2023 (7) TMI 1325 - AT - Income Tax

Denial of Set off brought forward losses by applying provisions of section 79 - Change in share holding pattern between both the shareholders - i.e., the holding of FHL increased to 85%, while holding of FHHPL got reduced to 15% - AO said that said change in shareholding pattern between two shareholder would be hit by provisions of section 79 of the Act, which bars carry forward of losses - contention of the learned AR that the provisions of section 79 would be applicable only if the shares of the company carrying not less than 51% of the voting power beneficially held by certain persons were transferred to other persons HELD THAT - In the instant case, we noticed that there are only two shareholders, viz., FHL and FHHPL. Both the above said shareholders, as a group, has beneficially held 51% of the voting power in both the years, i.e., the year in which loss was incurred and the year in which the loss was sought to be set off, meaning thereby, there is no change in the shareholding pattern of the group. We further noticed that the FHHPL is holding company of FHL. Hence, the increase in shareholding of FHL in the assessee company, in any case, would not result in the change in the voting power of the shareholders. Accordingly, we find merit in the contentions of the learned AR that the provisions of section 79 will not be applicable in the facts of the present case. Hence, we are not able to agree with the view expressed by the tax authorities that the change in individual shareholding of the shareholders would also attract provision of section 79 - Accordingly, we set aside the order passed by the learned CIT(A) on this issue and direct the AO to allow set off brought forward losses. Addition u/s 68 - assessee has not offered proper explanations with regard to nature and source of share premium received by it - HELD THAT - The provisions of sec.68 would be attracted when the assessee fails to prove the identity of the creditor, credit worthiness of the creditor and genuineness of transactions. The examination u/s 68 of the Act has to be with reference to the creditor who has given money to the assessee. We notice that there is no doubt in the mind of tax authorities about the three ingredients mentioned above in respect of share premium amount of Rs.27 crores collected from FHL, i.e, the AO has seems to have accepted that the FHL has the capacity and credit worthiness to subscribe to the shares. The addition has been made only on the ground that the assessee has failed to substantiate the share premium @ Rs.90/- per share, i.e., the capacity of the assessee to charge high share premium is being questioned by the tax authorities. The above said question would not be covered by the provisions of sec.68 since we have noticed earlier the provisions of sec 68 would be directed towards the creditor only. Decided in favour of assessee.

Summary

Issues involved:
The judgment involves issues related to the rejection of claim for set off of brought forward losses under section 79 of the Income Tax Act and the addition made under section 68 of the Act.

Issue 1: Set off of brought forward losses under section 79 of the Income Tax Act
- The assessee contested the decision of tax authorities to reject the claim for set off of brought forward losses by applying provisions of section 79 of the Act.
- The Assessing Officer held that a change in shareholding pattern between two shareholders would be hit by section 79, thereby disallowing the carry forward and set off of accumulated losses.
- The appellate tribunal considered the provisions of section 79, which require beneficial ownership of shares carrying not less than 51% of voting power to remain with the same group of persons.
- The tribunal found that in this case, the shareholding pattern between the two shareholders remained consistent, with no change in beneficial ownership, as one shareholder was the holding company of the other.
- Consequently, the tribunal held that section 79 was not applicable, and directed the Assessing Officer to allow set off of brought forward losses for the relevant assessment years.

Issue 2: Addition made under section 68 of the Income Tax Act
- The addition under section 68 was related to the share premium collected by the assessee on the issuance of equity shares.
- The Assessing Officer questioned the justification for collecting a high share premium given the accumulated losses of the company.
- The tribunal noted that the share premium was collected from existing shareholders based on a valuation report prepared by chartered accountants using the Discounted Cash Flow method.
- The tribunal observed that the tax authorities doubted the commercial expediency of collecting a high share premium but did not question the identity or creditworthiness of the shareholder.
- The tribunal concluded that the provisions of section 68, which focus on the creditor providing funds to the assessee, were not applicable in this case.
- Therefore, the tribunal directed the Assessing Officer to delete the addition made under section 68 of the Act, as the three key ingredients of section 68 were not in question in relation to the share premium collected.

Conclusion:
The appellate tribunal allowed both appeals of the assessee, setting aside the orders passed by the tax authorities on the issues of set off of brought forward losses under section 79 and the addition made under section 68 of the Income Tax Act.