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Judgment
PER MANISH AGARWAL, AM :
The present appeal is filed by Revenue against the order dated 04.12.2023 by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] in Appeal No. CIT(A), Delhi-6/10608/2019-20 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 26.12.2019 passed u/s 143(3) of the Act pertaining to Assessment Year 2017-18.
Brief facts of the case are that the assessee is a Private Limited company incorporated on 28.10.2010 under The Companies Act, 1956 and is engaged in the business of delivering education solutions to schools, higher education, professional and health care market. The return of income was e-filed on 29.09.2017, declaring NIL income. Thereafter, in terms of the order passed by National Company Law Tribunal (“NCLT”) approving the scheme of merger with appointed date on 01.04.2016, the assessee e-filed revised return on 29.03.2019 wherein assessee has declared income of INR 38,86,25,756/- under normal provision of the Act. The case of the assessee was selected for scrutiny and assessment was completed by disallowing the set off of brought forward business of INR 4,02,40,643/-.
Aggrieved by the said order, the assessee filed an appeal before Ld.CIT(A) wherein the assessee has made fresh claim of depreciation of INR 22,33,986/- through revised computation before the AO which was not allowed.
Ld.CIT(A) in terms of the order dated 04.12.2023 has partly allowed the appeal of the assessee where the claim of assessee of set-off of brought forward unabsorbed losses u/s 79 of the Act was allowed and further claim of depreciation in terms of revised computation of income of INR 22,33,986/- made through revised return before the AO which was also allowed.
Aggrieved by the said order, the Revenue is in appeal before the Tribunal by raising various Grounds of appeal.
Ground of appeal Nos. 1 to 3 of the Revenue are with respect to allowing benefit u/s 79 of set off of brought forward business losses of INR 4,02,40,643/-.
Heard the contentions of both the parties at length and perused the material available on records. Ld.CIT(A) while allowing the claim of the assessee, has made the following observations:-
2)Merger order was passed by NCLT on later date 19/03/2018 approving 01/04/2016 as appointed date and NCLT order does not require to spell out set off of losses.
3)Amalgamated and amalgamating company are part of the McGraw Group having same ultimate parent company, there for the c/f and set off of loss should not be disallowed on the ground that there is a change in shareholding due to merger apropos scheme of section 79.
Relevant section 79 is reproduced as below for reference-
48[Carry forward and set off of losses in case of certain companies.
49 79. (1) Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place during the 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 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 even if the said condition is not satisfied in case of an eligible start-up as referred to in section 80-IAC, the loss50 incurred in any year prior to the previous year shall be allowed to be carried forward and set off against the income of the previous year if all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year and such loss has been incurred during the period of 50a[ten] years beginning from the year in which such company is incorporated.
(2)Nothing contained in sub-section (1) shall apply.—
(a)to a case where a change in the said voting power and shareholding 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;
(b)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 amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company;
(c)to a company where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 (31 of 2016), after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner;
(d)to a company, and its subsidiary and the subsidiary of such subsidiary, where,—
(i)the Tribunal, on an application moved by the Central Government under section 241 of the Companies Act, 2013 (18 of 2013), has suspended the Board of Directors of such company and has appointed new directors nominated by the Central Government, under section 242 of the said Act; and
(ii)a change in shareholding of such company, and its subsidiary and the subsidiary of such subsidiary, has taken place in a previous year pursuant to a resolution plan approved by the Tribunal under section 242 of the Companies Act, 2013 (18 of 2013) after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner;
51[(e) to a company to the extent that a change in the shareholding has taken place during the previous year on account of relocation referred to in the Explanation to clauses (viiac) and (viiad) of section 47;]
52[(f) to an erstwhile public sector company subject to the condition that the ultimate holding company of such company, immediately after the completion of strategic disinvestment, continues to hold, directly or through its subsidiary or subsidiaries, at least fifty-one per cent of the voting power of such company in aggregate.]
52[(3) Notwithstanding anything contained in sub-section (2), if the condition specified in clause (f) of the said sub-section is not complied with in any previous year after the completion of strategic disinvestment, the provisions of sub-section (1) shall apply for such previous year and subsequent previous years.]
Explanation.—For the purposes of this section,—
(i)a company shall be a subsidiary of another company, if such other company holds more than half in nominal value of the equity share capital of the company;
52[(ia) "erstwhile public sector company" shall have the same meaning as assigned to it in clause (ii) of the Explanation to clause (d) of sub-section (1) of section 72A;
(ib)"strategic disinvestment" shall have the same meaning as assigned to it in clause (iii) of the Explanation to clause (d) of sub-section (1) of section 72A;]
(ii)"Tribunal"53 shall have the meaning assigned to it in clause (90) of section 2 of the Companies Act, 2013 (18 of 2013).]
Section 79 of ITA 1961 was introduced as an anti-abuse provision to curb attempts at transferring losses incurred by a corporate entity by means of transfer of shareholding. It restricts carry-forward and set-off of losses in the hands of a closely held company, if the shares of such company carrying at least 51% of voting power are not beneficially held by persons who beneficially held such shares on the last day of the previous year in which the loss was incurred. The background is that the ITA allows certain taxpayers to carry forward and set off the losses incurred in a financial year ("FY") against the income of subsequent FYs, on satisfaction of prescribed conditions. The section was introduced with the intent to curb the practice of profitable enterprises acquiring loss making undertakings for the sole reason of utilising tax losses accumulated by such undertakings to reduce their taxable business profits. Section 79 of IT Act gets attracted when there is a change in persons beneficially holding shares, carrying at least 51% of the voting power of the company on the last day of the FY in which a set off is claimed, as compared to the last day of the FY in which the loss was incurred.
The timeline of events is reproduced as below for a ready reference-
A) McGraw Hill Education (India) Pvt. Ltd. (AAACT0179L Amalgamating/Transferor company Co 1) merged with McGraw Hill Education Services Pvt. Ltd. (AAGCM8263J Amalgamated company Co 2) B) McGraw Hill Education Services Pvt. Ltd. (AAGCM8263J Amalgamated/Transferee company Co 2) changed its name to McGraw Hill Education (India) Pvt. Ltd. C) Newly named Amalgamated company McGraw Hill Education (India) Pvt. Ltd. (AAGCM8263J) for AY 2017-18 filed its revised return pursuant to NCLT order dated 19/03/2018 with effect from 01/04/2016. D) Proceedings under section 143/Complete scrutiny were continued in Newly named Amalgamated company McGraw Hill Education (India) Pvt. Ltd. (AAGCM8263J) for AY 2017-18
E) In the revised ROI, appellant had claimed loss of the amalgamated company itself qua business losses of AT 2013-14, 2014-15 and 2015-16. F) The shareholding pattern is as below-
AY 2013-14
(b) Shares held by holding/ ultimate holding company and their subsidiaries/ associates
31 March 2013 Rs. 31 March 2012 Rs. 19,999,999 - - 19,999,999 - 10 10 - AY 2014-15
(c) Shares held by holding/ ultimate holding company and their subsidiaries/ associates
31 March 2014 Rs. 31 March 2013 Rs. 65,960,260 19,999,999 10 10 (d) Details of shareholders holding more than 5% shares in the Company
31 March 2014 31 March 2013 No. % holding No. % holding 6,596,026 99.99998% 1,999,999 99.99998% AY 2015-16
31 March 2015 Rs. 31 March 2014 Rs. 65,960,260 65,960,260 10 10 31 March 2015 Rs. 31 March 2014 Rs. No. % holding No. % holding 6,596,026 99.99998% 6,596,026 99.99998% AY 2017-18
(c)Shares held by holding company Out of equity shares issued by the Company, shares held by its holding company are as below:
31 March 2017 (Rs.) 31 March 2016 (Rs.) McGraw-Hill Education (Singapore) Pte Ltd, the holding company 6,596,026 equity shares of Rs. 0.15 each fully paid (31 March 2016: Rs. 10 each fully paid) 989,400 65,960,260 (d) Details of shareholders holding more than 5% shares in the company Name of the shareholder 31 March 2017 31 March 2016 No. % holding in the class No. % holding in the class Equity share of Rs. 0.15 each fully paid (31 March 2016: Rs. 10 each, fully paid) 6,596,026 99.99% 6,596,026 99.99% McGraw-Hill Education (Singapore) Pte Ltd 6,596,026 99.99% 6,596,026 99.99% As per the records of the Company, including its register of shareholders/members and other declarations received from shareholders regarding beneficial interest, the above shareholding represents legal ownership of shares.
The thrust of argument of appellant is that there is no change in shareholding of the amalgamated company as on 31/03/2017.
As per the provisions of ITA, 1961 reproduced supra-Normal provisions are applicable if the following conditions are satisfied –
Condition 1 – The taxpayer is a company in which the public are not substantially interested.
Condition 2 – The persons beneficially holding 51 per cent of the voting power on the following two dates are different:
a. on the last day of the previous year in which the loss was incurred;
b. on the last day of the previous year in which the company wants to set off the brought forward loss.
If the above two conditions are satisfied, brought forward loss cannot be set off.
If the change in the shareholding did not result in holding voting power of 51 per cent or it was established that the shares of the company carrying not less than 51 per cent of the voting power were beneficially held by the same persons, both on the last day of the previous year as well as the last day of the year or years in which the loss was incurred, it could be presumed that there was no change in the control over the company and the disqualification imposed on the company because of the change in its shareholding would stand removed.
As can be seen, there is no change in the shareholding pattern on 31/03/2017 wrt AY 2013-14 to AY 2015-16. It has also been submitted that 'We would like to submit that
From the perusal of the observations of Ld.CIT(A), it is observed that Ld.CIT(A) has allowed the set off of brought forwards business losses as post amalgamation, shareholding of the assessee company, was not changed more particularly, 51% of the voting rights were held by the persons who were be the beneficial shareholders of the company of more than 51% on the last day of the year where losses were occurred. These finding given by Ld. CIT(A) have not been controverted by the revenue before us. Under these circumstances, we find no error in the order of Ld.CIT(A) which is hereby upheld. Accordingly, Ground of appeal Nos. 1 to 3 raised by the Revenue are dismissed.
Ground of appeal No.4 raised by the revenue is with respect to action of ld. CIT(A) in allowing the depreciation of INR 22,33,986/-on the block of building claimed by the assessee through revised computation of income filed before the AO.
Heard the contentions of both the parties at length and perused the material available on records. It is observed that the assessee has made additional claim of depreciation on the block of building through revised computation of income filed as a result of merger which was not claimed in the original return of income filed. The AO has disallowed the same as it was not claimed through original or revised return of income by placing reliance on the judgement of Hon’ble Supreme Court in the case of Goetze (India) Ltd. v. CIT reported in [2006] 157 Taxman 1 (SC). It is observed that in the said judgement, Hon’ble Supreme Court though held that assessee is not entitled to make additional claim without filing return of income or revised return of income however, the hon’ble court further observed that this has not impinged the right of the appellate authorities who can entertain additional claim. Ld.CIT(A) after considering these facts and by placing reliance on the judgement of Hon’ble Jurisdictional Delhi High Court in the case CIT vs Sam Global Securities Ltd. reported in (2014) 360 ITR 682 (Del.) and further placing reliance on the judgement of Hon’ble Madras High Court in the case of CIT vs Abhinitha Foundation Pvt. Ltd. reported in 83 taxmann.com 100 (Mad.) has allowed the additional depreciation to the assessee.
Before us, revenue has placed reliance on the judgment of Goetz India (supra) which as observed above, only restrict the allowance of additional claim with original or revised return of income before the AO and does not restrict the power of the appellate authorities to entertain the additional claim of deduction even though no revised return was filed. In the case of CIT v. Jai Parabolic Springs Ltd. reported in (2008) 306 ITR 42 (Delhi) the AO disallowed the claim of the assessee on the ground that “since the claim for the deferred revenue expenditure of INR 15,58,500/- was not claimed by the assessee in the return of income for the assessment year 1990-91, the same is not allowed”. Their Lordships after considering the decision of the Hon’ble Apex Court in the case of Goetze (India) Ltd. (supra) has held as under (Head note):
“Held, dismissing the appeal, that there was no prohibition on the powers of the Tribunal to entertain an additional ground which according to the Tribunal arose in the matter and for the just decision of the case. There was no infirmity in the order of the Tribunal”.
In the case of National Thermal power Co. Ltd. vs. CIT reported in (1998) 229 ITR 383(SC), the hon’ble Supreme Court has held that:
“The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. ….. We do not see any reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner of Income tax(Appeals). Both the assessee was well as the Department have a right to file an appeal/cross objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier”.
The CBDT as back as in 1955 issued a circular No. 14(XL-35), dated 11th April, 1955 wherein the Board has recognized the fact that responsibility for claiming refunds and relief rests with the assessee as imposed by law, even then the Board has directed the officers to draw the attention of the assessees in respect of any refunds or reliefs to which they are eligible, which they have not claimed for some reason or other. The Board later issued Circular F.No.81/27/65-IT(B) dated 18thMay,1965, defining the duties of PROs in providing assistance to the public in filing correct return and making eligible claims. In the case of Essar Oil Ltd. the coordinate bench of ITAT Mumbai in ITA No. 3661 & 2827/Mum/2000, after considering various CBDT Circulars and the decision of the Hon’ble Apex Court in the case of NTPC Ltd. (229 ITR 303); UCO Bank (237 ITR 889) and in the case of Shelly Products and Anr. (261 ITR 367) and various decisions and Circulars has held as under:
“Having regard to these decisions, in our view the order of the CIT(A) cannot be found fault with. The learned Departmental Representative to the query from the Bench has fairly admitted that there is nothing in Goetze (India) Ltd., which prevents the Tribunal from entertaining any fresh claim if the same can be entertained in the light of the available material on the face of the record. Anything to the contrary of the proposition will only negate the principle laid down by the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra). We therefore confirm his order. It may be mentioned that we have taken this view after considering the fact that in all other years the department has accepted these expenses and allowed deduction as claimed by the assessee”
In view of above discussion and in the circumstances of the case and by respectfully following the judgement of hon’ble Supreme court, hon’ble jurisdictional high court and of the coordinate bench of Tribunal, as stated above, we find no error in the order of Ld. CIT(A) who has allowed the additional claim of depreciation of INR 22,33,986/- on block of building which order is hereby upheld. The Ground of appeal No.4 raised by the Revenue is thus, dismissed.
In the result, the appeal of the Revenue is dismissed.
Footnotes
- 48.Substituted by the Finance (No. 2) Act, 2019, w.e.f. 1-4-2020. Prior to its substitution, section 79, as earlier amended by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988/1-4-1989, Finance Act, 1988, w.e.f. 1-4-1989, Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1-4-1989 and Finance Act, 1999, w.e.f. 1-4-2000 and later on substituted by the Finance Act, 2017, w.e.f. 1-4-2018 and further amended by the Finance Act, 2018, w.e.f. 1-4-2018, read as under : "79. Carry forward and set off of losses in case of certain companies. —Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year,— (a) in the case of a company not being a company in which the public are substantially interested and other than a company referred to in clause (b), 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 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; (b) in the case of a company, not being a company in which the public are substantially interested but being an eligible start-up as referred to in section 80-IAC, the loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, if, all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred,— (i) continue to hold those shares on the last day of such previous year; and (ii) such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated: Provided that nothing contained in this section shall apply to a case where a change in the said voting power and shareholding 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: Provided also that nothing contained in this section shall apply to a company where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 (31 of 2016), after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner."
- 49.For relevant case laws, see Taxmann's Master Guide to Income-tax Act.
- 50.For the meaning of the term "loss", see Taxmann's Direct Taxes Manual, Vol. 3. 50a. Substituted for "seven" by the Finance Act, 2023, w.e.f. 1-4-2023.
- 51.Inserted by the Finance Act, 2021, w.e.f. 1-4-2022.
- 52.Inserted by the Finance Act, 2022, w.e.f. 1-4-2022.
- 53.For definition of "Tribunal" under section 2(90) of the Companies Act, 2013, see Appendix.