Provisions of section 79
1.
Override
Effect- Override the provisions of Chapter VI- Section 66 to section 78
2.
Applicability
– Applicable to company is which public is not substantially interested i.e
mainly listed company or public company which is 51% subsidiary of listed
company. (hereinafter referred as prescribe company)
3. Substantive provision
a)
Prescribed company has bought forward loss
(Business Loss, Loss under the head Capital gain, Loss under the head Income
from House property)(Unabsorbed depreciation is not covered) at the beginning
of previous year.
b)
There is change in shareholding of prescribed
company in previous year, as result of which persons holding 51% equity stake
are different at the end of previous year as compared to year in which loss was
incurred in earlier previous years.
c)
On account of above change in shareholding,
prescribed company will not be allowed to be carried forward and sett of bough
forward loss in previous year.
4.
Exemptions-
Section 79 is not applicable in following cases:-
a)
Change is shareholding took place as a result of
death of shareholders or account of transfer of shares by way of gift to
relative of shareholder.
b)
Change in shareholding of Indian company, which
is subsidiary of foreign company, as a result of amalgamation of demerger of
foreign company subject to the condition that 51% shareholders of amalgamated
or demerged company continue to be shareholders of amalgamated or resulting
company
Section 79 mischief in the course of restructuring
1. Merger of Indian Holding company, having Indian subsidiary company, with another Indian
company.
a)
Suppose A (P) Ltd is having subsidiary S (P)
Ltd.
b)
S (P) Ltd is having bough forward business
losses
c)
A (P) Ltd get merged with B (P) Ltd
d)
As a result of merger of A (P) Ltd with B (P) Ltd, there is change in
51% shareholding of S (P) Ltd, as B (P) Ltd will become shareholder of S (P)
Ltd in place of A (P) Ltd.
e)
Thus on account of above-said merger, S(P) Ltd
will not be able carried forward and set off bought forward business Loss –
Unintended consequence on S (P) Ltd due section 79.
Critical Observations:-
i)
This case amounts to discrimination to Indian
Holding Company having Indian Subsidiary as compared to exemption allowed to
Foreign Company having Indian subsidiary company. Indian holding company be
allowed exemption similar to as available to Foreign holding company.
ii)
The exemption to foreign company is available
irrespective, whether it is listed company or not.
iii)
In India, where holding company is listed
company, the provision of section 79 will not be applicable to public limited
subsidiary company, since subsidiary will not be prescribed company. Thus in
India exemption is available to listed Holding company only in above facts of
the case.
2. Merger of Indian holding company, having
Indian subsidiary company, with subsidiary company.
a)
Suppose X (P) Ltd is having Subsidiary S (P) Ltd
b)
X (P) Ltd is having bought forward business
losses
c)
X (P) Ltd gets merged with S (P) Ltd
d)
As a result of merger of X (P) Ltd with S (P)
Ltd, there is charge in shareholding of S (P) Ltd. Now shareholders of X (P)
Ltd becomes the shareholders of S (P) Ltd as in the process of merger S (P) Ltd
will issue shares to the shareholders of X (P) Ltd
e)
Thus of account of afore-said merger, Following
consequences could prevail :-
i)
One View
-On appointed date of merger X (P) Ltd existence comes to end, its assets and
liabilities are transferred to S (P) Ltd and in consideration of that S (P) Ltd
issue its shares to the shareholders of
X (P) Ltd. Thus during the existence of X (P) Ltd, there is no change in
shareholding of X (P) Ltd and hence section 79 does not have applicability.
ii)
Other
View- On appointed date of merger,
there is change in shareholding of X (P) Ltd and hence business losses of X (P)
Ltd cannot be carried forward and set off in the hands of S (P) Ltd u/s 72A.
In Select Holiday Resorts (P) Ltd , Delhi
HC has occasion to consider the facts similar to above, whereby holding company
gets merged with subsidiary company and holding company was having bought
forward losses
It was held
that since management and control of subsidiary company is with same set of
persons who were having management and control of Holding company and change in
more shareholding was only due to merger of the two companies, carried forward
of loss was allowed.
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