Section 79 of the Income Tax Act is applicable to closely held companies ( read private companies ) . This provision lays down a law that if the shareholding of the majority shareholders gets changed to the extent of 51% or more as on the last date of a financial year, the company will be denied the benefit of carryforward and set of loss of earlier years . Now , the provision is being made applicable by Revenue Official by going through literal interpretation that if 51% change in shareholding , in that case the losses of earlier years can not be carried forward and set off. However, in recent cases, the High Courts have explained that the section 79 denies the benefit of carry forward and set off losses not on mere change of shareholding , but the change of controling stake to the extent of 51 % or more.
First : Section 79 of the Income Tax Act
Carry forward and set off of losses in the case of certain companies.
79. Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a 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—
(a) on the last day of the previous year the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred :
Provided that nothing contained in this section shall apply to a case where a change in the said voting power takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift :
Provided further that nothing contained in this section shall apply to any change in the shareholding of an Indian company which is a subsidiary of a foreign company as a result of amalgamation or demerger of a foreign company subject to the condition that fifty-one per cent shareholders of the amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company.
Basically the provision says as under :
In case of a closely held company , if there is a loss of earlier year or current year, it can not be set off or carriedforwarded in a year ( say FY 2015-16) if following conditions are satisfied:
The shareholders having aggregate 51% or more on 31st March of the year or years in which losses were incurred are not holding 51% as on 31st of March 2016 .
The change in shareholding also change in voting power .
The change in shareholding is not on account for death of a shareholder or gift to a relative of the shareholder
The change in shareholding of Indian company is on account of merger or demerger of parent foreign company.
For the present post , the main issue for discussion is whether the change in shareholding for more than 51% criteria or voting power change to the extent of 51% is the main requirement for invoking section 79 of the Income Tax Act . The answer to the questions as per majority rulings by High Court is that it is the voting power change that matters and mere change in shareholding numbers should not be the reason for denying benefit of carry forward and set off of losses under section 79 .
Supreme Court judgment in case of CIT vs Italindia Cotton (p) Ltd  174 ITR 160/40 wherein the Apex Court clearly stated that if shares representing not less than 51 per cent of the voting power remained beneficially held by the same persons on the relevant dates. The excerpt of the relavant portion of decision is as under :
8. The object sought to be served by enacting section 79 appears to be to discourage persons claiming a reduction of their tax liability on the profits earned in companies which had sustained losses in earlier years. It was not unusual for a group of persons to acquire a company, which had suffered losses in earlier years, in the expectation that the company would earn substantial profits after such acquisition, and they would benefit by a reduction of the tax liability on those profits on a set off of losses carried forward from earlier years before the acquisition. The acquisition of a company in such a case would be effected by a change in its shareholding and the control over the company could be ensured by securing the beneficial ownership of shares carrying 51 per cent or more of the voting power. If the change in shareholding did not result in holding voting power of 51 per cent or it was established that the shares of the company carrying not less than 51 per cent of the voting power were beneficially held by the same persons, both on the last day of the previous year as well as the last day of the year or years in which the loss was incurred, it could be presumed that there was no change in the control over the company, and the disqualification imposed on the company because of the change in its shareholding would stand removed..
The facts of the case was that the assessee was a wholly owned subsidiary of ABL. Up to the assessment year 2000-01, all the shares of the assessee-company were held by the ABL. In the assessment year 2001-02, the holding of ABL was reduced to 55 per cent and the remaining 45 per cent shares were transferred to another subsidiary of ABL, namely APIL.
In the assessment year 2002-03, ABL further transferred 49 per cent of its remaining 55% shares to another company namely ‘TAFE’ and, consequently, ABL retained only 6 per cent shares whereas its subsidiary APIL held 45 per cent shares.
The assessee in its return claimed set off of losses of previous years. But the A.O denied the set off and carryforward on teh ground that there was change in beneficial shareholding of 51 per cent or more, as provided under section 79. CIT(A) agreed with the A.O view.
The Tribunal, however, did not agree with A.O and CIT(A) and allowed the benefit of set off of brought forward loss to assessee.
On revenue’s appeal, the High Court confirmed the decision of ITAT stating that the main reason for anot allowing set off and carryforward is the change of control which is relected in change of voting power to the extent of 51% or more . For this purpose , the Hon’ble High Court relied on the Supreme Court judgment in case of CIT vs Italindia Cotton (p) Ltd .
Read the excerpt below :
While dealing with a case under section 79(a) and (b) of the unamended section [Clause (b) was deleted with effect from 1-4-1998] and while relating to clause (a) of section 79, the Apex Court in CIT v. Italindia Cotton (P.) Ltd.  174 ITR 160/40 Taxman 126A, held that the section would be applicable only when there is change in shareholding in the previous year which may result in change of control of the company and that every such change of shareholding need not fall within the prohibition against the carry forward and set-off of business losses.
In the present case, though there may have been change in the shareholding in the assessment year 2002-03, yet, there was no change of control of the company, as the control remained with the ABL as the voting power of ABL, along with its subsidiary company, remained at 51 per cent. The Supreme Court further observed that the object of enacting section 79 appears to be to discourage persons claiming a reduction of their tax liability on the profits earned in the companies which had sustained losses in earlier years. In the present case, the control over the company, with 51 per cent voting power, remained with ABL and, as such, the provisions of section 79 would not be attracted. [Para 18]
That the change in control is the main factor for application of the provision u/s 79 is also eveident from another decision by Delhi High Court in CIT vs Select Holiday Resorts Pvt Ltd  217 Taxman 110 (Delhi)
The facts in breif was that 98 per cent shares of assessee-company were held by IIPL and 100 per cent shares of IIPL were held by four shareholders all belonging to one family . Thus the family was conrolling IIPL as well as assessee-company.
IIPL was merged with Select Holiday ( Assessee) as a result four shareholders of IIPL were allotted shares of the amalgamated company.
The Assessing Officer disallowed carry forward of losses under section 79, holding that change in shareholding had taken place.
However, the CIT (Appeals) and the Tribunal , both disagreed with the A.O and held that there was no change in the management of the company which remained with the same set of people who were earlier exercising control and change in more than 51 per cent shareholding was only due to merger of the two companies. Therefore, carry forward of losses was allowed.
When Department filed appeal before High Court , the appeal was dismissed . The Hon’ble High Court held that since there was no change in control of assessee company even after merger , there was no occasion for invoking sec. 79. The relevant part is produced below :
3. It is evident that during the earlier period 98% of the assessee’s shares were held by IIPL. The holding company was amalgamated with the assessee company. However, the shareholders of that holding company i.e. IIPL continued to be shareholders of the assessee company itself. The shareholders beneficially entitled to 98% of the shares continued to be the same. In these circumstances, the prohibition from carrying forward the losses, placed by Section 79 does not operate; on the other hand Section 79(a) makes the provision consequently inapplicable. The conclusions of the Tribunal in this regard are unexceptionable. For the above reasons no substantial question of law can be determined by the Court.
A contrary judgment of Delhi High Court in case of Yum Restaurant (India) Pvt Ltd vs ITO  66 taxmann.com 47 (Delhi) was given . So let us first see the facts and the decision
Facts in brief was that Yum Restarant I P L was 100% subsidary of the Singapore based compmany Yum Asia . During assessment year 2008-09 , shares were transferred from YUM Asia to YUM Singapore . Both these companies were 100% subsidary of YUM , USA . The A.O invoked section 79 on the ground of change in shareholding for more than 51% .
CIT(A) and the ITAT upheld the order of the assessing officer .
The High Court confirmed the Tribunal decision on disallowing the set off of loss on the basis of section 79 by saying as under
20. Having examined the facts as well as the concurrent orders of the AO and the ITAT, the Court finds that there was indeed a change of ownership of 100% shares of Yum India from Yum Asia to Yum Singapore, both of which were distinct entities. Although they might be AEs of Yum USA, there is nothing to show that there was any agreement or arrangement that the beneficial owner of such shares would be the holding company, Yum USA. The question of ‘piercing the veil’ at the instance of Yum India does not arise. In the circumstances, it was rightly concluded by the ITAT that in terms of Section 79 of the Act, Yum India cannot be permitted to set off the carry forward accumulated business losses of the earlier years.
21. Consequently, the Court declines to frame a question at the instance of the Assessee Yum India on the issue of carry forward and set off of the business losses under Section 79 of the Act.
If one goes through the ITAT , Delhi decision in this case reported in Yum Restaruant India Pvt Ltd vs ITO Ward 18(3)  152 ITD 773 (Delhi – Trib.) one finds it very starge that neither the Supreme Court ruling was considered nor the Delhi High Courts own order in case Select Holiday or AMCO Power cases were considered . For this reason , I am of the opinion that had the attention of teh Ld judges were brought on the various decisions by Apex Court and Delhi High court’s order on the same issue, the decision would have been otherwise.