1976 (8) TMI 83 - AT - Income Tax

Summary

Issues Involved:
1. Entitlement to carry forward and set off losses prior to the change in share-holdings.
2. Application of Section 79 of the Income-tax Act, 1961.
3. Interpretation of the term "previous year" in Section 79.
4. Validity of the Income-tax Officer's opinion regarding the intention behind the change in share-holdings.

Issue-wise Detailed Analysis:

1. Entitlement to Carry Forward and Set Off Losses Prior to the Change in Share-holdings:
The assessee, a private limited company, had incurred losses prior to the assessment year 1973-74, the year in which there was a change in share-holdings. The company claimed that these prior losses, along with unabsorbed depreciation, development rebate, and allowance under Section 80J, should be carried forward and set off against future profits. The Income-tax Officer (ITO) rejected this claim based on the provisions of Section 79, which he interpreted as prohibiting the carry forward of losses due to the change in share-holdings aimed at reducing tax liability.

2. Application of Section 79 of the Income-tax Act, 1961:
Section 79 stipulates that 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" if there is a change in share-holdings, unless:
(i) Shares carrying not less than fifty-one percent of the voting power were beneficially held by persons who held shares on the last day of the year or years in which the loss was incurred, or
(ii) The ITO is satisfied that the change in share-holdings was not effected with a view to avoiding or reducing any liability to tax.
In this case, the first condition was not satisfied as the entire share-holdings had changed hands. Therefore, the second condition needed to be examined.

3. Interpretation of the Term "Previous Year" in Section 79:
The assessee argued that the term "previous year" in Section 79 should be interpreted to refer only to the year of change (1973-74) and not to subsequent assessment years. The Tribunal agreed with this interpretation, noting that the term "previous year" appears three times in Section 79 and should carry the same meaning each time, referring specifically to the year of change. The Tribunal found that the legislative history and the language of the section supported this interpretation, limiting the application of Section 79 to the year of change.

4. Validity of the Income-tax Officer's Opinion Regarding the Intention Behind the Change in Share-holdings:
The ITO had opined that the change in share-holdings was effected with a view to avoiding or reducing tax liability, but he did not provide any basis or material for this opinion. The Tribunal found no evidence to support the ITO's opinion. Instead, the Tribunal noted that the new shareholders had taken over a sick mill and improved its performance, showing profits in subsequent years. The Tribunal concluded that the change in share-holdings was bona fide and not aimed at reducing tax liability. Therefore, Section 79 was not applicable.

Conclusion:
For the assessment year 1973-74, the Tribunal held that Section 79 did not preclude the assessee from carrying forward and setting off prior losses, as there was no income in that year and the change in share-holdings was not aimed at tax avoidance. For the assessment year 1974-75, the Tribunal ruled that Section 79 did not apply, as it is confined to the year of change. Even if Section 79 were applicable, the Tribunal found that the change in share-holdings was bona fide. Thus, the assessee was entitled to carry forward and set off the losses incurred prior to the year of change against the income of subsequent years.

Judgment:
- Appeal No. 2031/(Mad) 1974-75: Dismissed.
- Appeal No. 1162 (Mad) /1975-76: Allowed. The ITO was directed to grant the claim of the assessee in accordance with the Tribunal's decision.