Whether Section 79 can be invoked if the beneficial ownership ofncomoany is the same?
Let us have a short overview one of the interesting issue.
- Section 79 of the Income Tax Act disallows a closely held company from carrying forward and setting off its tax losses if there is a change in the beneficial ownership of shares carrying more than 49% of the voting power of the company as compared to the year in which the loss was incurred (subject to certain exceptions).
- This provision is an anti abuse provision introduced to bring an end to the practice of buying loss making entities for the sole purpose of setting off losses.
- Various courts are besieged with the question whether beneficial ownership can be said to have remained unchanged merely because registered owner of shares, holding more than 49% of the voting power, has changed.
- Hon’ble Karnataka High Court in the case of Commissioner of Income-tax v. AMCO Power Systems Ltd.,[ 62 taxmann 350 (Karnataka)] held that a holding company would naturally exercise control over its wholly-owned subsidiary and thus, it would also be considered to have voting power over the shares of its step-down subsidiary.
- However, the Hon’ble Delhi High Court in Yum Restaurants (India) (P.) Ltd. v. Income-tax Officer,[ 66 taxmann 47 (Delhi)] held that simply because the ultimate holding company remained unchanged, this would not automatically imply that the beneficial ownership also remained unchanged. The onus was on the taxpayer to show that there was a separate beneficial shareholder, distinct from the registered shareholder, who was entitled to the benefits flowing from the shares (i.e., voting rights, dividend, etc.).
- Similarly, the Hon’ble Delhi ITAT in ACIT v. WSP Consultants India (P.) Ltd.,[ 140 taxmann 65 (Delhi – Trib.)] noted there was nothing on record to show that the ultimate holding company was the beneficial owner of shares of the company having 51% or more voting right. In the absence of such evidence, the registered shareholder would be presumed to be the beneficial shareholder.
- In a very recent judgement of the ITAT Mumbai in the case of Hiranandani Healthcare Pvt Ltd Vs CIT (ITAT Mumbai) (I.T.A. No. 1142/Mum/2023), ITAT highlighted that the key factor in Section 79 is the maintenance of beneficial ownership by the same group of shareholders. As there was no change in the group’s beneficial ownership, the ITAT ruled in favor of the Assessee.
The taxpayers would be required to present evidence to substantiate the fact that in a given case, the beneficial owner is distinct from the registered owner.
The copy of the order passed by ITAT is as under: