest shareholder in the group's holding company Tata Sons with 66 per cent stake had last month moved the Income Tax Appellate Tribunal (ITAT) to challenge the tax department order on cancelling the registration . On October 31, the department had cancelled the registration of six trusts operating under Tata Trusts citing violation of norms applicable to charitable institutions. 

The contentious issue that Tata Trusts is challenging is the date of the order, that makes it liable to pay a much higher amount of tax under the new tax provision introduced in June 2016 concerning charitable trusts. The Trusts is of the view that the cancellation should apply retrospectively as it had offered to surrender the registration in 2015, about one year before the new tax provision became effective.  

According to sources in the know, CBDT wants officials, who were the in charge of the matter during that period and also post that, to explain the rationale of not resolving the case in the stipulated time period. The officials have been asked to give a rationale for not acting on the Trusts' registration in 2015 after a show-cause notice issued the same year, said two persons privy to the development.  

The CBDT is also trying to ascertain whether the Tata Trusts case triggered the special provision in the regulation, one of the sources quoted above said. 

A separate wing deals with the taxation aspects of charitable trusts. But, the Tata Trusts case has been lying unresolved for years. It was shifted to the assessment wing of the tax department only in 2018. Accordingly, it was re-opened for tax assessment.  

The tax department will prepare the response for the appellate tribunal, where it's contesting Tata Trusts,  after getting inputs from the concerned officials. So far, the  department is of the view that giving up the status of a charitable organisation is not valid as it's up to the CBDT to cancel a registration. 

In the October order, the tax department had invoked a new provision in the I-T Act--Section 115 (TD). Under this, a trust whose registration is cancelled is required to pay tax on its accreted (past exempted income). The section deals with additional income tax if the trust converts or merges into a non-charitable trust, or if it gets dissolved and fails to transfer its assets/liabilities.

The concerned entities are Jamsetji Tata Trust, RD Tata Trust, Tata Education Trust, Tata Social Welfare Trust, Sarvajanik Seva Trust, and Navajbai Ratan Tata Trust. While these are not the main shareholding trusts, they hold 39,000 shares in Tata Sons, the parent company of the group, a person in the know said. Sir Dorabji Tata Trusts and Sir Ratan Tata Trust are the main entities of Tata Trusts.

The six trusts, in this case, received shares in the form of donation from Tata Sons between 1974 and 1990. This was a violation of the Section 13 of the I-T Act. Following observations by the Comptroller & Auditor General of India (CAG) over the Trusts investments in equity shares, Tata Trusts had approached the tax department to express its desire to surrender the registration of a charitable organisation in early 2015. 

The tax demand on Tata Trusts is based on the accumulation of income of the last three assessment years--2015-16, 2016-17 and 2017-18. The asset value of Tata Trusts has risen significantly as most of these investments were made decades ago.

Tax Woes
 

I-T introduced a special provision to tax certain categories of trusts in 2016.
 

Invoked the provision in the October 2019 order cancelling the registration of Tata Trusts. 
 

Trusts moved ITAT, challenging the order seeking the cancellation retrospectively.
 

Tata Trusts had offered to give up charitable trust status in 2015.
 

According to I-T dept, tax liability to be decided on the date of cancellation and not on the date of surrendering. 
 

New rule says accreted income to be taxed at maximum marginal rate in certain matters.