IT : Carry forward losses cannot be denied on ground of change in shareholding due to merger if management of company continues to remain with same set of people
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[2013] 35 taxmann.com 368 (Delhi)
HIGH COURT OF DELHI
Commissioner of Income-tax
v.
Select Holiday Resorts (P.) Ltd.*
S. RAVINDRA BHAT AND R.V. EASWAR, JJ.
IT APPEAL NO. 943 OF 2011†
DECEMBER 6, 2012
Section 79 of the Income-tax Act, 1961 - Losses - Carry forward and set off of, in case of certain companies [Merger, effect of] - Assessment year 2004-05 - 98 per cent shares of assessee-company, were held by IIPL and both were managed by same set of people - On merger of IIPL into assessee-company, Assessing Officer disallowed carry forward of losses, under section 79 - Whether, where there was no change in management of company which continued to remain with same set of people, and change in shareholding was only due to merger, carry forward of losses of company could not be denied - Held, yes [Para 4] [In favour of assessee]
Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to exempt income - [Quantum of disallowance] - Assessment year 2004-05 - Assessee earned tax free income of Rs. 13.80 crores and disallowed 6.23 per cent of total expenditure, but Assessing Officer disallowed Rs. 1.13 crores under section 14A - Commissioner (Appeals) and Tribunal reduced disallowance to 33 per cent of total expenditure - Whether, where having regard to nature of activity of assessee, disallowance made by Commissioner (Appeals) under section 14A was not erroneous, and no interference was required – Held, yes [Para 2] [In favour of assessee]
FACTS-I
| ■ | 98 per cent shares of assessee-company were held by IIPL and 100 per cent shares of IIPL were held by four persons of a family who had the control and management of IIPL as well as assessee-company. On merger of IIPL into assessee-company, shareholders of IIPL were allotted shares of the amalgamated company. The Assessing Officer disallowed carry forward of losses under section 79, holding that change in shareholding had taken place. | |
| ■ | The Commissioner (Appeals) and the Tribunal held that there was no change in the management of the company which remained with the same set of people who were earlier exercising control and change in more than 51 per cent shareholding was only due to merger of the two companies. Therefore, carry forward of losses was allowed. | |
| ■ | On reveune's appeal: |
HELD-I
| ■ | It is evident that during the earlier period, 98 per cent of the assessee's shares were held by IIPL. The holding company was amalgamated with the assessee-company. However, the shareholders of that holding-company, i.e., IIPL continued to be shareholders of the assessee-company itself. The shareholders beneficially entitled to 98 per cent of the shares continued to be the same. In these circumstances, the prohibition from carrying forward the losses placed by section 79 does not operate; on the other hand section 79(a) makes the provision consequently inapplicable. The conclusions of the Tribunal in this regard are unexceptionable. For the above reasons, no substantial question of law can be determined by the Court. Appeal is meritless and dismissed. [Para 4] |
FACTS-II
| ■ | The assessee-company, engaged in business of investment and finance, reported a loss. However, it earned tax-free income of Rs. 13.80 crores, against which it allocated 6.23 per cent of total expenditure. The Assessing Officer did not accept assessee's claim and added Rs. 1.13 crores under section 14A as 99 per cent of the assessee's income was tax free. | |
| ■ | On appeal, the Commissioner (Appeals) reduced the disallowance to 33 per cent of total expenditure, which was confirmed by the Tribunal. | |
| ■ | On revenue's appeal: |
HELD-II
| ■ | Apart from the fact that the appellate Commissioner and the Tribunal have concurrently determined the disallowance to be 33 per cent, i.e., a substantial mark-up over and above the disallowance reported by the assessee, the Court is of the opinion that having regard to the nature of activity engaged in by the assessee, the method adopted for apportioning 33 per cent of the expenditure towards earning of tax free income cannot be considered to be erroneous. It is not the revenue's case that an entirely different set of employees or establishment was kept or necessitated for earning such income; that income was part of the composite income reported by the assessee which included other heads such as sale of investments, sale of securities etc. [Para 2] |
CASE REVIEW
Dy. CIT v. Select Holiday Resorts (P.) Ltd. [2011] 16 taxmann.com 374 (Delhi)/[2012] 49 SOT 20 (para 4) affirmed.
Sanjeev Rajpal for the Appellant. Ajay Vohra, Ms. Kavita Jha and Somnath Shukla for the Respondent.
JUDGMENT
1. The revenue claims to be aggrieved by the order dated 23.12.2010 of the ITAT in ITA 1184 and 2460/Del/2008. It urges the following questions of law i.e. (a) whether the Tribunal fell into error in holding that the appellate commissioner's determination vis-a-vis the disallowance under Section 14A of the Income Tax Act was reasonable on the facts of the case and (b) whether the impugned order proceeds on an erroneous interpretation of Section 79 of the Act.
2. The facts necessary for deciding the case are that the assessee which is engaged in the business of investment and finance, during the assessment year in question i.e., 2004-05 reported a loss. It however, had turnover of Rs. 2,21,36,99,011/-. The tax free income claimed was Rs. 13,80,61,476/-. The assessee allocated Rs. 7,12,094/- out of the total expenditure of Rs. 1,14,17,833/- towards tax-free income, which come to 6.23% of the expenditure. The assessing officer however did not accept the same and added back Rs. 1,13,76,728/- u/s 14A. The assessee's appeal to the Commissioner was partly accepted in the sense that the latter determined the disallowance to be 33% of the total expenses (which was Rs. 1,14,17,833/-). The revenue's appeal was rejected by the Tribunal. It is contended that the Tribunal and the Appellate Commissioner fell into error in adopting a methodology which is not supported in law. Counsel points to the fact that almost 99% of the assessee's income and activity pertains to tax free income/interest generated and in these circumstances the quantum of disallowance i.e. 33% of the total expense was inadequate. 2. This Court has considered the submissions. Apart from the fact that the appellate commissioner and the ITAT have concurrently determined the disallowance to be 33% which works out to Rs.38 lakhs i.e. a substantial mark-up of nearly Rs. 34 lakhs over and above the disallowance reported by the assessee, the Court is of the opinion that having regard to the nature of activity engaged in by the assessee, the method adopted of apportioning 33% of the expenditure towards earning of tax free income cannot be considered to be erroneous. It is not the revenue's case that an entirely different set of employees or establishment was kept or necessitated for earning such income ; that income was part of the composite income reported by the assessee which included other heads as sale of investments, sale of securities etc. 3. So far as second question i.e. the applicability of Section 79 is concerned, the Tribunal had this to say :
"15. Now examining the present case, we find that IIPL was holding 98% of the shares of the assessee company. On the other hand 100% shares of IIPL were held by four persons of the family who were having the control and management of the IIPL as well as the assessee company. Because of the merger of IIPL into the assessee company, the former came to an end as a result of which the shares of amalgamated company were allotted to the share holders of IIPL. Thus, it is clear that there is no change in the management of the Company which remained with the same family (set of persons) who was earlier exercising control. The assessee submitted a list of directors on the Board of the two companies prior to merger as well as the directors on the Board of merged company. It remained in the same hands. Thus, the Ld. Commissioner of Income Tax (Appeals) is correct in holding that change in more than 51% was due to merger in two companies. There was no change in the part of the Ld. Commissioner of Income Tax (Appeals)'s adjudication wherein he has referred the Circular No. 528 dated 16.12.88 and considered the case of the present merger as akin to death of share holder. He also held that in the case of death of a living person the shares held by him get transferred to his legal heirs. Similarly when existence of a company is legally finished, the benefit of assets held by it (including shares of other company) will pass on to its shares holders. Under the circumstances, we fully agree with the view of the Ld. Commissioner of Income Tax (Appeals) and do not find any infirmity or illegality in the order of the Ld. Commissioner of Income Tax (Appeals). Accordingly, we uphold the same."
3. It is evident that during the earlier period 98% of the assessee's shares were held by IIPL. The holding company was amalgamated with the assessee company. However, the shareholders of that holding company i.e. IIPL continued to be shareholders of the assessee company itself. The shareholders beneficially entitled to 98% of the shares continued to be the same. In these circumstances, the prohibition from carrying forward the losses, placed by Section 79 does not operate; on the other hand Section 79(a) makes the provision consequently inapplicable. The conclusions of the Tribunal in this regard are unexceptionable. For the above reasons no substantial question of law can be determined by the Court.
Appeal is meritless and is dismissed.
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