Relief for M&As, company rejigs on carrying forward losses

tata realty, m&as, carry forward, itat, companies act, deals

A tax tribunal has ruled that losses can be carried forward for eight years if the “effective” shareholding doesn’t change, an order that could impact several M&As and group restructuring exercises.

In case of any M&A or an internal group restructuring, if the effective shareholding of the major shareholders remains at least 51% even after the deal, losses in the merged entity can be used to set off future tax liabilities.

The Mumbai Appellate Tax Tribunal (ITAT) in its ruling in the case of Tata Realty said any deal has to see whether the ultimate shareholder continues to hold a similar stake after such a deal.

“The ruling reiterates the popular view that it is the control over the voting rights or beneficial holding which is relevant and not the legal title to the shares. As per the Companies Act, a company which is controlled by another company is the subsidiary of the latter,” said Yashesh Ashar, partner at tax advisory firm Bhuta Shah & Co.

tata realty, m&as, carry forward, itat, companies act, deals

Tax experts say it is necessary to examine whether the majority of the voting power continues to be beneficially held in the year of carry forward and set off of loss by the persons who held such voting right at the end of the year in which loss was incurred.

There have been multiple rulings that had earlier said such planning should be disallowed.

“The ruling should find favour with group restructuring exercises,” said Ashar.

This comes after a Karnataka High Court ruling in July this year. The court said even if a company while paying taxes or preparing financial statements categorised a certain amount as “other business income,” the same amount can be used to carry forward.

The question before the court was which amount can be allowed to be carried forward.

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