2012 (8) TMI 771 - AT - Income Tax

Set off of brought forward business loss and unabsorbed depreciation - denial - invocation of provisions of Section 79 - change in shareholding - shares of the company carrying more than 51% of the voting power were beneficially held by the new shareholders - Held that - There is no dispute to the fact that the shareholding pattern has changed on 10-09-2003 and the assessee had accumulated business losses on that date. It is also found that various exceptions provided in the said provisions are not applicable to the facts of the case. Therefore, no infirmity found in the order of CIT(A) denying set of brought forward business loss and unabsorbed depreciation - Decided against assessee

Summary

Issues:
- Applicability of section 79 of the Income Tax Act to deny carry forward of losses.
- Interpretation of the provisions of section 79 in relation to change in shareholding.
- Impact of change in shareholding on the set off of business losses.

Analysis:
1. Applicability of Section 79: The appeal was filed against the order of the CIT(A) denying the carry forward and set off of business losses for the Assessment Year 2005-06 based on the provisions of section 79 of the Income Tax Act. Section 79 restricts the carry forward of losses if there is a change in shareholding. The AO and CIT(A) held that the change in shareholding attracted the provisions of section 79, which led to the denial of set off of business losses for the assessee.

2. Interpretation of Section 79: The provisions of section 79 mandate that if there is a change in shareholding of a company where the public is not substantially interested, losses from previous years cannot be carried forward and set off unless certain conditions are met. The section requires that shares carrying at least 51% of the voting power must be beneficially held by the same persons before and after the change in shareholding. The CIT(A) upheld the AO's decision by emphasizing the strict application of the provisions of section 79 in the case of the assessee.

3. Impact of Change in Shareholding: The assessee argued that the provisions of section 79 should not be applied as there was no change in the shareholding pattern except for a fresh issue of shares made during the financial year 2003-04. However, the authorities rejected this argument, stating that the change in shareholding on 10-09-2003 led to the beneficial holding of shares carrying more than 51% of the voting power by new shareholders. The authorities held that the provisions of section 79 were clearly attracted, thereby justifying the denial of set off of business losses for the relevant assessment year.

4. Judicial Precedent: The assessee relied on a decision of the Madras Bench of the Tribunal, arguing that section 79 should only apply to the year of change in shareholding and not subsequent years. However, the Tribunal distinguished this case by pointing out that the relevant provisions of section 79 had been omitted by the Finance Act, 1988. Therefore, the Tribunal upheld the decision of the CIT(A) and dismissed the appeal, stating that there was no infirmity in applying the provisions of section 79 to deny the carry forward and set off of business losses.

In conclusion, the judgment highlights the strict application of section 79 of the Income Tax Act concerning changes in shareholding and the implications on the carry forward and set off of business losses for companies not substantially owned by the public. The decision underscores the importance of adhering to statutory provisions even in the absence of specific conditions or intentions to avoid tax liabilities.