No trading, no taxing: Why TTD with its demat account treads on the edge

Tirumala Tirupati Dewasthanam (TTD) has opened a demat account with Stock Holding Corporation of India so it can accept shares and securities from devotees as donations. To those who take keen interest in taxation matters and keep track of them, the news would have rung a bell.

In July 2010, the Bombay High Court upheld the decision of National Securities Depositories Ltd’s (NSDL) decision not to allow the Sangli-based private religious trust named Ganpati Panchayatam Sansthan to open demat accounts in the names of PAN card holding deities in its Sangli temple, Lord Ganesh, Chintamaneshwardev, Chintamaneshwaridevi, Suryanarayandev and Laxminarayandev. The high court gave the following reasons for its decision that seemingly went against the view of the apex court that deities indeed can be persons. In fact this is why they were granted PAN card by the income tax department:

• Trading in shares on the stock markets requires certain skills and expertise and to expect this from deities would not be proper, and • Deities should remain in temples and not in stock markets.

How come then TTD got the demat account? The answer lies in a small but significant technicality – while the Sangli trust was unregistered which is why demat accounts were sought in the names of gods and goddesses, TTD is a registered trust that can seek and get demat account in its own right though admittedly on behalf of Lord Srinivasa of Tirupati.

Yet, there could be a bit of disquiet in the minds of people. Aren’t the twin observations of the Bombay High Court typed alongside bullet points in italics relevant and valid even in respect of registered religious trusts such as TTD? To be sure, TTD has apparently opened demat account only for the benefit of devotees wanting to make donations in the form of shares and securities of listed companies but wouldn’t this fall foul of sections 13 and 11(5) of the Income-Tax Act that between them prohibit religious and charitable trusts seeking and enjoying tax exemption from parking their funds in shares? There could be a bit of quibbling – TTD didn’t invest its funds; it only got the shares as gift. True, but once the immediacy of receipt of gift is over, the shares would stand as investments in its books. Indeed that is the primary reason why trusts including Azim Premji’s are given shares as gifts so that dividends therefrom can bankroll their activities. Be that as it may.

TTD like any other religious or charitable trust receives voluntary contributions as towards its corpus. In fact, the hoardings in the temple premises make it clear that devotees’ offerings are towards the corpus. Why is this care taken? The answer lies in another small but significant technicality – voluntary contributions to corpus are tax-free per se but voluntary contributions that aren’t with a specific direction that they are meant for the corpus are treated as income in the first place and granted exemption subject to utilization for the charitable or religious purpose within the prescribed time. Thus the corpus route to receipt is more convenient. The moot question is how would TTD accomplish this? In a structured online demat transaction where is the scope for a donor of shares to state his or her preference as to donation to corpus specifically in so many words?

One may say that the twin observations of the Bombay High Court are not strictly speaking applicable to registered trusts that operate through their trustees who have their own minds but then that would be a very convenient interpretation that does not heed the central message – Gods should keep away from the rough and tumble of the share market. Shares on receipt as donation will have to be valued at that point and at the end of every year i.e. on 31 March because unlike cash whose value remains the same though there could be dilution in its purchasing power thanks to ravages of inflation, shares are a different kettle of fish with volatility in their values being the norm. Shares have to be nursed. Churning is the key so that deadwood is periodically replaced with healthy ones. Will TTD steadfastly refuse to trade with the help of its demat account? Well, it will have to because otherwise it runs the risk of losing tax exemption.