1983 (8) TMI 155 - AT - Income Tax

Summary

Issues:
Applicability of section 79 of the Income-tax Act, 1961 on carry forward and set off of losses due to a change in shareholding.

Analysis:
1. The judgment revolves around the application of section 79 of the Income-tax Act, 1961 concerning the carry forward and set off of losses due to a significant change in shareholding by a company. The case involved a company that experienced a change in shareholding, leading to a debate on the applicability of section 79 and its clauses (a) and (b) to determine the company's entitlement to carry forward losses from previous years.

2. Initially, the Income Tax Officer (ITO) disallowed the carry forward of losses for the company in the assessment year 1980-81, citing the provisions of section 79(a) as applicable due to the change in shareholding. However, the company argued that the change was made to rehabilitate the company, not to avoid tax liabilities, invoking section 79(b) as a defense for the carry forward of losses. The Commissioner (Appeals) ruled in favor of the company, allowing the benefit of carry forward of losses based on the company's intent behind the shareholding change.

3. The crucial point of contention was whether the change in shareholding was made with the intention to avoid or reduce tax liability, as per the conditions stipulated in section 79. The departmental representative argued that the provisions of section 79(a) were clear and that the company failed to prove that the shareholding change was not tax-motivated. Conversely, the company contended that the change was aimed at reviving the company due to sustained losses, not for tax avoidance, relying on the decision in Italindia Cotton Co. (P.) Ltd. v. CIT [1978] 113 ITR 58 to support their position.

4. The Tribunal analyzed the provisions of section 79, specifically clauses (a) and (b), to determine the company's eligibility for carrying forward losses. Despite the company not meeting the conditions of clause (a), the Tribunal found that the company satisfied the requirements of clause (b) as the shareholding change was not intended to avoid tax liability but to revive the struggling company. Citing the precedent set by the Bombay High Court, the Tribunal concluded that the company was entitled to the benefit of carry forward and set off of losses from previous years under section 79(b).

5. Ultimately, the Tribunal upheld the decision of the Commissioner (Appeals) and dismissed the appeal, affirming the company's right to carry forward and set off losses based on the provisions of section 79(b) of the Income-tax Act, 1961. The judgment emphasized the importance of the intent behind a change in shareholding in determining the applicability of section 79 and the eligibility for carrying forward losses in such cases.