1985 (7) TMI 75 - HC - Income Tax

Change In Shareholding, Closely Held Company, Company, Depreciation, Depreciation And Development Rebate, Developement Rebate

Issues Involved:
1. Interpretation of Section 79 of the Income-tax Act.
2. Whether unabsorbed depreciation and unabsorbed development rebate constitute "losses" under Section 79.

Detailed Analysis:

Interpretation of Section 79 of the Income-tax Act:
The primary issue revolves around the interpretation of Section 79 of the Income-tax Act, which deals with the carry forward and set off of losses in certain companies. The court examined whether the term "loss" in Section 79 includes unabsorbed depreciation and unabsorbed development rebate.

Section 79 states:
"79. Carry forward and set off of losses in the case of certain companies.-Notwithstanding anything contained in this Chapter, where 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 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 year or years in which the loss was incurred; or
(b) the Income-tax Officer is satisfied that the change in the shareholding was not effected with a view to avoiding or reducing any liability to tax."

The court noted that Section 79 overrides other provisions in Chapter VI but not the entire Act. The connotation of the term "loss" in Section 79 must be understood in the context of Chapter VI, which deals with the aggregation of income and set off or carry forward of loss.

Whether Unabsorbed Depreciation and Unabsorbed Development Rebate Constitute "Losses" under Section 79:
The Tribunal had reasoned that the term "loss" in Chapter VI does not include unabsorbed depreciation and unabsorbed development rebate, as indicated by the commentary in Kanga and Palkhiwala's Law and Practice of Income-tax. The Tribunal concluded that Section 79 places a bar only on the carry forward and set off of losses and not on unabsorbed depreciation or unabsorbed development rebate.

The court examined Section 72(2), which provides a rule of priority for the set off of business losses over allowances under Section 32(2) or Section 35(4). The court observed that even this provision does not describe unabsorbed depreciation or unabsorbed development rebate as losses but as allowances.

The court further noted that "unabsorbed depreciation" and "unabsorbed development rebate" are specifically mentioned in Sections 32(2) and 35(4) of Chapter IV, respectively. The Act does not treat these items as losses, and they cannot be considered losses for the purposes of Section 79.

The court referred to the Supreme Court's decision in CIT v. Jaipuria China Clay Mines (P.) Ltd., which distinguished between various allowances and losses, emphasizing that depreciation is not an actual outgoing but an allowance.

The court also cited decisions from the Madras High Court and the Gujarat High Court, which supported the view that unabsorbed depreciation and unabsorbed development rebate are not losses under Section 79.

Conclusion:
The court concluded that the term "loss" in Section 79 does not include unabsorbed depreciation or unabsorbed development rebate. Therefore, the bar imposed by Section 79 does not apply to these items. The court answered the question in the affirmative, in favor of the assessee and against the Revenue.

The assessee was entitled to costs, and a copy of the judgment was to be sent to the Income-tax Appellate Tribunal, Cochin Bench.

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