Section 79 of Income Tax Act- Mischief – In the Restructuring

 

Provisions of section 79

1. Override Effect– Override the provisions of Chapter VI- Section 66 to section 78
2. Applicability – Applicable to company is which public is not substantially interested i.e mainly listed company or public company which is 51% subsidiary of listed company. (hereinafter referred as prescribe company)
3. Substantive provision
4. a) Prescribed company has bought forward loss (Business Loss, Loss under the head Capital gain, Loss under the head Income from House property)(Unabsorbed depreciation is not covered) at the beginning of previous year.
5. b) There is change in shareholding of prescribed company in previous year, as result of which persons holding 51% equity stake are different at the end of previous year as compared to year in which loss was incurred in earlier previous years.
6. c) On account of above change in shareholding, prescribed company will not be allowed to be carried forward and sett of bough forward loss in previous year.
7. Exemptions– Section 79 is not applicable in following cases:-
8. a) Change is shareholding took place as a result of death of shareholders or account of transfer of shares by way of gift to relative of shareholder.
9. b) Change in shareholding of Indian company, which is subsidiary of foreign company, as a result of amalgamation of demerger of foreign company subject to the condition that 51% shareholders of amalgamated or demerged company continue to be shareholders of amalgamated or resulting company

Section 79 mischief in the course of restructuring

1. Merger of Indian Holding company, having Indian subsidiary company, with another Indian company.
2. a) Suppose A (P) Ltd is having subsidiary S (P) Ltd.
3. b) S (P) Ltd is having bough forward business losses
4. c) A (P) Ltd get merged with B (P) Ltd
5. d) As a result of merger of A (P) Ltd with B (P) Ltd, there is change in 51% shareholding of S (P) Ltd, as B (P) Ltd will become shareholder of S (P) Ltd in place of A (P) Ltd.
6. e) Thus on account of above-said merger, S(P) Ltd will not be able carried forward and set off bought forward business Loss – Unintended consequence on S (P) Ltd due section 79.

Critical Observations:-

1. i) This case amounts to discrimination to Indian Holding Company having Indian Subsidiary as compared to exemption allowed to Foreign Company having Indian subsidiary company. Indian holding company be allowed exemption similar to as available to Foreign holding company.
2. ii) The exemption to foreign company is available irrespective, whether it is listed company or not.

iii)     In India, where holding company is listed company, the provision of section 79 will not be applicable to public limited subsidiary company, since subsidiary will not be prescribed company. Thus in India exemption is available to listed Holding company only in above facts of the case.

2. Merger of Indian holding company, having Indian subsidiary company, with subsidiary company.
3. a) Suppose X (P) Ltd is having Subsidiary S (P) Ltd
4. b) X (P) Ltd is having bought forward business losses
5. c) X (P) Ltd gets merged with S (P) Ltd
6. d) As a result of merger of X (P) Ltd with S (P) Ltd, there is charge in shareholding of S (P) Ltd. Now shareholders of X (P) Ltd becomes the shareholders of S (P) Ltd as in the process of merger S (P) Ltd will issue shares to the shareholders of X (P) Ltd
7. e) Thus of account of afore-said merger, Following consequences could prevail :-
8. i) One View -On appointed date of merger X (P) Ltd existence comes to end, its assets and liabilities are transferred to S (P) Ltd and in consideration of that S (P) Ltd issue its shares to the shareholders of X (P) Ltd. Thus during the existence of X (P) Ltd, there is no change in shareholding of X (P) Ltd and hence section 79 does not have applicability.
9. ii) Other View- On appointed date of merger, there is change in shareholding of X (P) Ltd and hence business losses of X (P) Ltd cannot be carried forward and set off in the hands of S (P) Ltd u/s 72A.

In Select Holiday Resorts (P) Ltd , Delhi HC has occasion to consider the facts similar to above, whereby holding company gets merged with subsidiary company and holding company was having bought forward losses

It was held that since management and control of subsidiary company is with same set of persons who were having management and control of Holding company and change in more shareholding was only due to merger of the two companies, carried forward of loss was allowed.