FRAMATOME CONNECTORS BERG LTD. vs. DEPUTY COMMISSIONER OF INCOME TAX

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ITA/1553/2009HC KeralaKLHC01026314200922 January 2019Author: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON12 pages
AI SummaryPartly Allowed

What did the High Court hold?

The High Court held that Section 79 of the Income Tax Act, 1961, squarely applies to the claim of carry forward of losses incurred by FC Berg in any year prior to the previous year (i.e., as on and prior to March 31, 1999). The Court reasoned that FC Berg was not a company in which the public were substantially interested when it incurred losses and when the change in shareholding occurred in July 1999. The subsequent amalgamation with FC OEN, a company in which the public are substantially interested, does not absolve FC OEN from the restrictions of Section 79 concerning losses incurred by FC Berg prior to the previous year. However, the Court clarified that Section 79 does not prohibit the claim of business loss incurred in the previous year itself (1999-2000) in which the change in shareholding occurred. Therefore, the business loss of FC Berg from April 1, 1999, to December 31, 1999, was allowed to be carried forward by FC OEN. The question of law was answered partly in favour of the assessee and partly in favour of the revenue.

What were the facts?

The appeals concern Assessment Year 2000-01, involving two companies, Framatome Connectors Berg Ltd. (FC Berg) and Framatome Connectors OEN Ltd. (FC OEN). FC Berg, existing since 1996, had 40% shareholding with Framatome Connectors India Ltd. (FCI) and 60% with T.V. Sundaram Iyengar Ltd. (TVS). In July 1999, FC OEN, a subsidiary of FCI, acquired 60% of FC Berg's shares, with FCI retaining 40%. Subsequently, FC Berg was amalgamated with FC OEN effective January 1, 2000. For AY 2000-01, FC OEN claimed carry forward and set off of business losses of FC Berg. The Assessing Officer (AO) disallowed this claim by applying Section 79 of the Income Tax Act, 1961.

What were the issues?

1. Whether the Tribunal ought to have held that Section 79 of the Income Tax Act, 1961, is inapplicable to the assessee-company (FC OEN) for Assessment Year 2000-01, considering that the company, as on the last date of the previous year (1999-2000), was a company in which the public are substantially interested, and 51% shareholding existed prior to the amalgamation on January 1, 2000? Assessee's Contention: The assessee argued that the amalgamated company, FC OEN, was a company in which the public were substantially interested. They contended that the 51% shareholding requirement under Section 79(a) was met by the existence of shareholding prior to the amalgamation, making Section 79 inapplicable. Revenue's Contention: The revenue contended that Section 79 was applicable because FC Berg, the company incurring the losses, was not a company in which the public were substantially interested at the time the losses were incurred and when the change in shareholding occurred in the previous year. The subsequent change in status due to amalgamation did not negate the applicability of Section 79 for prior period losses.

Which sections of the Income-tax Act were involved?

Section 79

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON TUESDAY, THE 22ND DAY OF JANUARY 2019 / 2ND MAGHA, 1940 ITA.No. 1553 of 2009 AGAINST THE ORDER IN ITA.617/(COCH)/2006 OF I.T.A.TRIBUNAL,COCHIN BENCH DATED 13-03-2009 [ASSESSMENT YEAR 2000-01] APPELLANT/RESPONDENT IN ITA: FRAMATOME CONNECTORS BERG LTD., THYKOODAM, COCHIN-19. BY ADVS. SRI.E.K.NANDAKUMAR [SR.] SRI.JOSON MANAVALAN SRI.K.JOHN MATHAI SRI.KURYAN THOMAS SRI.M.GOPIKRISHNAN NAMBIAR SRI.PAULOSE C. ABRAHAM SRI.P.GOPINATH (SR.) RESPONDENT/APPELLANT IN ITA: DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 2(1), RANGE 2, ERNAKULAM. BY SRI.P.K.R.MENON, SENIOR COUNSEL, GOI (TAXES) BY ADV. SRI.JOSE JOSEPH, SC FOR GOI (TAXES). THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.01.2019, ALONG WITH ITA.1713/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITAs.1553 & 1713 of 2009 - 2 - IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON TUESDAY, THE 22ND DAY OF JANUARY 2019 / 2ND MAGHA, 1940 ITA.No.1713 of 2009 AGAINST THE ORDER IN ITA.1152/(COCH)/2005 OF I.T.A.TRIBUNAL, COCHIN BENCH, COCHIN DATED 13-03-2009 [ASSESSMENT YEAR 2000-01] APPELLANT/RESPONDENT IN ITA: FRAMATOME CONNECTORS OEN LTD., THYKOODAM, COCHIN - 19. BY ADVS. SRI.E.K.NANDAKUMAR [SR.] SRI.K.JOHN MATHAI SRI.P.BENNY THOMAS SRI.KURYAN THOMAS RESPONDENT/APPELLANT IN ITA: THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1), RANGE 2 ERNAKULAM. BY ADVS. SRI.P.K.R.MENON, SENIOR COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.01.2019, ALONG WITH ITA.1553/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITAs.1553 & 1713 of 2009 - 3 -

JUDGMENT [ ITA.1553/2009, ITA.1713/2009 ] Vinod Chandran,J. The question raised in the appeal filed by two Companies; one of which was amalgamated to the other, for the assessment year 2000-01 arises on the applicability of Section 79 of the Income Tax Act, 1961 [for brevity “the Act”]. The question of law is re-framed as follows: “Ought not the Tribunal have held that the assessee-Company as on the last date of the previous year [1999-2000] relevant to the assessment year [2000-2001] being a Company in which the public are substantially interested and the 51% shareholding of that Company having existed prior to the amalgamation on 01.01.2000, Section 79 of the Act is inapplicable to the Company?”

2.

On facts, it has to be noticed that FC Berg Limited was a company which existed from 1996 onwards with 40% of its shareholding with Framatome Connectors India Limited [FCI] and 60% with T.V.Sundaram Iyengar Limited [TVS]. In July 1999, FC OEN Limited, which is a subsidiary Company of FCI, acquired 60% of the shareholding in FC Berg, with 40% remaining with FCI. Later on, FC Berg was amalgamated with FC OEN with effect from 01.01.2000, in the same financial year. In the returns filed for the - 4 - assessment year 2000-2001, FC OEN Limited claimed carry forward and set off, of business loss for the relevant previous year and also the prior years. The Asessing Officer [for brevity “AO”] declined the same applying Section 79. The interpretation of Section 79, as applied to the facts of the acquisition of shares and the subsequent amalgamation would answer the question posed before us.

3.

We have heard Sri.Kuryan Thomas appearing for the assessee-Company and Sri.P.K.R.Menon, Senior Counsel, Government of India (Taxes) for the Revenue.

4.

We deem it appropriate to extract Section 79 and clause (a) of the provision:

“79. Carry forward and set off of losses in the case of certain companies Notwithstanding anything contained in this 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 unless - (a) on the last day of the previous year the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred”.

5.

Section 79 is a measure devised by the legislature to prevent profit making companies, from claiming deduction of carried forward losses of companies taken over, which were carried on un-profitably. The provision applies only to companies in which the public are not substantially interested. The specific case put up by the assessee is that on the close of the year, the company, after amalgamation, is FC OEN Limited, which is a company in which the public are substantially interested.

6.

Section 79, takes care of a change in shareholding, taking place in the relevant previous year, in the case of a company not being a company in which the public are substantially interested. Undisputed is the fact that FC Berg, which existed as on the beginning of the previous year, i.e., 01.04.1999, was a company in which the public are not substantially interested. FC OEN, a company in which the public are substantially interested, acquired 60% of the shares in FCI Berg in July, 1999. Hence, there was a change in shareholding of the company in which the public were not substantially interested, i.e., FC Berg, in the previous year. The Section does not contemplate, absolving a company by virtue of such change - 6 - in shareholding or amalgamation resulting in a change of status of the Company from one in which the public are not substantially interested to one in which they are. Also merely by the acquisition of share holding of a company in which the public are not substantially interested, by a Company in which the public are substantially interested, the amalgamated Company does not acquire the status of the latter.

7.

What is relevant in considering whether the new company is entitled to claim business loss for the years prior to the previous year is sub-clause (a), which is extracted herein above. Sub-clause (a) stipulates an exception insofar as 51% of the shareholding of the company in which there was a change in shareholding in the previous year, being held by persons who beneficially hold 51% of the shares in the new company also. Hence, if FC OEN had held 51% of the shareholding of FC Berg on any years prior to the previous year, then the loss of such years could be claimed by FC OEN after amalgamation.

8.

On the facts as evidenced from the particular case, we find that FC Berg was existing as on 01.04.1999, which was a company in which the public are not substantially interested. In July 1999, 60% of the shares - 7 - in FC Berg was acquired by FC OEN. The change in shareholding, as contemplated in Section 79 hence was occasioned in the previous year relevant to the subject assessment year. It continued as a company in which the public are not substantially interested. The amalgamation took place with effect from 01.01.2000, upon which there was a change in the status of the company insofar as it became a company in which the public are substantially interested. Such change in status from a company in which the public are not substantially interested to one in which they are not is not relevant in considering the application of Section 79. The significant aspect is the change of shareholding in the company, in which the public are not substantially interested; which companies losses are claimed by the new company with the changed shareholding pattern.

9.

FC Berg was a company in which the public are not substantially interested in the financial year 1999-2000 (previous year) and there was a change in shareholding in July, 1999 and a further amalgamation on 01.01.2000. We are only concerned insofar as application of Section 79, on the change of shareholding which occurred in July, 1999. As on the close of the financial - 8 - year FC Berg stood amalgamated with FCI OEN, which is a company in which the public are substantially interested. Whether that Company would be entitled to claim the business losses of FC Berg, is the question. For that, not less than 51% of the share holding of FC Berg on the last day of the year or years in which the loss occurred, should have been beneficially held by not less than 51% of the shareholders of FC OEN. FC OEN acquired 60% of the shareholding of FC Berg only in July, 1999. Irrespective of that, the new company will be entitled to claim the business loss of the amalgamated company in the assessment year relevant to that previous year in which there was change in shareholding. This is because the prohibition is only in claiming the losses of any year prior to the previous year. But 51% of the shareholding, in FC Berg, in none of the years prior to the previous year (1999-2000), was ever held by FC OEN or even FCI.

10.

Section 79 squarely applies in the case of the assessee, FC OEN Limited in so far as the claim of carry forward of losses, incurred by FC Berg, in any of the years prior to the previous year. On amalgamation, FC OEN Limited cannot claim business loss of FC Berg for - 9 - the years prior to the previous year, i.e, as on and prior to 31.3.1999. However, Section 79 does not prohibit the claim of business loss of that previous year in which there was a change in shareholding, i.e., 1999-2000. We see from the assessment order that business loss upto 31.12.1999 has been declined obviously for reason of the new company in which the public are substantially interested having been formed on 01.01.2000. As we earlier noticed, the amalgamation and the change in status of the company to one in which public are substantially interested, does not at all affect the applicability of Section 79 insofar as the earlier company was not one in which the public are substantially interested. Hence, the business loss of the earlier company from 01.04.1999 to 31.12.1999 has to be allowed to be carried forward by FC OEN Limited. We, hence, answer the question of law partly in favour of the assessee and partly in favour of the Revenue. We direct the AO to carry out the modification insofar as grant of carry forward of business loss or set off of business loss of the previous year relatable to FC Berg, i.e., of the financial year 1999-2000, in the assessment year 2000-2001. ITAs.1553 & 1713 of 2009 - 10 - Appeals partly allowed. Parties are left to suffer their respective costs. K.VINOD CHANDRAN JUDGE ASHOK MENON JUDGE Vku/-

ITAs.1553 & 1713 of 2009 - 11 -

Appendix — schedule of exhibits
APPENDIX OF ITA 1553/2009 APPELLANT'S ANNEXURES: ANNEXURE A TRUE COPY OF THE ASSESSMENT ORDER FOR 2000-01 ISSUED BY THE INCOME TAX DEPARTMENT TO THE APPELLANT DATED 29/12/2005. ANNEXURE B TRUE COPY OF THE ORDER ISSUED BY THE COMMISSIONER OF INCOME TAX (APPEALS) TO THE APPELLANT DATED 19/9/1006. ANNEXURE C TRUE COPY OF THE TRIBUNAL ORDER DATED 13/03/2009 ISSUED TO THE APPELLANT. ITAs.1553 & 1713 of 2009 - 12 - APPENDIX OF ITA 1713/2009 APPELLANT'S ANNEXURES: ANNEXURE-A TRUE COPY OF THE ASSESSMENT ORDER FOR 2000-01 ISSUED BY THE INCOME TAX DEPARTMENT TO THE APPELLANT DATED 19/3/2005. ANNEXURE-B TRUE COPY OF THE ORDER ISSUED BY THE COMMISSIONER OF INCOME TAX (APPEALS) TO THE APPELLANT DATED 18/8/2005. ANNEXURE-C TRUE COPY OF THE TRIBUNAL ORDER DATED 13/3/2009 ISSUED TO THE APPELLANT. [ true copy ]

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