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

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that Section 154 of the Income Tax Act, 1961 can only be exercised by the Assessing Officer for rectification of mistake which is apparent on the face of record.

The Bench of Pramod Kumar (Vice President) and Aby T. Varkey (Judicial Member) held that the issue whether Section 79 of the Income Tax Act was applicable in the case of the assessee where there was a change in its shareholding, was a debatable issue which involved interpretation of various sections and provisions of law, including the Income Tax Act, 1961 as well as the Companies Act, 1956.

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

The Assessing Officer (AO) passed an order under Section 154 of the Income Tax Act, 1961, reversing his assessment order, and disallowed the assessee- M/s. Birla Edutech Limited's claim for set off of carried forward losses and unabsorbed depreciation. Section 154 confers the AO the jurisdiction to pass an order rectifying any mistake apparent on record. The AO opined that since there was a major change in the shareholding pattern of the assessee company as per the provisions of Section 79 of the Income Tax Act, the loss cannot be set- off. Against the order of the AO, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)), who dismissed the appeal. The assessee challenged the rectification order passed by the AO before the ITAT.

Section 79 of the Income Tax Act provides that where a change in shareholding has taken place in the assessee company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, unless the specified conditions are satisfied.

The assessee Birla Edutech submitted before the Tribunal that it issued new equity shares to its parent company- M/s. Birla Shloka Edutech Ltd. (BSEL), subsequent to which its parent company, BSEL, became a major shareholder in the assessee company.

The assessee added that since in the relevant previous year, more that 50% of its shares were held by BSEL, which is a listed company, the assessee became a company in which the public are substantially interested. Thus, it contended that the assessee company did not fall under the purview of Section 79 of the Income Tax Act.

The assessee submitted that Section 79 has no application in cases where there is a change in the shareholding without any ultimate change in the management. It argued that the assessee company and its parent company are both a part of the Yash Birla Group of companies. Thus, there being no change in control within the group, the assessee averred that Section 79 was not attracted.

It further contended that the issue whether Section 79 was applicable in the case of assessee or not, involved a mixed question of fact and law, as well as interruption of various statutes, provisions of law and examination of relevant facts. Thus, it averred that the said issue was debatable. The assessee argued that since power under Section 154 of the Income Tax Act can only be invoked for rectification of mistakes that are apparent on the face of the record, the AO cannot pass an order under Section 154 to disallow assessee's claim for set-off.

Noting that Section 79 of Income Tax Act has no application in the case of a company in which the public are substantially interested, the Tribunal referred to the provisions of Section 3(iv) of the Companies Act, 1956, which provides that a private company which is a subsidiary of a public company, shall be deemed to be a "public company". Further, it noted that as per Section 2(18) of the Income Tax Act, a company is said to be a company in which the public are substantially interested, if it is a company which is not a private company under the Companies Act, 1956, and either of the specified conditions are satisfied.

While holding that power under Section 154 of the Income Tax Act can only be exercised for rectification of mistake which is apparent on the face of record, the ITAT reckoned that in order to determine whether provisions of Section 79 were applicable to the assessee's case, various sections and provisions of law would be required to be interpretated.

Thus, the Tribunal ruled that since the issue involved interpretation of relevant laws and sections, it cannot be said to be a mistake apparent on the face of record, and thus the AO had erred in invoking jurisdiction under Section 154.

Therefore, the ITAT concluded that the assessment order allowing set-off of losses, where there was a change in shareholding, was not a mistake apparent from record which could be rectified under Section 154. The Tribunal added that it involved a debatable issue and thus, the AO could not have passed any rectification orders.

"Thus, we find considerable force in the submission of the Ld. AR that AO erred in invoking Section 154 of the Act to disallow the losses u/s 79 of the Act which in any case can be termed to be mistake apparent on record. From the discussion (supra) it can be seen that not only provisions of Income Tax Act but also Companies Act need to be considered for adjudicating the issue on which several judicial precedents are there on the issue and which is mixed question of fact and law and therefore, certainly it cannot be rectified by AO u/s 154 of the Act."

The ITAT thus allowed the appeal and set aside the rectification order passed by the AO.

Case Title: M/s. Birla Edutech Limited versus ITO

Dated: 10.11.2022 (ITAT Mumbai)

Representative for the Assessee: Mr. Vipul Jain

Representative for the Revenue Department: Mr. Chetan Kacha (Sr. AR)

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