ITAT Delhi: Carry Forward of Business Losses Post-Amalgamation – Emphasis on Beneficial Ownership

 As per the Income Tax Law, where a company’s shareholding changes during a year, losses from earlier years cannot be carried forward to set off against that year’s income, unless at the end of the year, at least 51% of the voting shares continue to be beneficially held by the persons who beneficially held them when the losses were originally incurred.

In a recent ruling, the Delhi ITAT held that the carry forward of losses cannot be denied merely due to a change in shareholding pursuant to amalgamation, where the ultimate beneficial ownership remains unchanged. The Tribunal further observed that the shareholding of the amalgamated company is deemed to be effective from the appointed date of amalgamation, notwithstanding that the shares pursuant to the merger are issued after such date. Accordingly, where losses are incurred after the appointed date and there is no change in beneficial or controlling ownership, their carry forward is permissible.

In the present case, the assessee company filed its return of income declaring business losses. The AO denied the carry forward of previous years’ losses, alleging a substantial change in shareholding of 97%, pursuant to amalgamation.

The assessee contended that although the immediate shareholding changed post-amalgamation, the ultimate holding company and beneficial ownership remained consistent, and emphasis should be placed on beneficial ownership rather than mere voting power.

The ITAT concurred with the CIT(A) that the carry forward of losses could not be denied since the ultimate beneficial ownership of the assessee company remained consistent. It was also noted that there was no change in shareholding after the appointed date of amalgamation. Although the amalgamation order and issuance of shares occurred later to the appointed date, the amalgamated structure is deemed to have existed from the appointed date. Since the losses in dispute were incurred entirely thereafter and the beneficial and controlling shareholding remained unchanged in the relevant years, the carry forward of losses could not be denied.

The ruling reaffirms that losses incurred after the appointed date cannot be disallowed for carry forward merely because the issuance of shares occurs later, provided the ultimate beneficial and controlling ownership remains unchanged, since the amalgamation is deemed effective from the appointed date itself, irrespective of when the shares are issued