Thursday, October 29, 2015

Set-off of losses allowed despite change in shareholding if control over Co. remains unchanged

a)  Assessee-company (‘APSL’) was wholly owned subsidiary of AMCO Batteries Limited (‘ABL’).
b)  ABL transferred 45% and 49% of its shareholding to its subsidiary company (‘APIL’) and Tractors and Farm Equipments Limited (‘TAFE’), respectively.
c)  Consequently, ABL retained only 6% shares and 45% of shares held by its subsidiary, APIL. The remaining 49% shares were with TAFE.
d)  As shareholding of the ABL in APSL reduced to 6% in the relevant assessment year, meaning thereby, it was left with less than 51% shares. Thus, AO did not allow APSL to carry forward and set-off the business losses of that year as per section 79 of the Income-tax Act (‘Act’).
e)  On appeal, CIT(A) confirmed the order of AO. However, on further appeal, the Tribunal sets aside the order of AO.
f)  Aggrieved by the order of Tribunal, revenue filed the instant appeal before the High Court.
The High Court held in favour of assessee as under-
1)  Section 79 provides that where there is a change in shareholding of a Company, no losses (incurred in any year prior to the previous year) shall be carried forward and set-off against the income of the previous year, unless on the last day of the previous year the shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.
2)  The expression ''not less than 51% of voting power..."used in Section 79 indicates that only voting power is relevant and not the shareholding pattern.
3)  In the instant case, despite the transfer of shares, the holding-company (ABL) still holds effective control over the assessee-company (ABSL) as it holds 51% of shareholding along with its subsidiary (APIL).

4)  Section 79 was introduced to prevent misuse of carry forward of losses by the new owner. But, in the instant case, effective control over the assessee-company (APSL) remained unchanged even after the change in shareholding. Therefore, losses could be carry forward and set-off- CIT v. AMCO Power Systems Ltd. [2015] 62 350 (Karnataka)