By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi
Chartered Accountants
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Section 79 is not applicable if there is no change in control and management, even if there is change in more than 51% of share holding due to merger of two companies.
Facts:
The assessee had claimed set-off of brought forward loss and unabsorbed depreciation of Rs. 5,99,88,612. The AO noted that there has been major change in the shareholding pattern due to merger of M/s. Indrama Investment (P) Ltd. (IIPL) with the assesseecompany.
The issued share capital of the assessee-company was Rs.15 crore. Out of the share capital of Rs.15 crore, the share capital worth Rs.14.70 crore was held by IIPL. After the merger the share capital of the assessee company became Rs.6 crore. Shareholding of IIPL had been cancelled pursuant to the merger. As a result of merger more than 51% of the share capital which was held earlier by IIPL was reduced to nil. The AO held that the above change in the shareholding pattern had resulted in violation of conditions laid down in section 79 of the Income-tax Act for allowability of set-off of carried forward business loss.
In the present case it may be noted that IIPL was holding 98% of the shares of the appellant-company. On the other hand 100 per cent shares of IIPL were held by four persons of the family who were having the control and management of the IIPL as well as of the appellant-company. Because of the merger of IIPL into the appellant-company, the former came to an end, as a result of which the shares of amalgamated company were allotted to the shareholders of IIPL.
Thus, it is clear that there is no change in the management of the company which remained with the same family (set of persons) which was earlier exercising control. The assessee submitted a list of directors on the board of the two companies prior to the merger as well as the directors on the board of merged company. It remained in the same hands. Thus, the learned CIT(A) is correct in holding that the change in more than 51% was due to merger in two companies. There was no change in control and management. The CBDT vide Circular No. 528 clarified that set-off of brought forward losses will not be denied where change in shareholding takes place due to death of any shareholder. The case of the present merger is akin to death of shareholder. In the case death of a living person the shares held by him get transferred to his legal heirs. Similarly when existence of a company is legally finished, the benefit of assets held by it (including shares of other company) will pass on to its shareholders. Therefore, the provision of section 79 were not applicable in the facts of the present case.
