Ita/1553/2009 Of Framatome Connectors Berg Ltd v. Deputy Commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON TUESDAY, THE 22ND DAY OF JANUARY 2019 / 2ND MAGHA, 1940 ITA.No. 1553 of 2009 AGAINST THE ORDER IN ITA.617/(COCH)/2006 OF I.T.A.TRIBUNAL,COCHINBENCH DATED 13-03-2009 APPELLANT/RESPONDENT IN ITA: FRAMATOME CONNECTORS BERG LTD.,THYKOODAM, COCHIN-19. BY ADVS.SRI.E.K.NANDAKUMAR [SR.]SRI.JOSON MANAVALANSRI.K.JOHN MATHAISRI.KURYAN THOMASSRI.M.GOPIKRISHNAN NAMBIARSRI.PAULOSE C. ABRAHAMSRI.P.GOPINATH (SR.) RESPONDENT/APPELLANT IN ITA: DEPUTY COMMISSIONER OF INCOME TAXCIRCLE 2(1), RANGE 2, ERNAKULAM. BY SRI.P.K.R.MENON, SENIOR COUNSEL, GOI (TAXES) BY ADV. SRI.JOSE JOSEPH, SC FOR GOI (TAXES). THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.01.2019, ALONG WITH ITA.1713/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: - 2 - IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON TUESDAY, THE 22ND DAY OF JANUARY 2019 / 2ND MAGHA, 1940 ITA.No.1713 of 2009 AGAINST THE ORDER IN ITA.1152/(COCH)/2005 OF I.T.A.TRIBUNAL,COCHIN BENCH, COCHIN DATED 13-03-2009 APPELLANT/RESPONDENT IN ITA: FRAMATOME CONNECTORS OEN LTD.,THYKOODAM, COCHIN - 19. BY ADVS.SRI.E.K.NANDAKUMAR [SR.] SRI.K.JOHN MATHAISRI.P.BENNY THOMAS SRI.KURYAN THOMAS RESPONDENT/APPELLANT IN ITA: THE ASSISTANT COMMISSIONER OF INCOME TAX,CIRCLE 2(1), RANGE 2 ERNAKULAM. BY ADVS. SRI.P.K.R.MENON, SENIOR COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.01.2019, ALONG WITH ITA.1553/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: JUDGMENT [ ITA.1553/2009, ITA.1713/2009 ] Vinod Chandran,J. The question raised in the appeal filed by twoCompanies; one of which was amalgamated to the other, forthe assessment year 2000-01 arises on the applicability ofSection 79 of the Income Tax Act, 1961 [for brevity “theAct”]. The question of law is re-framed as follows: “Ought not the Tribunal have held that theassessee-Company as on the last date of the previous year[1999-2000] relevant to the assessment year [2000-2001]being a Company in which the public are substantiallyinterested and the 51% shareholding of that Companyhaving existed prior to the amalgamation on 01.01.2000,Section 79 of the Act is inapplicable to the Company?” 2. On facts, it has to be noticed that FC BergLimited was a company which existed from 1996 onwards with40% of its shareholding with Framatome Connectors IndiaLimited and 60% with T.V.Sundaram Iyengar Limited . In July 1999, FC OEN Limited, which is a subsidiaryCompany of FCI, acquired 60% of the shareholding in FCBerg, with 40% remaining with FCI. Later on, FC Berg wasamalgamated with FC OEN with effect from 01.01.2000, inthe same financial year. In the returns filed for the assessment year 2000-2001, FC OEN Limited claimed carryforward and set off, of business loss for the relevantprevious year and also the prior years. The AsessingOfficer [for brevity “AO”] declined the same applyingSection 79. The interpretation of Section 79, as applied tothe facts of the acquisition of shares and the subsequentamalgamation would answer the question posed before us. 3. We have heard Sri.Kuryan Thomas appearing forthe assessee-Company and Sri.P.K.R.Menon, Senior Counsel,Government of India (Taxes) for the Revenue. 4. We deem it appropriate to extract Section 79 and clause (a) of the provision: “79. Carry forward and set off of losses in thecase of certain companies assessment year 2000-2001, FC OEN Limited claimed carryforward and set off, of business loss for the relevantprevious year and also the prior years. The AsessingOfficer [for brevity “AO”] declined the same applyingSection 79. The interpretation of Section 79, as applied tothe facts of the acquisition of shares and the subsequentamalgamation would answer the question posed before us. 3. We have heard Sri.Kuryan Thomas appearing forthe assessee-Company and Sri.P.K.R.Menon, Senior Counsel,Government of India (Taxes) for the Revenue. 4. We deem it appropriate to extract Section 79 and clause (a) of the provision: “79. Carry forward and set off of losses in thecase of certain companies Notwithstanding anything contained in this Chapter,where a change in shareholding has taken place in aprevious year in the case of a company, not being acompany in which the public are substantiallyinterested, no loss incurred in any year prior to theprevious year shall be carried forward and set offagainst the income of the previous year unless - (a) on the last day of the previous year the shares ofthe company carrying not less than fifty-one percent of the voting power were beneficially held bypersons who beneficially held shares of the companycarrying not less than fifty-one per cent of thevoting power on the last day of the year or yearsin which the loss was incurred”. ITAs.1553 & 1713 of 2009 5. Section 79 is a measure devised by thelegislature to prevent profit making companies, fromclaiming deduction of carried forward losses of companiestaken over, which were carried on un-profitably. Theprovision applies only to companies in which the publicare not substantially interested. The specific case putup by the assessee is that on the close of the year, thecompany, after amalgamation, is FC OEN Limited, whichis a company in which the public are substantiallyinterested. 6. Section 79, takes care of a change inshareholding, taking place in the relevant previous year,in the case of a company not being a company in whichthe public are substantially interested. Undisputed is thefact that FC Berg, which existed as on the beginning of theprevious year, i.e., 01.04.1999, was a company in whichthe public are not substantially interested. FC OEN, acompany in which the public are substantially interested,acquired 60% of the shares in FCI Berg in July, 1999.Hence, there was a change in shareholding of the company inwhich the public were not substantially interested, i.e.,FC Berg, in the previous year. The Section does notcontemplate, absolving a company by virtue of such change in shareholding or amalgamation resulting in a changeof status of the Company from one in which the publicare not substantially interested to one in which they are.Also merely by the acquisition of share holding of acompany in which the public are not substantiallyinterested, by a Company in which the public aresubstantially interested, the amalgamated Company does notacquire the status of the latter. 7. What is relevant in considering whether thenew company is entitled to claim business loss for theyears prior to the previous year is sub-clause (a), whichis extracted herein above. Sub-clause (a) stipulates anexception insofar as 51% of the shareholding of the companyin which there was a change in shareholding in the previousyear, being held by persons who beneficially hold 51% ofthe shares in the new company also. Hence, if FC OEN hadheld 51% of the shareholding of FC Berg on any years priorto the previous year, then the loss of such years could beclaimed by FC OEN after amalgamation. 8. On the facts as evidenced from the particularcase, we find that FC Berg was existing as on 01.04.1999,which was a company in which the public are notsubstantially interested. In July 1999, 60% of the shares 8. On the facts as evidenced from the particularcase, we find that FC Berg was existing as on 01.04.1999,which was a company in which the public are notsubstantially interested. In July 1999, 60% of the shares in FC Berg was acquired by FC OEN. The change inshareholding, as contemplated in Section 79 hence wasoccasioned in the previous year relevant to the subjectassessment year. It continued as a company in which thepublic are not substantially interested. The amalgamationtook place with effect from 01.01.2000, upon which therewas a change in the status of the company insofar as itbecame a company in which the public are substantiallyinterested. Such change in status from a company in whichthe public are not substantially interested to one in whichthey are not is not relevant in considering the applicationof Section 79. The significant aspect is the change ofshareholding in the company, in which the public are notsubstantially interested; which companies losses areclaimed by the new company with the changed shareholdingpattern.9. FC Berg was a company in which the public arenot substantially interested in the financial year1999-2000 (previous year) and there was a change inshareholding in July, 1999 and a further amalgamationon 01.01.2000. We are only concerned insofar as applicationof Section 79, on the change of shareholding whichoccurred in July, 1999. As on the close of the financial year FC Berg stood amalgamated with FCI OEN, which isa company in which the public are substantially interested.Whether that Company would be entitled to claim thebusiness losses of FC Berg, is the question. For that,not less than 51% of the share holding of FC Berg onthe last day of the year or years in which the lossoccurred, should have been beneficially held by notless than 51% of the shareholders of FC OEN. FC OENacquired 60% of the shareholding of FC Berg only in July,1999. Irrespective of that, the new company will beentitled to claim the business loss of the amalgamatedcompany in the assessment year relevant to thatprevious year in which there was change in shareholding.This is because the prohibition is only in claiming thelosses of any year prior to the previous year. But 51% ofthe shareholding, in FC Berg, in none of the yearsprior to the previous year (1999-2000), was ever held byFC OEN or even FCI. 10. Section 79 squarely applies in the case ofthe assessee, FC OEN Limited in so far as the claim ofcarry forward of losses, incurred by FC Berg, in any ofthe years prior to the previous year. On amalgamation,FC OEN Limited cannot claim business loss of FC Berg for the years prior to the previous year, i.e, as on andprior to 31.3.1999. However, Section 79 does not prohibitthe claim of business loss of that previous year inwhich there was a change in shareholding, i.e., 1999-2000.We see from the assessment order that business lossupto 31.12.1999 has been declined obviously for reasonof the new company in which the public are substantiallyinterested having been formed on 01.01.2000. As weearlier noticed, the amalgamation and the change instatus of the company to one in which public aresubstantially interested, does not at all affect theapplicability of Section 79 insofar as the earliercompany was not one in which the public are substantiallyinterested. Hence, the business loss of the earliercompany from 01.04.1999 to 31.12.1999 has to be allowedto be carried forward by FC OEN Limited. We, hence, answerthe question of law partly in favour of the assessee andpartly in favour of the Revenue. We direct the AO tocarry out the modification insofar as grant of carryforward of business loss or set off of business lossof the previous year relatable to FC Berg, i.e., ofthe financial year 1999-2000, in the assessment year2000-2001. Appeals partly allowed. Parties are left to suffertheir respective costs. Vku/- Sd/-K.VINOD CHANDRANJUDGESd/-ASHOK MENONJUDGE APPENDIX OF ITA 1553/2009 APPELLANT'S ANNEXURES: ANNEXURE A TRUE COPY OF THE ASSESSMENT ORDER FOR 2000-01 ISSUED BY THE INCOME TAX DEPARTMENTTO THE APPELLANT DATED 29/12/2005. ANNEXURE BTRUE COPY OF THE ORDER ISSUED BY THE COMMISSIONER OF INCOME TAX (APPEALS) TO THEAPPELLANT DATED 19/9/1006. ANNEXURE C TRUE COPY OF THE TRIBUNAL ORDER DATED 13/03/2009 ISSUED TO THE APPELLANT. APPENDIX OF ITA 1713/2009 APPELLANT'S ANNEXURES: ANNEXURE-A TRUE COPY OF THE ASSESSMENT ORDER FOR 2000-01 ISSUED BY THE INCOME TAX DEPARTMENTTO THE APPELLANT DATED 19/3/2005. ANNEXURE-B TRUE COPY OF THE ORDER ISSUED BY THE COMMISSIONER OF INCOME TAX (APPEALS) TO THEAPPELLANT DATED 18/8/2005. ANNEXURE-C TRUE COPY OF THE TRIBUNAL ORDER DATED 13/3/2009 ISSUED TO THE APPELLANT. [ true copy ]