2019 (1) TMI 1477 - HC - Income Tax

Applicability of Section 79 - Carry forward and set off of losses in the case of certain companies - Tribunal have held that the assessee-Company as on the last date of the previous year relevant to the assessment year being a Company in which the public are substantially interested and the 51% shareholding of that Company having existed prior to the amalgamation on 01.01.2000, Section 79 of the Act is inapplicable to the Company Held that - Not less than 51% of the share holding of FC Berg on the last day of the year or years in which the loss occurred, should have been beneficially held by not less than 51% of the shareholders of FC OEN. FC OEN acquired 60% of the shareholding of FC Berg only in July, 1999. Irrespective of that, the new company will be entitled to claim the business loss of the amalgamated company in the assessment year relevant to that previous year in which there was change in shareholding. This is because the prohibition is only in claiming the losses of any year prior to the previous year. But 51% of the shareholding, in FC Berg, in none of the years prior to the previous year (1999-2000), was ever held by FC OEN or even FCI. Section 79 squarely applies in the case of the assessee, FC OEN Limited in so far as the claim of carry forward of losses, incurred by FC Berg, in any of the years prior to the previous year. On amalgamation, FC OEN Limited cannot claim business loss of FC Berg for the years prior to the previous year, i.e, as on and prior to 31.3.1999. Section 79 does not prohibit the claim of business loss of that previous year in which there was a change in shareholding, i.e., 1999-2000. We see from the assessment order that business loss upto 31.12.1999 has been declined obviously for reason of the new company in which the public are substantially interested having been formed on 01.01.2000. As we earlier noticed, the amalgamation and the change in status of the company to one in which public are substantially interested, does not at all affect the applicability of Section 79 insofar as the earlier company was not one in which the public are substantially interested. Hence, the business loss of the earlier company from 01.04.1999 to 31.12.1999 has to be allowed to be carried forward by FC OEN Limited. We, hence, answer the question of law partly in favour of the assessee and partly in favour of the Revenue. We direct the AO to carry out the modification insofar as grant of carry forward of business loss or set off of business loss of the previous year relatable to FC Berg, i.e., of the financial year 1999-2000, in the assessment year 2000-2001.

Summary

Issues:
Applicability of Section 79 of the Income Tax Act, 1961 to a company amalgamated with another company.

Analysis:
The case involved an appeal by two companies, one of which was amalgamated with the other, regarding the applicability of Section 79 of the Income Tax Act, 1961 for the assessment year 2000-01. The main question was whether the company, after amalgamation, should be exempt from Section 79 due to being a company in which the public are substantially interested and having 51% shareholding existing prior to the amalgamation. The court examined the facts where FC Berg Limited, initially owned by FCI and TVS, was later acquired by FC OEN Limited, a subsidiary of FCI. The amalgamation of FC Berg with FC OEN took place in the same financial year. The issue revolved around the interpretation of Section 79 concerning the acquisition of shares and subsequent amalgamation.

The court analyzed Section 79, which aims to prevent profit-making companies from claiming deductions of carried forward losses of unprofitable companies taken over. This provision applies to companies not substantially interested by the public. The court noted that the change in shareholding occurred when FC OEN acquired shares of FC Berg in the previous year. The court emphasized that the change in status from a company not substantially interested to one substantially interested does not affect the application of Section 79. The critical aspect is the change in shareholding in the company claiming losses.

The court highlighted that for the new company to claim business losses of the previous year, at least 51% of the shareholding of the old company should have been held by the new company's shareholders. In this case, FC OEN acquired 60% of FC Berg's shares in July 1999, but it did not meet the criteria for claiming business losses of FC Berg for the years before the previous year. The court clarified that Section 79 prohibits the claim of losses from years before the previous year but allows losses of the previous year with a change in shareholding.

Ultimately, the court partially favored the assessee and partially the revenue. It directed the Assessing Officer to modify the grant of carry-forward or set off of business losses of FC Berg for the financial year 1999-2000 in the assessment year 2000-2001. The court allowed the carry-forward of business losses from April 1, 1999, to December 31, 1999, by FC OEN Limited, despite the amalgamation and change in the company's status.

In conclusion, the judgment clarified the application of Section 79 concerning the carry-forward and set off of losses in the case of companies undergoing amalgamation and changes in shareholding, emphasizing the importance of meeting the statutory requirements for claiming business losses.