Navigating Section 79: How Continuity of Beneficial Ownership Preserves Loss Carry-Forward

 A recent ruling by the Income Tax Appellate Tribunal (ITAT) in ACIT vs. Lurgi India International Services Pvt. Ltd. provides crucial clarity on the application of Section 79 of the Income Tax Act, which restricts the carry-forward of losses in closely-held companies upon a change in shareholding. The decision underscores that the provision looks at economic reality over legal form, emphasizing beneficial ownership and the timing of corporate restructuring.

Section 79 generally disallows the carry-forward of accumulated business losses if, in the year of loss, there is a change in beneficial shareholding of more than 49%. The Revenue had invoked this section, arguing that a post-amalgamation shift of 97% shares barred the company from carrying forward its historical losses.

The ITAT dismissed this appeal, relying on two pivotal principles:

1. The Paramountcy of Ultimate Beneficial Ownership:
The tribunal highlighted that Section 79 is not triggered by mere legal reshuffling of shares if the ultimate beneficial ownership remains unchanged. In this case, although the immediate registered shareholder shifted from Air Liquide Global E & C Solutions India Pvt. Ltd. to Air Liquide International France, the ultimate parent and beneficial owner—L’Air Liquide SA—remained constant throughout. The ruling reinforced that the law targets transactions where a new person acquires control to misuse past losses, not internal group reorganizations that preserve the same economic ownership.

2. The Appointed Date in Amalgamation:
The timing of the change was critical. The amalgamation was sanctioned by the High Court with an appointed date of April 1, 2013. Legally, all effects of the merger, including the shareholding change, relate back to this date. Consequently, the "change" occurred before the loss years under consideration (AY 2014-15 onwards). Since Section 79 examines the shareholding in the year the loss was incurred, the restructuring did not affect the eligibility to carry forward subsequent losses.

This decision is a significant precedent for corporate groups undertaking internal restructurings like mergers or demergers. It confirms that losses remain portable if the ultimate beneficial control is unchanged and the restructuring is effective from a date prior to the loss years. The ruling promotes equitable tax treatment, ensuring that genuine business reorganizations are not penalized, while still preventing abuse through trafficking in loss-making companies. For taxpayers and advisors, it reinforces the need to document both the continuity of beneficial interest and the legal effective date of corporate actions to safeguard valuable tax attributes.