Income Tax Appellate Tribunal: ‘Carry forward losses if stake rejig is within grp’

ITAT held that the provisions of section 79 of the I-T Act do not apply if 51% of the voting power is beneficially held by the same group, both in the financial year when the loss was incurred and the year when the set-off is being claimed. In other words, a restructuring, which results in a change of shareholding, within the group will not debar claims of carry-forward and set-off of losses. Section 79 disallows a closely-held company from carrying forward and setting off its tax losses if there is a change in the beneficial ownership of shares carrying more than 49% of the voting power of the company as compared to the year in which the loss was incurred (subject to certain exceptions). The object of this provision is to curb the practice of profitable companies acquiring loss-making ones for the sole reason of utilising tax losses through carry-forward and set-off against their own profits.
Business losses can be carried forward up to the next eight financial years, from the year in which the loss was incurred. The carry-forward and set-off against profits helps reduce the tax outgo in future years.

Hiranandani Healthcare had two shareholders – Fortis Healthcare (FHL) and Fortis Healthcare Holdings (FHHPL) – holding 40% and 60% of shares respectively as of April 1, 2011. In financial year 2011-12, it issued 30 lakh equity shares to FHL at a premium of Rs 90 per share, resulting in a change in the shareholding pattern. As a result, the holding of FHL increased to 85% whereas that of FHHPL reduced to 15%. As of March 31, 2012 Hiranandani Healthcare had accumulated losses of Rs 58.6 crore to be carried forward and set off. By invoking the provisions of section 79, an I-T officer denied the claims of carry-forward and set-off of the brought forward losses for the financial year 2011-12 and 2012-13, which was upheld by commissioner (appeals). However, ITAT held that as both FHL and FHHPL formed the same group and held 51% of the voting power collectively in all the relevant years, the section was not applicable and carry-forward of losses would be permitted.