MULTIFILMS PLASTICS P.LTD,MUMBAI vs. DCIT 8(2), MUMBAI

In this appeal, the only issue raised by the assessee is against the action of the income-tax authorities in denying the set off of unabsorbed business losses of earlier years by invoking the provisions of section 79 of the Act.

Briefly put, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter- alia, engaged in the business of manufacturing and dealing in Multilayer Plastic Films and raw material, etc. In the course of the assessment proceedings the Assessing Officer noted that the shareholding pattern of the assessee company had undergone a change and, therefore, he show-caused the assessee as to why the provisions of section 79 of the Act not be applied in order to deny the set-off of brought forward unabsorbed business loss. Notably, section 79 of the Act, as it stood for the year under consideration, reads as under:-

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 : Provided that nothing contained in this section shall apply to a case where a change in the said voting power takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift : Provided further that nothing contained in this section shall apply to any change in the shareholding of an Indian company which is a subsidiary of a foreign company as a result of amalgamation or demerger of a foreign company subject to the condition that fifty-one per cent shareholders of the amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company. (b) [Omitted by the Finance Act, 1988, w.e.f. 1-4-1989.] 3.1 Section 79 of the Act contains an exception to the scheme of Chapter VI of the Act which prescribes for carry forward and set off of loses of one year against the income of the subsequent years. Section 79 of the Act prescribes that in case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the relevant previous year shall be carried forward and set-off against the income of the relevant previous year, unless on the last day of the relevant 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. In other words, the prescription of section 79 of the Act is that set-off of brought forward loss can be allowed only if on the last day of the previous year in which the set-off is claimed as well on the last day of the year or years in which the loss was incurred, the shares of the company carrying not less than 51% of the voting power are beneficially held by the same persons. In the present case, the Assessing Officer has compared share holding pattern on the last day of the instant previous year with the shareholding pattern as on the last day of the preceding assessment year of 2009-10 when the loss was incurred. The relevant tabulation reproduced by the Assessing Officer in para 8.1 of his order is as under:-

On the basis of the aforesaid, the Assessing Officer came to conclude that the persons holding not less than 51% of the voting power on the last day of the instant previous year were not holding not less than 51% of the voting power on the last day of the previous year relevant to the earlier assessment year of 2009-10. Therefore, he invoked the provisions of section 79 of the Act and denied the set-off of the brought forward business loses. The CIT(A) has also affirmed the stand of the Assessing Officer so far as it relates to the carry forward of business loss. Accordingly, assessee is in appeal before us.

Before the lower authorities as well as before us, the short plea of the assessee is that the shareholders appearing at Serial No.1 to 5, 7 and 8 hold 100% of the voting power at the end of the previous year relevant to the preceding assessment year 2009-10 and that the same set of shareholders continue to hold the shares carrying not less than 51% of the voting power as on the last day of the previous year under consideration i.e. 76.44%. At the time of hearing, the Ld.Representative for the assessee pointed out that the requirement of section 79 as understood in plain terms, is that the same set of shareholders should hold shares carrying not less than 51% of the voting power in the assessment year in which the loss was incurred as well as in the assessment year in which the loss is sought to be set off. According to him, viewed in the aforesaid light, the requirement of section 79 of the Act is met in the present case.

On the other hand, Ld. Representative for the Revenue pointed out that the shareholding pattern itself demonstrates that in the earlier previous year, relevant to the A.Y 2009-10, the shareholder at Serial No.1 was holding 66.61% and in the instant year, his shareholding has come down to 4.89%, which clearly brings out that the shares of the company carrying not less than 51% of the voting power is not held by the same persons between the two dates i.e. last day of the instant previous year and last day of the preceding previous year corresponding to the A.Y 2009-10. It was, therefore, contended that the lower authorities have correctly invoked section 79 of the Act and denied the set-off of brought forward business loss.

We have carefully considered the rival submissions. In the present case, it is quite clear that on the last day of the previous year in which the loss was incurred, namely, assessment year 2009-10, Shri Sudhir S. Bhandiwadekar has held 66.61% of shareholding whereas on the last day of the previous year relevant to the assessment year under consideration, the shareholding of the said shareholder has reduced to 4.89% a situation, which clearly triggers the prohibition contained in section 79 of the Act. It is quite clear that the persons holding not less than 51% of the voting power are not the same as on 31/3/2009 and 31/3/2010, namely, the last day of the previous year in which loss was incurred and the last day of the instant previous year when the loss is sought to be set-off respectively. Therefore, in this view of the matter, the action of the lower authorities deserves to be affirmed. We hold so.