Carry forward of losses in the case of takeover of a company undergoing NCLT proceedings:
Introduction to Sec 79:
1. Section 79 of the Income Tax Act provides that carry forward and set off of business and capital losses shall be allowed only if there is continuity in the beneficial ownership of shares having 51% of the voting power.
2. Thus section 79 expressly prohibits carry forward of loss and depreciation by the Corporate Debtor after the takeover by a new successful bidder as the share holding undergoes complete change and there is no continuity of 51% of beneficial ownership.
2018 amendment:
1. In order to overcome this and to allow the benefit of carry forward of losses as well as unabsorbed depreciation to the Corporate Debtor, pursuant to a resolution plan, Section 79 has been amended with effect from 1-4 2018 by adding a new proviso.
2. It is reproduced as follows:
“Provided also that nothing contained in this section shall apply to a company where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Banckruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.”
3. A plain reading of the above proviso indicates that once the Resolution Order is passed by the NCLT, Section 79 will not be applicable on the Corporate Debtor.
Procedural aspects:
1. The only condition is that the jurisdictional Principal Commissioner of Income Tax (PCIT) is afforded an opportunity of being heard, understandably in the Corporate Insolvency Resolution Process (CRIP) proceeding.
2. Some of the benches of the NCLT take this opportunity of being heard to the department as sufficient compliance under the amended second proviso of section 79 and accordingly give clear direction in the Resolution Order to allow past losses of the Corporate Debtor to be carried forward. (Antanium Holdings Pte Ltd vs Sujana Universal Industries … on 17 May, 2021 NCLAT, Chennai, Company Appeal (AT) (CH) (Ins) No.07 of 2021).
3. However, in many other cases, the NCLT bench gives a general observation that losses of the past years shall be carried forward as per law and the Corporate Debtor may approach the jurisdictional PCIT who will pass necessary order under section 79 to carry forward the losses.
The copy of the order is as under:
