Summary: Section 79 of the Income Tax Act, 1961, addresses the carry forward of losses in cases where there is a change in shareholding. This provision disallows the carryforward of past losses if, by the end of the previous year, the beneficial ownership of at least 51% of voting power has changed. The term “beneficial ownership” refers to the ultimate control and benefits derived from the shares, beyond just registered ownership.
In the case of Hiranandani Healthcare Pvt. Ltd. vs. CIT, the company had undergone a significant change in its shareholding. Fortis Healthcare Ltd. (FHL) increased its ownership from 40% to 85%, while Fortis Healthcare Holdings Pvt. Ltd. (FHHPL) saw its stake reduced to 15%. Despite this, the Income Tax Appellate Tribunal (ITAT) ruled that the beneficial ownership remained unchanged since FHHPL was the holding company of FHL. Thus, the group continued to control more than 51% of voting power.
The ITAT concluded that Section 79 did not apply, allowing Hiranandani Healthcare to set off its brought forward losses. This case highlights the importance of understanding beneficial ownership when determining tax eligibility for loss carryforward under Section 79.
Section 79 of the Income Tax Act, 1961, plays a pivotal role in this context by addressing the concept of beneficial ownership. This provision ensures that only those companies where the ultimate control and benefits derived from the shares remain consistent can utilize past losses to offset future gains.
Here’s a brief overview:
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 term “beneficially held” refers to the ultimate control and benefits derived from the shares, not just the registered ownership.
In the Hiranandani Healthcare Pvt. Ltd. vs. CIT case, the term “beneficial ownership” under Section 79 of the Income Tax Act, 1961, was a central issue. Here’s how the case elaborates on this concept
- Background:
Hiranandani Healthcare Pvt. Ltd. (the assessee) had two main shareholders: Fortis Healthcare Ltd. (FHL) and Fortis Healthcare Holdings Pvt. Ltd. (FHHPL). During the assessment year 2012-13, the company issued new shares to FHL, which increased FHL’s shareholding from 40% to 85% while FHHPL’s shareholding decreased to 15% - Issue:
The AO disallowed the set-off of brought forward losses, citing Section 79, which restricts the carry forward of losses if there is change in shareholding beyond 51%. - Tribunal’s Decision:
The Income Tax Appellate Tribunal (ITAT) ruled in favor of Hiranandani Healthcare. The Tribunal noted that both shareholders, as a group, continued to beneficially hold more than 51% of the voting power in both the year the loss was incurred and the year the loss was sought to be set off. Since FHHPL was a holding company of FHL, the ultimate beneficial ownership did not change. - Conclusion:
The ITAT concluded that the provisions of Section 79 were not applicable in this case and the assessee was allowed to set off brought forward losses.
Key Takeaways:
The concept of beneficial ownership under Section 79 of the Income Tax Act, 1961, plays a crucial role in determining the eligibility for carrying forward and setting off losses in companies experiencing changes in shareholding. This provision ensures that only those companies where the ultimate control and benefits derived from the shares remain consistent can utilize past losses to offset future gains. The Hiranandani Healthcare Pvt. Ltd. vs. CIT case underscores the importance of understanding beneficial ownership beyond mere registered ownership, emphasizing the need for a comprehensive view of shareholding structures.
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