1988 (9) TMI 1 - SC - Income Tax

Whether both the conditions mentioned in clause (a) & clause (b) of section 79 must apply for disentitling the loss of a prior year being allowed as set-off in accordance with the substantive provisions of s. 79 - to avoid falling within the scope of s. 79 it is sufficient for the assessee to show that the case attracts either clause (a) or clause (b). If the assessee succeeds in doing so he will be entitled to the benefit of the provisions entitling him to carry forward and set-off of losses

Summary

Issues:
Interpretation of section 79 of the Income-tax Act, 1961 regarding the carry forward and set-off of losses for companies not substantially interested by the public.

Analysis:
The case involved three private limited companies controlled by different shareholder groups. The assessee suffered a loss in the accounting year ending March 31, 1960, and a question arose regarding the entitlement to carry forward that loss due to changes in shareholding by the assessment year 1963-64. The Income-tax Officer disallowed the set-off based on section 79, which requires that beneficial shareholding representing not less than 51% should remain the same to carry forward losses, or the change in shareholding should not be to avoid tax liability.

The Appellate Assistant Commissioner held that the change in shareholding should be with the intent to avoid or reduce tax liability for the disallowance to apply. The Tribunal observed two exceptions under section 79: the beneficial holding should not change hands by 51%, and any change in shareholding should not aim to avoid tax liability. The Tribunal did not definitively determine if the assessee fell within the second exception.

The Tribunal referred a question to the Bombay High Court regarding the interpretation of section 79. The High Court held that both conditions in section 79 must apply for disallowing the set-off of losses, emphasizing that the change in shareholding should be to avoid or reduce tax liability. Section 79 aims to prevent tax avoidance by companies acquiring loss-making entities to set off losses against future profits. The Supreme Court ruled that the conditions in section 79 operate as alternatives, not cumulatively, allowing for the set-off if either condition is met.

The Supreme Court agreed with the High Court's interpretation, emphasizing that the purpose of section 79 is to deter tax avoidance schemes through shareholding changes. The Court cited precedents to support its conclusion and dismissed the appeal, affirming the right of the assessee to carry forward and set-off losses against income. The judgment aligned with the intent of the Income-tax Act to prevent abuse of loss set-off provisions for tax avoidance purposes.