2018 (4) TMI 689 - AT - Income Tax

Set off of loss brought forward of the earlier years to be set off in the current assessment year - since 51% shareholding as on 31st March 2009, 31st March 2010 and 31st March 2012 is not with the same persons, the loss cannot be set off - Held that - Section 79 of the Act provides for carry forward and set off of losses. In the present appeal, the assessee is not seeking carry forward of losses to be set off but the assessee is seeking to set off the brought forward losses of the earlier years to be set off in the current assessment year and therefore provisions of section 79 may not be applicable. The said section would apply if there is a change in voting power in the assessment year when the loss is sought to be carried forward and set off against the subsequent year losses. The assessee in the present appeal for A.Y. 2012-13 is seeking to set off loss incurred in A.Y. 2009-10 and 2010-11. The issue before us relates to loss of A.Y.2009-10 and 2010-11 to be set off against income of A.Y.2012-13. Mr. Vijay Wadhwa and Mrs. Vinita Wadhwa through their shareholding in RPL and WGH as on 31st March 2009 and 31st March 2010, i.e., the last day of the previous year in which the loss was incurred, held voting rights to the extent of 56% and 53% respectively and as on 31st March 2012 held 100% of shares carrying voting rights directly and therefore the assessee appellant is entitled to carry forward and set off of loss of A.Y. 2009-10 and 2010-11 against income of A.Y. 2012-13. - Decided in favour of assessee.

Issues Involved:
1. Applicability of Section 79 of the Income Tax Act, 1961 for carry forward and set-off of losses.
2. Determination of beneficial ownership and voting power.
3. Interpretation of Section 79(a) and its emphasis on voting power rather than shareholding.
4. Relevance of judicial precedents in interpreting Section 79.

Issue-wise Detailed Analysis:

1. Applicability of Section 79 of the Income Tax Act, 1961 for carry forward and set-off of losses:
The primary issue revolves around whether the assessee company can set off brought forward house property losses amounting to ?20,98,59,295/- against the current year's house property income. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] denied this set-off by invoking Section 79 of the Income Tax Act, which stipulates that no loss shall be carried forward and set off if there is a change in the beneficial shareholding to the extent of 51% in the year in which the loss was incurred and the year in which the loss is sought to be set off.

2. Determination of beneficial ownership and voting power:
The assessee argued that Mr. Vijay Wadhwa and Mrs. Vinita Wadhwa were the beneficial owners of the shares of the assessee company during the relevant assessment years and hence Section 79 should not apply. The assessee provided detailed shareholding patterns and demonstrated that Mr. Vijay Wadhwa and Mrs. Vinita Wadhwa held significant shares in the intermediary companies (RPL and WGH) which in turn held shares in the assessee company. The assessee contended that the beneficial ownership and control through voting power remained unchanged.

3. Interpretation of Section 79(a) and its emphasis on voting power rather than shareholding:
The Tribunal emphasized that Section 79(a) focuses on "voting power beneficially held" rather than mere shareholding. The condition under Section 79(a) is the exercise of voting power, not the holding of shares. The Tribunal noted that the phrase "beneficially held" in Section 79(a) pertains to voting power and not shareholding. The Tribunal also highlighted that the second proviso to Section 79(a) and the substituted Section 79(b) (introduced by the Finance Act, 2017) support this interpretation by distinguishing between voting power and shareholding.

4. Relevance of judicial precedents in interpreting Section 79:
The Tribunal referred to several judicial precedents to support its interpretation. The Karnataka High Court in the case of Commissioner of Income Tax Vs. Amco Power Systems Ltd. held that the purpose of Section 79 is to prevent the misuse of carry forward and set-off of losses by new owners who acquire companies solely to benefit from such set-offs. The Tribunal also cited the Delhi High Court's decision in Commissioner of Income Tax Vs. Select Holiday Resorts (P.) Ltd., which held that the change in shareholding due to merger does not violate Section 79 if the management remains with the same set of people. The Tribunal distinguished the facts of the present case from the Delhi High Court's decision in Yum India, noting that the beneficial ownership and control in the present case were consistent.

Conclusion:
The Tribunal concluded that Mr. Vijay Wadhwa and Mrs. Vinita Wadhwa, through their shareholding in RPL and WGH, beneficially held more than 51% of the voting power in the assessee company as on 31st March 2009, 31st March 2010, and directly on 31st March 2012. Therefore, the assessee is entitled to set off the brought forward losses of ?20,98,59,295/- against the income of the assessment year 2012-13. The appeal of the assessee was allowed.

Order Pronounced:
The order was pronounced in the open court on 14.02.2018.

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