Analysis of Section 79 of Companies Act, 1961 -Carry forward and set off of losses in companies
Section 79 of the Income Tax Act, 1961 deals with the carry forward of losses for certain class of companies which satisfy the conditions specified in Sec.79
Below is the analysis on carry forward of losses in case of filing of Income Tax return by Companies:
In case of a company in which public are not substantially interested (other than eligible start-up company referred below), no loss shall be carried forward and set off against the income of the previous year, unless at least 51% of the voting power of the company are beneficially held (on the last day of the previous year in which the loss is sought to be set off) by the same person(s) who held at least 51% of the shares on the last day of the financial year in which the loss was incurred.
The return preparer has to ensure that 51% shareholders holding beneficial voting power shall remain the same as at the beginning and at the end of the year as well. For this he may require a list of shareholders and beneficial shareholders both at the beginning and the end of the year.
Now the next question that would come to mind is whether losses mentioned in Sec.79 would include losses incurred under all the heads or only the losses under the head PGBP. The answer is in affirmative. It would include losses under all the heads of the income, including capital gains.
Whether unabsorbed depreciation is covered under Section 79? Nope. This section does not apply to unabsorbed depreciation. In other words, one need not refer to the compliance of Sec.79 to carry forward unabsorbed depreciation.
Another probable question is what types of companies are companies where public is substantially interested. Please refer Sec.2(18)of the Income Tax Act, which is produced below:
“company in which the public are substantially interested”—a company is said to be a company in which the public are substantially interested—
(a) if it is a company owned by the Government or the Reserve Bank of India or in which not less than forty per cent of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank ; or
(aa) if it is a company which is registered under section 25 of the Companies Act, 1956 (1 of 1956) ; or
(ab) if it is a company having no share capital and if, having regard to its objects, the nature and composition of its membership and other relevant considerations, it is declared by order of the Board to be a company in which the public are substantially interested :
Provided that such company shall be deemed to be a company in which the public are substantially interested only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration ; or
(ac) if it is a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, 1956 (1 of 1956), to be a Nidhi or Mutual Benefit Society ; or
(ad) if it is a company, wherein shares (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, one or more co-operative societies ;
(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) 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) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made there under ;
(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 the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year.
Explanation.—In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words “not less than fifty per cent”, the words “not less than forty per cent” had been substituted;
Exceptions to Sec.79:
Section 79 provides exceptions for compliance on occurrence of the below events:
1. Where a change in the said voting power takes place in a previous year consequent upon the death of a shareholder
2. where a change in the said voting power takes place in a previous year on account of transfer of shares by way of gift to any relative of the shareholder making such gift
3. 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 51% shareholders of the amalgamating or demerged foreign company continues to be the shareholder of the amalgamated or the resulting foreign company
4. Where change in the shareholding is taken place 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.
Change from AY 2020-21:
Apart from the above 4 exceptions another exception has been carved out stating that 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 (Eg: That which has happened in IL&FS); 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.
In the case of eligible start-up company(as referred to in Section 80-IAC), not being a company in which the public are substantially interested, 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
The eligible start-up either has to satisfy the above two conditions or it would have to satisfy the 51% clause applicable for other closely held companies.