Section 79 of income tax act.

Dear Naveen,

Please find answers to your queries as follows:

What is the logic behind Section 79 in the Income Tax Act, 1961? 

The provisions of section 79 have been inserted in the Statute for the purpose of avoiding/preventing the possibility of a few persons acquiring the shares of a company which has sustained losses in the earlier years and then commence to carry on profitable business through such company in order to reduce their tax liability through securing set off of losses of earlier years when the shares in the company were held by the different shareholders. 

What happens in case the shareholding does not change hands but only the paid-up capital increased by fresh infusion of funds by a new promoter?

In this case also section 79 will be applicable.

I hope some of your queries will be resolved through this.

In case of any further query feel free to PM or mail me.

CA Anubhav Jain

anubhav.jain @ skparekh.com

9868729930
 

Acquiring a firm will not be hit by Section 79 as it would amount to a merger/amalgamation and for that we have other sections of the Income Tax Act (72A, etc.) to deal with. The point is that how can the losses be disallowed only because of a change in the majority shareholding. A company has a distinct legal entity from its shareholders and the losses of the company cannot be set off against the personal income of the shareholders. If that is the case, then Section 79 is of no relevance in the Act. The logic that some shareholders can acquire shares and start a profitable business does not hold good as the law permits setting off of losses on one business against the profits another business.