2019 (3) TMI 649 - HC - Income Tax

Entitlement to carry forward accumulated loses u/s 74 - Advance Ruling - status of an entity as incorporated abroad - Change in status from Trust to LLC - non filing of return of income AND is not allotted any PA - HELD THAT - Petitioner No.1 both as a trust and as LLC in terms of the law of Delaware, USA, continues to be the same person. This position is accepted in India. Therefore, gain and loss earned by it in its earlier avtar would in law, not be denied only because of change in status from Trust to LLC. Ruling of the AAR on the question as proposed would necessarily depend upon context, in which, the question has been raised. In this case, the Petitioner No.1 was seeking to carry forward accumulated loses under Section 74 of the Act when admittedly it had not filed any return of income, claiming loses for the earlier Assessment Year under the Act and it was not an Assessee under the Act. Thus, no fault can be found with the impugned order of the AAR, answering the question as posed for its consideration by the Petitioner No.1 in the negative. This decision will not impact the case of the three series (funds) to claim the benefit of carrying forward losses under Section 74 of the Act, if they are otherwise entitlement to it in law. Neither the AAR nor we had any occasion in the present proceedings to decide whether or not, the three series (funds), for whom the Petitioner is claiming benefit in its hands, are entitled to the benefit of carry forward loses under Section 74 of the Act or not.

Summary

Issues Involved:
1. Locus standi of Petitioner Nos. 2, 3, and 4.
2. Entitlement of Petitioner No. 1 to carry forward accumulated capital losses under Section 74 of the Income Tax Act, 1961.
3. Compliance with Section 80 and Section 139(3) of the Income Tax Act, 1961.
4. Applicability of Private International Law and SEBI regulations.

Issue-wise Detailed Analysis:

1. Locus Standi of Petitioner Nos. 2, 3, and 4:
The court addressed the preliminary objection raised by the Respondents regarding the locus standi of Petitioner Nos. 2, 3, and 4, who were not applicants before the AAR. The court noted that Petitioner No. 1 alone had approached the AAR, and thus, only Petitioner No. 1 had the standing to challenge the impugned order. Consequently, Petitioner Nos. 2, 3, and 4 were deleted from the petition, and the case proceeded solely on behalf of Petitioner No. 1.

2. Entitlement to Carry Forward Accumulated Capital Losses:
The core issue was whether Petitioner No. 1, after converting from a trust to an LLC, was entitled to carry forward accumulated capital losses under Section 74 of the Income Tax Act, 1961. The AAR had ruled against Petitioner No. 1, stating that there is no provision in the Act allowing one assessee to carry forward and set off losses incurred by another assessee. The court upheld this view, emphasizing that Petitioner No. 1 had not filed any return of income and thus was not entitled to claim the benefit of Section 74.

3. Compliance with Section 80 and Section 139(3) of the Income Tax Act:
The court highlighted the importance of compliance with Section 80 and Section 139(3) of the Income Tax Act, which mandate that a return of income must be filed to claim the carry forward of losses. Petitioner No. 1 had not filed any return of income, and thus, the court concurred with the AAR's reliance on these sections to deny the carry forward of losses.

4. Applicability of Private International Law and SEBI Regulations:
The court acknowledged the principle of Private International Law, which determines the status of an entity based on the law of the country where it was incorporated. The court agreed that Petitioner No. 1, both as a trust and as an LLC, continued to be the same entity under Delaware law. However, this did not satisfy the requirements of the Indian Income Tax Act for carrying forward losses. The court also noted that SEBI's communication allowing the same registration after the name change did not impact the requirement to comply with the Income Tax Act.

Conclusion:
The court dismissed the petition, upholding the AAR's decision that Petitioner No. 1 was not entitled to carry forward accumulated losses under Section 74 of the Income Tax Act, 1961, due to non-compliance with the statutory requirements of filing a return of income. The ruling clarified that the decision would not affect the individual claims of the three series (funds) if they are otherwise entitled to carry forward losses under the Act.