2012 (11) TMI 623 - AT - Income Tax

Set off & Carry forward business loss - change in share holding - inclusion of share application money for determination of percentage of share holding - Held that - Share holding of the Company has changed by more than 51% and management and control of the company has been passed on to Pippal family. There is unabsorbed losses of Rs.29,94,643/- of A.Y. 2004-2005. CIT(A) rejected the assessee s contention that 72.8% of total paid share capital was introduced by family of Shri Hari Kishan Pippal during the F.Y. 2004-05 and not during the year under consideration has no merit in its case because that was simply share application money and no shares were allotted during that year. The shares have been admittedly allotted during the year under consideration for the reasons whatever it may be. Therefore, after considering the totality of the facts of the case in the light of section 79, the A.O. has rightly disallowed the claim of set off of brought forward losses and the CIT(A) has rightly confirmed the order of the A.O - Order of the CIT(A) is confirmed - In the result, appeal of the assessee is dismissed.

Summary

Issues Involved:

1. Denial of set off and carry forward of business loss amounting to Rs. 29,94,643.
2. Interpretation of Section 79 of the Income Tax Act.
3. Validity of the assessment in law and facts.

Issue-wise Detailed Analysis:

1. Denial of Set Off and Carry Forward of Business Loss:

The assessee, a company running a hospital, contested the denial of set off and carry forward of a business loss amounting to Rs. 29,94,643 for the Assessment Year (AY) 2007-08. The Assessing Officer (A.O.) observed that the company had changed its shareholding by more than 51% during the year, transferring control and management to the Pippal family. The A.O. noted that the company incurred a loss of Rs. 29,94,643 in FY 2004-05 and that the change in shareholding disqualified the company from carrying forward this loss under Section 79 of the Income Tax Act. The A.O. disallowed the carry forward of the loss, a decision confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Interpretation of Section 79 of the Income Tax Act:

Section 79 restricts the carry forward and set off of losses in cases where there is a change in shareholding exceeding 51% in companies not substantially held by the public. The CIT(A) and the Tribunal both upheld that the change in shareholding during the year under consideration invoked the provisions of Section 79. The assessee argued that the share application money introduced in FY 2004-05 should be considered as the effective change in shareholding. However, the CIT(A) clarified that mere remittance of share application money does not equate to shareholding until shares are formally allotted. The shares were allotted during the FY 2006-07, making Section 79 applicable, thus disallowing the carry forward of losses.

3. Validity of the Assessment in Law and Facts:

The assessee contended that the assessment was bad in law and on facts. However, the Tribunal found that the A.O. and CIT(A) correctly applied the provisions of Section 79. The Tribunal referenced the Gujarat High Court ruling in CIT v. Shri Subhlaxmi Mills Ltd., which established that Section 79 could be invoked in subsequent years if the conditions are met, even if not invoked in the initial year of shareholding change. The Tribunal concluded that the change in shareholding during the year under consideration was validly assessed under Section 79, and the denial of the carry forward of losses was justified.

Conclusion:

The Tribunal dismissed the appeal, confirming that the provisions of Section 79 of the Income Tax Act were correctly applied, leading to the disallowance of the carry forward and set off of the business loss incurred in FY 2004-05. The assessment was upheld as valid in law and on facts.