2017 (1) TMI 1328 - AT - Income Tax

Carry-forward the losses of earlier years - Held that - Section 79 was enacted with the object of preventing what may be shortly described as buying of losses by taking over controlling interest in the shareholding of a company which had carried forward losses.We find that the FAA has not passed a speaking order.From his order,it is not clear as what was the shareholding for the initial year and what changes took place during the year under consideration. He has listed names of several companies and their shareholding pattern. But,nothing is coming out as to how the provisions of section 79 are applicable or not. He has not commented upon the clause (a)and (b)of the section and their applicability to the facts of the case. Therefore, we are of the opinion that,in the interest of justice, matter should be restored back to his file for fresh adjudication.He will decide the matter after affording a reasonable opportunity of hearing to the assessee. Effective ground of appeal is decided in favour of the AO, in part.

Summary

Issues:
1. Allowance of carry-forward losses under section 79 of the Income-tax Act, 1961.

Analysis:
The judgment revolves around the interpretation and application of section 79 of the Income-tax Act, 1961, concerning the allowance of carry-forward losses for a company. The Assessing Officer (AO) completed the assessment for an assessee-company engaged in real estate development, determining its income at &8377; 84.32 lakhs, despite the company declaring a loss of &8377; 3,73,65,308. The primary issue in contention was the allowance of carry-forward losses of earlier years due to a change in the shareholding pattern of the company. Section 79 prohibits the carry-forward of losses if there is a change in shareholding, unless specific conditions are met.

The AO disallowed the carry-forward of losses based on the provisions of section 79, citing that the shareholders did not hold 51% of the voting power as required by the section. The assessee contested this decision, arguing that section 79 was not applicable in its case. The First Appellate Authority (FAA) analyzed the shareholding pattern and held that the company was eligible to carry forward losses as the beneficial ownership of shares carrying more than 51% of the voting power remained consistent despite changes in shareholding.

Upon appeal, the Appellate Tribunal considered the background and principles governing section 79. It highlighted that the section aims to prevent the acquisition of companies with losses for tax benefits. The Tribunal noted that the FAA did not provide a detailed analysis of the shareholding changes and the application of clauses (a) and (b) of section 79. Consequently, the Tribunal partially allowed the AO's appeal and remanded the matter to the FAA for a fresh adjudication, emphasizing the importance of a comprehensive assessment based on the provisions of section 79.

In conclusion, the judgment underscores the significance of adhering to the specific requirements outlined in section 79 for the allowance of carry-forward losses in cases of shareholding changes. The decision emphasizes the need for a thorough examination of shareholding patterns and compliance with the statutory provisions to determine the eligibility of a company to carry forward losses under the Income-tax Act, 1961.