2015 (10) TMI 2385 - HC - Income Tax

Entitlement to carry forward and set-off of business loss - assessee not owning 51% voting powers in the company as per Section 79 of the Act by taking the beneficial share holding of M/s. Amco Properties & Investments Ltd. - Held that - Dealing with a case under Section 79(a) and (b) of the unamended Section Clause (b) was deleted w.e.f. 01.04.1988 and while relating to Clause (a) of Section 79 of the Act, the Apex Court in Commissioner of Income Tax V/S Italindia Cotton Private Limited (1988 (9) TMI 1 - SUPREME Court), held that the Section would be applicable only when there is change in shareholding in the previous year which may result in change of control of the Company and that every such change of shareholding need not fall within the prohibition against the carry forward and set-off of business losses. In the present case, though there may have been change in the shareholding in the assessment year 2002-03, yet, there was no change of control of the Company, as the control remained with the ABL as the voting power of ABL, along with its subsidiary Company APIL, remained at 51%. The Supreme Court further observed that the object of enacting Section 79 appears to be to discourage persons claiming a reduction of their tax liability on the profits earned in the Companies which had sustained losses in earlier years. In the present case, the control over the Company, with 51% voting power, remained with ABL and, as such, in our view, the provisions of Section 79 of the Act would not be attracted. - Decided in favour of assessee. Entitlement to claim deduction in accordance with Section 35AB - transfer of technical knowhow, which amount was payable in installments between 31.5.1998 to 31.5.2006 - Held that - The assessee would be entitled to claim deduction in accordance with Section 35AB of the Act in respect of sum of ₹ 5 Crores for transfer of technical know-how, even though the amount was payable and paid in instalments on subsequent dates. This we say so, also because the law is well settled that while interpreting the provisions of taxing statutes, where two views are possible, the one which is in favour of the assessee should be adopted. - Decided in favour of assessee.

Issues Involved:
1. Entitlement to carry forward and set-off of business losses under Section 79 of the Income Tax Act.
2. Entitlement to claim deduction under Section 35AB of the Income Tax Act for payment of Rs. 5 Crores for transfer of technical know-how.

Issue-wise Detailed Analysis:

1. Entitlement to Carry Forward and Set-off of Business Losses under Section 79 of the Income Tax Act:

The primary issue concerns whether the respondent-assessee is entitled to carry forward and set-off business losses despite changes in shareholding, specifically whether the voting power of the respondent had been reduced below 51% as per Section 79 of the Income Tax Act.

The facts reveal that up to the assessment year 2000-01, all shares of the respondent-Company were held by ABL. In subsequent years, shares were transferred to APIL and TAFE, reducing ABL's direct shareholding but maintaining control through APIL, a wholly-owned subsidiary of ABL.

Section 79 stipulates that no loss incurred in any year prior to the previous year shall be carried forward and set off unless on the last day of the previous year, shares carrying not less than 51% of the voting power were beneficially held by the same persons who held shares in the year of loss.

The Tribunal accepted the respondent-assessee's argument that voting power, not just shareholding, should be considered. Despite the reduction in ABL's direct shareholding, ABL retained control through APIL, ensuring the voting power remained above 51%. The Tribunal concluded that the purpose of Section 79 is to prevent misuse of set-off benefits by new owners, not to penalize companies maintaining control through subsidiaries.

The High Court agreed, emphasizing that the control of the company remained with ABL through APIL, thus fulfilling the requirement of maintaining 51% voting power. The Court referenced the Supreme Court's interpretation in Commissioner of Income Tax V/S Italindia Cotton Private Limited, which supports the view that Section 79 applies only when there is a change in control, not merely shareholding.

2. Entitlement to Claim Deduction under Section 35AB of the Income Tax Act for Payment of Rs. 5 Crores for Transfer of Technical Know-how:

The second issue pertains to whether the assessee is entitled to a deduction under Section 35AB for a lump sum consideration of Rs. 5 Crores for acquiring technical know-how, payable in installments.

Section 35AB allows deduction of one-sixth of the amount paid for acquiring know-how in the year of payment and the balance in equal installments over the next five years. The Revenue argued that the benefit could only be claimed when actual payment is made, and since the first payment was made after the date of transfer, the benefit should not apply.

The respondent-assessee contended that the liability to pay arose on the date of the agreement and transfer of know-how, even though payments were deferred. The Court considered the definitions in Section 43(2), which includes "incurred" liability under the mercantile system of accounting, and Section 43B, which distinguishes between actual payment and incurred liability.

The High Court held that the liability to pay arose on the date of transfer of know-how (01.03.1998), and the deferred payment schedule did not alter this liability. The Court referenced several Supreme Court judgments, including Keshav Mills Ltd. and Bharat Earth Movers, which support the view that liability arises when legally due, not when actually disbursed.

The Court also referred to the Bombay High Court's decision in Commissioner of Income-Tax -vs- Raymond Ltd., which held that lump sum consideration payable in installments still qualifies under Section 35AB.

Conclusion:

Both questions of law were answered in favor of the assessee. The assessee was entitled to carry forward and set-off business losses under Section 79, as the voting power remained with ABL through APIL. Additionally, the assessee was entitled to claim deduction under Section 35AB for the Rs. 5 Crores paid for technical know-how, as the liability to pay arose on the date of transfer, regardless of the deferred payment schedule. The appeals were dismissed with no order as to costs.

← Previous Next →