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Commissioner of Income-tax Bombay City-ii Vs. Hindustan Export and Import Corporation Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 45 of 1971
Judge
Reported in[1983]139ITR691(Bom); [1981]5TAXMAN169(Bom)
ActsIncome Tax Act, 1961 - Sections 3, 70, 71, 72, 79 and 297(2)
AppellantCommissioner of Income-tax Bombay City-ii
RespondentHindustan Export and Import Corporation Pvt. Ltd.
Excerpt:
.....public are substantially interested and in which a change in the shareholding has taken place in a previous year, will be entitled to set off the loss in any year prior to the previous year referred to in s. (b) is that the ito has to be satisfied that a change in the shareholding was not effected with a view to avoiding or reducing any liability to tax. (a) and (b) are disjunctive, and if any one of them is satisfied, the bar created by s. 79 refers to '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',the words 'the previous year' clearly refer to the 'previous year' against the income of which the set-off of the loss which is carried forward will be permissible. 79 was, therefore, not satisfied. (b)..........respect of the change in the shareholding effected during the previous year prior to the 'previous year', assessment for which is governed by the provisions of the i.t. act, 1961, the construction canvassed on behalf of the revenue could not be accepted. the provisions will have to be strictly construed, and the words 'previous year' will have to be given their plain meaning as defined in s. 3 of the act. it appears to us, therefore, that the 'previous year', in respect of which the change in the shareholding referred to in s. 79 has to be considered, is the 'previous year' under the i.t. act, 1961. if that be the construction of s. 79, it will operate for the first time only where the change in the shareholding has taken place in the previous year relevant to the assessment year.....
Judgment:

Chandurkar, J.

1. The two questions which have been referred to this court under s. 256(1) of the I.T. Act, 1961, at the instance of the Revenue, are as follows :

'(1) Whether the Tribunal erred in holding that section 79 will apply only where a change in shareholding has taken place in a previous year relevant to an assessment under the Income-tax Act, 1962 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the provisions of section 79 of the Income-tax Act, 1961, have no application so far as the carry forward of the loss of 1959-60 is concerned ?'

2. The assessee is a private limited company registered under the Indian Companies Act in which in the accounting year 1960, which is the previous year for the assessment year 1961-62, 98% of the shares were held by one Rattanlal and the remaining two per cent. by his wife Mrs. Brij Rattanlal. In this accounting year 1960, there was a change in the shareholding of the assessee-company. Forty per cent. of the shares came to be held by Mrs. Kanti Grover, wife of Mr. K. K. Grover, the managing director of the assessee-company; 40% of the shares were held by Mrs. Sohan Kapur Grover, the mother of the managing director, and the remaining 20% were held by Mr. S. R. Grover, the father of the managing director. K.K. Grover is the brother-in-law of Rattanlal.

3. In the assessment year 1962-63, which was the first assessment year governed by the provisions of the I.T. Act, 1961, there was an unabsorbed business loss of the assessee-company to the tune of Rs. 17,006. The assessee's declared total income for the assessment year 1962-63, was Rs. 43,026. The assessee claimed that the unabsorbed business loss of the previous year should be carried forward and set-off against the income of previous year should be carried forward and set-off against the income of the assessee-company of the accounting period relevant to the assessment year 1962-63.

4. The ITO held that having regard to the provisions of s. 79 of the I T. Act, 1961, the losses brought forward could not be set off against the business profits of the accounting year 1961, firstly because none of the present shareholders were holding any shares in the year 1959, when the loss occurred, and, secondly, because the change in the shareholding also appeared to have been effected with a view to reduce the liability to tax.

5. The order of the ITO was upheld by theAAC, who dismissed the appeal filed by the assessee-company, and the assessee-company thereafter filed an appeal before the Appellate Tribunal.

6. Before the Tribunal, it was contended that s. 79 applied only where the change in the shareholding took place in a previous year which was relevant to the assessment year under the I. T. Act, 1961, and that s. 79 was not attracted in a case where the change took place in a previous year which was relevant to the assessment year prior to the assessment year 1962-63 which is the first assessment year under the I.T. Act, 1961. The Tribunal accepted this contention and took the view that s. 79 can have no application to a case where a change in the shareholding took place prior to the commencement of the company's previous year relevant to the assessment year 1962-63, which is the first assessment year under the I.T. Act, 1961. The Tribunal found that since the change in the shareholding of the assessee-company took place in the previous year relevant to the assessment year 1961-62, s. 79 had no application so far as the carry-forward of the loss of the assessment year 1959-60 is concerned.

7. Since the view taken by the Tribunal was not acceptable to the Department, the questions reproduced earlier fall for consideration.

8. Section 79 reads as follows :

'79. 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 shareholding was not effected with a view to avoiding or reducing any liability to tax.'

9. Learned counsel appearing on behalf of the Revenue has contended that when s. 79 refers to 'a previous year', those words could not be so construed as to refer only to previous year relevant to an assessment year governed by the provisions of the I.T. Act, 1961, and, accordingly to learned counsel, the words 'a previous year' must be construed as meaning any previous year, and those words, therefore, will take in even a previous year relevant to an assessment year under the Indian I.T. Act, 1922. Learned counsel has, therefore, contended that though undisputedly the change in the shareholding has taken place in the accounting year 1960, that year will still be a previous year for the purposes of s. 79, and, since, admittedly, the persons who held shares in the assessment year in question were not the same as those who held the shares in the year when the loss occurred, the company would not be entitled to the benefit of setting-off of the carry forward loss of the assessment year 1959-60 or as on December 31, 1958, because, admittedly, the accounting year of the assessee-company was the English calendar year. In substance, the contention of learned counsel for the Revenue is that since none of the present shareholders as on December 31, 1961, which is the last day of the previous year relevant to the assessment year 1962-63, held more than 51% of the shares on the last day of the year 1958, that is, on December 31, 1958, in which the loss occurred, the requirements of cl. (a) of s. 79 of the I.T. Act, 1961, are not satisfied.

10. Mr. Dastur, learned counsel for the assessee, has argued that s. 79 of the I.T. Act, 1961, applies only in a case, where the set off of a past loss is to be made under the provisions of Chap. VI of the I.T. Act, 1961, and as in the present case the loss is not to be set off under Chap. VI of the I.T. Act, 1961, s. 79 cannot prevent the assessee from claiming the benefit of set-off. It was also contended by learned counsel that s. 79 applies only where a change in the shareholding takes place in a previous year relevant to an assessment year governed by the I.T. Act, 1961, and as in the instant case, the change in the shareholding took place in the previous year 1960, that is, calendar year 1960, s. 79 does not apply. The other contentions raised by learned counsel for the assessee were that s. 79 applies only where the loss incurred in a previous year relevant to an assessment year was governed by the I.T. Act, 1961, and as in the present case, the loss was incurred in the previous year 1958, that is, calendar year 1958, s. 79 did not apply to the assessment proceedings in question. Learned counsel had further contended that s. 79 prohibits the carry forward and setoff of a loss against the profits of the previous year in which the change in the shareholding takes place, and as in the present case, the change in the shareholding took place in the previous year 1960, and the present reference is concerned with the previous year 1961, s. 79 does not apply. This last argument appears to us to be outside the questions referred to us.

11. Learned counsel for the assessee, in support of his argument that s. 79 is attracted only where the set-off of a past loss is to be made under the provisions of Chap. VI of the I.T. Act, 1961, has in the course of his arguments contended that s. 79 opens with the words 'Notwithstanding anything contained in this Chapter', and learned counsel went on to argue that there was nothing in the provisions of s. 72 which dealt with the set-off of losses carried forward from the previous years, and this right to have losses brought forward from the years prior to the assessment year 1962-63, according to learned counsel, was not dealt with by s. 72 at all but that such a right was really saved by the provisions of s. 6 of the General Clauses Act. In other words, the contention of learned counsel for the assessee is that ss. 70 and 71 dealt with the computation of income of the previous year relevant to the assessment year 1962-63, and there was nothing in s. 72 which showed that it permitted losses brought forward from a year prior to the previous year relevant to the assessment year 1962-63. Learned counsel has contended that there is nothing in the provisions of s. 297(2) of the I.T. Act, 1961, which can be construed as expressly taking away this right which had accrued to it under s. 24(2)(iii) of the Indian I.T. Act, 1922. In support of the proposition that if there is no express provision in s. 297(2) of the I.T. Act, 1961, dealing with the any specific matter, in such a case, following the repeal of the Indian I.T. Act, 1922, by the 1961 Act, the provisions of s. 6 of the General Clauses Act will be attracted, Learned counsel has referred primarily to the two decisions of the Supreme Court in ITO (Third) v. M. Damodar Bhat : [1969]71ITR806(SC) , and T. S.Baliah v. T. S.Rangachari, ITO : [1969]72ITR787(SC) . We were also referred to a decision of the Calcutta High Court in CIT v. B.P. (India) Ltd. : [1979]116ITR440(Cal) .

12. According to learned counsel for the Revenue, there was no question of looking to the provisions of s. 24(2) of the Indian I.T. Act, 1922, in so far as the right of set-off is concerned, because, according to learned counsel for the Revenue, the assessment for the assessment year 1962-63 has to be dealt with in accordance with the provisions of the I.T. Act, 1961 alone, and learned counsel has relied on a decision of the Allahabad High Court in CIT v.Mangiram GopiChand : [1978]111ITR807(All) , where the view taken by the Allahabad High Court seems to be that s. 24 (2) of the Indian I.T. Act, 1922, does not survive after the repeal of that Act by the I.T. Act, 1961.

13. Though elaborate arguments have been advanced on both sides on the question as to whether s. 72 of the I.T. Act, 1961, deals with losses carried forward from the previous year prior to the previous year relevant to the assessment year 1962-63, which was the first year in which the provisions of the I.T. Act, 1961, became applicable, we do not think it necessary to deal with these several arguments,because on a construction of the provisions of s. 79 of the 1961 Act, the questions referred to us could be properly answered. For the purposes of this reference, it was enough to consider the second argument advanced on behalf of the assessee that s. 79 applies only where a change in the shareholding takes place in a previous year relevant to the assessment year governed by the I.T. Act, 1961.

14. Section 79 is in three parts. The substantive provision in the first part of s. 79 is that 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' where a change in the shareholding has taken place in 'a previous year'. Having regard to the non obstante clause in s. 79, the provisions of s. 79 will apply notwithstanding anything contained in Chap. VI which is the Chapter in which s. 79 occurs. Section 79 is, therefore, an independent provision which alone will be material in a case where the right to carry forward and set off losses in the case of companies dealt with by that section is claimed by the company. The two other parts of s. 79 are those contained in cls. (a) and (b). These clauses prescribe the conditions which are required to be satisfied if a company, which is not a company in which the public are substantially interested and in which a change in the shareholding has taken place in a previous year, will be entitled to set off the loss in any year prior to the previous year referred to in s. 79. Under cl. (a), the condition is that on the last day of the previous year, that is to say, the previous year relevant to the assessment year in question, the shares of the company carrying not less than 51% of the voting power should have been beneficially held by the same 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. The condition prescribed in cl. (b) is that the ITO has to be satisfied that a change in the shareholding was not effected with a view to avoiding or reducing any liability to tax. Both these clauses are separated by the word 'or'. There is no dispute that the two conditions in cls. (a) and (b) are disjunctive, and if any one of them is satisfied, the bar created by s. 79 will not apply.

15. The question which has, however, to be decided for the purposes of the present reference is whether the words 'the previous year' in which the change in the shareholding has taken place can be read as any 'previous year' including a 'previous year' under the Indian I.T. Act, 1922, or whether the 'previous year' means a 'previous year' relevant to the assessment year under the I.T. Act, 1961.

16. Now, in the first part of s. 79, the words 'previous year' occur at three places. At two places at the end of the first part, those words are prefixed by the definite article 'the', while in the earlier part it is referred to as 'a previous year'. Now, there can be no dispute that the assessment year 1962-63, is the first assessment year governed by the provisions of the I.T. Act, 1961. The first previous year for the purposes of the I.T. Act, 1961, will be the previous year 1961-62, or if the calendar year is taken, it will be the calendar year 1962, ending December 31, 1962. In so far as the present assessee-company is concerned, the previous year for the assessment year 1962-63, will be the calendar year 1962. Now, when s. 79 refers to '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', the words 'the previous year' clearly refer to the 'previous year' against the income of which the set-off of the loss which is carried forward will be permissible. Therefore, the words 'the previous year' used at two places in the latter part of s. 79 obviously will have reference to the previous year relevant to the assessment year 1962-63. The only question which then survives is whether the use of the words 'a previous year' in the opening part of s. 79 can be considered as referring to a previous year even under the Indian I.T. Act, 1922, or whether those words indicate that the change in shareholding contemplated by s. 79 has to take place in a 'previous year' as understood under the 1961 Act so as to restrict the operation of s. 79 only to a case where the change in the shareholding takes place in the previous year relevant to the assessment year governed by the I.T. Act, 1961. Now, the words 'previous year' have been defined in s. 3 of the Act. Having regard to the definition of 'previous year' in s. 3 of the Act and further, having regard to the known canons of construction and interpretation that where a word or phrase has been used by the Legislature and it has been defined, the meaning of the word or phrase as given in the definition clause has to be given to that word or phrase, unless there is any intention to the contrary indicated, the words 'previous year' have to be interpreted with reference to the definition in s. 3. Therefore, normally when the words 'previous year' are used even in the opening part of s. 79, it has to be assumed that they are used in the same sense in which they have been define under s. 3. The words 'previous year' have a positive connotation in the I.T. Act, and there is nothing in the provisions of s. 79 which indicates that those words were intended to refer to any other year than the previous year as understood for the purposes of the I T. Act, 1961.

17. One more circumstances which leads us to this conclusion is that there was no provision analogous to s. 79 in the Indian I.T. Act, 1922. Such a provision has been introduced for the first time by enacting s. 79. Therefore, unless there is a clear indication in the section itself that the bar created by s. 79 was intended to be operative even in respect of the change in the shareholding effected during the previous year prior to the 'previous year', assessment for which is governed by the provisions of the I.T. Act, 1961, the construction canvassed on behalf of the Revenue could not be accepted. The provisions will have to be strictly construed, and the words 'previous year' will have to be given their plain meaning as defined in s. 3 of the Act. It appears to us, therefore, that the 'previous year', in respect of which the change in the shareholding referred to in s. 79 has to be considered, is the 'previous year' under the I.T. Act, 1961. If that be the construction of s. 79, it will operate for the first time only where the change in the shareholding has taken place in the previous year relevant to the assessment year 1962-63, that is, the previous calendar year, 1962, for the purposes of the present case. The first circumstances which, therefore, required to be established in order to deprive the company of the benefit of set-off of losses carried forward was that the change in the shareholding should have taken place in the calendar year, 1962. Admittedly, the change in the shareholding in this case has taken place in the year ending December 31, 1960. The basic requirement of s. 79 was, therefore, not satisfied. Therefore, the further question as to whether the condition in cl. (a) or cl. (b) was satisfied does not really arise. On the construction which we have placed on s. 79, it is obvious that the Tribunal was justified in taking the view that the assessee-company was not affected by the provisions of s. 79.

18. In this view of the matter, both the questions will have to be answered in favour of the assessee. Accordingly, the questions referred to are answered as follows :

QuestionNo. 1 : In the negative and in favour of the assessee.

QuestionNo. 2 : In the negative and in favour of the assessee.

19. The assessee to get the costs of this reference.


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