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2018 (4) TMI 689

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 app .....

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7.50% Total 17,50,000 100.00% Shareholding pattern of RPL in A.Y.2009-10 Name No. of shares held As a % Vijay Wadhwa 450 45.00% Vinita Wadhwa 450 45.00% Other individual shareholders 100 10.00% Total 1000 100.00% Shareholding pattern of RPL in A.Y.2010-11 Name No. of shares held As a % Vijay Wadhwa 435 43.50% Vinita Wadhwa 435 43.50% Other individual shareholders 130 13.00% Total 1000 100.00% In A.Y.2012-13 the share held by RPL, SND and WGH in the assessee company were transferred to Shri Vijay Wadhwa and Smt. Vinita Wadhwa for consolidation and re-organisation of business. 3. During the course of assessment proceeding Assessing Officer asked the assessee to show cause as to why the set off of brought forward house property losses of ₹ 20,98,59,295/- against the current year s house property income shall not be denied in view of section 79 of the Act to the assessee as during the year more than 51% of the shareholding pattern of the assessee has changed. In response the assessee filed letter dated 10.10.2014 and assessee submitted the provision of section 79 of the Act states that in case of a closely held company, no loss shall be carried forward and set off, if there is a .....

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ny is held by same persons and therefore the assessee is entitled to set off the said loss. The learned AR submitted that the object of section 79 has explained in Apex Court in the case of CIT Vs. Italindia Cotton Co. P. Ltd. reported in 147 ITR 160 is to discourage persons claiming a reduction of their tax liability on the profits earned in companies which has sustained losses in earlier years. It was not unusual for a group of persons to acquire a company, which had suffered losses in the earlier years, in the expectation that the company would earn substantial profits after such acquisition, and they would benefit by a reduction of the tax liability of those profits on a set off of losses carried forward from earlier years before the acquisition. The learned AR submitted that section 79(a) emphasis on the voting power beneficially held by the same person as on the last day of the previous year when the loss is incurred and on the last day of the previous year when the set off is claimed. The condition under section 79(a) is exercise of voting power is important for the purpose of section 79(a). The beneficiary held in section 79(a) goes with the voting power and not with the sh .....

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IIPL and 100% shares of IIPL were held by four persons of a family who had the control and management of IIPL as well as assessee company. The Assessing Officer disallowed the carry forward of losses u/s.79 and Tribunal has allowed the claim and matter went to Hon ble Delhi High Court has dismissed the appeal of the revenue. The learned AR submitted that Hon ble Delhi High Court in case of Yum Restaurants (India) P. Ltd. reported in 380 ITR 637. The facts are different, therefore it is not applicable. The learned AR submitted that there are judgment in favour of the assessee, moreover, there is Tribunal judgment which are decided by the Tribunal and there is a direct decision of Hon ble Karnataka High Court, assessee s appeal should be allowed. 6. The learned DR submitted that there is no evidence that shares of the assessee company were beneficial held by Shri Vijay Wadhwa and Mrs. Vinita Wadhwa for A.Y.2009-10 and 2010-11 when the loss were incurred by the assessee company. The decision in case of Tainwala Trading and Investments Co. Ltd. decided by Bombay Tribunal and Apex Court in case of Vodafone which clearly states that section 79 refers shares being beneficiary held and not .....

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from the chart I & II above that more than 51% of the assessee company s shares and voting power are held by the Wadhwa Group Companies which in turn are beneficially held by Mr. Vijay Wadhwa and Mrs. Vinita Wadhwa. These two individuals were also the directors in all above mentioned companies i.e. assessee, RPPL and WGHPL. They continue to be directors in the above companies now also. 9. During the year under consideration, the assessee company has earned taxable income of ₹ 30,11,61,838/- under the head income from house property and after setting off the brought forward losses of ₹ 20,98,59,295/- as shown in above table, remaining income of ₹ 9,13,02,543/- (i.e. ₹ 30,11,61,838 - ₹ 20,98,59,295) has been offered as income and taxes have been transferred by them to Mr. Vijay Wadhwa and Mrs.Vinita Wadhwa for consolidation and re-organisation of the business structure. Thus, instead of having the beneficial ownership in the assessee company through intermediate companies, these two individuals (i.e. Mr. Vijay Wadhwa and Mrs. Vinita Wadhwa) are now direct beneficial shareholders of assessee company. The current shareholding of the assessee is as und .....

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nita Wadhwa. Similar issue had come up before Hon ble Karnataka High Court in case of Commissioner of Income Tax Vs. Amco Power Systems Ltd. 379 ITR 375 wherein it is held that Section 79 of the Act would be benefit of carry forward and set off of business losses of previous Company should not be exercise by any owner, who may purchase the shares of company only to get benefit of set-off of business losses for previous years of company which may bear profits in subsequent years after new owner takes over the company. For such purpose it is provided under such section that 51% of voting power that was beneficially held by person or persons should continue to be held, then only such benefit could be given to that company. Section 79 speaks of 51% voting power, which ABL continued to have even after transfer of 49% shares to TAFE, as it controlled voting power of APIL, and together, ABL had 51% voting power. We find that the Hon ble High Court has observed as under:- Business loss carry forward and set-off assessee company was engaged in manufacture and sale of storage batteries. By agreement between ABL and assessee APSL, former agreed to transfer technical know-how and grant of non- .....

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h may bear profits in subsequent years after new owner takes over company. It was provided that 51% of voting power that was beneficially held by person or persons should continue to be held, then only such benefit could be given to company. Though ABL might not have continued to hold 51% shares, but S.79 speaks of 51% voting power, which ABL continued to have even after transfer of 49% shares to TAFE, as it controlled voting power of APIL, and together, ABL had 51% voting power. Control of company remained with ABL as change in shareholding did not result in reduction of its voting power to less than 51%. Control over company, with 51% voting power, remained with ABL and, provisions of S.79 would not be attracted. Appeal dismissed. 13. Similarly, we find the similar facts in ITAT, G Bench reported in 52 DTR 0014 in the case of Deputy Commissioner of Income Tax Vs. Select Holiday Resorts (P.) Ltd. wherein it was held as under:- IIPL was holding 98 per cent of shares of the assessee company. On the other hand 100 per cent shares of IIPL were held by four persons of the family who were having the control and management of the IIPL as well as of the assessee company. Because of the me .....

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forward of losses, under section 79 - Whether, where there was no change in management of company which continued to remain with same set of people, and change in shareholding was only due to merger, carry forward of losses of company could not be denied. 15. The object of section 79 as explained by the Apex Court in the case of CIT Vs Italindia Cotton Co. P. Ltd. reported in 147 ITR 160 is to discourage persons claiming a reduction of their tax liability on the profits earned in companies which has sustained losses in earlier years. It was not unusual for a group of persons to acquire a company, which had suffered losses in the earlier years, in the expectation that the company would earn substantial profits after such acquisition, and they would benefit by a reduction of the tax liability on those profits on a set off of losses carried forward from earlier years before the acquisition. The acquisition of a company in such a case would be effected by a change in its shareholding and the control over the company could be ensured by securing the beneficial ownership of shares carrying 51 per cent or more of the voting power. 16. It is important to note that section 79(a) lays emphas .....

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hat ownership of the shares with the same person is not contemplated for denying the set off of the loss. Furthermore the word preceding held is beneficially which is an adjective/adverb of the word benefit . Therefore, what is to be seen is whether the benefit of voting rights is held by the same persons. The phrase beneficially held would contemplate wider meaning to cover a situation wherein if a person is able to influence voting rights to the extent of 51% in the company seeking set off through chain of holding then same would be sufficient not to disentitle the set off of the loss. The phrase used in section 79(a) .....beneficially held by persons who beneficially held would indicate indirect control of voting rights through chain of holding by the same group. In the instant case as evident from chart above, Mr. Vijay Wadhwa and Mrs. Vinita Wadhwa through their shareholding in RPL and WGH can be said to be holding 51% voting power in the assessee company as on 31st March 2009 and 31st March 2010 and directly as on 31st March 2012. Therefore, the assessee is entitled to set off the loss under consideration in the assessment year 2012-13. 22. The decision of the Delhi High Cour .....

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n this context that separate legal entity concept of each company was explained. On the contrary due to the use of phrase beneficially held in section 79 of the Act, the legislature seems to have accepted the concept of group control due to chain holdings with one/more persons ultimately. 25. The reliance placed by the lower authority on Mumbai Tribunal case in the case of Tainwala Trading and Investments Co. Ltd. reported in f2012J 22 taxinann.com 68 (Mum.) is distinguishable on facts. In that case Mr. Tainwala was a Director in a company who held shares in the company incurring loss. Mr. Tainwala became shareholder of the company incurring loss in the year when the company incurring loss wanted set off. From the said decision, it is not clear whether Mr. Tainwala was a shareholder in the company in which he was a Director and it was on these facts that the Tribunal negatived the argument of the assessee for set off under section 79 of the Act. Also the argument of change in shareholding due to cross gift was also negative because of no evidence to that effect. In the instant case in appeal, Mr. Vijay Wadhwa and Mrs. Vinita Wadhwa were shareholders in RPL and WGH who in turn were .....

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