il Appeal No 1520 NT of 1986
From the Judgment and Order dated 1081977 of the Bombay High Court in ITR No 34 of 1968
VS Desai and Ms A Subhashini for the Appellant
Harish Salve Mrs AK Verma and Joel Peres for the Respondents
Three private limited companies the Italindia Cotton Co P Ltd who is the assessee before us the India Corporation P Ltd and the International Cotton P Ltd were controlled by three groups of share holders who may be described as the Chunilal Group the Babubhai Group and the Purushottam Group
There was a change in the share holding of the three companies during the accounting year ending 3 1 March 1963
The Chunilal Group acquired controlling interest in India Corporation P Ltd the Babubhai group acquired controlling interest in the assessee company and the Purushottam Group acquired controlling interest in International Cotton P Ltd The assessee suffered a loss in the accounting year ending 31 March 1960 relevant to the assessment year 1960 61 in the amount of Rs12172
This was available for a set off in a subsequent year
But having regard to the change in the share holding of the assessee during the accounting year ending 31 March 1963 relevant to the assessment year 1964 64the question arose whether the assessee was entitled to of carrying forward that loss for the purpose of computing PG NO 817 its assessable profits for that assessment year
The Income tax Officer held that section 79 of the Income tax Act 1961 disentitled the assessee from claiming such a set off
He said that 51 of the voting power held by persons on the last day of the year in which the loss was suffered was no longer held by them on 31 March 1963
On appeal by the assessee the Appellate Assistant Commissioner of Income tax took a different view
He held that before the right to set off a loss could be denied to an assessee not only should there be a change in the persons holding a voting power of not less than 51 but further the change should have been effected with a view to avoiding or reducing the liability to tax
The Revenue appealed to the Income Tax Appellate Tribunal
Upon an analysis of section 79 the Tribunal observed that the denial of the set off of a loss incurred in an earlier year was subject to two exceptions the first being that the beneficial holding representing not less than 51 of the voting power should not change hands between the last day of the year in which the loss was incurred and the last day of the relevant previous year and the second exception was that any change in the share holding contemplated by the parent provision should not have been effected with a view to avoiding or reducing any liability to tax
According to the Tribunal the two exceptions applied independently and if either came into play the prohibition contained in section 79 against the setting off of a loss could not be invoked by the Revenue
It appears to have been admitted before the Tribunal that the assessee was not entitled to the benefit of the first exception and in the view which it took it rendered no definite finding on whether the assessee fell within the terms of the second exception 
At the instance of the assessee the Tribunal referred the following question to the Bombay High Court for its opinion Whether both the conditions mentioned in clause a and 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 section 79 of the Income tax Act 1961 The High Court answered the question in favour of the assessee
holding that even if a change in the voting power of not less than 51 between the two relevant dates has taken place for the Revenue to succeed such change should be effected with a view to avoiding or reducing any liability to tax
It observed that as the Tribunal had not considered the question whether the change in the voting power had taken place with a view to avoiding or reducing any liability to tax that question should now be decided by PG NO 818 the Tribunal before the claim for a set off could be finally disposed of
And now this appeal
Chapter VI of the Income tax Act 1961 contains a number of provisions entitling the assessee to the carry forward and set off of a loss suffered by him
Section 70 provides for the set off of a loss from one source against income from another source under the same head of income
Section 71 provides for the set off of a loss from one head against income from another head
Section 72 entitles an assessee to carry forward and set off a business loss which could not be set off wholly during the year in which it arose
Then follow provisions relating to the setting off of losses in certain particular cases
Section 79 with which we are concerned provides Notwithstanding anything contained in this Chapter where a change in shareholding has taken place in a previous year in the case of a company not being a company in which the public are substantially interested 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 unless a on the last day of the previous year the shares of the company carrying not less than fifty one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty one per cent of the voting power on the last day of the year or years in which the loss was incurred or b the Income tax Officer is satisfied that the change in the share holding was not effected with a view to avoiding or reducing any liability to tax Section 79 is an exception to the scheme enacted in Chapter VI for the carry forward and setting off of a loss incurred in any earlier year against the income of the relevant previous year
The provision was enacted in the Income tax Act 1961 for the first time in order to deny that benefit to companies not being companies in which the public are substantially interested
On its plain terms section 79 provides that in the case of such companies if a change in shareholding has taken place in a previous year no loss incurred in any year prior to the previous year shall be carried forward or set off against the income of the previous year unless a both on the last day of the previous year and on the last day of the year or years in PG NO 819 which the loss was incurred the shares of the company carrying not loss than 51 per cent of the voting power were beneficially held by the same persons b the Income tax Officer is satisfied that the change in the share in holding was not affected with a view to avoiding or reducing any liability to tax
The question before us is whether the two conditions operate cumulatively or in the alternative
In other words should both conditions exist together to nullify the prohibition against carry forward and set off of the loss Upon careful consideration we are of opinion that the conditions are intended to operate as alternative to one another
If the terms of either cla or clb are satisfied the disqualification suffered by a company by reason of a change in share holding in the previous year is removed and the company is entitled to the benefit of the provisions in Chapter VI relating to the carry forward and set off of losses
The benefit is available notwithstanding the change in share holding in the previous year if shares representing not less than 51 of the voting power remain beneficially held by the same persons on the relevant dates
Similarly the benefit is available notwithstanding the change in shareholding in the previous year if the change was not effected with a view to avoiding or reducing any liability to tax
The object sought to be served by enacting section 79 appears to be to discourage persons claiming a reduction of their tax liability on the profits earned in companies which had sustained losses in earlier years
It was not unusual for a group of persons to acquire a company which had suffered losses in earlier years in the expectation that the company would earn substantial profits after such acquisition and they would benefit by a reduction of the tax liability on those profits on a set off of losses carried forward from earlier years before the acquisition
The acquisition of a company in such a case would be effected by a change in its share holding and the control over the company could be ensured by securing the beneficial ownership of shares carrying 51 per cent or more of the voting power
If the change in share holding did not result in holding voting power of 51 per cent or it was established that the shares of the company carrying not less than 51 percent of the voting power were beneficially held by the same persons both on the last day of the previous year as well as the last day of the year or years in which the loss was incurred it could be presumed that there was no change in the control over the company and the disqualification imposed on the company because of the change in its share holding would stand removed
But there may be a change in the share holding and it may result in a change of control of the company
Yet every PG NO 820 such change of shareholding need not fall within the prohibition
There can be a case where persons already owing a shareholding carrying less than 51 percent of the voting power in the company may enlarge their share holding during the previous year in order that control over the company may pass to them
Attempts to acquire control over a company by controlling a majority of the share holding are not unknown
The acquisition of control over a company provides a source of both direct and indirect financial benefit as well as power over its policies and activities
On the other side there can be a case where the change is affected with a view to avoiding or reducing some liability to tax
The change is effected not for business or commercial reasons but in order that tax liability may be avoided or reduced
In that event the change in the share holding will tend to bring about the result which section 79 was designed to prevent
In our opinion to avoid falling within the scope of section 79 it is sufficient for the assessee to show that the case attracts either cl
a of cl
If the assessee succeeds in doing so he will be entitled to the benefit of the provisions of the Income Tax Act entitling him to claim a carry forward and set off losses suffered by the company in an earlier year or years against the income of the previous year
We are fortified in our conclusion by the view expressed by the Gujarat High Court in Commissioner of Income tax Gujarat III vs Shri Subhalaxmi Mills Ltd and by the Madras High Court in Commissioner of Income tax vs Saravanabhava Mills Pvt Ltd1983 ITR856
In our judgment the High Court is right in the view taken by it and the appeal must be dismissed
The appeal is dismissed with costs


Summary:
The prospectus for the year 198889 for admission in the evening classes of the Three Year LLB Degree Course conducted by the Department of Laws of the Punjab Universi ty prescribed that admission to evening classes was open only to regular employees of Government Semi Government institutionsaffiliated CollegesStatutory Corporations and Government Companies and that a candidate should attach No ObjectionPermission letter from his employer with his application for admission
Out of the 150 seats available in the evening classes 64 were reserved for scheduled castes scheduled tribes backward classes physically handicapped persons outstanding sportsmen and defence personnel and the remaining 86 were reserved for regular employees of Govern mentSemi Government institutions etc
 as mentioned in the aforesaid rule for admission
690 The two appellants one employed in a Limited Company a joint venture with an Undertaking of the State Government and the other working as a temporary employee in a State Government office applied for admission in the evening classes with No Objection Certificates  from their employ ees
Both were interviewed but were not
selected although their positions in the merit list were 29 and 19 respective ly on the ground that wile one of the appellants was an employee of a Public Limited Company and did not fall within the exclusive categories as mentioned in the impugned rule the other was only a temporary employee
Both the appellants filed writ petitions in the High Court challenging the validity of the impugned rule
Peti tions were also filed by five other refused candidates
It was contended that the impugned rule was violative of article 14 of the Constitution
The High Court dismissed the writ petitions
While upholding the validity of the impugned rule the High Court held that Government employees had protection of article 311 of the Constitution which non Govern ment employees did not have and that the employees of the Semi Government institutions were also on the same footing
Hence the two appellants filed appeals in this Court
In the counter affidavit filed in this Court the re spondents sought to justify the exclusion of private employ ees restricting admission to evening classes only to the Government employees and similar other institutions on the grounds of production of bogus certificates of employment from private employers and imparting of legal education to the employees of the GovernmentSemi Government and other institutions as in public interest
It was also contended that a candidate should have an assured tenure of employment likely to continue for three years and that as far as possible there should be no possibility of wastage of a seat
Allowing the appeals HELD 11 Article 14 forbids legislation but does not forbid reasonable classification
Whether a classification is a permissible classification under article 14 or not two conditions must be satisfied namely 1 that the classifi cation must be rounded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group and 2 that the differ entia must have a rational nexus to the object sought to be achieved by the statute in question
697F 691 12 In considering the reasonableness of classification from the point of view of article 14 of the Constitution the Court has to consider the objective for such classification
If the objective be illogical unfair and unjust necessari ly the classification will have to be held as unreasonable
703C D 13 No doubt a classification need not be made with mathematical precision but if there be little or no differ ence between the persons or things which have been grouped together and those left out of the group then the classifi cation cannot be said to be a reasonable one
700C 14 Surrounding circumstances may be taken into consid eration in support of the constitutionality of a law which is otherwise hostile or discriminatory in nature
But the circumstances must be such as to justify the discriminatory treatment or the classification subserving the object sought to be achieved
700G H Ram Krishna Dalmia vs Shri Justice SR Tendolkar   relied on
15 A classification by the identification of sources most not be arbitrary but should be on a reasonable basis having a nexus with the object sought to be achieved
704H705A4 Chitra Ghosh vs Union of India  and DN Chanchala vs State of Mysore 1971 Supp
SCR 608 relied on
16 In the instant case the objective of starting the evening classes was to accommodate in the evening classes employees in general including private employees who were unable to attend morning classes because of their employ ment
However in framing the impugned rule the respondents have deviated from its objective for starting the evening classes
699F G The classification of the employees of GovernmentSemi Government institutions etc
by the impugned rule for the purpose of admission in the evening classes of Three Year LLB Degree Course to the exclusion of all other employees is unreasonable and unjust as it does not subserve any fair and logical objective
703D The Government and public sector employees cannot be equated with Government undertaking and companies
The classification of 692 Government undertakings and companies may in certain cir cumstances be a reasonable classification satisfying the tests laid down but the employees of GovernmentSemi Govern ment institutions etc as mentioned in the impugned rule cannot be held to constitute a valid classification for the purpose of admission to evening classes of Three years LLB Degree Course
703F G Hindustan Paper Corpn
Ltd vs Government of Kerala   distinguished
17 The Government employees or the employees of Semi Government and other institutions cannot stand on a differ ent footing from the employees of private concerns insofar as the question of admission to evening classes is con cerned
699H Though the service conditions of employees of Govern mentSemiGovernment institutions etc
are different and they may have greater security of service that hardly matters for the purpose of admission in the evening classes
The test is whether both the employees of private establish ments and the employees of GovernmentSemi Government insti tutions etc
are equally in a disadvantageous position in attending morning classes
There can be no doubt that both of them stand on an equal footing and there is no difference between these two classes of employees in that regard
To exclude the employees of private establishments will not therefore satisfy the test of intelligible differentia that distinguishes the employees of GovernmentSemi Government institutions etc grouped together from the employees of private establishments
700A C 18 Though an educational institution is entitled to identify sources from which admission will be made in such institution there is no difference between identification of the sources and a classification
If any source is speci fied such source must also satisfy the test of reasonable classification and also that it has a rational nexus with the object sought to be achieved
The sources must be clas sified on reasonable basis that is to say it cannot be classified arbitrarily and unreasonably
The impugned rule does not satisfy the test laid down in this regard
704D F Chitra Ghosh vs Union of India  and DN Chanchala vs State of Mysore 1971 Supp
SCR 608 relied on
19 The circumstances relied on by the respondents namely the 693 possibility of production by the candidates of bogus certif icates and insecurity of their services are not such circum stances as will justify the exclusion of the employees of private establishments from the evening classes
700H 701A Ram Krishna Dalmia vs Shri Justice section R Tendolkar   explained
110 The exclusion of employees of private establish ments cannot also be justified on administrative grounds
The respondents have not placed any material before the High Court or in this Court as to in how many cases they had come across bogus certificates produced by private employees during the time the admission to evening classes was open also to private employees
It may be that there were one or two cases of production of bogus certificates but that cannot be a ground for the exclusion of all private employ ees from the benefit of getting legal education in the evening classes
701E F Pannalal Binjraj vs Union of India  distin guished 111 There is no material to indicate that by the ex pression regular employees it is intended to include only those employees who will have an assured tenure of service for three years that is to say co extensive with the period of the Three Year LLB Degree Course
The expression regular employees normally means bona fide employees
Such bona fide employees may be permanent or temporary
All that the University can insist is that one should be a bona fide employee and if there be materials to show that a candidate for admission in the evening classes is a bona fide employee the University cannot further insist on an assured tenure of service of such an employee for a period of three years
The reason for exclusion of private employ ees on the ground that there may not be an assured tenure of employment likely to continue for three years therefore not only does not stand scrutiny but is also unfair and unjust and cannot form the basis of such an exclusion
702A C 112 It is difficult to understand the logic of the rule restricting admission in the evening classes to employees of GovernmentSemiGovernment institutions etc
on the plea that such employees require legal education in public interest
It may be that certain sections of Government employees require legal education hut surely Government employees in general do not require legal education
Certain private sector employees may also require legal education in the interest of the 694 establishments of which they are employees
It cannot therefore be laid down that only Government employees require legal education and not private employees
703B Jolly vs State of Kerala AIR 1974 Kerala 178 approved
The impugned rule having made a classification which cannot be justified on any reasonable basis must be held to be discriminatory and violative of article 14 of the Constitu tion
705B 2
It is not possible to bring the impugned rule in conformity with the provision of article 14 by putting a full stop after the words regular employees and striking down remaining part of the impugned rule so as to read Admis sion to evening classes is open only to regular employees
Prima facie the part which is sought to be retained is not severable from the remaining part of the rule
The invalid portion is inextricably mixed up with the valid portion of the rule and accordingly the entire rule requires to be struck down
705G H RMD Chamarbaugwalla vs Union of India   relied on
B Prabhakar Rao vs State of Andhra Pradesh 1985 Supp
SCC 432 distinguished
Article 154 does not contemplate to reserve all the seats or the majority of the seats in an educational insti tution at the cost of the rest of the society
The same principle should also apply with equal force in the case of cent percent reservation of seats in educational institu tions for a certain class of persons to the exclusion of meritorious candidates
707A B MR Balaji vs State of Mysore 1963 Supp 1 SCR 439 Pradeep Jain vs Union of India  and Nida marti Maheshkumar vs State of Maharashtra   relied on
In the instant case the respondents have reserved 64 seats out of 150 seats for Scheduled Castes Scheduled Tribes backward classes etc
Out of the remaining 86 seats reservation of seats for regular or bona fide employees for admission to evening classes should in no event exceed the limit of 50 per cent
The admission to the remaining 43 seats will be open to the general candidates on merit basis
Thus while the respondents will be at liberty to reserve seats for regular or bona fide 695 employees for admission to evening classes such reservation should not exceed SO per cent after deducting the number of seats reserved for Scheduled Castes Scheduled Tribes backward classes etc
709B C 4
The impugned rule is discriminatory and violative of article 14 of the Constitution and is accordingly struck down as invalid
The refusal by the respondents to admit the appellants in the evening classes of the Three Years LLB degree course was illegal
The appellants are therefore entitled to he admitted in the evening classes
However the striking down of the impugned rule should not in any manner whatsoever disturb the admissions already made for the session 1988 89
The respondents should admit the appellants in the second semester which has commenced from January 1989 and allow them to complete the Three Year LLB degree course if not otherwise ineligible an the ground of unsat isfactory academic performance
The seats allocated to the appellants will be in addition to the normal intake of students in the college
710D F Ajay Hasia vs Khalid Mujib Sehravardi   relied on