2012 (8) TMI 804 - HC - Income Tax

Entitlement to carry forward losses from the previous year 2001-02 and 2002-03 u/s 79 - whether the company-investors came within the description of those owning not less than 51% of the voting power beneficially through the two individual shareholders - Held that - As at the time of original incorporation (within the assessment year 2000-01) on 16.8.2000, the arrangement between the shareholders and real owner i.e. foreign investor companies, was always that the former were to facilitate the process awaiting approval. While such conclusion is permissible in law, lack of any discussion in the present case by the lower authorities should have led the Tribunal to either examine or remand the matter for reconsideration. As appears from a reading of the Tribunal s order and FEMA order, at the time of incorporation, the share capital was Rs. 2,000/- and the foreign investors infused Rs.49.90 lakhs during the subsequent assessment year which was treated as share application money and later appropriated as share capital after allotment of shares to the foreign investors, thus this disclosed arrangement is not forthcoming from the record , thus the matter has to be remitted to the AO for reconsideration of the entire record and returning findings with specific reference to the arrangement, if any, which existed between original shareholders of the company and the foreign investors - in favour of assessee by way of remand.

Summary

Issues:
Question of law regarding the permissibility of carrying forward losses due to Section 79 of the Income Tax Act.

Analysis:
The case involved the assessee's claim for set-off of losses from the assessment years 2001-02 and 2002-03 in the returns filed for the subsequent years. The Assessing Officer disallowed the claim citing Section 79 of the Income Tax Act, which restricts carrying forward losses in certain situations. The dispute arose from a change in shareholding of the assessee, where original individual shareholders were replaced by foreign companies. The ITAT accepted the assessee's contentions that the original shareholders were nominees holding shares on behalf of foreign investors, who fell within the definition of "beneficial owner" under Section 79. The Tribunal considered the provisions of FEMA and the shareholding pattern to support its decision.

The revenue argued that the deletion of the requirement to find the transfer of shareholding not bona fide led to a presumption of transfer, disallowing the carry forward of losses under Section 79. The Tribunal's decision was based on the interpretation of the shareholding pattern and the compliance with FEMA rules. The Court noted the lack of discussion by lower authorities on the original arrangement between shareholders and foreign investors. The Court remitted the matter to the Assessing Officer for reconsideration, emphasizing the need for specific findings on the arrangement between original shareholders and foreign investors.

In conclusion, the Court allowed the appeal and directed the Assessing Officer to re-examine the matter with a focus on the arrangement between original shareholders and foreign investors, ensuring specific findings are returned within four months.