Case Law Details
Meredith Traders (P) Ltd. Vs ITO, ITAT Mumbai
IT Appeal Nos. 3435 and 3436 (Mum.) of 2010
Assessment Years: 2004- 05 and 2005- 06
Decided on: 27 May 2011
Order
R.S. Syal, AM
1. These two appeals by the assessee are directed against the order passed by the CIT under section 263 on 24-3-2010 in relation to the assessment years 2004-05 and 2005-06. Since both the appeals are based on identical facts and common grounds of appeal and further the ld. CIT(A) has also passed a common order, we are proceeding to dispose them by this consolidated order for the sake of convenience.
2. Briefly stated the facts of the case are that on examination of the records of the assessee for the assessment years 2004-05 and 2005-06, it was noticed by the CIT that the order passed by the A.O. under section 154 for the assessment year 2004-05 and that under section 143(3) for the assessment year 2005-06 were erroneous and prejudicial to the interests of Revenue. The reason for such decision by the ld. CIT was that the losses pertaining to assessment year prior to 1998-99 were allowed to be set off by the AO, which could not have been done as per section 79 of the Income-tax Act, 1961 (hereinafter called ‘the Act’). A show-cause notice was issued in this regard. The assessee furnished reply in support of its claim, which fact has been recorded in para-4 of the impugned order. In the course of proceedings under section 263, the ld. CIT noted that during the financial year relevant to assessment year 1998-99 there was a change in the shareholding pattern of the company. Thus, while completing the assessment for assessment year 1998-99, the AO did not allow carry forward of losses on account of prohibition contained in section 79 of the Act. The assessee preferred appeal before the first appellate authority who accepted the assessee’s claim and directed to allow carry forward of losses. The decision of CIT(A) was upheld by the Tribunal. The Department went in appeal before the Hon’ble Bombay High Court. Vide judgment dated 20-4-2009, the Hon’ble Bombay High Court held that there was no need for the AO to give a finding on the applicability of section 79 in that year as the assessee had not claimed carry forward of losses in that assessment year. Keeping these facts into consideration, the ld. CIT held that in the assessment years 2004-05 and 2005-06, the A.O. had wrongly allowed the set off of the brought forward losses of assessment year 1996-97. Relying on the judgment of the Hon’ble Supreme Court in the case of CIT v. Manmohan Das [1966] 59 ITR 699, the ld. CIT observed that the question of allowability of losses was to be determined for the assessment year in which such losses were claimed. As the assessee’s case fell within the ambit of section 79, he held that the assessee was not entitled to set off the losses of earlier years against the income of the years under consideration. It was so held because substantial change took place in the shareholding pattern of the assessee company in the period relevant to assessment year 1998-99. Finally, the ld. CIT held that the contention of the assessee, that section 79 did not apply to it, was devoid of any merit. The assessee’s argument that it was a deemed public limited company was found by the ld. CIT to be correct only for the purposes of Indian Companies Act, 1956, but the same was held to be not acceptable while applying the provisions of the Income-tax Act, 1961. He, therefore, set aside the above referred orders passed by the A.O. for both the years by holding them as erroneous and prejudicial to the interests of the Revenue and directed the assessing authority to redo the assessment as per law after giving the assessee a sufficient opportunity.
3. We have heard the rival submissions and perused the relevant material on record. The ld. CIT has opined that the brought forward losses of an earlier year did not qualify to be set off against the income of the years in question because of the operation of section 79. At this juncture, it would be apt to reproduce section 79 as under:
“79. Carry forward and set off of losses in the case of certain companies:- Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless:-
(a) on the last day of the previous year the shares of the company carrying not less than fifty one per cent 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:
Provided that nothing contained in this section shall apply to a case where a change in the said voting power takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift:
Provided further that nothing contained in this section shall apply to any change in the shareholding of an Indian company which is a subsidiary of a foreign company as a result of amalgamation or demerger of a foreign company subject to the condition that fifty-one per cent shareholders of the amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company.”
4. A bare perusal of section 79 divulges that if a change in the shareholding of the company takes place in a previous year, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless the conditions specified in clause (a) are satisfied. The thing which is of utmost importance is that section 79 is applicable “in the case of a company, not being a company in which the public are substantially interested”. It, therefore, transpires that section 79 has no application in the case of a company in which the public are substantially interested. To put it in simple words, if it is a company in which the public are not substantially interested, then section 79 would apply and vice versa section 2(18) of the Act defines “company in which the public are substantially interested”, the relevant part of which is as under:
“(b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely:-
(A)** ** **
(B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by –
(a) the Government, or
(b) a corporation established by a Central, State or Provincial Act, or
(c) any company to which this clause applies or any subsidiary company of such company if the whole of such share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year”.
5. As per clause (b) of section 2(18), a company is said to be a company in which the public are substantially interested if it is a company which is not a private company as defined in the Companies Act, 1956, and the conditions either in item (A) or in item (B) are satisfied. ‘Public company’ has been defined in section 3(iv) of the Indian Companies Act, 1956, to mean a company which –
(a) is not a private company;
(b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed;
(c) is a private company which is a subsidiary of a company which is not a private company.
6. Here, it is pertinent to note that the above extracted clause (iv) of section 3 of the Companies Act defining ‘public company’ has been substituted by the Companies (Amendment) Act, 2000, with effect from 13-12-2000. Section 43A defining “deemed public company” was amended with effect from 13- 12-2000 to abolish the concept of “deemed public company”. Simultaneous with the amendment in section 43A, section 3(iv) of the Companies Act was also substituted to provide that a private company which is subsidiary of a company which is not a private company shall mean a “public company”. From the above discussion, it is evident that where a private company is subsidiary of a public company, such private company shall also mean a ‘public company’.
7. Now, we advert to the facts of the instant case. It is noticed that as on 31-3-1997 two private limited companies were shareholders in the assessee company. Some change was effected in the shareholding composition of the assessee company by which as on 31-3-1998 M/s. Gagan Trading Co. Ltd. became shareholder of 7,00,000 shares out of the total share capital of 24,00,002 shares. Again, some changes were effected, as a result of which on 31-3-2003, M/s. Gagan Trading Co. Ltd. held 12,01,001 shares out of the total capital of 24,00,002 shares. It is thus seen that M/s. Gagan Trading Co. Ltd. held more than 50 per cent of the shares of the assessee company as at the end of financial year ending on 31-3- 2003.
8. Testing the facts of the instant case on the touchstone of the above discussed provisions of the Income-tax Act as well as the Companies Act, it is evident that the hitherto character of the assessee company was changed to that of a public company in the preceding year by reason of M/s. Gagan Trading Co. Ltd.(a public company in itself) acquiring more than fifty per cent of the shares of the assessee company. Although the assessee company was originally registered as a private company, but became public company by virtue of the provisions of section 3(iv)(c) of the Companies Act. In order to be categorized as a company in which the public are substantially interested within the meaning of section 2(18) of the I.T. Act, 1961, it is sine qua non that not only the company should not be a private company as per the Companies Act but also it should fulfill the conditions defined either in item (A) or item (B).
9. It is noticed in the preceding para that the first condition, being the assessee not a private company has been satisfied. Now it needs to be examined whether the second condition is also fulfilled or not. It is only when both the conditions are cumulatively satisfied that the character of a company in which the public are substantially interested is adorned. We can notice from item (B) of section 2(18)(b) that the shares in such a company which is not a private company carrying not less than 50% of the voting power should have been allotted unconditionally to, or acquired unconditionally by, and be beneficially held by any company to which this clause applies throughout the relevant previous year. The assessee is satisfying this condition as well inasmuch as M/s. Gagan Trading Co. Ltd. Held 12,01,001 shares of the assessee company as on 31-03-2003, which continued to be held during the whole of the previous year in question. It shows that more than 50% of the shares of the assessee company were held by M/s. Gagan Trading Co. Ltd., as a result of which that company became the holding company of the assessee company. Therefore, it is explicit that the assessee company, by fulfilling the requisite conditions, became a company in which the public are substantially interested as per the Companies Act. In that view of the matter, once it is held that the assessee is a company in which the public are substantially interested, application of section 79 is automatically ruled out because this section applies only “in the case of company, not being a company in which the public are substantially interested”.
10. The ld. CIT has albeit held that the assessee is a deemed public company as per the Companies Act, but he held that the same could not be true while applying the provisions of the Act. There is a basic fallacy in this point of view for the reason that section 79 of the Act is not applicable to the companies in which public are substantially interested. The definition of the company in which public are substantially interested has been given in section 2(18), which itself refers to the definition of private company as per the Companies Act. It is here that the Doctrine of Incorporation comes into play. As the definition of a ‘private company’ as per the Companies Act has been bodily lifted and incorporated in section 2(18) of the Income-tax Act, then whatever is its meaning in that enactment, will apply with full force to section 2(18) and in turn section 79 of the Act. It is impermissible to argue that the assessee may be a deemed public company as per the Companies Act, but would not be so for the purposes of the IT Act. Once a company is found to be not a private company as per the Companies Act, the same cannot be treated as a private company for the purposes of section 79 read with section 2(18) of the Act. Our view is fortified by the judgment of the Hon’ble Supreme Court in Surana Steels (P) Ltd. v. Dy. CIT [1999] 237 ITR 777/104 Taxman 188.
11. In that view of the matter, it is obvious that the assessee company did not fall within the ambit of section 79 and as such the ld. CIT was not justified in setting aside the orders allowing set off of the brought forward losses of an earlier year against the income of the years under consideration. We, therefore, quash the impugned order.
12. In the result, both the appeals are allowed.
