(1) Section 79 of the Income Tax Act provides conditions for carry forward and set off of losses in case of a company not being a company in which the public are substantially interested. Clause (a) of this section applies to all such companies, except an eligible start-up as referred to in section 80-IAC, while clause (b) applies only to such eligible start-up.

Under clause (a), 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 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.

Under clause (b), the loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, if, all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year and such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated. The said clause was inserted vide Finance Act, 2017 in order to facilitate ease of doing business and to promote start-up India.

To further facilitate ease of doing business in the case of an eligible start-up, it is proposed to amend section 79 so as to provide that loss incurred in any year prior to the previous year, in the case of closely held eligible start-up, shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the two conditions stipulated currently at clause (a) or clause (b). For other closely held companies, there would be no change, and loss incurred in any year prior to the previous year shall be carried forward and set off only on satisfaction of condition currently provided at clause (a).

(2) The existing provisions of the section 54GB of the Income-tax Act, inter alia, provide for roll over benefit in respect of capital gain arising from the transfer of a long-term capital asset, being a residential property owned by the eligible assessee. To be able to get benefit of this provision, the assessee is required to utilise the net consideration for subscription in the equity shares of an eligible company before the due date of filing of the return of income. The assessee is required to have more than fifty per cent share capital or more than fifty per cent voting rights after the subscription in shares in the eligible company. The said section, inter alia, puts restriction on transfer of assets acquired by the company for five years from the date of acquisition. Currently the benefit of this section was only available for investment in the equity shares of eligible start-ups and that period also got over on 31st March 2019. Thus, at present no benefit is available for residential property transferred after 31st March 2019.

In order to incentivise investment in eligible start-ups, it is proposed to amend the said section so as to-

(i) extend the sun set date of transfer of residential property for investment in eligible start-ups from 31st March 2019 to 31st March 2021;

(ii) relax the condition of minimum shareholding of fifty per cent of share capital or voting rights to twenty five per cent.

(iii) relax the condition restricting transfer of new asset being computer or computer software from the current five years to three years.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.

[Clauses 20 & 22]

Extract of Clauses 20 & 22 of Finance Bill 2019

20. Amendment of section 54GB.

In section 54GB of the Income-tax Act, with effect from the 1st day of April, 2020,—

(i) in sub-section (4), the following proviso shall be inserted, namely:—

‘Provided that in case of a new asset, being computer or computer software, acquired by an eligible start-up referred to in the proviso to clause (d) of sub-section (6), the provisions of this sub-section shall have effect as if for the words “five years”, the words “three years” had been substituted.’;

(ii) in sub-section (5), in the proviso, for the figures “2019”, the figures “2021” shall be substituted;

(iii) in sub-section (6), in clause (b), in sub-clause (iii), for the word “fifty” at both the places where it occurs, the word “twenty-five” shall be substituted.

22. Substitution of section 79.

For section 79 of the Income-tax Act, the following section shall be substituted with effect from the 1st day of April, 2020, namely:––

Carry forward and set off of losses in case of certain companies.

‘79. (1) Notwithstanding anything contained in this Chapter, where a change in shareholding has 30 taken place during the 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 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 35 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 even if the said condition is not satisfied in case of an eligible start up as referred to in section 80-IAC, the loss incurred in any year prior to the previous year shall be allowed to be carried forward and set off against the income of the previous year if all the shareholders of such 40 company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year and such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.

(2) Nothing contained in sub-section (1) shall apply,––

(a) to a case where a change in the said voting power and shareholding 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;

(b) 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 50 that fifty-one per cent. shareholders of amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company;

(c) to a company where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner;

(d) to a company, and its subsidiary and the subsidiary of such subsidiary, where,––

(i) the Tribunal, on an application moved by the Central Government under section 241 of the Companies Act, 2013, has suspended the Board of Directors of such company and has appointed new directors nominated by the Central Government, under section 242 of the said Act; and

(ii) a change in shareholding of such company, and its subsidiary and the subsidiary of such subsidiary, has taken place in a previous year pursuant to a resolution plan approved by the Tribunal under section 242 of the Companies Act, 2013 after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.

Explanation.––For the purposes of this section,––

(i) a company shall be a subsidiary of another company, if such other company holds more than half in nominal value of the equity share capital of the company;

(ii) “Tribunal” shall have the meaning assigned to it in clause (90) of section 2 of the  Companies Act, 2013.’.

Note on Clauses 20 & 22 of Finance Bill 2019

Clause 20 of the Bill seeks to amend section 54GB of the Income-tax Act relating to capital gain on transfer of residential property not to be charged in certain cases.

The said section, inter alia, provides that where the capital gain arises from the transfer of a long-term capital asset, being a residential property (a house or a plot of land), owned by the eligible assessee; and the assessee, before the due date of furnishing of return of income under sub-section (1) of section 139, utilises the net consideration for subscription in the equity shares of an eligible company; and the company has, within one year from the date of subscription in equity shares by the assessee, utilised this amount for purchase of new asset, then, the amount so utilised shall not be charged to tax as the income of the previous year. It is further provided that the new assets shall not be sold or otherwise transferred within a period of five years from the date of their acquisition; the capital gains arising from transfer of residential property made after the 31st day of March, 2017 (in case of eligible start-up, the 31st March, 2019) shall not be eligible for the benefit under the said section; and the assessee shall have more than fifty per cent. share capital or more than fifty per cent. voting rights after the subscription in shares in the eligible company.

It is proposed to amend the said section so as to provide that in the case of an eligible start-up, in place of five years, the restriction of three years on transfer from the date of acquisition of new asset, being computer or computer software shall apply; the capital gains arising from transfer of residential property made upto the 31st March, 2021 shall be eligible for the benefit under the said section; and the assessee shall have more than twenty-five per cent. share capital or more than twenty-five per cent. voting rights after the subscription in shares in the eligible company.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

Clause 22 of the Bill seeks to substitute section 79 of the Income-tax Act relating to carry forward and set off of losses in case of certain companies and provides that where a change in shareholding has taken place during the 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 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.

The proviso to sub-section (1) of the said section provides that if the above condition is not satisfied in case of an eligible start up as referred to in section 80-IAC, loss incurred in any year prior to the previous year shall still be allowed to be carried forward and set off against the income of the previous year if all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year and such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.

Clause (a) of sub-section (2) to the said section provides that nothing contained in the section shall apply to a case where a change in the said voting power and shareholding 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.

Clause (b) of sub-section (2) to the said section provides that nothing contained in the 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 amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company.

Clause (c) of sub-section (2) to the said section provides that nothing contained in this section shall apply to a company where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.

Clause (d) of sub-section (2) to the said section provides that nothing contained in this section shall apply to a company, and its subsidiaries and the subsidiary of such subsidiary, where,–

(i) the National Company Law Tribunal, on a petition moved by the Central Government under section 241 of the Companies Act, 2013 has suspended the Board of Directors of such company and has appointed new directors which are nominated by the Central Government, under section 242 of the said Act; and

(ii) a change in shareholding of such company, and its subsidiary and the subsidiary of such subsidiary, has taken place in a previous year pursuant to a resolution plan approved by the National Company Law Tribunal under section 242 of the Companies Act, 2013 after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.

The Explanation to the section specifies that a company shall be a subsidiary of other company, if such other company holds more than half in nominal value of the equity share capital of the company.

This amendment will take effect from 1st April, 2020 and will, accordingly, be applicable for assessment year 2020-2021 and subsequent assessment years.

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