CA Suraj R. Agrawal
1. M/s. AMCO Power Systems Limited is a Company engaged in the manufacture and sale of storage batteries.
2. Assessee filed its return of income on 28.11.2003 wherein NIL income was shown after setting off losses brought forward from earlier years.
3. The Tribunal, however dismissed the appeal of the Revenue, and partly allowed the appeal of the respondent-assessee by allowing the benefit of set-off of brought forward losses, but did not give the benefit of lease rentals paid by the assessee.
Issue put before (Karnataka High Court):
Whether the Tribunal was correct in holding that the assessee would be entitled to carry forward and setoff of business loss despite the assessee not owning 51% voting powers in the company as per Section 79 of the Act by taking the beneficial share holding of M/s. Amco Properties & Investments Ltd.?
Contention by Appellant:
it is not the shareholding which has to be taken into consideration, but the voting power which was held by a person or persons who beneficially held shares of the Company, and has thus contended that because the ABL was holding 100% shares of APIL, which was a wholly owned subsidiary of ABL and fully controlled by ABL, even though the shareholding of ABL had been reduced to 6%, yet the voting power of ABL remained 51% and as such, the provisions of Section 79 of the Act would not be attracted in the present case.
Contention by Revenue:
1. Up to the assessment year 2001-02 there was no dispute that the ABL continued to have 51% or more shares as its shareholding. In the said assessment year, the ABL was holding 55% shares and that its subsidiary APIL was holding 45% shares. For the assessment year 2002-03, when the ABL transferred 49% shares (out of its 55%) to TAFE, then ABL was left with only 6% shares, meaning thereby, it was left with less than 51% shares.
2. It is, thus, contended that the Company would hence not be entitled to claim carry forward and set-off of business losses in the assessment years 2002-03 and 2003-04.
3. Learned counsel has submitted that even though the APIL may be wholly owned subsidiary of ABL, but both the companies would be separate entities and cannot be clubbed together.
Ruling of Honorable Karnataka High Court:
1. Section provides that where there is a change in shareholding of a Company, 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 51% of the voting power were beneficially held by
2. Persons who beneficially held shares of the Company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred.
3. The fact that ABL is the holding Company of APIL, which is the wholly owned subsidiary of ABL and that Board of Directors of APIL are controlled by ABL, is not disputed. The submission of the learned counsel for the respondent-assessee that the shareholding pattern is distinct from voting power of a Company has force.
4. Since the ABL was having complete control over the APIL, which is the wholly owned subsidiary of ABL, in courts view, even though the shareholding of ABL may have reduced to 6% in the year in question, yet by virtue of being the holding Company, owning 100% shares of APIL, the voting power of ABL cannot be said to have been reduced to less than 51%, because together, both the companies had the voting power of 51% which was controlled by ABL.
5. Question in favour of the assessee and against the Revenue, and confirm the finding of the Tribunal in this regard.
Key Take Away
As the purpose of the provision is to prevent misuse of losses by transferring ownership, it should be restricted to cases of transfer of ‘beneficial shareholding’. A transfer of shares of the loss-making company by the shareholder-company to its subsidiary is not hit by s. 79