Special Provisions applicable to a Closely Held Company in which Public are Not Substantially Interested

The following are the Special Provisions under the Income Tax Act which are applicable to a company in which Public are not substantially interested i.e. Closely Held Company.

(1) [Section 79]: Carry Forward and Set Off of Losses in case of a Closely Held Company

(i) [Section 79(1)]: Carry forward and Set Off of Losses in case of Certain Companies

Notwithstanding anything contained in this Chapter, where a change in shareholding has taken 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 were beneficially held by persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred:

However, even if the said condition is not satisfied in case of an eligible start up as referred to in section 80-IAC, the loss incurred in any year prior to the previous year shall be allowed to be carried forward and set off against the income of the previous year if all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year and such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated. [Proviso to section 79(1)]

In other words, to further facilitate ease of doing business in the case of an eligible startup, section 79 has been amended so as to provide that loss incurred in any year prior to the previous year, in the case of closely held eligible start-up, shall be allowed to be carried forward and set off against the income of the previous year on satisfaction of either of the following two conditions:

(a)        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 were beneficially held by persons who beneficially held shares of the company carrying not less than 51 % of the voting power on the last day of the year or years in which the loss was incurred,

or

(b)        The loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year, if, all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year and such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.

(ii) [Section 79(2)]: Section 79(1) Not to Apply in Certain Cases

Nothing contain in section 79(1) shall apply—

(a)        to a case where a change in the said voting power and shareholding 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;

(b)        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 51 % shareholders of amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting foreign company;

(c)        to a company where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner;

(d)        to a company, and its subsidiary and the subsidiary of such subsidiary, where,—

(i)         the Tribunal, on an application moved by the Central Government under section 241 of the Companies Act, 2013, has suspended the Board of Directors of such company and has appointed new directors nominated by the Central Government, under section 242 of the said Act; and

(ii)        a change in shareholding of such company, and its subsidiary and the subsidiary of such subsidiary, has taken place in a previous year pursuant to a resolution plan approved by the Tribunal under section 242 of the Companies Act, 2013 after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.

(e)        to a company to the extent that a change in the shareholding has taken place during the previous year on account of relocation referred to in the Explanation to clause (viiac) and (viiad) of section 47.

(2) [Section 2(22(e)]: Deemed dividend

Any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder holding not less than 10% voting power or to a concern in which such shareholder is a member or a partner and in which he has substantial interest or any payment by an such company on behalf or for the individual benefit of any such shareholder, to the extent to which company in either case possesses accumulated profit shall be treated as deemed dividend. For details and amendment made by the Finance Act, 2020

(3) [Section 56(2)(viib)]: Share issued for a consideration more than the fair market value

Where a company, not being a company in which the public are substantially interested, receives, in any previous year,—

• from any person being a resident, any consideration for issue of shares

and

• such consideration received for issue of shares exceeds the face value of such shares,

then the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income-tax under the head “Income from other sources”.

Provisions of section 56(viib) not to apply in the following cases [First proviso to section 56(2)(viib)]:

The above provision shall not apply where the consideration for issue of shares is received—

(i)         by a venture capital undertaking from a venture capital company or a venture capital fund or a specified fund: or

(ii)        by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

(4) [Proviso 1 to Section 68]: Source of Income of Applicant of Shares Not Explained

Where the assessee is a company, (not being a company in which the public are substantially interested) and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a)        the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b)        such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory.

(5) [Section 179]: Liability of Directors of Private Company

As per section 179, where any tax due from a private company in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.