The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that change in the shareholding pattern of the same shareholders having 51% of the voting power won’t attract the provision of Section 79 of the Income Tax Act, 1961.
The assessee is engaged in providing health care services. The shareholders of the assessee company are M/s. Fortis Healthcare Limited (FHL) and M/s. Fortis Healthcare Holdings Pvt. Limited (FHHPL). Both the above-mentioned shareholders hold 40% and 60% of shares respectively.
The assessee issued 30 Lakhs equity shares having a face value of Rs.10/- each with a premium of Rs.90/- per share (totaling Rs.100/- per share) to FHL. As a result, there was a change in the shareholding pattern between both shareholders, i.e., the holding of FHL increased to 85%, while the holding of FHHPL was reduced to 15%.
The Assessing Officer stated that the change in shareholding pattern between two shareholders would be hit by provisions of Section 79 of the Income Tax Act, which bars carry forward of losses if there is a change in shareholding pattern. Therefore, the Assessing Officer held that the assessee is not entitled to carry forward and set off of accumulated loss available.
The Authorized Representative submitted that the provisions of section 79 would be applicable only if the shares of the company carrying not less than 51% of the voting power beneficially held by “certain persons” were transferred to “other persons”.
It was further submitted that, in the instant case, not less than 51% of the voting power was held by the very same two shareholders in the year(s) of incurring losses and also in the years in which the said loss was sought to be set off. The ratio of voting power between the two shareholders has undergone a change due to the issue of fresh shares to FHL. The provisions of Section 79 of the Income Tax Act will not be applicable in case of a change in the voting pattern between the persons falling in the same group.
The Departmental Representative submitted that the provisions of Section 79 of the Income Tax Act will be applicable if there is a change in the voting pattern of the persons who beneficially held shares of the company.
The Two-member bench comprising of B.R. Baskaran (Accountant member) and Narender Kumar Choudhry (Judicial member) held that the increase in shareholding of FHL in the assessee company, in any case, would not result in the change in the voting power of the shareholders.
There was merit in the contentions of the Authorized Representative that the provisions of Section 79 of the Income Tax Act will not be applicable in the facts of the present case. Therefore, the order passed by the Commissioner of Income Tax (Appeal) was set aside and the Assessing Officer was directed to allow set off brought forward losses. Thus, the appeal of the assessee was allowed.
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