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

Facts

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 taxmann.com 350 (Karnataka)

Unabsorbed research exp. claimed as revenue exp. can’t be carried forward if hit by Sec. 79

If assessee did not capitalize scientific research expenditure and claimed it as revenue expenditure, any unabsorbed portion of such research exp. would be in nature of business loss and not in nature of unabsorbed depreciation - Therefore, it would be subject to restriction imposed under Section 79 in case of closely held company

Issue for consideration:

a)In view of Section 79 of the Act, where a change in shareholding (i.e., 51%) has taken place in a previous year in the case of a company (being closely held company), no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year.

b)In the instant case, an issue arose whether unabsorbed scientific research expenditure would also be subject to same treatment as that of carry forward of losses in Section 79

c)Assessee’s contention was that the unabsorbed scientific research expenditure had to be treated at par with unabsorbed depreciation based on the principles laid down in the case of Mahyco Vegetable Seeds Ltd. [2010] 123 ITD 40 ( Mum.)

Tribunal held as under:

1)In the case of Mahyco Vegetable Seeds Ltd(Supra), the expenditure in question was unabsorbed capital expenditure incurred on scientific research claimed as deduction under section 35. Therefore, the unabsorbed capital expenditure on scientific research had the same effect as unabsorbed depreciation;

2)Therefore, for applying the above cited decision, it was necessary that the scientific research expenditure should have been capitalized before claiming deduction under section 35;

3)If assessee treated scientific research expenditure as revenue expenditure and claimed deduction thereof, it would give rise to business losses and couldn't be deemed as similar to unabsorbed depreciation.

4)Therefore, in such case there would be a business loss and the provisions of section 79 would be applicable- DEPUTY CIT V. TEJAS NETWORKS LTD.[2015] 55 taxmann.com 55 (Bangalore - Trib.)