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

2. The assessee suffered a loss in the accounting year ending March 31, 1960, relevant to the assessment yearin the amount of Rs. 12, 172. This was available forin a subsequent year. But, having regard to the change in the shareholding of the assessee during the accounting year ending March 31, 1963, relevant to the assessment yeara question arose whether the assessee was entitled to the benefit of carrying forward that loss for the purpose of computing its assessable profits for that assessment year. TheOfficer held that section 79 of theAct, 1961, disentitled the assessee from claiming such aHe 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 March 31, 1963. On appeal by the assessee, the Appellate Assistant Commissioner oftook a different view. He held that before the right toa loss could be denied to an assessee, not only should there be a change in the persons holding 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 theAppellate Tribunal. Upon an analysis of section 79, the Tribunal observed that the denial of theof 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 shareholding 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 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 exceptionAt the instance of the assessee, the Tribunal referred the following question to the Bombay High Court for its opinion (at p. 61 of 113 ITR)"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 asin accordance with the substantive provisions of section 79 of theAct, 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 have been 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 view to avoiding or reducing any liability to tax, that question should now be decided by the Tribunal before the claim forcould be finally disposed of. And now this appeal

Reasoning: 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