TaxTMI 
TaxTMI 
2008 (6) TMI 314
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....h losses were incurred. Before the AO, the assessee produced an opinion given by advocates. Advocates noted that the shareholding of the company clubbed with the shareholding of M/s AMCO Properties & Investments Ltd. would exceed 51 per cent of the voting power. However, a doubt was expressed as to whether shareholding of a subsidiary company can be taken into account in determining the beneficial ownership in terms of s. 79. The shareholding of the company for the financial years 1999-2000 to 2003-04 is as under: ---------------------------------------------------------------- Financial 31-3-1999 31-3-2000 31-3-2001 31-3-2002 31-3-2003 Year ---------------------------------------------------------------- Assessment 1999-2000 2000-01 2001-02 2002-03 2003-04 year ---------------------------------------------------------------- Share holding pattern ---------------------------------------------------------------- (a) ABL 100% ....
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.... is not an independent company and is only a sham organization. In such a case, the Department is entitled to pierce the corporate veil and arrive at the true state of affairs. Coming to the assessee company, even though there may be change in shareholding pattern, the management has to function in a manner consistent with its bye laws, The voting power is strictly determined by the ownership of shares. In the assessee company, as on 31st March, 2003, the voting power of ABL was only 6 per cent as against 55 per cent as on 31st March, 2001. Therefore, the assessee loses the benefit of carry forward of losses prior to 31st March, 2001. The assessee has cited the decision of Supreme Court in the case of Raghuvanshi Mills Ltd. vs. CIT (1961) 41 ITR 613 (SC). This decision was rendered under the IT Act, 1922. The issue before the Hon'ble Supreme Court was the meaning of the word 'substantial' with reference to shareholding. The Supreme Court was interpreting the term 'substantially interested' for distribution of profits. The Court held that anyone who holds more than 15 per cent of the voting power for the benefit of another and who does not exercise his voting pow....
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....sorbed depreciation has already been allowed to the set off by the AO by passing order under s. 154 of the IT Act. 7. On the other hand, the learned Departmental Representative supported the orders of the authorities below. It was submitted that a subsidiary company is an independent company and it cannot be said that shares held by subsidiary company are beneficially held by holding company. 8. We have heard both the parties. Before proceeding further it will be useful to reproduce s. 79 of the IT Act. "Sec. 79: Notwithstanding anything contained in the chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, 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." [Section quoted is incomplete-Ed.] 9. The requirement as per the s. 79 of the IT Act is that 51 per cent of the voting power should be beneficially held by persons who held beneficial shares of the company carrying not less than 51 per cent of the voting power on the last day of the year or years in which the loss was incurred....
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.... observed: "The mere possibility of voting power being controlled is not enough. Anything is possible and anyone's voting power may be controlled but that is not what the law requires. The law requires a de facto control, a control which is in fact exercised. Here again, we do not find that the JM has given that finding." 10. The above order of the Bombay High Court was taken in appeal by the apex Court [sic-The appeal was against the case of Raghuvanshi Mills Ltd. vs. CIT (1953) 24 ITR 338 (Bom)] and the Hon'ble Supreme Court expressed in the case Raghuvanshi Mills Ltd. vs. CIT (1961) 41 ITR 613 (SC) at p. 620 as under: "The essence of the Explanation lies not in the percentage which only shows the limit of the minimum holding by the public, but lies in the words 'unconditionally' and 'beneficially'. These words underline the fact that no person who holds a share or shares not for his own benefit but for the benefit of another and who does not exercise freely his voting power, can be said to belong to that body, which is designated 'public'. The word 'public' is used in contradistinction to one or more persons who act in unison and among ....
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.... 11 as follows: This Court pointed out that by the words 'unconditionally' and 'beneficially' it is indicated that the voting power arising from the holding of those shares should be free and not within the control of some other shareholder and the registered holder should not be a nominee of another. It was pointed out again by this Court in Shree Changdeo Sugar Mills Ltd. vs. CIT that the 'unconditional' and 'beneficial' holding is meant that the shares are held by the holder for their own benefit only and without any control of another'." 13. To see the applicability of s. 79 of the IT Act, we have to see that 51 per cent of the voting power is beneficially held during the year under reference by the persons who held such voting right during the year in which loss was incurred. Since the board of directors of M/s APIL is controlled by M/s ABL, being a holding company, hence the voting power of M/s APIL is controlled by M/s ABL and hence such voting power is beneficially held by M/s ABL. It is clear from the ratio of law laid down from the Bombay High Court in the case of Raghuvanshi Mills Ltd. Hence, we are inclined to agree with the content....
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....counting entries were made: (1) Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC); (2) CIT vs. Swadeshi Cotton & Flour Mills (P) Ltd. (1964) 53 ITR 134 (SC). 19. The learned CIT(A) relied on the interpretation of word paid as given by Bombay High Court in the case of Taparia Tools Ltd. vs. Jt. CIT (2003) 180 CTR (Rom) 256 : (2003) 260 ITR 102 (Rom). The learned CIT(A) also referred to the decision of the jurisdictional High Court in the case of WIDIA (India) Ltd. vs. Chief CIT & Anr. (1999) 151 CTR (Kar) 142 : (1998) 233 ITR 1 (Kar). The learned High Court held that expression paid means actually paid or incurred, according to the method of accounting. Accordingly, the learned CIT(A) held that liability to pay the consideration of Rs. 5 crores arose on 1st March, 1998 by virtue of the agreement and this is to be treated as paid in view of the definition of word paid as contained in s. 43(2) of the Act. The learned CIT(A), therefore directed that deduction under s. 35AB should be allowed. 20. On the above referred issue, we have heard both the parties. It is clear that as per the agreement entered between the assessee and ABL, lump sum consideration of Rs. 5 crores was considered f....