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2017-11-15
Sec. 79 in Chapter VI of the Income Tax Act, 1961 (the Act) was introduced as an anti-abuse provision, intended to curb taxpayers’ attempts at transferring losses incurred by a corporate entity by means of transfer of shareholding. This section restricts carry-forward and set-off of losses in the hands of a closely-held company, if the shares of such company carrying at least 51% of voting power are not beneficially held by persons who beneficially held such shares on the last day of the previous year in which the loss was incurred. Finance Act 2017 amended Sec.79 in order to facilitate ease of doing business and to promote startups India, to provide for carry-forward and set-off of loss incurred during the period of seven years from the year of incorporation of a closely-held start-up company (referred to in Sec. 80-IAC), if all shareholders of such company which held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year. Like most tax provisions, Sec. 79 has its fair share of controversies. This insight covers 19 recent rulings pronounced by various ITATs, HCs and the SC on certain debatable issues like Beneficial owner/ interest, Company in which public are substantially interested, Inapplicability of Sec. 79, Year of applicability of Sec. 79, etc.. We hope that our readers find this compilation helpful.
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Sr. No. |
Citation |
Summary |
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Company in which public are substantially interested |
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1. |
As the assessee-company’s shares were listed on Cochin Stock Exchange on the last day of the year, it is a ‘company in which public are substantially interested’ as defined u/s. 2(18)(b)(A); Sec. 79 not applicable – ITAT dismisses Revenue’s appeal; Allows carry-forward of loss; Holds that as AO had not discussed whether the assessee was or was not a company in which public are substantially interested, there was a mistake apparent from the record, and that AO erred in rejecting the assessee’s rectification application u/s. 154 on the ground that the issue is debatable… |
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2. |
Where voting power of assessee-company being acquired unconditionally by a ‘company in which public are substantially interested’, assessee- company is also a ‘company in which public are substantially interested’; Sec. 79 not applicable to assessee-company – HC rules out applicability of Sec. 79 to assessee-company, allows claim of set-off of brought forward losses; Holds that assessee-company is covered under sub-clause (B) of clause (b) of Sec. 2(18) (defining ‘company in which the public are substantially interested’) as its voting power was unconditionally acquired by Tata Power Co. Ltd. from Tata Industries Ltd., both of which are companies in which public are substantially interested… |
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3. |
Once it is held that assessee is a company in which the public are substantially interested, application of Sec. 79 is automatically ruled out because this section applies only "in the case of company, not being a company in which the public are substantially interested" - ITAT rules in favour of assessee; Holds that there is basic fallacy in CIT(A)’s view that assessee is a deemed public company as per the Companies Act, but the same could not be true while applying the provisions of the Income Tax Act… |
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4. |
Assessee is a company in which public are substantially interested as per Sec. 2(18) when holding companies of holding company are companies in which public are substantially interested, hence Sec. 79 is inapplicable - ITAT rules in favour of assessee; Holds that where the holding company holding 89.99% shares of the assessee company has been jointly held by five companies which are all listed on recognised stock exchanges, the holding company is a widely held company to which Sec. 2(18)(b)(B)(c) is applicable, and hence assessee is a widely held company or a company in which public are substantially interested… |
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Beneficial owner/ interest |
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5. |
HC remands matter to AO to examine whether the arrangement of transfer of shares from initial subscribers to MOA to foreign investors was in accord with the previously known and disclosed arrangement and to examine whether the arrangement is covered u/s. 79; Observes that ITAT had accepted assessee's contentions and held that the two individuals were in fact holding shares on behalf of foreign investors, and the foreign investors fell within the description of "beneficial owner" u/s. 79; ITAT had held in its order [TS-5771-ITAT-2011(DELHI)-O] that loss carry forward cannot be denied u/s 79 upon share transfer by 'Subscribers to Memorandum'… |
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6. |
Intra-group share transfer triggers Sec 79; Ultimate Holding company not 'beneficial' owner - HC upholds ITAT order, denies set off and carry forward of business losses u/s 79 owing to 100% change in shareholding of assessee-company during AY 2009-2010; Dismisses assessee's contention that despite change in shareholding, the ultimate holding company remained unchanged and hence loss set-off denial u/s 79 was not warranted… |
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7. |
ITAT denies loss carry forward, Rejects 'beneficial ownership' argument for intra-group share transfers - ITAT denies carry forward of loss applying 'shareholding change limitation' as per Sec 79; Rejects assessee's argument that share transfer within Group did not result into change in 'beneficial' shareholding… |
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8. |
ITAT denies loss carry forward u/s 79, Applies 'separate legal entity' concept - Company is separate legal entity distinct from shareholders; Transfer of shares by holding company to its director hit by Sec 79; Holding co held shares on its own behalf and not as beneficial owner of director; Carry forward of tax loss not permissible due to change in shareholding |
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9. |
Carry-forward of losses cannot be denied on account of change in shareholding due to merger if beneficial shareholders before and after merger continue to be the same - SC affirms Delhi HC order reported in [TS-5829-HC-2012(DELHI)-O]; HC had held that during the earlier period, 98% of assessee's shares were held by a holding company which was amalgamated with assessee company; However, the shareholders of that holding company continued to be shareholders of the assessee-company itself, hence shareholders beneficially entitled to 98% of the shares continued to be the same… |
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10. |
Beneficial ownership u/s 79 unchanged, allows loss set-off claim - ITAT rules in assessee's favour on interpretation of beneficial ownership u/s 79, allows set-off of business loss pertaining to AY 1997-98 against profits for AY 2004-05; Rejects Revenue's stand that since the holding co., which individually held more than 51% shares of assessee co. as on March, 1997, lost controlling power as on March, 2004, the set-off should be denied in view of Sec 79… |
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11. |
Immediate shareholding relevant u/s 79 loss carry-forward, rejects taxpayer's ‘ultimate beneficial interest’ claim - ITAT applies Sec 79, denies carry forward and set-off of brought forward losses to assessee as 100% of its shareholding underwent a change in subject AY; Rejects assessee's stand that Sec 79 was inapplicable as both the predecessor and successor companies were subsidiaries of the same holding company, leading to no change in ultimate beneficial ownership… |
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Inapplicability of Sec. 79 |
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12. |
Unabsorbed depreciation not hit by Sec 79; Allows set-off post shareholding change - Bangalore ITAT allows set-off of unabsorbed depreciation to assessee for AY 2009-10, holds that Sec 79 (limiting loss set-off upon change in shareholding pattern) inapplicable; Observes that assessee claimed set off of unabsorbed depreciation which was denied by Revenue owing to change in beneficial ownership of the assessee during subject AY applying Sec 79… |
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13. |
Capitalised Scientific Research expense at par with unabsorbed depreciation; S.79 not applicable - ITAT holds that Scientific Research Expenditure (SRE) capitalized and deducted u/s 35(1)(iv) shall have the same effect as unabsorbed depreciation; Accordingly, this would be outside the purview of S.79 that applies to carry forward of business losses (not unabsorbed depreciation) in case of change in beneficial shareholding of more than 51%… |
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Year of applicability of Sec. 79 |
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14. |
Share application vs. Share allotment |
Applicability of Sec. 79 cannot be ascertained in the year in which share application money was merely paid, the same has to be ascertained in the year of share allotment - ITAT rules in favour of Revenue; Holds that “simply paying the share application money does not entitle any applicant of shares to allotment of shares unless and until the same are allotted by the company. A person who has only remitted share application money can claim no stake in the company. It is only after the shares have been allotted that an applicant who had remitted the money becomes a shareholder and can participate in the affairs of the company as provided in the articles of association”… |
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15. |
Amalgamation |
Set-off of business loss claimed by assessee pursuant to an amalgamation to be allowed, when there was no change in shareholding pattern of assessee-company on date of allotment of shares; Deduction u/s. 80HHC to be computed after considering current year's profit after reducing therefrom unabsorbed depreciation and unabsorbed investment allowance - ITAT rules partly in favour of assessee; Upholds Tribunal’s order allowing relief of set-off of business losses considering the date of allotment of shares as the actual date of scheme of amalgamation for the purpose of Sec. 79, and not the date on which the amalgamation scheme was made effective by HC’s order… |
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Other Aspects |
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16. |
Principles of Sec. 79 |
Even where the change in shareholding is substantial, the company could satisfy the AO that the change in the shareholding was not effected with a view to avoiding or reducing any liability to tax - ITAT restores the matter to CIT(A) for adjudication considering applicability of clauses (a) and (b) of Sec. 79; ITAT explains the broad principles governing provisions of Sec. 79; States that clauses (a) and (b) are cumulative and alternative, and that the fact that the benefit of clause (a) may not be available to an assessee will not disentitle him to the benefit of clause (b); Holds that even where the change in shareholding is substantial, the company could satisfy the AO that the change in the shareholding, was not effected with a view to avoiding or reducing any liability to tax… |
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17. |
[TS-6290-ITAT-2014(NEW DELHI)-O] Penalty on disallowance of carry forward of loss u/s. 79 |
Where disallowance of carry-forward of the long term capital loss u/s. 79 was on technical grounds and not on account of any concealment of any particulars of income, penalty u/s. 271(1)(c) not leviable – ITAT deletes concealment penalty for AY 2007-08; Holds that the assessee's conduct of carrying forward long term capital gains (accepted by the AO for previous years) cannot be said to be contumacious so as to warrant levy of penalty; Holds that Sec. 271(1)(c) postulates imposition of penalty for furnishing of inaccurate particulars and concealment of income… |
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18. |
[TS-5514-HC-2015(KARNATAKA)-O] Change in voting power |
Change in voting power, and not shareholding, relevant for applicability of section 79 - HC upholds ITAT order, allows carry forward and set-off of business losses despite change in shareholding, since effective control over the assessee company was unchanged; As Sec 79 uses the expression "not less than 51% of the voting power..", HC finds force in assessee's submission that voting power in a company relevant and not the shareholding pattern… |
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19. |
[TS-5533-ITAT-2017(HYDERABAD)-O] Sec. 263 revision possible only in the year in which change in shareholding occurs, not subsequently |
Once the losses of AY 2009-10 have been quantified and allowed in assessment for AY 2010-11, Principal CIT cannot invoke Sec. 263 for AYs 2011-12 and 2012-13 because there was a change in shareholding in AY 2009-10 - ITAT rules in favour of assessee; Holds that since change in shareholding had occurred in AY 2009-10, exercising powers u/s. 263 in AYs. 2011-12 and 2012-13 holding the assessment orders as erroneous and prejudicial to Revenue is not appropriate… |
Rulings on Sec. 79 in Principles
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Sr. No. |
Rulings |
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1. |
[TS-5043-HC-1976(GUJARAT)-O] - Sec. 79 does not affect the set-off of unabsorbed depreciation and unabsorbed development rebate, treatment whereof is guided by the provisions of Secs. 32(2) and 33(2)(ii), respectively |
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2. |
[TS-5545-HC-1982(MADRAS)-O] - The word ‘unless’ according to grammatical meaning is equivalent to ‘if not’ and this word followed by the disjunctive ‘or’ occurring between clauses (a) and (b) clearly on grammatical interpretation goes to show that clauses (a) and (b) are to be applied disjunctively and if either of these clauses is satisfied, the ban created by Sec. 79 cannot apply. |
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3. |
[TS-5016-SC-1988-O] - To avoid falling within the scope of Sec. 79 , it is sufficient for the assessee to show that the case attracts either clause (a) or (b). Thus, the benefit is available notwithstanding the change in the shareholding in the previous year, if shares representing not less than 51% of the voting power remain beneficially held by the same persons on the relevant dates. Similarly, the benefit is available notwithstanding the change in the shareholding in the previous year if the change was not effected with a view to avoiding or reducing any liability to tax. |
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4. |
[TS-5579-HC-1995(GUJARAT)-O] - If the change in shareholding was effected not with the object of avoiding or reducing any liability to tax but with some other object in view, Sec. 79 would not apply and the company’s right to carry forward and set off the loss would not be lost even though the result of the change in the shareholding may be a negation or reduction of tax liability. Other rulings on the topic - [TS-5533-HC-1988(PUNJAB)-O], [TS-5740-HC-1989(KERALA)-O], [TS-5086-HC-1990(CALCUTTA)-O], [TS-5563-HC-1989(CALCUTTA)-O], [TS-5442-HC-1992(ALLAHABAD)-O], [TS-5651-HC-1993(GUJARAT)-O], [TS-5543-HC-1993(GUJARAT)-O], [TS-5532-HC-1991(BOMBAY)-O], [TS-5226-HC-1995(MADRAS)-O], [TS-5338-ITAT-1990(MADRAS)-O] |
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5. |
[TS-5054-HC-1991(CALCUTTA)-O] - It has been held that Tribunal was right in law in allowing carry forward of unabsorbed depreciation and unabsorbed investment allowance even though there was a change in the shareholding of the assessee-company u/s. 79 |
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6. |
[TS-5008-SC-1997-O] - Where no finding has been recorded by any authority regarding the change of shareholding of the company, there arises no question of applicability of section 79; Sec. 79 does not affect the set-off of unabsorbed depreciation and unabsorbed development rebate, treatment whereof is guided by the provisions of sections 32(2) and 33(2)(ii), respectively |
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7. |
[TS-5722-HC-1995(MADHYA PRADESH)-O] - Where there is no positive finding that the change in shareholding was effected with a view to avoiding or reducing any liability to tax, there is no option with the Tribunal but to permit the set off of the losses during the relevant AY. |
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8. |
[TS-5362-HC-1980(BOMBAY)-O], [TS-5425-HC-1983(BOMBAY)-O] - Sec. 79 shall operate only where the change in the shareholding has taken place in any previous year relevant to AY 1962-63 or any subsequent AY. |
