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Thursday, 19 December 2019 08:36
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Shorter stories

 

NUMBER ONE … Legacy hotspots & large writedowns

While the NCLT felt that Mistry was trying to “remain whole and sole and call the shots in the company” and was using Ratan Tata “as credit cards in his wallet”, the NCLAT has agreed with his plea that Tata was undermining his authority as Group Chairman.  

Mistry spoke of Tata’s unwise decisions that he was trying to unwind: these included those in Tata Power, Corus, Indian Hotels and in lending to Sivasankaran. The ‘legacy hotspots’, Mistry told the board when he was sacked, “could potentially result in a write down over time of about Rs 118,000 cr”.

 

NUMBER TWO … Tata Trusts action full of mistrust

Apart from changes in the Articles of Association that whittled down the Chairman’s powers, Mistry spoke of one meeting where Nitin Nohria and Vijay Singh, directors of the Trust, left the meeting to get instructions from Ratan Tata; in addition to making working difficult, he said, it “created the added risk of contravening insider trading regulations”.

In his NCLT petition, Mistry had said the trustees “used to call for unpublished price sensitive information from listed Tata operative companies”. If SC upholds this, the Group can face class action suits.

 

NUMBER THREE: Tata Trusts’ tax tangle will be costly

The tax implications could run into thousands of crore rupees. The case revolves around the Trusts owning TCS shares; this violates the tax rules. The Trusts also said the dividend income on its shares was exempted from the rule that says 85% on income had to be used for charitable purposes.

The date of cancellation of the trust registration is critical. If the date is 2015, tax will have to be paid on the earnings. If June 2016 is taken as the date, tax will have to be paid on ‘accreted income’ which includes the value of the TCS shares owned by the Trusts.

 

NUMBER FOUR … 15-all so far, SC to decide on match

After the NCLT derisively dismissed Mistry's pleas, NCLAT's ruling is a big victory. Apart from possibly getting his job back, Mistry can get a better value for his shares in Tata Sons; these fell after Tata Sons was converted into a private company.

Whether the Supreme Court upholds NCLAT's verdict remains to be seen but, if it does not, the Tatas will be in trouble since NCLAT has accepted Mistry's plea of ‘prejudicial’ and ‘oppressive’ action and also that the “company's affairs have been or are being conducted in a manner ‘prejudicial’ and ‘oppressive’ to members including Appellants’.

 

Trusts’ tax tangle

Given the philanthropic work that most Tata Trusts are known for, few would expect them to be embroiled in a tax case, and that too one where the tax implications could run into thousands of crore rupees. Indeed, the tax authorities cancelling the registration of six Tata Trusts itself comes as a bit of a shock for a group that has not been seen as one associated with sharp tax practices; following a Tata representation, presumably, the central board of direct taxes (CBDT) has asked tax officials for a detailed explanation of the events that led to this.

 

The case first came to public attention when a CAG report, for 2013, said the taxman had ‘allowed irregular exemptions to Jamshetji Tata Trust and Navajbai Ratan Tata’ and that this had a ‘tax effect of Rs 1,066.95 crore’. Under the law, trusts are not allowed to hold shares in private firms, but this is what the Tata Trusts had done since they were donated shares of TCS (at that time, Orchid Print) by Tata Sons in 2000. Tata Trusts sold these shares in 2008 and invested the bulk of the money in the preference capital of Tata Sons.

 

If this wasn’t bad enough, a report by the Public Accounts Committee said, in 2018, ‘the Committee is again perturbed to find that Tata Trusts has been claiming dividend income which forms the majority of its income, is exempt from the requirement of applying 85% of Trust income towards charitable purpose’.

 

While the Tata Trusts themselves wanted to surrender their registration under Section 12AA of the Income Tax Act in 2015, the date on which this takes place is critical since the IT Act doesn’t have any provision for surrender, it just allows cancellation of the registration; this is what the taxman has now done.

 

If 12AA is cancelled from the date on which the Tatas Trusts applied for cancellation, they will have to pay income tax on their earnings. If, however, the registration is deemed to have been cancelled after Section 115 (TD) became applicable – June 2016 – they will have to pay taxes on their “accreted income”.

This is defined as “the aggregate fair market value of the total assets of the trust or the institution, as on the specified date, exceeds the total liability of such trust or institution”. While it is not clear how much this will amount to, it is important to keep in mind even the CAG’s estimate of tax loss was made in 2013.

 

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