Case: Commisoner Of Income Tax, Bombay Vs. Italindia Cotton Co. (P) Ltd

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 shareholding was not effected with a view to avoiding or reducing any liability to tax." 3. 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 which the loss was incurred, the shares of the company carrying not less than 51 per cent. of the voting power were beneficially held by the same persons or (b) the Income-tax Officer is satisfied that the change in the shareholding was not effected 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 setoff of the loss ? Upon careful consideration, we are of the opinion that the conditions are intended to operate as alternative to one another. If the terms of either clause (a) or clause (b) are satisfied, the disqualification suffered by a company, by reason of a change in the shareholding 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 the shareholding 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 the shareholding in the previous year if the change was not effected with a view to avoiding or reducing any liability to taxThe 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 the earlier years, in the expectation that the company would earn substantial profits after such acquisition, and they would benefit by 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 company in such a case would be effected by a change in its shareholding 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 the shareholding 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 per cent. 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 shareholding would stand removed4. But there may be a change in the shareholding and it may result in change of control of the company. Yet, every such change of shareholding need not fall within the prohibition. There can be a case where persons already owning a shareholding carrying less than 51 per cent. of the voting power in the company may enlarge their shareholding 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 shareholding are not unknown. The acquisition of control over a company provides 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 effected 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 shareholding 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 clause (a) or clause (b). 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 of 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 CIT v. Shri Subhlaxmi Mills Ltd. [1983] 143 ITR 863, and by the Madras High Court in CIT v. Saravanabhava Mills P. Ltd. [1983] 143 ITR 856In our judgment, the High Court is right in the view taken by it and the appeal must be dismissed

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]Upon careful consideration, we are of the opinion that the conditions are intended to operate as alternative to one another. If the terms of either clause (a) or clause (b) are satisfied, the disqualification suffered by a company, by reason of a change in the shareholding 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 andof losses. The benefit is available notwithstanding the change in the shareholding 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 the shareholding in the previous year if the change was not effected with a view to avoiding or reducing any liability to taxThe 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 the earlier years, in the expectation that the company would earn substantial profits after such acquisition, and they would benefit by reduction of the tax liability on those profits on aof losses carried forward from earlier years before the acquisition. The acquisition of company in such a case would be effected by a change in its shareholding 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 the shareholding 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 per cent. 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 shareholding would stand removed4. But there may be a change in the shareholding and it may result in change of control of the company. Yet, every such change of shareholding need not fall within the prohibition. There can be a case where persons already owning a shareholding carrying less than 51 per cent. of the voting power in the company may enlarge their shareholding 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 shareholding are not unknown. The acquisition of control over a company provides 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 effected 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 shareholding 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 clause (a) or clause (b). If the assessee succeeds in doing so, he will be entitled to the benefit of the provisions of theAct, entitling him to claim a carry forward andof 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 CIT v. Shri Subhlaxmi Mills Ltd. [1983] 143 ITR 863, and by the Madras High Court in CIT v. Saravanabhava Mills P. Ltd. [1983] 143 ITR 856In our judgment, the High Court is right in the view taken by it and the appeal must be dismissed