1986 (6) TMI 74 - AT - Income Tax

Summary

Issues Involved:
1. Interpretation and application of Section 79 of the Income-tax Act, 1961.
2. Determination of whether the conditions in Section 79(a) and (b) need to be satisfied cumulatively or independently.
3. Evaluation of the change in shareholding and its impact on the set-off of past business losses.
4. Examination of whether the change in shareholding was effected with a view to avoiding or reducing tax liability.

Issue-wise Detailed Analysis:

1. Interpretation and Application of Section 79 of the Income-tax Act, 1961:
The primary issue revolves around the interpretation of Section 79 of the Income-tax Act, 1961, which restricts the carry forward and set-off of losses in certain cases of change in shareholding. The revenue contended that the Commissioner (Appeals) erred in holding that both conditions of Section 79 must be cumulatively satisfied before denying the benefit of set-off of losses. The Tribunal examined the language of Section 79, which states that no loss incurred in any year prior to the previous year shall be carried forward and set off unless either condition (a) or (b) is satisfied.

2. Determination of Whether the Conditions in Section 79(a) and (b) Need to be Satisfied Cumulatively or Independently:
The Tribunal analyzed whether conditions (a) and (b) of Section 79 should be considered cumulatively or independently. The revenue argued that the conditions should be considered independently, while the assessee relied on various High Court decisions suggesting a cumulative approach. The Tribunal referred to the Hon'ble Karnataka High Court's decision in Patil Vijaykumar v. Union of India, which emphasized that the language of the statute should be given effect as it stands. The Tribunal concluded that the conditions in Section 79(a) and (b) are to be applied independently, not cumulatively.

3. Evaluation of the Change in Shareholding and Its Impact on the Set-off of Past Business Losses:
The ITO observed that there was a change in shareholding on 10-1-1976, where more than 51% of the voting power changed hands from the Guha Roy Group to the Mehra Group. This change was not disputed by the assessee before the Commissioner (Appeals) or the Tribunal. The Tribunal noted that the change in shareholding satisfies the condition in Section 79(a), thereby disallowing the carry forward and set-off of past business losses.

4. Examination of Whether the Change in Shareholding Was Effected with a View to Avoiding or Reducing Tax Liability:
The ITO inferred that the change in shareholding was an attempt to avoid or reduce tax liability, as the incoming shareholder owed a small amount to the assessee before taking over the liabilities. The assessee contended that the change was due to business exigencies and financial difficulties, not to avoid tax liability. The Tribunal found that the Commissioner (Appeals) did not provide a categorical finding or evidence to support the assessee's assertion. The Tribunal concluded that the ITO's inference was justified, satisfying the condition in Section 79(b) as well.

Conclusion:
The Tribunal reversed the order of the Commissioner (Appeals) and restored the ITO's decision, holding that the conditions in Section 79(a) and (b) are to be applied independently. The Tribunal found that both conditions were satisfied, thereby disallowing the set-off of past business losses. The appeal by the revenue was allowed.