Delhi Tribunal rules on carry forward of business loss in intra-group change in shareholding (Yum Restaurants)

We are pleased to release a Tax Alert which summarizes a recent decision of the Delhi Bench of Income Tax Appellate Tribunal (Tribunal) in the case of Yum Restaurants (India) Pvt. Ltd. (Taxpayer) v. ITO in the context of restriction on carry forward of past years’ business losses under the Income Tax Laws (ITL) in the event of change in shareholding beyond the threshold limit of 51%.

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n the facts of Taxpayer’s case, the change in shareholding was in favor of a sister subsidiary of the common ultimate holding company (UHC) i.e. within the same group. The ITAT ruled that although holding and subsidiary companies are bound by their relationship, nevertheless they do not lose their individual existence in the commercial world and both are separately liable for their respective transactions. Further, the corporate veil cannot be pierced to treat both as one. Accordingly, any change beyond 51% in the shareholding of the loss-making Taxpayer would trigger limitation of restriction notwithstanding that the transfer is an intra-group transfer between companies having common UHC.
This ruling provides useful guidance on the scope of limitation provision for carry forward of losses in the event of change in shareholding. It emphasizes the principle that the registered shareholder should ordinarily be considered as the “beneficial shareholder” unless the registered shareholder holds the shares for and on behalf of some other person. It also emphasises that separate corporate existence of holding and subsidiary companies should ordinarily be respected.

Incidentally, in the case of Select Holiday Resort, the Delhi High Court (HC) was concerned with a situation where the change at immediate shareholder level was due to merger of immediate parent with the taxpayer company which resulted in shareholders of immediate parent becoming direct shareholders of amalgamated-taxpayer company.  The HC, in that case, equated the event of merger to the death of a shareholder and held that the limitation provision was not attracted since beneficial shareholders, pre and post-merger, remained the same. Subsequently, the Supreme Court rejected Tax Authority’s Special Leave Petition (SLP) against the Delhi HC ruling.