Taxpublishers.in - Monday Corner Answer to the Quiz for the week (29 Apr 2024)

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Quiz for the week (29 Apr 2024): Simran (P) Ltd is an eligible start-up company with 5 shareholders incorporated in June,2021. The paid-up capital was 5 lakh equity shares of Rs.10 each fully paid-up. The Board of Directors decided to issue fresh shares to increase the capital to Rs.5 crores by issuing 45 lakh equity shares of Rs.10 each. The company has business loss of Rs.20 lakhs and unabsorbed depreciation of Rs.30 lakhs. Discuss the implications of the fresh issue of capital. Best Answer : Since the company issuing equity share of Rs.10 each on face value basis, the provisions of section 56(2)(viib) will not apply. Therefore, so far as the company is concerned the issue of shares will not result in any income chargeable under the head ‘Other sources’. Now the impact of issue of shares on the carry forward of (i) business loss; and (ii) depreciation – to be seen. Section 79(1) says that where a change in shareholding takes place during the 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 on the last day of the previous year, the shares of the company carrying not less than 51% of the voting power where held by persons who beneficially held those shares carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred. In the facts narrated in the query, it is stated that the company would be issuing 45 lakh equity shares of Rs.10 each which would be equal to 90% of the total share capital of the company (after such issue). Therefore, the shareholders who held shares when the loss was incurred would be diluting their shareholding to less than 51% of the total shareholding. Thus, the loss brought forward on the first day of the previous year in which the shares were issued leading to such shareholding being reduced to less than 51% cannot be set off. However, this embargo will not apply to brought forward depreciation. Therefore, in spite of issuing fresh shares which go to reduce the shareholding percentage of existing shareholders to less than 51%, the brought forward depreciation would be eligible for set off without getting impacted due to change in shareholding pattern. In the query it is stated that the assessee is an eligible start-up company which was incorporated in June, 2021 which falls within the time bandwidth of 1st April, 2016 to 31st March, 2024. Therefore, the assessee is eligible for deduction under section 80-IAC @ 100% of the profits for 3 consecutive assessment years out of 10 years beginning from the year in which the eligible start-up is incorporated. Taking note of the fact that the assessee is eligible for deduction under section 80-IAC, reference is invited to proviso to section 79(1) which says that even if the said condition (i.e. 51% shareholding retained by the shareholders when the loss was incurred) is not satisfied in the case of an eligible start-up referred to in section 80-IAC, the loss incurred in any year prior to the previous year shall be eligible for carry forward provided all the shareholders who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continued to hold those shares on the last day of the previous year and such loss has been incurred during the period of 10 years beginning from the year in which such company is incorporated. Most importantly, loss incurred in first 10 years beginning from the year in which the company was incorporated becomes eligible for set off of loss on the condition that the shareholders who held shares on the last day of the previous year or years in which the loss was incurred continue to hold those shares. Thus, proviso to section 79(1) provides extended time for carry forward and set off of losses from 7 years to 10 years by virtue of the Finance Act, 2023. Also, the shareholding percentage is dispensed with and instead if the shareholders who held shares when the loss was incurred continue to hold shares then such loss is eligible for carry forward and set off. As regards unabsorbed depreciation these conditions do not apply and such depreciation is eligible for carry forward and set off regardless of the nature of business being start-up or otherwise. The above said aspects have to be taken into account in the context of income-tax while issuing fresh shares by the start-up.

Quiz for the week (29 Apr 2024):

Simran (P) Ltd is an eligible start-up company with 5 shareholders incorporated in June,2021. The paid-up capital was 5 lakh equity shares of Rs.10 each fully paid-up. The Board of Directors decided to issue fresh shares to increase the capital to Rs.5 crores by issuing 45 lakh equity shares of Rs.10 each. The company has business loss of Rs.20 lakhs and unabsorbed depreciation of Rs.30 lakhs. Discuss the implications of the fresh issue of capital.

Best Answer :

Since the company issuing equity share of Rs.10 each on face value basis, the provisions of section 56(2)(viib) will not apply. Therefore, so far as the company is concerned the issue of shares will not result in any income chargeable under the head ‘Other sources’.

Now the impact of issue of shares on the carry forward of (i) business loss; and (ii) depreciation – to be seen. Section 79(1) says that where a change in shareholding takes place during the 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 on the last day of the previous year, the shares of the company carrying not less than 51% of the voting power where held by persons who beneficially held those shares carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred.

In the facts narrated in the query, it is stated that the company would be issuing 45 lakh equity shares of Rs.10 each which would be equal to 90% of the total share capital of the company (after such issue). Therefore, the shareholders who held shares when the loss was incurred would be diluting their shareholding to less than 51% of the total shareholding. Thus, the loss brought forward on the first day of the previous year in which the shares were issued leading to such shareholding being reduced to less than 51% cannot be set off. However, this embargo will not apply to brought forward depreciation. Therefore, in spite of issuing fresh shares which go to reduce the shareholding percentage of existing shareholders to less than 51%, the brought forward depreciation would be eligible for set off without getting impacted due to change in shareholding pattern.

In the query it is stated that the assessee is an eligible start-up company which was incorporated in June, 2021 which falls within the time bandwidth of 1st April, 2016 to 31st March, 2024. Therefore, the assessee is eligible for deduction under section 80-IAC @ 100% of the profits for 3 consecutive assessment years out of 10 years beginning from the year in which the eligible start-up is incorporated.

Taking note of the fact that the assessee is eligible for deduction under section 80-IAC, reference is invited to proviso to section 79(1) which says that even if the said condition (i.e. 51% shareholding retained by the shareholders when the loss was incurred) is not satisfied in the case of an eligible start-up referred to in section 80-IAC, the loss incurred in any year prior to the previous year shall be eligible for carry forward provided all the shareholders who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continued to hold those shares on the last day of the previous year and such loss has been incurred during the period of 10 years beginning from the year in which such company is incorporated.

Most importantly, loss incurred in first 10 years beginning from the year in which the company was incorporated becomes eligible for set off of loss on the condition that the shareholders who held shares on the last day of the previous year or years in which the loss was incurred continue to hold those shares. Thus, proviso to section 79(1) provides extended time for carry forward and set off of losses from 7 years to 10 years by virtue of the Finance Act, 2023. Also, the shareholding percentage is dispensed with and instead if the shareholders who held shares when the loss was incurred continue to hold shares then such loss is eligible for carry forward and set off.

As regards unabsorbed depreciation these conditions do not apply and such depreciation is eligible for carry forward and set off regardless of the nature of business being start-up or otherwise.

The above said aspects have to be taken into account in the context of income-tax while issuing fresh shares by the start-up.