ACIT, Circle-27(2), New Delhi V. WSP Consultants India Pvt. Ltd., New Delhi

ITA 2940/DEL/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 8434 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2014-2015
• Appeal Filed On: 24-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Wholly owned subsidiary; Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘F’ : NEW DELHI) BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER and SHRI AMIT SHUKLA, JUDICIAL MEMBER (THROUGH VIDEO CONFERENCE) ITA Nos.2939 & 2940/Del./2018 (ASSESSMENT YEARS : 2013-14 & 2014-15) ACIT, Circle 27 (2), vs. M/s. WSP Consultants India Pvt. Ltd., New Delhi. 205, SSG Majesty Mall, Road No.43, Guru Harkishan Marg, Pitampura, New Delhi – 110 034. (PAN : AAACW5220F) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri S.K. Agarwal, CA REVENUE BY : Shri B.S. Ananat, Senior DR Date of Hearing : 22.02.2022 Date of Order : 22.02.2022 O R D E R PER AMIT SHUKLA, JM : The aforesaid appeals have been filed by the Revenue against the separate impugned order of even dated 22.01.2018 passed by the CIT (Appeals)-9, New Delhi in the quantum of assessment passed under section 143 (3) of the Income-tax Act, 1961 (for short ‘the Act’) for the assessment year 2013-14. 2. The common issue involved in both the appeals is with regard to deletion of disallowance of Rs.2,06,23,904/- (in AY 2013-14) and Rs.2,47,45,573/- (in AY 2014-15) on account of set off of brought forward 2 ITA No.2939 & 2940/Del/2018 losses under section 79 of the Act on the ground that there has been change in the shareholding. Apart from that, in AY 2014-15, the Revenue also challenged the disallowance of Rs.6,800/- made on account of club expenditure. 3. Since ground no.1 is common in both the years relating to identical set of facts, therefore, we are taking the appeal for AY 2013-14 and our finding given therein will apply mutatis mutandis for the AY 2014-15. 4. The facts in brief are that WSP CIL is a Private Limited company incorporated in India on 18 March 2004 under the Companies Act, 1956. It is a wholly owned subsidiary of WSP GRP Cyprus Holding Limited (‘WSP Cyprus’) and is engaged in providing support services with respect to Engineering Design Services ('EDS') to property, environment, transport and in frastructure sectors to its customers in India. Assessee company had set off brought forward losses amounting to Rs.2,06,23,906/- and Rs.2,47,45,573/- in AYs 2013-14 & 2014-15 respectively pertaining to AY 2012-13. Assessing Officer noted that in the annual report, there was related party disclosure which is reproduced as under :- Related party disclosure a) Parties where control exits : Holding Company - WSP GRP Cyprus Holding Ltd. Intermediate Holding Company - WSP Group Plc, UK (wef August 01, 2012) Ultimate Holding Company - WSP Group Plc, UK (up to July 31, 2012) WSP Global Inc (wef - August 01, 2013. 5. Further, Assessing Officer in his search of annual reports of these companies from public domain, he has noted the following facts :- 3 ITA No.2939 & 2940/Del/2018 “On 7 June 2012, Genivar Inc. announced that it made a friendly takeover cash offer of £278 million for WSP Group plc, headquartered in London. On August 1, 2012, Genivear Inc. completed the acquisition of all issued and outstanding shares of WSP Group Plc ("WSP"), a global multi-disciplinary professional services firm based in London, United Kingdom, for an amount of £ 4.35 per share for a total value of £ 277.7($437.6). This merger created a professional services firm with approximately 15,000 employees, working in over 300 offices worldwide. The total value of the transaction was $437.6 million, achieved principally through a private placement and a public offering of $ 422.1 million.” 6. Thus, he noted that losses pertained to FY 2011-12 and as on 31.03.2012, the ultimate holding company was WSP Group Plc, UK which continued to be so upto July 31,2012; and thereafter w.e.f. 0108.2012, all shares of WSP Group Plc. UK were acquired by Genevar Inc. Canada which later on reorganized as WSP Global Inc. Thus, he held that on 31.03.2013, shares of the company carrying less than fifty-one percent of the voting power are beneficially held by WSP Global Inc., Canada who did not beneficially hold shares of the company carrying not less than fifty one percent of the voting power as on 31.03.2012 in which loss was incurred. The relevant portion of which reads as under :- “79. Carry forward and set off of losses in the case of certain companies : 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 previously year unless – (a) On the last day of the previous year the shares of the company carrying not less than fifty-one percent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one percent of the voting power on the last day of the years in which loss was incurred.” 4 ITA No.2939 & 2940/Del/2018 Accordingly, he disallowed the brought forward of losses. 7. Ld. CIT (A), after considering the entire facts of the case and the reasoning given by the AO and after noting the shareholding pattern, held that through-out the holding company was WSP Cyprus and the change in ultimate holding company form WSP UK does not affect the shareholding of WSP Cyprus in the assessee company. Based on these facts and relying upon the principle laid down by Hon’ble Delhi High Court in the case of Yum Restaurants (India) (P.) Ltd. vs. ITO 66 taxmann.com 47, he observed and held as under :- “5.5 The Appellant in its submission has submitted that the shares of the Appellant were held by WSP Cyprus from 27 August 2007 and there was no change in the shareholding of the Appellant during financial year 2012-13, 2013-14 and 2014-15. The same is also evident from the financial statements furnished by the Appellant for the year ending March 2012, 2013 and 2014. The financial statements were provided in the paper-book filed by the Appellant. 5.6 Section 79 of the Act provides that, where a change in shareholding has taken place in a previous year in the case of the company not being a company in which public is substantially interested, no loss incurred in prior years shall be carried forward and set-off unless the shareholders beneficially carrying voting power of not less than 51 % is held by the same shareholders as held on the last day of the previous year in which such loss was incurred. Therefore, before invoking section 79, the conditions required to be met are whether there was any change in the shareholder beneficially holding shares in the appellant company and if so, whether 51 % or more shares were beneficially held by same shareholders. 5.7 As per judicial precedents, the shares beneficially held by the shareholder implies the registered shareholder of the company, unless the registered shareholder is holding shares merely in the capacity of a nominee/ agent/ trustee. It is well settled by the courts in India in case of multilayer structures, the shares held by immediate holding company is the shares held by immediate holding company beneficially and other intermediary holding company or ultimate holding company cannot be treated as holding shares in the first subsidiary company. Therefore, 5 ITA No.2939 & 2940/Del/2018 section 79 can be invoked only if there is a change in shareholding of the Appellant company. 5.8 In the facts of this case there is no change in the shareholding of the appellant company i.e. WSP Cyprus. The Appellant company continues to be the wholly owned subsidiary of WSP Cyprus which is the registered and beneficial owner of shares in AY 2012-13 (i.e. the year in which loss was incurred). The ultimate holding company of the group, WSP UK has become intermediate holding company and WSP Canada became ultimate holding company with effect from 1 August 2012. But this does not affect the shareholding of WSP Cyprus in the Appellant company. 5.9 Similar issue came up for consideration before Delhi High Court in the case of Yum Restaurants (India) (P.) Ltd. (supra). In the said case, the assessee was of the view that provisions of section 79 of the I.T. Act are not applicable because despite of change in its registered immediate shareholding from Yum Asia to Yum Singapore, its ultimate shareholding still remains with Yum USA. However, the Hon'ble High Court held that assessee will not be entitled to set-off the brought forward losses as there was change in registered immediate shareholding of the assessee and therefore provisions of section 79 of the Act were applicable. 5.10 In the case of Just Lifestyle Pvt. Ltd. vs DCIT (ITA No. 2638/ Mum/ 2012) reaffirmed the principle that a Company has a separate legal status from its shareholders and that the provisions of section 79 of the Act are clearly applicable when there is change in shareholding of more than 51 % in the year between the last day of the year of loss and the last day of the year of set off of such carried forward loss. The relevant observation of the Hon'ble tribunal is reproduced here below: " ... It is settled proposition of law that a company is a distinct legal entity and its identity is separate from the identity of its shareholders/members. Let us take an example. X Ltd holds 51% shares in Y Ltd., this does not mean that the shareholders of X Ltd hold 51% shares in Y Ltd. because X Ltd, Y Ltd and the shareholders are all distinct and separate persons .... " 5.11 Applying the ratio held by the Hon'ble ITAT in the above case, it cannot be held that merely because the shares of the Holding Company (which is WSP Cyprus in the instant case) were held by other shareholders, the said shareholders (i.e. ultimate shareholders) can be said to be the beneficial owner of shares of 6 ITA No.2939 & 2940/Del/2018 the Appellant. In fact there is nothing on record either in the impugned order or financial statement of the company including audit report which could indicate that the ultimate holding company was the actual beneficial share holder having 51% or more voting right in the appellant company as on 31.03.2012 ( the year of incurring of loss) and 31.03.2013 ( the year in which loss is claimed to be set off). Therefore, the losses denied by the Id. AO by invoking the provisions of section 79 of the Act is incorrect and devoid of merits. 5.12 In view of the fact of the case vis-a-vis provision of the Act and judicial precedents by jurisdictional High Court of Delhi in the case of Yum restaurants India Pvt. Ltd (supra) and of the Tribunals noted above, the addition made by the AO in impugned order amounting to INR 2,06,23,904/- is directed to be deleted and allow the Appellant to carry forward and set-off the losses of AY 2012-13.” 8. We have heard both the parties at length and the relevant finding given in the impugned order as well as the documents referred to at the time of hearing. Before us, ld. counsel for the assessee has made rebuttal of observations made by the AO in the assessment order in the following manner :- S.No. Observations of the AO in the assessment order Rebuttal/Submission of the company 1. Disclosure made in the TAR of AY 2014-15 at Clause 32(b) (refer page 76 of paperbook for AY 2014-15), wherein against the change in shareholding of the company during previous Year - ‘Yes’ was mentioned. Pursuant to the order of Hon’ble High Court dated 30 May 2014, WSP Engineering Services Ltd. ('WSP Engineering'), was merged with the WSP CIL with effect from 1 April 2013. In this regard, the tax audit report of the company for AY 2014-15 at Note 14 of Tax Audit Report (refer page 67 of Paper- book for AY 2014-15) provides that pursuant to merger two entities (i.e. SP CIL and WSP 7 ITA No.2939 & 2940/Del/2018 Engineering), the losses of the transferor entity (i.e. losses of WSP Engineering) shall not be carried forward. Accordingly, the tax auditors at clause 32(b) of the Tax Audit Report (‘TAR’) (which is in relation to carry forward of losses in case of change in shareholding as per section 79 of the Act) erroneously mentioned ‘Yes’. It is further submitted that the TAR of the Assessee Company for AY 2013-14 at Clause 25(b) (refer page 62 of paperbook for AY 2013- 14) in respect of similar disclosure for applicability of section 79 of the Act mentioned - ‘No’. It is worth noting that if the losses are allowed to be carried forward and set off in the first year (i.e. there being no implication of section 79), then there cannot be any implication in a later year(s), arising on account of the same reason. In other words, if the losses are allowed to be carried forward and set-off in AY 2013-14 then the same should be allowed and set-off in AY 2014-15 and later years as well. Hence, the Ld. 8 ITA No.2939 & 2940/Del/2018 AO has erred in applying the provisions of section 79 of the Act by relying on the inadvertent remark made by the tax auditor in his report in AY 2014-15. In this regard, attention of the Hon’ble Bench is also invited to the certificate provided by the statutory auditors (refer page 179 of paperbook for AY 2014- 15), wherein it is duly provided that WSP Cyprus held 99.99% shares in the Assessee Company during financial year 2012-13 and 2013-14. Further, statutory auditor has also opined that section 79 of the Act is not applicable in the case of the Assessee Company as there is no change in immediate shareholding of the Company. (refer page 180 to 186 of paperbook for AY 2014- 15) 2. As per Note 33 of the Financial Statements (‘Related Party Disclosure’, refer page 62 of paper- book for AY 2014-15) the ultimate holding company of the group changed from WSP Group Plc, UK (‘WSP UK’) to WSP Global Inc. Canada (‘WSP Canada’) with effect from 1 August 2012 i.e. in AY 2013-14). No change in the shareholding pattern of the company, as WSP Cyprus (i.e. immediate holding company) continuously held 99.99% shares in WSP CIL in the year of incurrence of loss (i.e. AY 2012-13) and as on the last date of previous year relevant to the 9 ITA No.2939 & 2940/Del/2018 On this basis the ld. AO invoked section 79 of the Act by arguing that there was a change in beneficial ownership of shareholding of the Assessee company. Assessment Year 2014- 15. Accordingly, the provisions of section 79 of the Act are not applicable in the case of WSP CIL. There was a change in ultimate holding company (i.e. WSP Group Plc, U.K. (upto July 31, 2012) and WSP Global Inc., Canada, with effect from 1 August 2012). However, there was no change in the immediate holding company, namely – WSP Group Cyprus Limited (‘WSP Cyprus’). Basis the ratio emerging from various judicial precedents discussed below, it can be concluded that the provisions of section 79 of the Act can be invoked only in case there is change in immediate shareholding, as against the contention of the ld. AO where section 79 has been invoked due to change in ultimate Holding Company of the Assessee company. 3. Details obtained from annual reports of the group companies obtained from public domain. Based on the information available on public domain, the ld. AO assumed that there was a change in shareholding of the company and invoked section 79 of the Act, to disallow the brought 10 ITA No.2939 & 2940/Del/2018 forward losses. It is submitted that the information sourced by the ld. AO from public domain was irrelevant for the purpose of provisions of section 79 of the Act, as the same is related to change in ultimate holding company of the assessee company. Though there was a change in ultimate holding company (i.e. WSP Group Plc, U.K. (upto July 31, 2012) and WSP Global Inc., Canada, with effect from 1 August 2012) however, there was no change in the immediate holding company. Therefore, the provisions of section 79 of the Act are not applicable in case of WSP CIL. 9. It has been submitted that AY 2013-14 was the year in which the ultimate shareholding of the assessee was changed from WSP UK to WSP Canada and, therefore, there is no implication of section 79 in AY 2013-14 in assessee company and consequently in AY 2014-15 also. We find that there was no change in the shareholding pattern of the assessee company and its immediate holding company is WSP Cyprus which continued to hold 99.9% of the shares which is evident from the following shareholding pattern :- 11 ITA No.2939 & 2940/Del/2018 Shareholder No. of equity shares held as on 31 March 2012 No.of equity shares held as on 31 March 2013 No.of equity shares held as on 31 March 2014 WSP GRP Cyprus Holding Limited 1,71,97,324 1,71,97,324 2,58,65,419 Percentage of shareholding 99.99% 99.99% 99.99% 10. Thus, in the year of incurrence of loss i.e. AY 2012-13 and as on the date of the previous year relevant to AY 2013-14 & 2014-15, there was no change in the shareholding pattern of the assessee company and it is the ultimate holding company. We find that the interpretation of the ld. CIT (A) is correct on facts and also on law in the ratio laid down by Hon’ble Delhi High Court in the case of Yum Restaurants (India) (P.) Ltd. which has also been followed by the ITAT Mumbai in the case of Just Lifestyle Pvt. Ltd. vs. DCIT in ITA No.2638/Mum/2012 as concluded in the appellate order wherein the ratio has been laid down that : (i) Section 79 can be invoked only in case there is change in immediate shareholding of a company; (ii) The registered shareholder shall be beneficial owner of shares, unless such shares are held in the capacity of a nominee/agent/trustee; (iii) In case of multilayer group structure, it cannot be construed that the intermediate holding company or ultimate holding cannot be said to be holding shares in the company where the subsidiary of such intermediate holding company or ultimate holding is the shareholder. 11. The aforesaid ratio is squarely applicable on the facts of the case which are as under :-  There is no change in the shareholding of the Assessee company, i.e. WSP Cyprus held 99.99 percent shares in the Assessee company; 12 ITA No.2939 & 2940/Del/2018  WSP Cyprus was the registered and beneficial shareholder of the Assessee company in AY 2012-13 (i.e. the year in which loss was incurred) and in AY 2013-14 & AY 2014-15 (i.e. the years in which such loss was set-off);  Change in ultimate holding company from WSP UK (upto 31 July 2012) to WSP Canada (from 1 August 2012) does not affect the shareholding of WSP Cyprus in the Assessee company;  There is nothing on record which could indicate that ultimate holding company was the beneficial shareholder in the Assessee company having more than 51% or more voting right. 12. Apart from that, it is well settled proposition that registered shareholder is beneficial owner of shares, unless such shares are held in the capacity of a nominee/agent/trustee of the real owner which is not the case here. Accordingly, the order of the ld. CIT (A) is confirmed and the same is based on correct appreciation of facts and law. Ground No.1 in both the years is determined against the Revenue. 13. Lastly, coming to the small disallowance of Rs.6,800/- in AY 2014-15 on account of club expenditure, the finding of the ld. CIT(A) is as under :- “5.18 Ground No.2 and 3 are directed against addition of Rs.6800/- on account of club expenditure and Rs.2158/- on account of interest on service tax. 5.19 The AO has made a disallowance in respect to the club expenditure incurred by the appellant amounting to INR 6,800 in the name of the Director, considering the said expense being personal in nature. 5.20 The Appellant giving reference to the provisions of the section 37 of I.T. Act, submitted that the said expense is not in the nature of capital expenditure or personal expenditure and the same was incurred in its course of business, hence, the same is duly allowable under section 37 of I.T. Act. 5.21 The Appellant relied on various judicial precedents wherein the similar expenditure was incurred by the assessee-company and the courts in the said cases held that the aforesaid 13 ITA No.2939 & 2940/Del/2018 expenditure was incurred wholly and exclusively for purpose of business and was to be allowed as business expenditure. 5.22 In various judicial precedents, the courts have held that expense incurred in relation to club fee shall be related to the business of the assessee, accordingly held as an allowable expense. Therefore, I find force in the argument of the Appellant and inclined to accept the submission. I delete the addition made by the AO in his order and allow the appeal of the Appellant on this ground.” 14. The facts are that AO has disallowed amount of Rs.6,800/- in the name of the Director considering the said expenses personal in nature. Ld. CIT (A), after referring to various decisions, held that expenses in relation to club fee are to be treated as business of the assessee and an allowable expenditure. We do not find any infirmity in such finding and the same is confirmed. Ground No.2 of AY 2014-15 is dismissed. 15. In the result, both the appeals filed by the Revenue are dismissed. Order was pronounced on 22 nd day of February, 2022. Sd/- sd/- (ANIL CHATURVEDI) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 22.02.2022 TS Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-9, New Delhi. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.