2021 (9) TMI 952 - AT - Income Tax

ITAT allows set-off of losses in merger, confirms continuity in control and management

Dy. CIT-1 (3) (2), Mumbai Versus Tril Roads Private Limited

The ITAT upheld the CIT(A)'s decision, allowing the set-off of brought forward losses. Despite a change in shareholding due to a merger, beneficial ... Set off of brought forward losses denied - agreement between the holding company and subsidiary companies - change in the shareholding pattern of the assessee during the assessment year post merger - provisions of section 79 should not be applied and set off of brought forward losses be denied - HELD THAT:- Effectively there is no change as far as the voting pattern and beneficial ownership as far as shareholding pattern in the assessee-company as on 31.03.2013. The shareholding pattern of TRIL in assessee-company is effectively increased from 24% to 76%. Considering the fact that the assessee is a subsidiary of TRIL, Actis and THPL before merger and after merger still a subsidiary of TRIL. It was brought to our notice that as on 31.03.2014 TRIL holds 100% shares of the assessee-company. In our considered view, effectively there is no change in the management as well as voting rights in the assessee-company. The company TRIL controls whole management directly as well as indirectly at the time of incurring loss and controlling directly after merger. It is effectively, the whole companies engaged in the same type of business and part of same group. The whole group managed by the same set of Directors and shareholders. The fact on record shows that TRIL is a holding company of assessee-company as well as THPL. Therefore, the position does not change before and after merger of THPL with TRIL. Effectively, TRIL was controlling and having beneficial ownership of 76% (directly 24% and indirectly 41%) before merger and 76% after merger. - Decided against revenue. Issues Involved:1. Applicability of Section 79 of the Income Tax Act, 1961.2. Change in shareholding pattern and its impact on the set-off of brought forward losses.3. Interpretation of 'voting power' and 'beneficial ownership' under Section 79.Detailed Analysis:1. Applicability of Section 79 of the Income Tax Act, 1961:The primary issue revolves around the interpretation and applicability of Section 79 of the Income Tax Act, 1961, which restricts the carry forward and set-off of losses in case of a change in shareholding. The Assessing Officer (AO) argued that the change in shareholding pattern triggered the provisions of Section 79, thereby disallowing the set-off of brought forward losses. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) disagreed, interpreting that the beneficial ownership and voting power remained unchanged despite the merger, thus Section 79 was not applicable.2. Change in Shareholding Pattern and its Impact on the Set-off of Brought Forward Losses:The AO observed a change in the shareholding pattern during the assessment year 2014-15, asserting that Tata Realty and Infrastructure Ltd. (TRIL) increased its shareholding from 24% to 100%. The AO contended that this change violated Section 79, which mandates that at least 51% of the voting power should remain with the same shareholders who held shares in the year the loss was incurred. The CIT(A) and ITAT, however, noted that TRIL held 65% of the shares (24% directly and 41% indirectly) before the merger and 100% after the merger, indicating no effective change in control and management.3. Interpretation of 'Voting Power' and 'Beneficial Ownership' under Section 79:The CIT(A) emphasized the terms 'voting power' and 'beneficially held' as used in Section 79, suggesting that the section aims to prevent misuse by new owners acquiring loss-making companies solely for tax benefits. The CIT(A) and ITAT concluded that TRIL beneficially held more than 51% of the voting power both before and after the merger, thus maintaining continuity in control and management. They referenced various judicial precedents, including CIT vs. Select Holiday Resorts (P) Ltd. and CIT vs. AMCO Power Systems Ltd., to support their interpretation that internal restructuring within the same group does not trigger Section 79.Conclusion:The ITAT upheld the CIT(A)'s decision, allowing the set-off of brought forward losses. It concluded that despite the change in shareholding due to the merger, the beneficial ownership and voting power remained effectively unchanged within the same group of companies. The appeal by the Revenue was dismissed, affirming that the provisions of Section 79 were not applicable in this case due to the continuity in control and management by TRIL.Order Pronounced:The appeal filed by the Revenue was dismissed, and the order was pronounced in the open Court on 18/08/2021.