Treaty non-discrimination may block loss carry-forward denial for foreign-parented subsidiaries under domestic ownership restrictions.

Section 79 can be restricted by the Indo-German tax treaty where a foreign-parented Indian subsidiary is placed at a disadvantage compared with an Indian-parented subsidiary; on that basis, loss carry-forward could not be denied if the German parent's shares were listed on a recognised German stock exchange, and the matter was remitted for limited verification. The disallowance of technical know-how expenditure under section 35AB was remitted for fresh adjudication because the foundational year's claim had not been properly argued and the record was incomplete. Expenditure on designing and planning a new factory layout was also remitted for de novo consideration, the record being insufficient to decide whether the claim was in substance a business loss arising from abandonment of capital work.

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Issues: (i) whether the assessee was disentitled to carry forward and set off accumulated business losses under section 79 of the Income-tax Act, 1961 in view of the change in shareholding following the foreign parent's merger, and whether article 24(4) of the Indo-German tax treaty overrode the domestic restriction; (ii) whether the disallowance of technical know-how expenditure claimed under section 35AB of the Income-tax Act, 1961 required fresh adjudication; (iii) whether the expenditure on designing and planning the layout of a new factory was allowable or required de novo examination.

Issue (i): whether the assessee was disentitled to carry forward and set off accumulated business losses under section 79 of the Income-tax Act, 1961 in view of the change in shareholding following the foreign parent's merger, and whether article 24(4) of the Indo-German tax treaty overrode the domestic restriction.

Analysis: The restriction in section 79, read with section 2(18), operated to deny carry forward of losses where there was a substantial change in shareholding and the company was not one in which the public were substantially interested. The assessee, however, was an Indian subsidiary whose capital was partly owned by a resident of Germany, bringing it within article 24(4) of the treaty. The treaty override was held to apply even to non-discrimination provisions, and the proper comparison was with an Indian subsidiary of an Indian parent company. On that comparison, the domestic scheme placed foreign-parented subsidiaries at a disadvantage because a foreign company could not obtain listing status on a recognized Indian stock exchange, thereby preventing the subsidiary from qualifying as a company in which the public are substantially interested.

Conclusion: Section 79 could not be applied in a treaty-inconsistent manner, and the matter was remitted for limited verification of whether the German parent's shares were listed on a recognized German stock exchange; if so, the loss carry-forward could not be denied.

Issue (ii): whether the disallowance of technical know-how expenditure claimed under section 35AB of the Income-tax Act, 1961 required fresh adjudication.

Analysis: The claim turned on the allowability of the deduction in the first year of the statutory benefit, and the relevant foundational appeal concerning that year was not argued. In the absence of a proper factual and procedural foundation, the issue was not fit for final merits adjudication in this appeal.

Conclusion: The issue was remitted to the Assessing Officer for fresh adjudication after giving the assessee an opportunity of hearing.

Issue (iii): whether the expenditure on designing and planning the layout of a new factory was allowable or required de novo examination.

Analysis: The expenditure was linked to capital work and the write-off of such cost after the business strategy changed raised issues not fully examined below, including whether the claim was really one of business loss arising on abandonment of capital work. The existing factual record was insufficient for a final determination.

Conclusion: The issue was remitted to the Assessing Officer for de novo consideration.

Final Conclusion: The assessee obtained relief on the principal treaty-based loss carry-forward issue, while the remaining substantial monetary claims were sent back for fresh consideration, resulting in a partial allowance of the appeal for statistical purposes.

Ratio Decidendi: A tax treaty's non-discrimination and treaty-override provisions can restrict the operation of a domestic loss-carry-forward bar where the domestic classification disadvantages an Indian subsidiary of a foreign parent compared with an Indian subsidiary of a domestic parent on an unreasonable ownership-based distinction.

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