Section 79 - Carry Forward of Losses & Implications of De-Listingof Shares

[Amit Ganguly]

A Traders Limited (ATL)

Implications under the Income Tax Act, 1961 on de-listing of shares

1 From the date of de listing of shares ATL  will become a company in which public are not substantially interested within the meaning of Section 2 (18)(b)(A) of the IT act 1961(Act)

2 It has to be ascertained as to whether ATL will remain a company in which the public are substantially interested within the meaning of Section 2 (18)(b)(B) of the act

3 In the event ATL becomes a closely held company. If it does not fulfill the requirements of Sec 2 (18)(b)(B),then the provisions of Section 2(22)(e) will come into play. In such a case, if ATL gives loans and advances to a share holder of the company or to a person or concern having substantial interest in the company out of accumulated profits, such amounts may be treated as dividend in the hands of the recipient company and charged to tax. Since this is not a dividend which is covered by the provisions of Section 115-O. it will not be exempted under Section 10(34) of the act.

4 It has been held in the following cases that if there wasn't accumulated profit and loans and advances or other payments are given by a closely held company to a shareholder or any other person or concern having substantial interest the same has to be treated as deemed dividend in the hands of the recipient as per the provisions of Section 2(22)(e) of the act.

D C I T vs Rajasthan Wires Pvt. Ltd           81 T.T.J 673(ITAT Jaipur)

C I T  vs Mukundray  K Shah   290 I.T.R 433(SC) = [2008 -TMI - 6556 - SUPREME Court]

5 ATL has accumulated business loss aggregating to Rs 20.57 crores and capital loss aggregating to Rs 8.01 crores as per the returns filed upto the assessment  year 2006-07.

6 If  ATL becomes a closely held company then the provisions of Section 79 of the act relating to carry forward of losses will be attracted.

7. As per the provisions of Section 79 where a change in share holding takes place in a previous year in case of a closely held company no loss incurred in any year prior to the previous year shall be carried forward and set of against the income unless on the last day of the previous year the shares of the company carrying not less than 51% of the voting power where beneficially held by persons who had beneficially held the shares carrying not less than 51% of the voting power as on the last day of the year or years in which loss was incurred.

8. It should be ensured that the share holding pattern of ATL after de listing should be such that atleast 51% of the shareholders who were there at the end of the financial year in which loss was incurred remain as shareholders.

9. As of now ATL being a listed company is treated as a widely held company and the companies in which ISG and/or other widely held companies hold more than 50% of the voting rights are also treated as widely held companies. Therefore on de listing of shares of ATL, if such shareholding comes down to less than 50% then all the companies in the chain will be treated as closely held companies. The provisions of Section 2(22)(e) and Section79 will be attracted in case of such companies also.