Tax tribunal relief for 3 major Tata trusts, setback for Cyrus Mistry

Former Tata Sons chairman censured for accessing and supplying records to I-T

The Income-tax Appellate Tribunal (ITAT) on Monday quashed an earlier order of the Commissioner of Income Tax (CIT) against three major Tata Trusts, thereby restoring tax exemption for the largest shareholder of the $100-billion conglomerate. The three trusts in question--- Sir Dorabji Tata Trust, Ratan Tata Trust and JRD Tata Trust--collectively hold about 66 per cent of shareholdings in Tata Sons. 

The CIT order, issued in March 2019, was meant to cancel the tax relief enjoyed by Tata Trusts.

The tribunal on Monday also made strong observations against former Tata Sons chairman Cyrus Mistry for his access to the records and his action of supplying documents to the tax department. ‘’His action of supplying documents to the income tax department, without any authorization of the company even though which were apparently obtained by him in the fiduciary capacity, almost immediately after being removed as chairman of Tata Sons, cannot be said to be influenced by call of a pure conscious and high ground of morality,” it said. In a severe remark, it said that the inputs from those engaged in a rivalry with an assessee should be taken with a reasonable degree of circumspection.

The latest ITAT ruling in favour of Tata Trusts comes at a time when the salt-to-software group is engaged in a legal battle in the Supreme Court with the Shapoorji Pallonji Group. The court had recently reserved its verdict on the cross appeals filed by Tata Sons and the SP Group against the National Company Law Appellate Tribunal (NCLAT) order which had restored Cyrus Mistry as chairman of Tata Sons. Mistry was removed as Tata Sons chairman in October 2016.   

CIT’s revised assessment order against the trusts was issued last year after the tax authorities found that compensation paid to former managing trustees including R Venkataramanan and A N Singh were in violation of the trust deed. The authorities also alleged that investment made by trusts in shares was not permissible.

The matter pertains to the assessment order of FY16, which had determined nil taxable income against these trusts for the return of income in 2014. CIT overturned the assessing officer’s assessment and issued show cause notice to trusts by invoking Section 263 of the IT Act, which deals with revision of order prejudicial to revenue. 

Exercising its jurisdiction, CIT in early 2019, withdrew the exemptions to these trusts and called the tax assessment order “erroneous and prejudicial”. According to CIT, the assessing officer failed to examine the issue of control of affairs of Tata Sons and any direct or indirect benefit coming to ‘’charitable trusts’’.

Citing the CIT grievances on control of affairs, a bench of ITAT chief PP Bhatt and vice-president Pramod Kumar said Tata Sons has a unique shareholding structure in the sense that it is not in the hands of the promoter family but with the charities who are under an obligation to apply the earnings for the charitable purposes...’’The articles of association of Tata Sons has, in recognition of this ownership model, granted certain rights to these charitable institutions on a collective basis- as long as these charitable institutions collectively hold not less than 40 per cent of the shareholdings in Tata Sons,” the tribunal said.  

‘’It is important to bear in mind the fact that these rights have been granted to these charitable trusts, and the assessee (three trusts) before us is only of these trusts, on a collective basis, and not to this assessee alone. Therefore, these rights, even if material, are not relevant in so far as control by this assessee is concerned. The assessee trust cannot, therefore, be said to be having control over the affairs of Tata Sons,’’ it underlined. 

The tribunal said that directions by the tax department clearly show that there was a clear and glaring non-application of mind by CIT to even undisputed material facts of the case.

CIT, in the order, had observed that the original assessment order did not have reasonableness of payments made to the trustees vis-à-vis services rendered by the trustees…. 

It had said that the trusts reimbursed the expenses to Tata Services aggregating to Rs 2.5 crore from FY 2011-12 to 2013-14 which included Rs 91 lakh for the year under consideration, paid by Tata Services to Singh for the services rendered by him to the Trust. Venkataramanan's entire remuneration had been reimbursed to Tata Sons and borne by the trust, it had said. 

On compensation, the appellate held that there are no restrictions on the remuneration for the managing trustee. Besides, the fact that these payments were made through Tata Services is nothing unusual. “It’s a common practice in the large business groups to have centralized entities providing services to all the group entities and related entities, particularly as it is not possible for each entity to have the benefit of their own standalone units dealing with support services. There is nothing unusual about it so as to warrant detailed investigations into the matter, the tribunal noted.