1982 (9) TMI 39 - HC - Income Tax

Summary

Issues Involved:
1. Application of Section 79 of the Income Tax Act regarding the carry forward and set off of losses.
2. Cumulative or disjunctive interpretation of clauses (a) and (b) of Section 79.
3. Applicability of Section 79 to subsequent assessment years following the year of change in shareholding.

Issue-wise Detailed Analysis:

1. Application of Section 79 of the Income Tax Act:
The primary issue involves determining the scope and application of Section 79 of the Income Tax Act, which restricts the carry forward and set off of losses in cases where there has been a change in shareholding of a company not substantially interested by the public. The assessee, a private limited company, had incurred losses prior to the assessment year 1973-74. The Income Tax Officer (ITO) disallowed the carry forward of these losses due to a change in shareholding, invoking Section 79. The Tribunal found that the conditions for applying Section 79 were not satisfied and allowed the carry forward of losses.

2. Cumulative or Disjunctive Interpretation of Clauses (a) and (b) of Section 79:
The court had to decide whether clauses (a) and (b) of Section 79 should be read cumulatively or disjunctively. Clause (a) involves the condition that shares carrying not less than 51% of the voting power were beneficially held by the same persons on the last day of the year in which the loss was incurred. Clause (b) involves the ITO's satisfaction that the change in shareholding was not effected with a view to avoiding or reducing any liability to tax. The Tribunal held that both conditions must be satisfied for Section 79 to apply. The court agreed, citing interpretations by Kanga and Palkhivala, and Sampath Iyengar, and judgments from the Bombay High Court in Italindia Cotton Co. P. Ltd. v. CIT and CIT v. Shri Subhlaxmi Mills Ltd. The court concluded that the conditions are cumulative, and the Revenue cannot deprive the assessee of the benefit of Section 72 unless both conditions are met.

3. Applicability of Section 79 to Subsequent Assessment Years:
The court also examined whether Section 79 applies only to the year of change in shareholding or to subsequent years as well. The Tribunal had held that Section 79 applies only to the year of change, not to subsequent years, allowing the assessee to carry forward and set off losses against the income of the assessment year 1974-75. The court upheld this view, stating that if the change in shareholding was not effected to avoid or reduce tax liability, the benefit of Section 72 continues in subsequent years. Therefore, the assessee is entitled to carry forward and set off losses even in the year of change and subsequent years.

Conclusion:
The court answered the first question in the affirmative, holding that clauses (a) and (b) of Section 79 are cumulative, and the assessee was entitled to the carry forward and set off of earlier years' losses. Regarding the second question, the court did not provide a separate answer, as the first question's resolution implied that the benefit of Section 72 continues in subsequent years if the change in shareholding was not to avoid or reduce tax liability. The tax cases were disposed of accordingly, with costs awarded to the assessee.