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Judgment
O R D E R
14.02.2022: This Appeal has been filed against part of order dated 19.10.2019 (released on 26.10.2019) passed by the Adjudicating Authority (National Company Law Tribunal), New Delhi, Principal Bench. By the impugned order the learned Adjudicating Authority has approved the Resolution Plan submitted by the Appellant. The Appellant is aggrieved only against observations made by the Adjudicating Authority in paragraphs 238 and 244. Apart from it, the Appellant is not aggrieved in any manner with the impugned judgment. The only prayer made in the Appeal is that observations and directions of the Adjudicating Authority in paragraphs 238 and 244 be set aside.
Corporate Insolvency Resolution Process with regard to ‘Asian Colour Coated Ispat Ltd.’ (Corporate Debtor) was initiated by order dated 20.07.2018. Pursuant to invitation for submission of Expression of Interest, Appellant submitted Resolution Plan dated 08.03.2020 with addendum dated 17.06.2019. The Resolution Plan was approved by 79.3% majority voting shares of the Committee of Creditors (CoC). An application was filed by the Resolution Professional before the Adjudicating Authority seeking approval of the Resolution Plan. The Resolution Plan having been approved and application filed before the Adjudicating Authority on 10.07.2019, the Resolution Professional in terms of Section 79(2)(c) of the Income Tax Act, 1961 served notice dated 26.08.2019 to the Jurisdictional Principal Commissioner of Income Tax, Central Circle 29, New Delhi. The reminder notice dated 19.09.2019 was also served by Respondent No. 1 to the Income Tax Authority. In paragraph 238 of the judgment, the Adjudicating Authority has disallowed carrying forward of losses on the ground that the liability of the Corporate Debtor has been extinguished. Further in paragraph 244, the Adjudicating Authority observed that the overriding effect of the Section 238 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘Code’) will not be applicable to the Resolution Plan.
We have heard Shri Gopal Jain, learned senior counsel appearing of the Appellant as well as learned counsel appearing for the Respondent No. 1 – Resolution Professional. Ms. Vibhooti Malhotra has appeared for Department of Income Tax. We have by order dated 02.02.2022 has accepted Reply filed by the Income Tax Department on the record.
Shri Gopal Jain, learned senior counsel for the Appellant submits that observations of the learned Adjudicating Authority that Appellant cannot avail the benefit of carrying forward of losses as per Section 79 of Income Tax Act, 1961 are erroneous. It is submitted that present is a case which is covered by Third Proviso to Section 79 sub-clause (b). Learned senior counsel has submitted that the present issue is fully covered by judgment of this Tribunal dated 04.12.2019 in Company Appeal (AT) (Insolvency) No. 467 of 2019, ‘JSW Steel Ltd. vs. Ashok Kumar Gulla & Ors.’, where it was also case of approval of Resolution Plan and this Tribunal held that the Successful Resolution Applicant can claim such benefit. With regard to observations in paragraph 244, it is submitted that the Resolution Plan having been approved after recording the finding that the plan complies with the provisions of the Code and Regulations, observation regarding Section 238 of the Code is out of place.
Learned counsel for the Income Tax Department, Ms. Vibhooti Malhotra referring to finding in the judgment of ‘JSW Steel Ltd. vs. Ashok Kumar Gulla’, as in Para 12 of the judgment, submits that there was no decision in the judgment or no finding was recorded that benefit of carry forward losses under Section 79 should be given to the Resolution Applicant. It is submitted that observations in the judgement was that the Applicant can claim such benefit of carry forward losses before the appropriate Income Tax Authority.
Learned Counsel for the Resolution Professional has also filed reply and does not dispute with the submissions of the learned counsel for the Appellant regarding carrying forward of losses. Resolution Professional has also submitted that in compliance of his duties as Resolution Professional notice was issued under Section 79 of the Income Tax Act, 1961 to the Income Tax Authorities. In its reply, Respondent has stated that Respondent No. 1 has no objection to grant of prayer made by the Appellant under Section 79 of the Income Tax Act, 1961.
We have considered submissions made by learned counsel for the parties and perused the record. We may first notice the observations of the Adjudicating Authority made in paragraphs 237 and 238, which are to the following effect:
“237.It is being said in the resolution plan that the name of the company may be changed post the effective date. It is also being said that the company (CD) is not ordinarily permitted to carry forward its unabsorbed business losses in case of a change in the shareholding of such company in excess of 51% as per Section 79 of the Income-tax Act, 1961. This restriction does not apply if such change in shareholding takes place pursuant to a resolution plan approved under the IBC, provided that the jurisdictional principal commissioner of Income-tax or the jurisdictional commissioner of Income tax (as appropriate), is afforded reasonable opportunity to express his views in this regard. Accordingly, the Resolution Professional shall, or cause the Company to, serve a notice to jurisdictional principal Commissioner of Income-tax or the jurisdictional commissioner of Income-tax (as appropriate) immediately after this Resolution Plan is submitted to the NCLT for its approval, and the Company should be permitted to carry forward its unabsorbed business losses notwithstanding a change in the shareholding of the company pursuant to this Resolution Plan.
238.With regard to this point, when all past liabilities are waived off, nothing has been left as liability, we do not believe this approval could be accorded to the company, therefore carrying forward of losses is not permitted.”
Section 79 of the Income Tax Act, 1961 which deals with carry forward and set off of losses in case of certain companies is to the following effect:
“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 percent 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:
Provide 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.]”
The Third Proviso of Section 79 sub-clause (b) provides that nothing contained in Section 79 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 after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.
As noted above, Resolution Professional has during pendency of approval of the plan issued notice to the Income Tax Authorities but no objection was filed. We may notice the reply of the Resolution Professional where rationale behind Section 79 of the Income Tax Act, 1961 has been highlighted. In paragraphs 4 and 5 of the Reply following has been stated:
“4.That the rationale behind section 79 of the Income Tax Act, 1961 was to ensure that taxpayers do not purposely, and with mala fide intent, acquire loss making companies and thereafter enjoy tax benefits of such losses while conducting profitable businesses. Therefore, Section 79 provides that carry forward of losses will not be allowed where there is a change in shareholding of the company, unless 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.Upon enactment of the Code, as a measure of incentive to resolution applicants that were acquiring companies through a resolution process, Section 79 of the Income Tax Act, 1961 was amended and proviso 2(c) was added, permitting companies undergoing resolution under the provisions of the Code to carry forward and set-off losses even if there was a change in voting power or shareholding pursuant to approval of Resolution Plan by the Adjudicating Authority. The rationale of amending section 79 of the Income Tax Act, 1961 was to encourage resolution applicants to submit resolution plans for revival of distressed companies so that such companies are not forced into liquidation.”
The amendment in Section 79 of the Income Tax Act, 1961 providing for exception in case of a company where change in shareholding takes place pursuant to Resolution Plan was with purpose and object. Thus, claim of carry forward of losses is not impermissible but can only be granted giving opportunity to the appropriate Income Tax Authority. The judgment of ‘JSW Steel Ltd. vs. Ashok Kumar Gulla & Ors.’ (supra) relied by the counsel for the Appellant was also a case of Successful Resolution Applicant with regard to whom Adjudicating Authority has made observations in so far as carry forward losses was concerned. In paragraph 12 and 17 of the judgment following has been laid down:
“12.As to the determination of the issue of ‘carry forward losses’ of the ‘Corporate Debtor’, in spite of notice to the Income Tax Authority, no reply has been filed and no objection has been raised. However, taking into consideration the submissions made by the counsel for the Appellant-‘JSW Steel Limited’ and taking into consideration the provisions of the Income Tax Act, 1961, including Section 79 and the Rules and Regulations framed thereunder, we hold that both the ‘Successful Resolution Applicant’ and the Income Tax Department will be guided by the Income Tax Act, 1961 and the Rules and Regulations framed thereunder. If the ‘Successful Resolution Applicant’ is entitled to ‘carry forward losses’ under Section 79 of the Income Tax Act, it may claim such benefit before the appropriate Authority, who will pass appropriate order in accordance with Section 79 of the Income Tax Act, 1961 and the Rules and Regulations framed thereunder.
17.In view of the discussions as made above, the part of the impugned order dated 19th December, 2018 so far as it relates to laying down conditions by the Adjudicating Authority is concerned, are set aside and deleted and substituted with clarification as made above. The rest part of the impugned order dated 19th December, 2018 as clarified vide order dated 16th April, 2019 approving the ‘Resolution Plan’ in favour of the Appellant is confirmed. The appeal is allowed with aforesaid observations. No costs.”
We, thus, are of the view that benefit of carry forward of losses can be availed by the Appellant subject of opportunity to be given to Income Tax Authority to pass appropriate orders in accordance with Section 79. We, thus, are of the view that observations in para 238 deserves to be deleted and are hereby deleted.
Now coming to observations of the Adjudicating Authority made in paragraph 244, suffice it to say, Resolution Plan having been approved after recording the finding that the plan is in compliance with provisions of the Code and Regulations, there was no necessity to refer to Section 238 of the Code. Observations in paragraph 244 were uncalled for. We, thus, are of the view that observations made in paragraph 238 and 244 of the order of the Adjudicating Authority need to be deleted and are hereby deleted and the benefit of carry forward losses can be claimed by the Appellant subject to decision by appropriate Income Tax Authority as per Section 79 of the Income Tax Act. It is open for the Appellant to claim benefit of carry forward losses as per Section 79 of the Income Tax Act before appropriate competent Income Tax Authority which shall decide the claim in accordance with law. We make it clear that we have not expressed any opinion regarding merits of the claim of the Appellant under Section 79 of the IT Act. Except deletion of observations made in paragraphs 238 and 244 rest of the judgment of the Adjudicating Authority is untouched in this Appeal. The Appeal is disposed of as above.