9911796707
TMI Blog1977 (8) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... Babubhai group acquired controlling interest in Italindia Cotton Co. (P.) Ltd., i.e., the assessee, and Purshottam group acquired controlling interest in International Cotton Private Ltd. The assessee-company suffered a loss in the accounting year ended March 31, 1960, relevant to the assessment year 1960-61, in the amount of Rs. 12,172 which was available for a set-off in a subsequent year. During the course of the assessment proceedings for the year under consideration in this reference a question regarding a claim for set-off of the prior year's loss came up for consideration before the Income-tax, Officer. The Income-tax Officer took the view that having regard to the provisions of section 79 of the Income-tax Act, 1961 (hereinafter referred to as " the Act "), the assessee became disentitled from claiming such a set-off of loss. He observed that due to the change in shareholding 51% shareholders as on March 31, 1960, did not hold the same proportions of shares as on March 31, 1963. Accordingly, the brought forward loss of Rs. 12,172 of the assessment year 1960-61 would lapse under the provisions of section 79 of the Act. In an appeal by the assessee before the Appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The first saving was that if the beneficial holding of shares to the extent of 51% remains the same in the previous year, as it was in the prior year in which the loss was incurred, then there will be no disentitlement to the set-off of loss. The second saving was that if " the change in the shareholding" which words could only refer back to the substantive provisions of the section and not to the provision contained in clause (a) of the section, was not effected with a view to avoiding or reducing any liability to tax, the company would again not to be disentitled from claiming the set-off of the loss. These two conditions mentioned in clauses (a) and (b) were specific. They were not cumulative but they were alternative. If any one of the conditions applied, then a company automatically becomes disentitled from claiming the set-off of the prior year's loss. Such savings were only of the kind that normally follow the substantive provisions of any section. According to the Tribunal clauses (a) and (b) of the section applied independently and they did not come into play simultaneously before an assessee-company, as in the present case, could be said to be disentitled from the set- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee from claiming a set-off in respect of the carried forward loss. However, if such change was not effected with a view to avoid or reduce any liability to tax even then the case would be covered by clause (b) of section 79 and the assessee will be entitled to claim set-off of carried forward loss notwithstanding such change of more than 51% of the voting power at the two relevant dates. In support of his contention that this is the true interpretation of clauses (a) and (b) of section 79, he referred to the report of the Select Committee of the Income-tax Bill, 1961, where in paragraph 41, it has been stated that the original bill which merely contained provisions similar to clause (a) should be redrafted and the benefit of set-off should be disallowed only when notwithstanding such change in the shareholding, i.e., more than 51% of the voting power of the group at the two relevant dates, such change in the voting power has taken place with the intention of avoiding or reducing the tax liability. Mr. Joshi, on the other hand, on behalf of the revenue submitted that, as held by the Tribunal, clauses (a) and (b) of section 79 are independent clauses and when there is a change in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility to tax." The question whether the carried forward loss of the previous year or years should be allowed to be set off in the relevant assessment year will depend upon the true construction of this section. Whenever on the last day of the previous year relevant to the assessment year the shares of a company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred, then clause (a) will be directly applicable and the assessee will be entitled to claim set-off of carried forward loss of the earlier year or years. In the present case, it is common ground that the loss was incurred in the accounting year ended March 31, 1960, relevant to the assessment year 1960-61, in the sum of Rs. 12,172. At that time, the assessee-company was controlled by Chunilal group. However, in the accounting year ended March 31, 1963, corresponding to the assessment year 1963-64, with which we are concerned, the assessee-company was controlled by Babubai group. Thus, this is on the admission of the assessee-company a case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lding" has been used clearly shows that it contemplates a change of the type referred to in clause (a), namely, more than 51% of the voting power of the group had changed at the two relevant dates. Clause (b), in our opinion, would apply in a case where a change in the voting power of more than 51% of the shareholding of a company has taken place at the two relevant dates, namely, the last day of the earlier year or years in which the loss was incurred and was allowed to be carried forward and the last date of the previous year relevant to the assessment year in which the set-off is claimed. When such a change in the voting power of more than 51% of the shareholding has taken place between these two relevant dates, then clause (b) further requires the Income-tax Officer to consider whether he is satisfied that such a change in the shareholding, change of more than 51 % of the voting power, has taken place with a view to avoiding or reducing any liability to tax. If a change of more than 51% of the voting power between the two relevant dates has taken place with a view to avoiding or reducing any liability to tax, then the assessee will not be entitled to the benefit of set-off unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more than 51% of the voting power on the last day of the previous year relevant to the assessment year as compared to the last day of the year or years in which the loss was incurred. This report of the Select Committee supports the contention of Mr. Patil. The view that we have taken on the construction of section 79 is also supported by the commentary in Sampath Iyengar's Law of Income-tax, 6th edition, 1973. This is what the learned author says at pages 1253-1254 "When the carry forward is permitted : The carry forward of an earlier year's loss in a company in which the public are not substantially interested (with a view to set off the same against the subsequent year's income of such a company) is permitted only if shares in the company carrying not less than fifty-one per cent. of the voting power were beneficially held by one and the same person or persons, both on the last day of the year in which the loss arose and also on the last day of the accounting year in which the brought forward loss is sought to be adjusted. This provision has been introduced by the 1961 Act to check the malpractice of buying of losses in a company to reduce the incoming shareholders' tax li ..... X X X X Extracts X X X X X X X X Extracts X X X X
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