Skip to content


income-tax Officer Vs. Cauvery Containers (P.) Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1983)6ITD191(Mad.)
Appellantincome-tax Officer
RespondentCauvery Containers (P.) Ltd.
Excerpt:
.....of carry forward and set off of loss despite the fact that it has not satisfied clause (a). in our view, clause (b) will apply in a case where the benefit under clause (a) is not available to the assessee. in the instant case, the benefit under clause (a) is not available to the assessee. under clause (b) of section 79 the condition to be satisfied is that the change in the shareholding was not effected with a view to avoid or reduce any liability to tax. the assessee, by his letter dated 10-10-1980 has stated that the change in the shareholding was brought about to rehabilitate the company which has become sick due to continued large losses and the then existing shareholders were not in a position to bring in any further finance and the change in shareholding was effected not with the.....
Judgment:
1. The assessee follows the year ending 30th April as accounting year.

There has been a major change in its shareholdings on 30-4-1978 as up to that date 2,200 shares were held by 16 persons whereas from that date they were held by 9 persons. The common shareholders before and after that date were only S/Shri B.N. Mallayya and U. Bhagwandas Rao who held only 220 shares in all. This took place in the assessment year 1979-80. There were carry forward of losses. Since there was no positive income in the assessment year 1979-80 the question of set off of brought forward losses and applicability of Section 79 of the Income-tax Act, 1961 ('the Act') did not come up for consideration. In the assessment year 1980-81 there was positive income. Hence, the question of set off and carry forward of losses and the issue of applicability of Section 79 was considered. The ITO held that the provisions of Section 79(a) are applicable and the assessee will not be entitled to carry forward of losses sustained in the earlier years. The assessee's case was that as the change was necessitated for rehabilitating the company which had become sick due to continued losses, the case would be covered by Section 79(6) and the change was not effected with a view to avoidance of tax liabilities. Hence, the provisions of Section 79(a) cannot be invoked. The ITO did not accept the assessee's contention on the ground that once Section 79(a) is satisfied there is no necessity to look into Section 79(6). The ITO held that in the assessment year 1979-80 it was not brought to the notice of the department with regard to the change in the shareholding and this was noticed at the time of assessment for 1980-81. The ITO held that the assessee will not be entitled to the benefit of carry forward of losses.

2. The assessee appealed to the Commissioner (Appeals). It was urged before him that the change in shareholding took place in the year 1979-80 and, hence, the issue of applicability of the provisions of Section 79 was to be considered in that assessment year. The Commissioner (Appeals) held that since there was no positive income for the assessment year 1979-80 justifying set off of brought forward losses, the question of applicability of Section 79 did not come up for consideration. In 1980-81 there was a positive income. Hence, that question arose. Thus, this objection of the assessee was rejected. Then it was next contended that the interpretation given by the ITO with regard to the provisions of Section 79 was not correct and ' there is no justification to refuse the benefit of carry forward of losses. The Commissioner (Appeals) held that it is not the case of the ITO that the change in the shareholding was effected with a view to avoid or reduce any liability to tax. The ratio laid down by the Bombay High Court in the case of Italindia Cotton Co. (P.) Ltd. v. CIT [1978] 113 ITR 58 would apply. Following the above decision he held that the assessee should be allowed the benefit of carry forward of losses of earlier years, and, acccordingly, he directed the ITO. Against the same, the revenue has preferred this appeal.

3. The learned departmental representative strongly urged that the provisions of Section 79(a) are applicable and the assessee will not be entitled for carry forward of losses sustained in earlier years. The conditions prescribed under Section 79 are specific and are alternative, and either of the circumstances is enough to bring the case under the mischief of Section 79. Clauses (a) and (b) are not independent. The assessee has not proved that the change of the shareholding was not effected with a view to avoid or reduce tax liability. He urged that the Commissioner (Appeals) was wrong in directing the ITO to allow the benefit of carry forward of losses of the earlier years. The learned counsel for the assessee strongly urged that the assessee, by letter dated 10-10-1980 has clearly stated that the change of shareholding was brought about to rehabilitate the company which has become sick due to continued losses and the existing shareholders were not in a position to bring in any further finance and the change of the shareholding was not to avoid or reduce the tax liability. These facts were reiterated in the objections filed for the draft assessment order. The above facts clearly show that the assessee has discharged the onus of proving that the change of the shareholding was not to avoid or reduce the tax liability. He strongly urged that the provisions of section 79(b) clearly apply. Since change in the shareholding was not effected with a view to avoid or reduce any liability to tax, the assessee is entitled for the carry forward and set off of losses of the earlier years. He placed strong reliance on the decision of the Bombay High Court in Italindia Cotton Co. (P.) Ltd.'s case (supra).

4. We have considered the rival submissions. Section 79 reads as under : 79. Carry forward and set off of losses in the case of certain companies. 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.

The assessee does not satisfy Clause (a) as the change in shareholding was more than 51 per cent of the voting power at the two relevant dates but the question for consideration is whether the assessee has satisfied Clause (b) and is entitled for the benefit of carry forward and set off of loss despite the fact that it has not satisfied Clause (a). In our view, Clause (b) will apply in a case where the benefit under Clause (a) is not available to the assessee. In the instant case, the benefit under Clause (a) is not available to the assessee. Under Clause (b) of Section 79 the condition to be satisfied is that the change in the shareholding was not effected with a view to avoid or reduce any liability to tax. The assessee, by his letter dated 10-10-1980 has stated that the change in the shareholding was brought about to rehabilitate the company which has become sick due to continued large losses and the then existing shareholders were not in a position to bring in any further finance and the change in shareholding was effected not with the object of avoiding or reducing any liability to tax. Again, in the objections filed to the draft assessment order these submissions were repeated. In the assessment order the ITO has not found that the objections are not correct. He has merely held that the two conditions mentioned in Section 79 are specific and they are alternative and either of the circumstances is enough to bring the case under the grip of Section 79. In our view, the assessee has proved that the change of shareholding was brought about to rehabilitate the company which became sick due to continued large losses and the change was effected not with a view to avoid or reduce any liability to tax.

Thus, Section 79(b) would apply to the assessee. Since the change in shareholding was not effected with a view to avoiding or reducing any liability to tax, it satisfies Clause (b) of Section 79 and thus the assessee is entitled for carry forward and set off of losses of the earlier years. The ITO's view that once Section 79(a) is not satisfied the assessee is not entitled for the benefit of carry forward of losses is not correct. Between Section 79 (a) and (b) the word 'or' is used.

So, if the assessee satisfies either Clause (a) or (b) it will be entitled for the benefit of carry forward and set off of losses of the earlier years. In the instant case, the assessee does not satisfy Clause (a) but satisfies Clause (b) of Section 79. Thus, the assessee is entitled for the claim. In the case of Italindia Cotton Co. (P.) Ltd. (supra) the Bombay High Court held as under : . . . Clause (b) is not entirely independent of Clause (a). Clause (b) will apply in a case where benefit under Clause (a) is not available to the assessee. Still in such a case notwithstanding the fact that a change in the voting power of more than 51 per cent of the shareholding has taken place between the two relevant dates he will be entitled to claim set off of carried forward loss if such change in the voting power is not with a view to avoiding or reducing liability to tax. In our opinion, the Tribunal was in error in taking the view that the expression 'the change in the shareholding' used in Clause (b) was only referable back to the substantive provisions of the section. The Tribunal was also in error in proceeding on the footing that clauses (a) and (b) are totally disconnected and have no inter-connection between the two.

In our opinion, Clause (b) will only apply to a case where the benefit of Clause (a) will not be available to an assessee and notwithstanding a change of more than 51 per cent of the voting power between the two relevant dates if a claim for set off has to be made by the assessee, then it is for the assessee to satisfy the taxing authorities and the Tribunal that such change in the shareholding has not taken place with a view to avoiding any liability to tax and if the taxing authorities and the Tribunal are so satisfied, then, notwithstanding a change of more than 51 per cent of the voting power between the two relevant dates, a claim for set off will be permissible under Clause (b) of Section 79.

Thus, it was held that Clause (b) will apply in a case where the benefit under Clause (a) of Section 79 is not available to the assessee and where the change in the voting power of more than 51 per cent of the shareholding has taken place between the two relevant dates he will be entitled to claim set off of carried forward loss if such change in the voting power is not with a view to avoiding or reducing liability to tax. The above ratio squarely applies to the instant case. In the instant case, though the change in the voting power of more than 51 per cent of the shareholding has taken place between the two relevant dates, still the assessee will be entitled to claim carry forward and set off of losses of earlier years as the change in the voting power is not with a view to avoiding or reducing the liability to tax. Thus, the assessee's claim for set off will be permissible under Clause (b) of Section 79. The Commissioner (Appeals) was perfectly justified in directing the ITO to allow the benefit of carry forward and set off of losses of the earlier years. Thus, we uphold his order.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //