Tata Trusts' run-in with authorities puts spotlight on how trusts are taxed

With India having a long tradition of family-led businesses, many trusts are in existence to carry out myriad activities, including charity and investment in companies. Some of the trusts belonging to the Tata group, for instance, have been in existence for more than 100 years, with JN Tata Endowment being set up way back in 1892.

Around the same time, the mother law for trusts, the Indian Trusts Act was enacted (in 1883). This law itself has been tightened over the last few years to prevent any misuse. It is, however, only the private trust formed for an identified group of people is covered by the Act. Public trusts, which are set up for charitable, educational, religious and scientific purposes, have separate framework emanating from laws, like the Bombay Public Trust Act, 1950, the Religious Endowments Act, 1863, and the Charitable and Religious Trusts Act, 1920. Trusts are also used as instruments for bequeathing wealth to minors or for simply being tax efficient.

For seeking tax exemptions, public trust is required to be registered under Section 12AA of the Income Tax Act. According to S Vasudevan, partner, Lakshmikumaran & Sridharan, the approving authority, which can be the principal commissioner or commissioner of income-tax, grants this exemption after satisfying himself/herself about the genuineness of the activities of the trust and also check whether the trust is in compliance with any other law which is material for achieving its objects. “A written order granting registration is required within six months from the end of the month in which the application was made. Such registration would make the trust eligible to claim exemption from the year in which the application was made,” he says.

Registration becomes ineffective if the trust has adopted a modification of its objects which do not conform to the conditions of registration, or the trust has converted into a form which is not eligible for registration under Section 12AA. Tax authorities can also cancel 12AA registration if the activities of the trust are not genuine or not in accordance with objects of the trust, or violate other laws that govern their activities or violate certain conditions specified in Section 13 (1).

How they are taxed

• Section 115TD of the Income Tax Act: Effective from June 1, 2016, it provides for levy of additional income-tax in case of conversion into, or a merger with, any non-charitable form or on the transfer of assets of a charitable organisation on its dissolution to a non-charitable institution
• Accreted income: Tax is charged on this amount which is the aggregate fair market value of the total assets or trust or institution, on a specified date after adjusting for the total liability 
• Section 12A: Gives non-profit entities such as charitable trusts, religious organisations, and NGOs, which are registered under the section, full exemption from income tax
• Requirement for exemption: To be exempt, a trust is required to apply at least 85 per cent of its income to charitable or religious purposes in India
• Charitable purpose: Relief of the poor, education, yoga, medical relief, preservation of environment monuments or places or objects of artistic or historic interest, any other object of general public utility
• Tax on activities of trust: Irrespective of the nature of use or application, or retention of the income, tax is levied on cess or fee or any other consideration, if the receipt does not exceed 20 per cent of the total receipts of the said trust or institution in a financial year

For Tata Trusts, a run-in with the tax authorities started when it sought to deregister some of the trusts in 2015. Vasudevan says there is no specific provision under the Income-tax Act for suo moto or voluntary applying for de-registration.

At the same time, a trust deed operated by nominated trustees can provide an end date for the trust, or let it be for perpetuity, says Vishal J Shah, partner, tax and regulatory, PwC India.

The date June 1, 2016, becomes crucial in determining the rules for cancellation. Section 115TD of the Income Tax Act effective from that day provides for levy of additional income-tax in case of conversion into, or a merger with, any non-charitable form or on the transfer of assets of a charitable organisation on its dissolution to a non-charitable institution.

Tax is levied at a rate depending on the income tax slab. It is calculated on the accredited value of assets derived as the aggregate fair market value of the total assets on a specified date after adjusting for the total liability. These assets could be in the form of real estate or equity shares held in companies. In the case of Tata Trusts, it owns two-thirds equity in Tata Sons, the holding company for the group.

Though Tata Trusts was granted cancellation and that order was upheld by the Income Tax Appellate Tribunal, whether tax should be levied or not has become a bone of contention. 

In 2013, the Comptroller & Auditor General flagged Rs 33,139 crore investment made by Jamsetji Tata Trust and Navajbai Ratan Tata Trust in certain modes that were allegedly not permitted. The statutory auditor said the I-T department had given irregular exemptions.

The asset value of Tata Trusts has risen manifold since most of these investments were made decades ago. According to Vasudevan, tax is payable if the trust converted into a form which is not eligible for Section 12AA registration or the trust has merged with an entity which is not another trust or institution with similar objects, or the trust has been dissolved and has failed to transfer its assets.  Considering the tax department is reportedly claiming Rs 1,800 crore, the dispute could drag on. The law, however, needs to clarify whether deregistration once granted can be annulled and, if so, within what period can the authorities claim tax.