2023 (4) TMI 229 - AT - Income Tax

Revision u/s 263 - Disallowance of brought forward business loss as substantial change (more than 51%) in shareholding pattern - as per provisions contained u/s 79 the assessee company cannot set off its brought forward business loss of preceding assessment years which made the assessment order passed under section 143(3) dated 06/12/2019 erroneous insofar as it is prejudicial to the interest of the Revenue - HELD THAT - Assessee drew our attention towards notice issued by the Assessing Officer during the assessment proceedings under section 142(1) of the Act requesting various details wherein a pertinent question has been put to the assessee that There is substantial increase in share capital during the year, please furnish name and address of person who has invested in share capital . Similarly, in another notice issued under section 142(1) AO put a question as to the substantial increase in share capital during the year under consideration and in response thereto, the assessee has duly replied, which has also been extracted in impugned order passed by Ld.PCIT. Thus factum of changes in the shareholding pattern has been duly disclosed by the assessee in its tax audit report (Form 3CA / 3CD) in the year under consideration - ultimate holding company was Sodexo SA, France. Moreover, when beneficial ownership is with ultimate holding company, loss cannot be disallowed. However, in the instant case, no such loss was claimed by the Assessee. PCIT has proceeded on wrong premise that the Assessing Officer has failed to do and did not conduct any enquiry qua the issue flagged by him - AO has passed the assessment order after enquiry and due verification on the basis of submissions and details furnished by the assessee by taking plausible view - Decided in favour of assessee.

Issues Involved:
1. Jurisdiction and Validity of the Order under Section 263.
2. Applicability of Section 79 of the Income Tax Act.
3. Set off of Carried Forward Business Losses.
4. Conduct of Enquiries by the Assessing Officer.
5. Principles of Natural Justice.
6. Direction to Initiate Penalty Proceedings under Section 270A.

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of the Order under Section 263:
The appellant contested the jurisdiction of the Principal Commissioner of Income-tax (PCIT) in passing the order under Section 263 of the Income Tax Act, 1961. The appellant argued that the assessment order passed under Section 143(3) was neither erroneous nor prejudicial to the interests of the revenue. The Tribunal noted that the assessment order was framed on the basis of a return declaring a business loss which was reduced after making certain disallowances. The Tribunal concluded that there was no error in the assessment order that would justify invoking Section 263, thus quashing the PCIT's order.

2. Applicability of Section 79 of the Income Tax Act:
The PCIT invoked Section 79, which restricts the set-off of carried forward losses in cases of substantial change in shareholding. The PCIT observed a change in the shareholding pattern of the assessee company, with Sodexo Services Asia Pte Ltd and Sodexo S.A., France holding different percentages of shares on different dates. The Tribunal found that the ultimate holding company, Sodexo S.A., France, controlled the voting power both before and after the change in shareholding. Therefore, Section 79 was not applicable as there was no substantial change in the beneficial ownership.

3. Set off of Carried Forward Business Losses:
The PCIT's order was based on the premise that the assessee claimed set off of carried forward losses. However, the Tribunal noted that no such set off was claimed in the assessment year under consideration. The Tribunal emphasized that since no set off was claimed, the provisions of Section 79 were not applicable, and thus, the assessment order was not erroneous or prejudicial to the revenue.

4. Conduct of Enquiries by the Assessing Officer:
The PCIT contended that the Assessing Officer (AO) failed to conduct necessary enquiries regarding the change in shareholding. The Tribunal examined the records and found that the AO had indeed conducted enquiries and obtained detailed responses from the assessee regarding the change in shareholding. The Tribunal highlighted that the AO had taken a plausible view based on the information provided, and thus, the assessment order could not be deemed erroneous.

5. Principles of Natural Justice:
The appellant argued that the PCIT passed the order under Section 263 without providing sufficient opportunity for representation, thereby violating the principles of natural justice. The Tribunal observed that the PCIT did issue a notice for hearing and provided an opportunity for the assessee to present its case. However, the Tribunal found that the PCIT's conclusions were based on incorrect factual and legal inferences, leading to the quashing of the order.

6. Direction to Initiate Penalty Proceedings under Section 270A:
The PCIT directed the AO to initiate penalty proceedings under Section 270A. The Tribunal found this direction to be erroneous as the basis for the penalty was the alleged erroneous assessment order, which the Tribunal found to be valid. Consequently, the direction to initiate penalty proceedings was also quashed.

Conclusion:
The Tribunal concluded that the assessment order passed by the AO was neither erroneous nor prejudicial to the interests of the revenue. The PCIT's order under Section 263 was quashed, and the appeal filed by the assessee was allowed.

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