Set-off of losses allowed despite change in shareholding if control over Company remains unchanged

CIT v. AMCO Power Systems Ltd. [2015] 62 taxmann.com 350 (Karnataka High Court)

Facts:

• Assessee-company (‘APSL’) was wholly owned subsidiary of AMCO Batteries Limited (‘ABL’).
• ABL transferred 45% and 49% of its shareholding to its subsidiary company (‘APIL’) and Tractors and Farm Equipments Limited (‘TAFE’), respectively.
• Consequently, ABL retained only 6% shares and 45% of shares held by its subsidiary, APIL. The remaining 49% shares were with TAFE.
• As shareholding of the ABL in APSL reduced to 6% in the relevant assessment year, meaning thereby, it was left with less than 51% shares. Thus, AO did not allow APSL to carry forward and set-off the business losses of that year as per section 79 of the Income-tax Act (‘Act’).
• On appeal, CIT(A) confirmed the order of AO. However, on further appeal, the Tribunal sets aside the order of AO.
• Aggrieved by the order of Tribunal, revenue filed the instant appeal before the High Court.

The High Court held in favour of assessee as under-

• Section 79 provides that where there is a change in shareholding of a Company, no losses (incurred in any year prior to the previous year) shall be carried forward and set-off against the income of the previous year, unless on the last day of the previous year the shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.
• The expression ''not less than 51% of voting power..."used in Section 79 indicates that only voting power is relevant and not the shareholding pattern.
• In the instant case, despite the transfer of shares, the holding-company (ABL) still holds effective control over the assessee-company (ABSL) as it holds 51% of shareholding along with its subsidiary (APIL).
• Section 79 was introduced to prevent misuse of carry forward of losses by the new owner. But, in the instant case, effective control over the assessee-company (APSL) remained unchanged even after the change in shareholding. Therefore, losses could be carry forward and set-off.