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SC Ruling Clears the Air on Carrying Forward Tax Losses

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Amco Power allowed to accrue tax losses; move to benefit cos making acquisitions & restructuring



In what could benefit companies making acquisitions and internal restructuring, a recent Supreme Court judgement has given clarity on whether tax losses could be allowed in the event of a change of shareholding beyond 51%.






A problem that many Indian companies faced was the uncertainty on whether the buyer in a transaction -acquisition or restructuring of a group company -can add tax losses. The income tax depart ment's view was that tax losses caused by the seller cannot be added as cost to the transaction. This was struck down by the SC.






In a case involving Amco Power Systems, the SC has allowed the company to accrue tax losses. Industry trackers said the whole debate was around Section 79 of the Income Tax Act, where the dispute was whether tax losses could be carried forward.






“This decision will help provide clarity on carry forward of tax losses, especially, in case of internal business restructuring where there is really no transfer of tax losses for it to be utilised by a third party ,“ said Hemal Zobalia, senior director at Deloitte India.






There are cases for and against on interpretation of beneficial owner versus registered shareholder for the purposes of carrying forward tax losses under the section.






The recent judgement is the first by the apex court on Section 79 and can impact other similar cases as well, said industry trackers. They said the judgement could also pave the way for clarity around funding in startups.






In the first week of October, industry body Assocham had sought a taxation-friendly environment from the finance ministry, especially around the shareholding pattern as section 79 of the Income Tax Act is proving to be a hindrance.






“Restriction prescribed under Section 79 of the Income Tax Act should not apply to the startup ecosystem where change in shareholding pattern is due to the infusion of funds by investors without change in the management of the company run by original founders,“ the chamber had said in a presentation submitted to Revenue Secretary Hasmukh Adhia.





The Economic Times, New Delhi, 28th Oct. 2015

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