Transfer of shares by initial subscribers to a MOA does not amount to a change in shareholding as per section 79 of the Income-tax Act, 1961 and therefore, benefit of brought forward loss is available

ITO Vs. M/s. S-Net Freight (India) Pvt. Ltd. (ITAT Chennai) – The Tribunal order has recognised that beneficial ownership and legal ownership could be different and for the purpose of section 79 of the Act, the beneficial ownership was relevant. Accordingly, share transfers by nominees or trustees of the beneficial owner would not trigger the provisions of section 79 of the Act while the beneficial ownership did not change beyond 51 percent.

Ld. CIT(A)  has  observed that it could not be accepted that the nominees were used only as a legal necessity. Now, once, the requirements of the provisions were FEMA the facts are to be stringently followed and it has been so done, it was the requirement of the Foreign Direct Investment Laws which made the assessee to act in the manner discussed above. The provisions of section 79 of the I.T. Act, therefore, cannot be said to envisage the transfer of shares by the subscribers of the Memorandum of Articles of Association as a change in the shareholding of the assessee company. The provisions of FEMA have not been shown to be non-mandatory. In order to carry on business in India, foreign company need must abide by the provisions of the said Act. Moreover, the two shareholders indeed acted only as the nominees to enable the smooth passage of the other shareholder in the subsequent year. Therefore, we do not find ourselves at one with the observations made by the ld. CIT(A) in this regard. The contention of the assessee is, therefore, accepted, particularly keeping in view the observations in “Swadeshi Match Co.” (supra), wherein it was held that “holding” within the meaning of Explanation II of para D of Part II of the First Schedule I of the Finance (No.2) Act, 1962 had not been defined and, therefore, it was possible to construe that the beneficial shareholding was included in it and vis-à-vis, that however, when a provision under consideration is a provision for giving enhanced benefit by way of additional rebate to the assessee and both constructions are possible, then it is discernible to adopt the construction which will benefit the assessee; and that therefore, for the purpose of Explanation II, both legal ownership and beneficial ownership should be taken into account.

IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH “G” DELHI)

ITA Nos. 2223, 2224 & 2443(Del)2010
Assessment years: 2001- 02, 2002-03 & 2003-04

Income Tax Officer Vs. M/s. S- Net Freight (India) Pvt. Ltd.

ITA No.867(Del)2010
Assessment year: 2002-03

M/s. S-Net Freight (India)P. Ltd. V.  Income Tax Officer

ORDER

PER A.D. JAIN, J.M.

ITA No. 2223(Del)2010:

This is Department’s appeal for assessment year 2001-02, taking the following ground:-