MUMBAI: The Income-Tax department has asked two Tata Trusts to explain investments flagged by Parliament’s Public Accounts Committee . Further it is reopening the issue of tax exemption granted to one of them, top I-T officials said on Friday. Tata Trust officials were asked to explain themselves but they have sought more time.I-T’s move is based on a Public Accounts Committee report of last year on the subject of exemption to charitable trusts and institutions including educational institutions and cricketing bodies. The report said that the I-T department gave ‘irregular’ exemption to Jamsetji Tata Trust and Navajbai Ratan Tata Trust involving tax impact of Rs 1,066.95 crore.The two trusts are part of a family of trusts allied to Sir Dorabji Tata Trust and Sir Ratan Tata Trust, the main shareholders of Tata Sons and key targets of Cyrus Mistry , who is waging a bitter battle with them and Tata Sons after his dismissal as Tata Sons chairman on October 24.“Tata Trusts do not pay tax. It is permissible for them under the Income Tax Act,” a Tata Sons spokesperson said. He did not elaborate. The details of the case are as follows: Jamsetji Tata Trust and Navajbai Ratan Tata Trust earned Rs 3,139 crore as capital gains in 2009-10 and 2010-11and invested the money in prohibited mode of investments.The PAC report says this is against provisions of section 13 (1) (d) of the Income Tax Act and that I-T department should have levied the maximum marginal rate on the entire investment. Its failure to do so led to a shortfall of Rs 1,066.95 crore.The finance ministry clarified later that the demand raised on Jamsetji Tata Trust for one year was partially stayed by Income Tax Appellate Tribunal. In the case of the other year, 2009-10, the assessing officer has stayed the demand considering that the Trust is eligible for long-term capital gains in the next year. The ministry also said that assessments for 2009-10 and 2010-11 in case of Navajbai Ratan Tata Trust has been reopened.The I-T department is likely to question the trusts on this issue in the coming weeks.The PAC, which took the help of Comptroller Auditor General of India on this issue, observed that many charitable trusts are earning huge profit consistently after meagre expenditure as compared to their total income and accumulate it as surpluses.These surpluses are used for creating fixed assets for earning more profit or are transferred to other trusts rather than investing in charitable purposes to avoid tax.Four cricket associations engaged in commercial activity got irregular exemptions of TV subsidy received from the Board of Control for Cricket in India (BCCI) involving tax effect of Rs 37.23 crore.The trusts also got irregular exemptions for voluntary contributions received without specific direction or were carrying out commercial activities without maintaining separate accounts or violating the provisions of Section 13 of I-T Act involving tax effect of Rs 99.44 crore.The timing of the findings comes close on the heels of the ouster of Cyrus Mistry as chairman of Tata Sons on October 24. Cyrus Mistry’s letter to Tata Sons board members on October 25, a day after he was ousted as chairman of Tata Sons, revealed potential conflicts between Tata Trusts and Tata Sons board members.In the note, Mistry mentioned that the trustees who were part of the Tata Sons board created the added risk of contravening insider trading regulations and had exposed the trusts, apart from exposing the trustees to potential tax liabilities.He also circulated a note to clarify the distinct roles of Tata Trusts, Tata Sons Board and the boards of the operating companies to the board which never discussed the matter.