Birla Edutech Limited Vs ITO (ITAT Mumbai)
ITAT Mumbai held that set-off of losses when there is a change in shareholding involves interpretation of various provisions and laws and hence it is not a mistake apparent from record. Accordingly, rectification power under section 154 cannot be invoked.
Facts-
The assessee company incurred loss of Rs.3,05,15,064/- in earlier AY. 2010-11 (including unabsorbed depreciation Rs.58,02,628/-) out of which Rs.70,23,243/- was set off against the income earned for AY. 2012-13. The AO while passing the scrutiny assessment on 30.03.2015 u/s 143(3) of the Act allowed the claim of the set-off of losses of Rs.70,23,241/-.
However, later the AO invoked his power u/s 154 and has passed the order dated 28.07.2016 u/s 154 of the Act reversing his own action by disallowing the assessee’s claim of set off of losses on the reason that since there was major change in the shareholding pattern of the assessee company as per provision of Section 79 of the Act, the loss cannot be allowed to be set- off.
Aggrieved, the assessee preferred an appeal before CIT(A) who dismissed the appeal of assessee on the ground that the AO in the original assessment proceedings had ignored the applicability of Section 79 of the Act and has not taken note of the relevant facts and circumstances of the case which clearly attracts section 79 of the Act. Since AO ignored the relevant facts, it was a mistake and therefore, AO rightly invoked power u/s 154 and disallowed carry forward loss, which was allowed to be set off erroneously by him while passing the original assessment order. Thus, rectification of an obvious non-application of provision is justified u/s 154 of the Act. Aggrieved, the assessee is before us.
Conclusion-
Further, it is noted that there are various judicial precedents on the issue of applicability of provisions of Section 79 of the Act on change in shareholding within the Group and when there is no change in ultimate holding or management. Further, there are also various judicial precedents in which authorities tried to establish whether the company is a company in which public is substantially interested or not and thus provisions of section 79 is not applicable. In every decision, whether it is in favour or against the appellant, appellate authorities has made the decisions after satisfying itself as to the applicability and interpretation of various provisions and laws. Thus, it cannot be said that it is a mistake apparent from records, when the issue involves interpretation of relevant laws and sections.
Thus, it can be safely concluded that set-off of losses when there is a change in shareholding is not a mistake apparent from record, and is debatable issue and it is not a case rectification.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-8, Mumbai dated 10.02.2020 for the assessment year 2012-13.
2. The grounds of appeal raised by the assessee are as under: –
“1. That on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) [hereinafter referred to as Ld. CIT(A)] was not justified and grossly erred in confirming the action of Ld. AO by disallowing set off of c/f losses and unabsorbed depreciation by invoking the provisions of section 79 of the Act without considering the provision of section 2(18) of the Act and section 3(iv) of Companies Act 1956.
2. That on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) was not justified and grossly erred in confirming the action of AO by disallowing the loss by invoking provisions of section 79 of the Act, when change in shareholding has taken place within the same Yash Birla Group.
3 That on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) and AO was not justified and grossly erred in disallowing the loss by invoking provisions of section 79 of the Act being debatable issue as mistake apparent from record and passing the order u/s 154 of the Act.
4. Without prejudice to above: Ld. CIT(A) and AO was not justified and grossly erred in disallowing set-off of carried forward unabsorbed depreciation by invoking the provisions of section 79 of the Act.”
3. Ground no. 3 is taken up first, being a legal issue, which challenges the jurisdiction of AO to have invoked the impugned action u/s 154 of the Income Tax Act, 1961 [hereinafter (“the Act”) (Rectification of mistake apparent on record). The assessee has raised this ground against the action of the Ld. CIT(A) in confirming the action of the AO passed u/s 154 of the Act [rectification of order] by disallowing set- off of carried forward losses and unabsorbed depreciation by invoking the provision of Section 79 of the Act without considering the provisions of Section 2(18) of the Act and Section 3(iv) of the Companies Act, 1956. According to the assessee, the AO did not had the power (suo-motto) to pass order u/s 154 of the Act because it was not mistake apparent from records whereas the issue involved mixed question of fact and law, and since the AO was not vested with the power of review by the stature he AO could not have invoked jurisdiction u/s 154 of the Act which was merely for correcting the mistake apparent on the face record.
4. Brief facts are that the assessee/Birla Edutech Ltd (M/s. BEL) is part of ‘Yash Birla Group’ of company. During the year, assessee/Birla Edutech Ltd (M/s. BEL) issued new equity shares to M/s. Shearson Investment & Trading co. Pvt. Ltd. and M/s. Birla Shloka Edutech Ltd. (“BSEL”) [Parent company of assessee] which is a listed company. The assessee company incurred loss of Rs.3,05,15,064/- in earlier AY. 2010-11 (including unabsorbed depreciation Rs.58,02,628/-) out of which Rs.70,23,243/- was set off against the income earned for AY. 2012-13. The AO while passing the scrutiny assessment on 30.03.2015 u/s 143(3) of the Act allowed the claim of the set-off of losses of Rs.70,23,241/-. However, later the AO invoked his power u/s 154 of the Act and has passed the order dated 28.07.2016 u/s 154 of the Act reversing his own action by disallowing the assessee’s claim of set off of losses on the reason that since there was major change in the shareholding pattern of the assessee company as per provision of Section 79 of the Act, the loss cannot be allowed to be set- off. According to AO, since his earlier action of allowing the ibid claim was a mistake apparent from records, he disallowed the claim of set-off of losses. However according to assessee, AO could not have undertaken such an exercise meaning the AO could not have reversed his own action which impugned action tantamount to reveiew of his own order which power the AO is not vested with. According to Ld. AR the AO erroneously has disallowed the claim allowed by him by wrongly applying section 154 of the Act which was only for rectification of mistake that too apparent on the facr of record. It was pointed out by the Ld. AR, that the issue involved is a mixed question of fact and law and involves interruption of various stature and provision of law and examination of relevant facts and there are conflicting judicial precedents on the subject (not jurisdictional High Court on this issue). So it was a debatable issue which could not have been interfered by AO u/s 154 of the Act. The Ld. AR brought to our notice the relevant facts that assessee company issued new equity shares on 6.02.2012 and M/s. BSEL became major share holder of 86.67% Rs.3,27,15,000/- shares out of the total Rs.3,77,45,000/- shares (i.e. 86.67% refer page no. 26-27 shares holding pattern) which was held by them till 31.03.2012. [It is assessee’s contention that by virtue of this share holding of 86.67% by M/s. BSEL which is a listed company, M/s. BEL i.e. assessee from date of issue (i.e. on 6.02.2012) till the end of financial years (i.e. 31.03.2012) is “a company in which public are substantially interested and therefore the bar placed by section 79 of the Act to claim set off and carry forward off losses and depreciation is not applicable]. Thus the claim of assessee/M/s. BEL is that since more that 50% of its shares are held by M/s. BSEL (which is a listed company) assessee became a company in which public are substantially interested and so assessee company would not fall in the ken of Section 79 of the Act, and in this back-drop the assessee claimed set off and carry forward of business losses and un-absorbed depreciation. However the AO did not agree and according to him, there was no exception provided in Section 79 of the Act on the facts of the assessee so he invoked section 154 of the Act to disallow the claim of set of loss.
5. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who dismissed the appeal of assessee on the ground that the AO in the original assessment proceedings had ignored the applicability of Section 79 of the Act and has not taken note of the relevant facts and circumstances of the case which clearly attracts section 79 of the Act. Since AO ignored the relevant facts, it was a mistake and therefore, AO rightly invoked power u/s 154 of the Act and disallowed carry forward loss, which was allowed to be set off erroneously by him while passing the original assessment order. Thus, rectification of an obvious non-application of provision is justified u/s 154 of the Act. Aggrieved, the assessee is before us.
6. Assailing the action of the Ld. CIT(A), the Ld. AR submitted that the Ld. CIT(A) erred in invoking rectification power u/s 154 of the Act for an issue which is per-se debatable and as discussed, there is mixed question of fact & law which need examination of other statues also. So the AO erred in reversing his own order which tantamount to review of his own order, which power the AO is not vested with and so his action u/s 154 of the Act was bad in law. To demonstrate the complicity of the issue which has been erroneously corrected u/s 154 of the Act [by disallowing the loss by invoking Section 79 of the Act as mistake apparent from record while passing the order u/s 154 of the Act], the Ld. AR cited various case laws viz. Vtkart Brother and others (1971) 82 ITR 50 (SC) and Tata Engineering and Locomotive Co. (1998) 108 ITR 869 (Bom); and also he assailed the impugned action of Ld. CIT(A) in not appreciating the fact and law involved in the issue i.e, since M/s. BSEL was a public company and holding 86.67% of the share of assessee company, section 79 of the Act was not applicable as held by the Hon’ble Jurisdictional High Court in Tata Petrodyne Ltd. (2015) 60 taxmann.com 81 (Bom) and this Tribunal in the case of Merediths Traders (P) Ltd. (ITA. No.3435/Mum/2010). Further, the Ld. AR submitted that in any case, the control of the assessee company was always with the Yash Birla group, so question of section 79 of the Act does not arise and cited the case laws (i) Amco Power Systems Ltd. (2015) 379 ITR 375 (Kar) (ii) Select Holiday Resorts (P.) Ltd. (2013) 217 Taxman 110 (Delhi) and (iii) Wadhwa & Associates Realtors Pvt. Ltd. (ITA. No.967/Mum/2016 dated 14.02.2018). And as per Ld. AR, in any case, (alternative argument), section 79 bars carry forward and set off of “any loss incurred in any year prior to the previous year”. Consequently, section 79 of the Act are not applicable to carry forward and set off of depreciation which is governed by Section 32(2) of the act and there is no restriction on carry forward of depreciation as held by Hon’ble Supreme Court in Shri Subhalaxmi Mill Ltd. 249 ITR 795 (SC). Moreover, according to Ld. AR, it can be seen that change in share holding has taken place within the group and therefore there is no change in the management as such. Therefore, AO erred in applying Section 79 of the Act. And in any case the issue of invoking Section 79 of the Act to disallow the loss and depreciation the AO could not have done while exercising jurisdiction u/s 154 of the Act because this power is only to correct mistake apparent on the face of the record. According to Ld AR, for applying Section 79 of the Act in the facts and circumstances of the case, interpretation of law of multiple provisions of the Act as well as Companies Act and case laws are required and thus it is a debatable issue. Therefore, according to Ld. AR in any case the AO did not have jurisdiction u/s 154 of the Act to disallow the carry forward loss applying section 79 of the Act.
7. Per contra, the Ld. DR supported the order of the Ld. CIT(A), and does not want us to interfere with the order of Ld. CIT(A).
8. Having heard both parties and after perusal of records, we note that in this case, in this assessment year i.e. AY. 2012-13, there was change in shareholding pattern due to which the assessee company became the subsidiary of another same group i.e. a Public Listed Company i.e. M/s. BSEL. The AO in the regular assessment u/s 143(3) of the Act vide order dated 30.03.2015, allowed the brought forward losses (set off for AY. 2010-11) to the tune of Rs.70,23,241/-. However, later, the AO passed the order dated 28.07.2016 u/s 154 of the Act disallowing set off of carried forward loss and unabsorbed depreciation to the tune of Rs.70.23,241/- applying section 79 of the Act. According to Ld. AR, the AO could not have done this impugned action u/s 154 of the Act because it was not a mistake apparent on the face of record and more over it was a debatable issue and there was mixed question of fact & law on the issue. So AO could not have disallowed the claim by exercise of power u/s 154 of the Act. Moreover, according to Ld. AR, the Ld. CIT(A) has not taken into consideration the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Tata Petrodyne Ltd (2015) 60 taxmann. Com 81 (Bom).
9. The Ld. AR brought to our notice the facts of the instant case which shows that the issue on which AO reversed his order u/s 154 of the Act was mixed question of fact & law. He brought to our notice that as on 31.03.2010 BEL had issued 50000 shares to seven (7) shareholders. Subsequently, new equity shares were issued on 06.02.2012 to parent company M/s. Birla Shloka Edutech Limited (M/s. BSEL) and Shearson Investment and Trading Co. P. Ltd. Thus, M/s. Birla Shloka Edutech Ltd. (M/s. BSEL) became major shareholder of 3,27,15,000 shares out of the total 3,77,45,000 shares (ie. 86.67%) on 06.02.2012 which was continuously held by them till 31.03.2012. According to Ld. AR, as per the provisions of Section 2(18)(b) of the Act, since Birla Shloka Edutech Ltd. [M/s. BSEL) was a listed company and was holding more than 50% of the paid-up share capital of BEL/assessee company from the date of issue (ie. 06/02/2012) till the end of the financial year (ie. 31.03.2012)]. Hence, according to assessee i.e, BEL/assessee company needs to be termed as “a company in which public are substantially interested”. Hence according to Ld. AR application of section 79 of the Act is automatically ruled out because this section applies only to Companies in which the public are not substantially interested. Hence according to him, the assessee can rightly set off and carry forward the Business Losses and unabsorbed depreciation as BEL does not fall within the ambit of Section 79 of the Act. However, the AO as well as the Ld. CIT(A) erred in not appreciating this fact and law.
10. According to Ld. AR, the short question is as to whether the brought forward losses and unabsorbed depreciation can be disallowed in the case of the assessee by applying Section 79 of the Act in proceedings for rectification of mistake u/s 154 of the Act is to be adjudicated first. To appreciate the contention of assessee that AO could not have undertaken this exercise u/s 154 of the Act because the issue involved was mixed question of fact and law. We note that as on 05.02.2012, the shareholding pattern of the assessee was as under: –
