 "Tata Trusts get I-T notice for tax avoidance")
The Income Tax (I-T) department has summoned top officials of the Tata Trusts to explain the misuse of tax exemption granted to the trusts for charitable purposes. The Tata Trust officials, who were summoned on Friday, sought more time and are expected to meet tax officials next week.
Confirming the development, a senior I-T official said the Tata Trusts had been asked to submit certain documents. “We are in the process of verifying and collating data required for further probe in the matter,” he said.
The action by the I-T department was a follow up to the Comptroller and Auditor General’s (CAG) report of 2013 that said the Trusts were earning a huge profit, instead of using it for charitable purposes. The Tata Trusts own 66% stake in Tata Sons, the holding company of Tata group.
A Tata Trusts official said Tata Trusts do not pay income tax, as permissible under the Income Tax Act. According to the CAG, the trusts, chaired by Ratan Tata, were making huge profit by spending less on charitable purposes and accumulating it as surplus. The surplus funds were then used for creating fixed assets for earning more profit, or were transferred to other trusts rather than being used for charitable purposes. This, the report claims, was done to avoid paying any tax. The CAG audit pointed out the 22 trusts under scrutiny, including others, have accumulated surpluses of Rs 819 crore. The trusts get income tax exemption only if they spend money on charitable purposes and not for making profits.
The CAG report said the I-T department allowed irregular exemptions to Jamshetji Tata Trust and Navajbai Ratan Tata Trust, which invested Rs 3,139 crore in prohibited modes arising from the accumulation of capital gains which involved tax effect of Rs 1,066.95 crore.
According to the report, Jamshetji Tata Trust and Navajbai Ratan Tata Trust earned Rs 1,905 crore and Rs 1,234 crore on account of capital gains during the assessment year 2009 and assessment year 2010, respectively. Further, they invested the same in prohibited mode of investments, which is in contravention to the Income Tax Act.
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“Thus, the assessment officer should have brought investments aggregating Rs 3,139 crore to tax at maximum marginal rate as per provision under Section 164(2) read with proviso there under. It resulted in short levy of tax of Rs 1,067 crore,” the report said.
The senior I-T official explained that an assessing officer would verify the ‘exempt’ on the basis of what one has filed for. The Ministry of Finance had promised to take action and the Income Tax summons issued on Friday was a part of that. Citing the CAG report, another tax official said the law itself prescribes the permissible modes of investments. If investments are made in modes other than prescribed ones, the assessees lose their entitlement to exemption.
The investigation by the Income Tax department comes at a challenging time for the Tata group. Ratan Tata, chairman of the trusts, is fighting a bitter battle with former Tata Sons Chairman Cyrus Mistry for the control of Tata group. In a board meeting held on October 24, the Tata Sons board appointed Tata in Mistry’s place.
Soon after Mistry was ousted, he accused Tata of interfering in the investment decisions of Tata Sons, the holding company of the Tata group. Mistry also accused AirAsia India of not taking action on Rs 22 crore fraud. While removing Mistry, the Tata Trusts had complained that they were not receiving enough dividend from Tata Sons to increase their charity work. This was despite Mistry promising that Tata Sons’ equity dividend payout would increase gradually to Rs 800 crore by 2020 from Rs 323 crore paid in the fiscal 2016. Mistry had even promised to increase dividend manifold from 2020 as income of Tata Sons was expected to increase due to many projects coming on-stream.
Earlier, this year both trusts even withdrew Rs 3,951 crore of convertible redeemable preference shares (CRPS) in Tata Sons, about 10 years before their tenure ended. According to financial statements for financial year ended March 2016, Jamsetji Tata Trust held 24.5 million CRPS and Navajbhai Ratan Tata Trust held 15.01 million CRPS. These CRPS of par value of Rs 1,000 each were issued between October 2007 and September 2009, had a tenure of 20 years and a dividend rate of 8.25% per annum.
The directors’ report of Tata Sons filed on October 22, two days before Mistry’s removal said, “Pursuant to the requests received from the trusts, the holders of the entire series of 39,515,000 – 8.25% CRPS, the board approved the redemption of the said CRPS and the same were redeemed and paid on May 25, 2016, along with pro rata dividend for the period up to May 25, 2016.”
Founded in 1974, Jamsetji Tata Trust offers institutional grants that are centered on overall developmental issues and has the same programme mandate as Sir Dorabji Tata Trust. It also gives free grants to select J N Tata scholars. N A Soonawala, R K Krishna Kumar, R Venkataramanan and Amit Chandra were its trustees.
Navajbai Ratan Tata Trust was also founded in the same year and works together with Sir Ratan Tata Trust to bestow grants. N A Soonawala, J N Mistry, R Venkataramanan and Amit Chandra are its trustees.
Mistry had advocated a strong governance structure for Tata Trusts, Tata Sons and Tata group companies so that there was no interference of trusts in investment decisions.