2022 (12) TMI 836 - AT - Income Tax

Rectification of mistake u/s 154 - debatable issue - set off of brought forward losses and unabsorbed depreciation u/s - 79 - change in shareholding - HELD THAT - We are of the opinion that the AO could not have invoked jurisdiction u/s 154 of the Act which power is only for rectification of mistake which is apparent on the face of record. According to Ld. AR the AO in the appellant s case has made assessment u/s 154 by invoking the provisions of section 79 - section 79 of the Act clearly excludes the company in which public are substantially interested now in order to check the applicability of section 79 we need to see the definition of the company in which public are substantially interested which is defined u/s 2(18) of the Act. Section 3 of Companies Act 1956 defines the company Private company and public company thus the issue in the appellant s case require interpretation of various sections in order to see whether the provisions of section 79 is applicable on the appellant or not and it indeed involves interpretation of various provisions of law. As noted that there are various judicial precedents on the issue of applicability of provisions of Section 79 of the Act on change in shareholding within the Group and when there is no change in ultimate holding or management. There are also various judicial precedents in which authorities tried to establish whether the company is a company in which public is substantially interested or not and thus provisions of section 79 is not applicable. In every decision whether it is in favour or against the appellant appellate authorities has made the decisions after satisfying itself as to the applicability and interpretation of various provisions and laws. Thus it cannot be said that it is a mistake apparent from records when the issue involves interpretation of relevant laws and sections. Thus it can be safely concluded that set-off of losses when there is a change in shareholding is not a mistake apparent from record and is debatable issue in the facts and circumstances discussed supra and it is not a case rectification. Thus it can be safely concluded that set-off of losses when there is a change in shareholding is not a mistake apparent from record and is debatable issue in the facts and circumstances discussed supra and it is not a case rectification AO erred in invoking Section 154 of the Act to disallow the losses u/s 79 of the Act which in any case can be termed to be mistake apparent on record. From the discussion (supra) it can be seen that not only provisions of Income Tax Act but also Companies Act need to be considered for adjudicating the issue on which several judicial precedents are there on the issue and which is mixed question of fact and law and therefore certainly it cannot be rectified by AO u/s 154 - Appeal of the assessee is allowed.

Issues Involved:
1. Jurisdiction of the Assessing Officer (AO) under Section 154 of the Income Tax Act, 1961.
2. Application of Section 79 of the Income Tax Act to disallow set-off of carried forward losses and unabsorbed depreciation.
3. Determination of whether the assessee company qualifies as "a company in which the public are substantially interested."

Issue-wise Detailed Analysis:

1. Jurisdiction of the Assessing Officer (AO) under Section 154 of the Income Tax Act, 1961:

Ground no. 3 was taken up first, challenging the jurisdiction of the AO to invoke Section 154 of the Act for rectification of a mistake apparent on record. The assessee argued that the AO did not have the power to pass an order under Section 154 as the issue involved was a mixed question of fact and law, not a mistake apparent from the record. The AO had initially allowed the set-off of losses in the assessment order dated 30.03.2015, but later reversed this decision under Section 154 on 28.07.2016, citing a major change in the shareholding pattern as per Section 79 of the Act. The assessee contended that the AO's action amounted to a review of his own order, which is not permitted under Section 154.

The Tribunal noted that the issue involved was indeed a mixed question of fact and law, requiring interpretation of various statutes and provisions. The Tribunal cited several judicial precedents to support the view that the AO could not have invoked Section 154 for such a debatable issue. Consequently, the Tribunal concluded that the AO erred in exercising jurisdiction under Section 154 and allowed ground no. 3 of the assessee.

2. Application of Section 79 of the Income Tax Act to disallow set-off of carried forward losses and unabsorbed depreciation:

The AO had disallowed the set-off of carried forward losses and unabsorbed depreciation by invoking Section 79 of the Act, which restricts such set-offs in cases where there is a significant change in shareholding. The assessee argued that Section 79 was not applicable as the company became a subsidiary of a public listed company (M/s. Birla Shloka Edutech Ltd.) during the relevant assessment year, making it "a company in which the public are substantially interested."

The Tribunal examined the shareholding patterns before and after the issuance of new equity shares and noted that more than 50% of the shares were held by a public company. The Tribunal referred to Section 2(18) of the Act and Section 3(iv) of the Companies Act, 1956, which define "a company in which the public are substantially interested." The Tribunal concluded that since the assessee company was a subsidiary of a public company, Section 79 was not applicable.

3. Determination of whether the assessee company qualifies as "a company in which the public are substantially interested":

The Tribunal analyzed the definitions provided in Section 2(18) of the Income Tax Act and Section 3(iv) of the Companies Act, 1956. It noted that a company in which the public are substantially interested includes a company that is a subsidiary of a public company. The Tribunal cited judicial precedents, including the decision of the Hon'ble Jurisdictional High Court in the case of Tata Petrodyne Ltd., which held that a company becomes one in which the public are substantially interested if its shares are held by a public company.

The Tribunal concluded that since M/s. Birla Shloka Edutech Ltd. (a public company) held more than 50% of the shares of the assessee company, the assessee qualified as "a company in which the public are substantially interested." Therefore, the provisions of Section 79 were not applicable, and the AO's action to disallow the set-off of losses was erroneous.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the AO erred in invoking Section 154 of the Act to disallow the set-off of carried forward losses and unabsorbed depreciation. The Tribunal concluded that the issue involved was a mixed question of fact and law, requiring interpretation of various statutes, and thus could not be rectified under Section 154. The Tribunal also held that the assessee company qualified as "a company in which the public are substantially interested," making Section 79 inapplicable. Consequently, the Tribunal canceled the AO's action and allowed the set-off of losses.

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