AO Can't Pass Rectification Order to Disallow Set-off Of Loss By Invoking Section 79 of Income Tax Act, On Change In Assessee's Shareholding: ITAT

FACTS

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has concluded that Section 154 of the Income Tax Act, 1961 can only be used by the Assessing Officer to correct inaccuracies that are obvious on the face of the record.

The bench consisting of Judge Aby T. Varkey and Vice President Pramod Kumar held that the question of whether Section 79 of the Income Tax Act applied in the case of the assessee where there was a change in its shareholding was a debatable issue involving the interpretation of various sections and provisions of law, including the Income Tax Act, 1961 and the Companies Act, 1956.

Thus, the ITAT decided that the Assessing Officer could not have exercised jurisdiction under Section 154 by invoking Section 79 to overturn his assessment order and deny the assessee's claim for set off of losses.

The Assessing Officer (AO) issued an order under Section 154 of the Income Tax Act, 1961, overturning his assessment order and denying the assessee's claim for set off of carried forward losses and unabsorbed depreciation. Section 154 gives the AO the authority to issue an order correcting any error on the record. According to the AO, the loss cannot be set off because there was a significant change in the assessee company's shareholding pattern under Section 79 of the Income Tax Act.

The assessee filed an appeal against the AO's decision before the Commissioner of Income Tax (Appeals) (CIT(A)), who dismissed the petition. Before the ITAT, the assessee contested the AO's rectification order.

Section 79 of the Income Tax Act states that if the assessee company's shareholding changes and it is not a company in which the public has a substantial interest, no loss incurred in any year before the previous year may be carried forward and set off against the income of the previous year unless the specified conditions are met.

ARGUMENTS BY THE PARTIES 

The assessee, Birla Edutech, stated before the Tribunal that it issued fresh equity shares to its parent business, M/s. Birla Shloka Edutech Ltd. (BSEL), following which BSEL became a major shareholder in the assessee.

The assessee also stated that because BSEL, a publicly traded company, held more than 50% of its shares in the preceding year, the assessee became a corporation in which the public is significantly engaged. As a result, it maintained that the assessee corporation was not subject to Section 79 of the Income Tax Act.

The assessee contended that Section 79 does not apply when there is a change in shareholding but no final change in management. It claimed that both the assessee and its parent firm are members of the Yash Birla Group. As a result of no change of control within the group, the assessee claimed that Section 79 was not invoked.

It further said that the question of whether Section 79 applied to the assessee entailed a blend of fact and law, as well as the interruption of different legislation, legal requirements, and an assessment of pertinent circumstances. As a result, it stated that the topic was questionable. The taxpayer contended that, because Section 154 of the Income Tax Act can only be used to correct mistakes that are obvious on the face of the record, the AO cannot issue an order under Section 154 disallowing the assessee's claim for set-off.

DECISION OF THE TRIBUNAL 

The Tribunal cited the terms of Section 3(iv) of the Companies Act, 1956, which states that a private company that is a subsidiary of a public company shall be deemed to be a "public company," noting that Section 79 of the Income Tax Act has no application in the case of a company in which the public are substantially interested. It further mentioned that a corporation is considered to be one in which the public has a considerable interest under Section 2(18) of the Income Tax Act if it meets either of the requirements and is not considered to be a private company under the Companies Act of 1956.

The ITAT concluded that various sections and legal provisions would need to be interpreted to ascertain whether Section 79 applied to the assessee's case, despite holding that the power under Section 154 of the Income Tax Act can only be used for the correction of mistakes that are obvious on the face of the record.

The ITAT concluded that the assessment order enabling the set-off of losses in cases of ownership changes was not a clear error that could be corrected under Section 154. The Tribunal further stated that because it involves a contentious matter, the AO was unable to make any correction orders.

The Tribunal concluded that the AO erred in asserting jurisdiction under Section 154 since the issue involves the interpretation of pertinent laws and provisions, which cannot be deemed to be an error apparent on the face of the record.

"Therefore, we give the Ld. AR's argument that the AO erred by using Section 154 of the Act to deny the losses under Section 79 of the Act—which in any event can be described as a mistake obvious on the cord—has considerable weight. From the discussion in the previous section, it is clear that in addition to the provisions of the Income Tax Act, the Companies Act must also be taken into account when deciding an issue on which there are numerous judicial precedents and which is a mixed question of fact and law and therefore cannot be resolved by an AO under Section 154 of the Act."

As a result, the ITAT upheld the appeal and nullified the AO's rectification decision.