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Commissioner of Income-tax, Gujarat-iii Vs. Shri Subhlaxmi Mills Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 65 and 98 of 1974
Judge
Reported in[1983]143ITR863(Guj)
ActsIncome Tax Act, 1961 - Sections 32, 32(2), 33, 33(2), 34, 34(3), 66, 70, 71, 72, 72(1), 72(3), 79, 143(3) and 263
AppellantCommissioner of Income-tax, Gujarat-iii
RespondentShri Subhlaxmi Mills Ltd.
Excerpt:
direct taxation - assessment - sections 32, 32 (2), 33, 33 (2), 34, 34 (3)66, 70, 71, 72, 72 (1), 72 (3), 79, 143 (3) and 263 of income tax act, 1961 - matter pertaining to applicability of section 79 - section 79 applicable to assessment year 1965-66 in relation to quantum of business losses allowed to be carried forward after set-off in assessment proceedings of assessment year 1964-65 - development rebate not created in year of installation of plant and machinery - development rebate neither allowed in year of installation nor allowed to be carried forward in any subsequent assessment year - provisions of section 79 not applicable to unabsorbed depreciation allowance. - - was not to reduce or to avoid the tax liability, was justified ? (6) whether, on the facts and in the.....b.j. divan, c.j. 1. the assessee concerned in both these cases is the same and the questions involved in both these references are on the same lines. in income-tax reference no. 65 of 1974 the years under references are assessment years 1965-66 and 1966-67 whereas in income-tax reference no. 98 of 1974, the year under reference is 1967-68. the relevant previous year is the financial year and hence in the income-tax reference no. 65 of 1974 the relevant previous years are the financial years 1964-65 and 1965-66, whereas in income-tax reference no. 98 of 1974 the relevant previous year is the financial year 1966-67. in income-tax references no. 65 of 1974 the following seven question have been referred to us for out opinion by the tribunal at the instance of the revenue : '(1) whether, on.....
Judgment:

B.J. Divan, C.J.

1. The assessee concerned in both these cases is the same and the questions involved in both these references are on the same lines. In Income-tax Reference No. 65 of 1974 the years under references are assessment years 1965-66 and 1966-67 whereas in income-tax Reference No. 98 of 1974, the year under reference is 1967-68. The relevant previous year is the financial year and hence in the income-tax Reference No. 65 of 1974 the relevant previous years are the financial years 1964-65 and 1965-66, whereas in Income-tax Reference No. 98 of 1974 the relevant previous year is the financial year 1966-67. In Income-tax References No. 65 of 1974 the following seven question have been referred to us for out opinion by the Tribunal at the instance of the Revenue :

'(1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the provisions of section 79 of the Act, not having been invoked for the assessment year 1962-63, cannot be invoked for the assessment year 1965-66, is erroneous in law

(2) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that in applying section 79 of the Act, only the business loss should be taken into account and not the unabsorbed depreciation or unabsorbed development rebate is erroneous in lawn

(3) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that in order to invoke the provisions of section 79 of the Act, the department must prove not only that here was a transfer of the shareholding of not less than 51 per cent. of the voting power as per clause (a) of section 79 by also that such a transfer was with the intent to reduce or avoid the tax liability as per clause (b) of section 79 ?

(4) Whether, on the facts and in the circumstances of the case, it is established from the material on record of the case that the condition of the exemption of the material on record of the case that the condition of the exemption clause (a) of section 79 of the Act is not fulfilled and therefore, no loss incurred in any year to the previous year corresponding to the assessment year under reference could be carried forward and set off against the income of the said previous year

(5) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the motive in acquiring shares of the assessee-company by the Sayaji Mils Ltd. was not to reduce or to avoid the tax liability, was justified

(6) Whether, on the facts and in the circumstances of the case, it is proved from the material on record of the case that the condition of the exemption clause (b) of section 79 of the Act is not satisfied and, therefore, no loss incurred in any year prior to the previous year corresponding to the assessment year under reference could be carried forward and set off against the income of the said previous year

(7) Whether, on the facts and in the circumstances of the case, the decision reached by the Tribunal, viz., that the assessee was entitled to carry forward the unabsorbed balance of development rebate for the assessment year 1966-67 to be set off against future profits, if reserves were created in the years in which actual off was allowed, was in accordance with law ?'

2. In Income-tax Reference No. 98 of 1974 the following five questions have been referred to us for our opinion :

'(1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the provision of section of 79 of the Act, not having been invoked for the assessment year 1962-63, cannot be invoked for the assessment year 1967-68, is erroneous in law

(2) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that in applying section 79 of the Act, only the business loss should be taken into account and not the unabsorbed depreciation or unabsorbed development rebate, is erroneous in law

(3) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law inholding that in order to invoke the provisions of section 79 of the Act, the department must prove not only that there was a transfer of the shareholding of not less than 51 per cent. of the voting power as per clause (a) of section 79, but also that such a transfer was with the intent to reduce or avoid the tax liability as per clause (b) of section 79

(4) Whether, on the facts and in the circumstances of the case, it is established from the material on record of the cases that the condition of the exception clause (a) of section 79 of the Act is not fulfilled and, therefore, no loss incurred in any year prior to the previous year corresponding to the assessment year under reference could be carried forward and set of f against the income of the said previous year

(5) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the motive in acquiring shares of the assessee-company for the Sayaji Mills Ltd., was not to reduce or to avoid the tax liability was justified ?'

3. Since the question which arise are common in both the cases, we will briefly mentioned at this stage the facts arising in Income-tax Reference No. 65 of 1974. The assessee before us is public limited company having textile mill in Cambay in Gujarat State. Its issued and subscribed capital was Rs. 21,00,000 divided into 21,000 shares of Rs. 100 each. Up to December 14,1961, the majority of the shares were held by Somani group or its nominees and the assessee-mill was under the management of Somani group. On December 14,1961, all the shares were purchased by the Sayaji Mills Ltd., Ahmedabad, and thus the assessee became the wholly owned subsidiary of the Sayaji Mills Ltd. from December 14,1961. onwards.

4. Up to the year 1961, Sayaji Mills Ltd. was under the management of two families, namely, the family of Vadilal Lallubhai and the family of Rohitbhai Chinubhai. These two families were managing other concern, namely, Maize Products Ltd. and the Rohit Mills Ltd. The Sayaji Mills Ltd. has also its textile units at Baroda and Bombay and also other concerns. In 1961-62, the families decided to separate the managements of the different concerns which they were running joint till then and consequently, the textile unit at Baroda, part of the Sayaji Mills Ltd. remained under the management of Vadilal Lallubhai group and the Bombay unit of the Sayaji Mills Ltd. went to the management of Rohitbhai Chinubhai group. After he separation of the managements, Vadilal Lallubhai group did to have any textile unit either in Ahmedabad or in Bombay. On being informed that the Somani group was desirous of selling its shareholding in the assessee-company, the Vadilal Lallubhai group entered into negotiations with the Somani group and purchased the entire subscribed share capital, namely, 21,000 shares, at the rate of Rs. 105 per share, the share itself being of the facevalue of Rs. 100. The first assessment year after December. 14,1961, was the assessment year 1962-63. At the beginning of that assessment year, the position as to the carried forward business loss, the unabsorbed depreciation allowance and the unabsorbed development rebate was as follows :

Asst. Business Unabsorbed Unabsorbedyear. Loss. depreciation. developmentrebate.- Rs. Rs. Rs.1953-54& ...... 5,72,300 .......1954-551958-59 2,34,595 2,62,401 86,9441959-60 4,84,173 2,25,581 1,20,2751960-61 3,77,778 2,94,844 2,10,0341961-62 ........ ........ 1,79,605(i.e. year ending31-12-1960).- 10,96,546 13,55,126 5,96,858

For the assessment years 1962-63, 1963-64 and 1964-65 the total income of the assessee-mills, prior to the set-off on account of carried forwards losses, carried forward unabsorbed depreciation and carried forward unabsorbed development rebate was as under :

- Rs.Assessment year 1962-63 1,28,339Assessment year 1963-64 6,57,496Assessment year 1964-65 2,99,807

For the assessment year 1965-66 the business income without considering the carried forwards business loss, unabsorbed depreciation and unabsorbed development rebate was Rs. 5,05,3488 and there was an amount of capital gains to the extent of Rs. 3,522. From this, the unabsorbed business losses carried forward for the assessment year 1960-61 amounting to Rs. 29,292 and unabsorbed brought forward depreciation for the assessment year 1963-64 amounting to Rs. 4,79,718 were set off and the total income was computed at nil under the ITO's order under s. 143(3) of the Act. This order was passed by the ITO on March 24,1970.

5. In the course of the assessment proceedings for the assessment year 1966-67, the ITO took the view that the provisions of section 79 of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), were applicable to the case of the assessee. He was also of the opinion that the provisions of s. 79 should be made applicable to the assessee even for the assessment year 1965-66 by the Department invoking the provisions of s. 263 of the Act. For the reasons stated by him in his order dated March 29,1971, which was for the assessment year 1966-67 and for the reasons stated by the Addl. Commissioner in his order under s. 263 of the Act, being order dated March 22, 1972, so far as the assessment year 1965-66 was concerned, the provisions of section 79 were in fact invoked in the assessee's case for these two assessment years. Against the order of the ITO dated March 29,1971, for the assessment year 1966-67, the assessee went in appeal before the AAC and by his order in appeal, the AAC confirmed the order of the ITO. Against the order of the Addl. commissioner in revision so far as the assessment year 1965-66 was concerned, the assessee preferred two appeals to the Appellate Tribunal. These two appeals were disposed of by a common judgment. Before the Tribunal it was first contended that the provisions of section 79 could not be invoked in respect of the assessment years 1965-66 and 1966-67 because these provisions were not invoked by the Department in respect of the assessment year 1962-63 since in the previous year relevant to the assessment year 1962-63, there was change in the shareholding of the assessee-company and section 79 became applicable, if at all, the assessment year 1962-63 the contention before the Tribunal was that as the Department failed to invoked the provisions of section 79 in the assessment year 1962-63, the Department had lost the right to apply the provisions of that section in subsequent years. The Tribunal accepted this contention of the assessee. The second contention urged on behalf of the assessee before the Tribunal was that even assuming that the carry forward and set off of the loss should be deemed even during the assessment years 1965-66 and 1966-67, it should be restricted to the business loss only, and should not apply to unabsorbed depreciation and unabsorbed development rebate. The Tribunal accepted this contention of the assessee and held that section 79 formed part of Chap. VI, which provided for the set-off and carry forward and set-off of business losses only and the word 'loss' in section 79 could not be given a wider interpretation but it must be restricted to 'Brought forward business loss' only. It was next contended by the assessee before the Tribunal that section 79 could be applied only if the Department could prove that both the conditions laid down in section 79(a) and section 79(b) were complied with i the assessee's case and not otherwise. The Tribunal held that in order that the assessee should be disentitled to carry forward business losses, it should be necessary for the Department to prove not only that the change in the shareholding which had been effected was 51% or more but (that it) was also with a view to reduce or avoid tax liability, and that, for the assessee, it would be enough to prove that the change in the shareholding was less than 49 per cent. or alternatively that it had not been effected with the intention to reduce or avoid the tax liability. The Revenue contended before the Tribunal that the change in the shareholding was brought about with a view to reduce question of fact were relied upon by the Revenue before the Tribunal. In this connection the Tribunal held that the transaction of December 14,1961, was entered into as an ordinary commercial transaction and by investing the amount, the Sayaji Mills Ltd. had acquired the textile unit for its commercial enterprises and not with the motive set out in section 79(b) of the Act. There was one further question regarding the development rebate which was allowed in this case. The Revenue contended before the Tribunal that since the development rebate reserve was not created in the year of the installation of the machinery, the assessee was not entitled to any unabsorbed development rebate. The Tribunal held that the assessee was entitled to carry forward the development rebate though the assessee had not created the development rebate reserve in the year of installation of the machinery. The Tribunal direct that the development rebate, which was not set off, should be carried forward and set off against future profits, if reserves were created in the subsequent years. In view of these difference conclusion of the Tribunal on difference contentions raised before it, the seven questions which we have set out hereinabove have been referred to us for out opinion.

6. As regards question No. (7) which is concerned with the questions of the year in which the development rebate is required to be created, in the case of this particular assessee with reference to an earlier assessment year, there is a decision of this High court in Addl. CIT v. Shri Subhlaxmi Mills Ltd. [1975] 100 ITR 188. In that case the High Court was concerned with the assessment year 1962-63 and this court examined the legal position in the light of the provisions of ss. 33 and 34 and particularly in the light of the Explanation to s. 34(3) which was added with retrospective effect that irrespective of the result of the profit and loss account shown by the books of the assessee, the reserve fund can be created shown by the books of the assessee, the reserve fund can be created merely by books entries, that is, by debiting the amount of the reserve to the profit and loss account of the relevant previous year and crediting the amount to the reserve account. The debiting of the profit and loss account must be done before the profit and loss account is closed, that is, entries should be made regarding the reserve at the time of making u0 of the profit and loss account. According to this High Court, the Legislature has clearly indicated that he assessee must ordinarily be allowed the benefit of the development rebate as a deduction in respect of the previous year in which the ship was acquired or the machinery or plant was installed and this can be done only if the profit and loss account, before it was finally made up, shows the necessary debt entry for getting of development rebate will not be satisfied and the development rebate cannot be allowed and once it is found that it cannot be allowed in the relevant previous year in which the machinery or plant was installed or the ship was acquired, it cannot be allowed to be carried forward in any subsequent year. Moreover, if the assessee were to wait for funds before crediting a reserve, in a conservable case the assessee concerned may not get any profit for several years after installation and only in the eighth year he may acquire sufficient profits for the creation of the reserve. Then the reserve itself having to be set apart for a period of eight years must expire before the reserve is finally exhausted or brought to an end. In view of this reasoning on the legal aspect this could had held that case this particular assessee that the development rebate could to be allowed and could not be carried forward since the development rebate reserve was not created in the year of the installation of the machinery. In view of this decision of our High Court, it must be held that on the facts and circumstances of the case, the decision reached by the Tribunal, namely, that the assessee was entitled to carry forward the unabsorbed balance of development rebate for the assessment year 1966-67 to be set off against future profits, even though reserves are created in the years in which actual set-off was allowed, was erroneous and not in accordance with law. Therefore, question No. (7) must be answered in the negative, that is, in favour of the Revenue and agent the assessee. It is common ground that the development rebate reserve was not created in the year of installation of the machinery concerned and hence there was no question of allowing development rebate in the year of installation in order to its being allowed to be carried forward in any subsequent year.

7. We will now take up the various contentions which have been urged by Mr. Kaji for the Revenue as regards the conclusion of the Appellate Tribunal regarding the convention that had been raised before it. The first submission of Mr. Kaji is that the assessee is a company in which the public are not substantially interested and for that purpose the material date that should be taken into consideration is December 14,1961, and not any other date. His nest submission was that the conclusion f the Tribunal that section 79 can be invoked in the first previous year in which the change took place was not correct and if that was not done, it cannot be done so in a subsequent year was contrary to the provisions of section 79 itself and the scheme as to development rebate depreciation allowance and business loss and the carry forward and set-off of these three difference items. He also submitted that by the word 'losses' used in section 79 what the Legislature meant was not merely business losses which have been carried forward but also unabsorbed depreciation allowance and unabsorbed development rebate which have been carried forward under the relevant provisions of the I.T. Act, 1961. He further submitted that on a construction of section 79, both cls. (a) and (b) of section 79 should be satisfied section 79 will not apply. He lastly submitted that on the facts the conclusion of the Tribunal regarding the motive of the assessee in acquiring this particular company as a wholly owned a subsidiary being part of the ordinary commercial enterprises of the assessee-company was to correct and the conclusion of the Tribunal of this aspect of the case was not justified on the facts of the case. He contended that he notice of the assessee was to reduce or to avoid the tax liability and this was amply borne out by the material on record and, therefore, the conclusion of the Tribunal which was on a mixed question of law and fact was no justified on the facts and circumstances of this case.

8. As regards the first submission of Mr. Kaji it must be pointed out that in its order as shown at the end of para. 6, the Tribunal has left the question open as to whether the assessee was a company in which the public are substantially interested or not. In para. 6 the Tribune has pointed out :

'It was, however, further submitted by the Revenue that the question as to whether on or before 14-12-1961, the assessee was a company in which the public were substantially interested or not, has never been examined and that issue may be referred back to the Appellate Assistant Commissioner and we may proceed to decide the other issue in this appeal, leaving the same open. The assessee, having agreed to this proposition we keep this issue open for decision of the low authorities, if such a necessity arises, and proceed to decide the other issues on the assumption that the assessee-company is one in which the public are not substantially interested.'

9. Since the Tribunal has not decided the matter finally and has left the question open for the decision of the lower authorities, in case such a necessity arises, but is not necessary for us not is it proper for us to decide this question as to whether the assessee-company is a company in which the public are or are not substantially interested as on December 14,1961.

10. Before starting to deal with the second submission of Mr. Kaji it is necessary that we should refer to the provisions of s. 789 of the Act. section 79 has been brought on the statute book by the Act of 1961 and it was at the stage of the Select Committee when this Act was enacted that several changes were made in the language of the section and the provisions of the section. section 79 as it now stands is 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 company, not being a company in which the public are substantially interested, no loss incurred in any year prior to 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 beneficially held by person 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 he change in the shareholding was not effected with a view to avoiding or reducing any liability to tax.'

11. It is obvious that the object of the Legislature in inaction section 79 is to prevent an assessee from buying or a company which has been incurring losses in the past and which has substantial carried forward losses. So far as incorporated company is concerned, there is no succession to he company since by a legal fiction until it is wound up, even if shareholders may go on changing, the company continues as a legal entity and hence this section has been enacted with a view to lifting the veil of incorporation and looking at the realities of the situation. section 79 given a mandate to the Revenue authorities not to carry forward losses when a change in shareholding has taken place in a particular previous year under the conditions mentioned in the section.

12. It is necessary at this stage to refer to some of the changes which have taken place and what was stated in the objects and Reasons at the time when the provisions were enacted. As the Addl. Commissioner has pointed out section 79 was brought on the statute book as a result of the recommendations of the Direct Taxes Administration Inquiry Committee. In its report of November, 1959 at para. 7, 81(12) the committee observed :

'There have been many instances, where persons acquired companies, which had sustained losses in earlier year, carried on profitable business through them and were able to reduce their tax liabilities by setting off the earlier losses of the companies when the shares were held by different persons. To get over this position, we endorse the recommendations of the Taxation Inquiry Commissioner contained in para. 73 of Chapter IV of Volume II of its Report to the effect that in the case of companies in which the public are not substantially interested, such set off of losses against subsequent profits should be allowed only if the shareholders in the year in which the income is earned are substantially the same as those in the years in which the losses were incurred.'

13. In accordance with these recommendations when the I.T. Bill of 1961, was drafted, it originally contained the following provisions in clause 79 :

'Notwithstanding anything contained in its Chapter, no loss incurred in any year prior to the previous year in the case of a company, not being a company in which the public are substantially interested, shall be carried forward and set off against the income of the previous year, unless on the last date 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 person, 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.'

14. Therefore, in the clause as originally draftier there was no provision similar to clause (b) of section 79 as it was finally enacted by Parliament. Regarding clause 79 the Select committee observed :

'The Committee thought that the provisions of the clause should be applied only when the shares of the company which has incurred loss are acquired by new shareholders with the object of getting the benefit of those losses and thus avoiding taxation liability.'

15. The clause has been redrafted accordingly. It may be pointed out that Shri M.R. Masani, who was a member of the Select Committee, had appended a minute of dissent to the report of the Select Committee and as regards clause 79 of the Bill and the recommendations of the Select Committee, he observed :

'Clause 79 seeks to provide that a company should not be allowed to carry forward its losses unless 51 per cent. of the share capital remains in the hands of the same shareholders. Whereas other countries are amending their income-tax laws to provide for carrying back business losses, the Bill tries to abridge even the limited right of carrying forward business losses. The principle of corporatentity, which is the very foundation of company law, is sought to be undermined by clause 79. The draft of this clause puts the onus on the assessee to prove that the change in the shareholding was not effected with a view to avoiding or reducing tax liability. This is clearly putting the onus on the wring side. This clause should be omitted. But if it is sought to be retained at all, it should apply in case where the circumstances show that the change in the shareholding was effected with a view to avoiding or reducing tax liability, without casting the onus on the taxpayer to price the negative.'

16. Thus so far as this minute of dissent was concerned, the only objection was about the onus of proof being cast on the assessee rather than on the Department and the minute of dissent wanted that the change should be effected to cast the onus on the Revenue rather than on the assessee. In accordance with the recommendations of the majority of the Select Committee the clause was redrafted by the addition of clause (b) as it now stands and the section as recommended by the Select Committee was in the form in which it stands on the statute book today. This history of the enactment shows that the section was introduced in this Act for the first time so far as income-tax law in India is concerned. There was no provision similar to section 79 is the Indian I.T. Act, 1922. Therefore, but is obvious that so far as section 79 is concerned, it was enacted with the object of preventing what may be shortly described as buying of losses by taking over controlling interest in the shareholding of a company which had carried forward losses. It is obvious that the Legislature has lifted the veil of corporate entity and tried to look at the real substance behind the transaction and behind the facade of corporate entity. It is well recognised in modern jurisprudence that notwithstanding the fact that a corporation, that is, an incorporated company, is a legal person in the eye of the law, it is open to the Legislature and even to the courts in certain cases to lift this veil and look at the realities and that is precisely what the Legislature in view while interpreting the provisions of section 79. As observed above, it was contended before the Tribunal, and that contention was accepted by the Tribune, that since the Revenue had not invoked the provisions of section 79 for the assessment year 1962-63, which is the first assessment after the change in the shareholding which took place on December 14,1961, it was not open to the Revenue to invoke these provisions for the assessment years 1965-66 and 1966-67. It must be borne in mind that section 79 occurs in Chap. VI which deals with aggregation of income and set off or carry forward of loss. Section 66, which is the first section in this chapter, mentions that in computing the total income of an assessee, there shall be included all income on which no income-tax is payable under Chapter VII. Sections from 70 onwards deal with set-off carry forward and set-off. section 79 deals with set off of loss from one source against income from another sources under the same head of income. Section 71 deals with set off of loss from one head against income from another head. Both these sections, ss. 70 and 71, deal with the losses incurred in the assessment year under consideration in the particular assessment proceedings. Section 72 deals with the carry forward and set-off of business losses. Under sub-s. (1) of s. 72 :

'Where for any assessment year, the net result of the computation under the head 'profits and gains of business or, profession business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where the assessee has income only under the head 'Capital gains' relating to capital assets other than short-term capital assets and has exercised the option under sub-section (2) of that section or where he has no income under any other head, the whole loss shall, subject to the provisions of this Chapter, be carried forward to the following assessment year.'

and under clause (i) of s. 72(1) :

'(i) it shall be set off against the profits and gains, if any, on any business or profession carried on by him and assessable for that assessment year :

Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year; and

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be arrived forward to the following assessment year and so on.'

17. We are not concerned with the rest of the provisions of s. 72. It is, therefore, clear, looking to the provisions of s. 72 read with section 79 that so far as the carried forward losses are concerned, in each assessment year the carried forward losses which are being carried forward and set-off into account and in each year such carried forward business loss has to be taken into consideration, has to e set off if there are sufficient profits and gains of the business or profession in which the loss was originally incurred and if the loss which has been carried forward from the previous year is not wholly so set off, the amount of loss not so set off has to be carried forward to the following assessment year from year to year and that is the only meaning that can be attached to the words 'and so on' occurring in s. 72(1)(ii) which we have emphasized above. Under these circumstances the contention urged by Mr.Patel on behalf of the assessee before us which was the same contention urged on behalf us which was the same contention urged on behalf of the assessee before the Tribunal, that section 79, not having been invoked in 1962-63, could not be invoked in any subsequent year, cannot be accepted, because, if that contention were to be accepted it would mean going contrary to the entire scheme of carrying forward and set off of business losses from previous year. It is true that under s. 72(3) no loss other than the loss referred to in the provision to sub-s. (1) of s. 72, shall be carried forward under s. 72 for more than eight assessment years immediately succeeding the assessment year for which the los was first computed. Thus, the maximum period for which the business loss can be carried forward is eight years, computed, that is, in which the loss was incurred for the first time. It is true, as Mr. Patel for the assessee emphasized before us, that section 79 is part of the machinery section and it has to be read with the provisions of s. 72, which in turn has to be read with the provisions of s. 143(3) of the Act. However, looking to the scheme of carrying forward and setting off of business losses as set out in s. 72, it is obvious that in each assessment year, the ITO concerned or the assessing authority has to ascertain as to what is the amount of business loss which have been carried forward from the immediately previous assessment year. That being the case, if the conditions of section 79 are otherwise satisfied and section 79 can be invoked, the question that has to be asked is : whether in the eye of the law so far as the assessment year 1965-66 is concerned, there was any business loss validly carried forward from the immediately preceding assessment year. It is obvious that if the conditions of section 79 are otherwise satisfied, there could not have been any carrying forward and set off of the business losses incurred by the assessee-company prior to 1962-63 so far as the assessment year 1963-64 or 1964-65 was concerned and similarly each subsequent assessment year was concerned. But once it is found that the provisions of section 79 can be invoked because the conditions and requirements laid down in section 79 are satisfied with reference to the assessment year 1962-63, business losses which ar claimed as being carried forward and which are sought to be set off against profits and gains from business so far as the assessment year 1965-66 is concerned, the ITO must ask himself the question whether any of these losses are from a date prior to the date of the commencement of the previous year relevant to the assessment year 1962-73. Of course, so far as the assessment year 1965-66 is concerned, the ITO or the assessing authority can take into consideration only the business losses which are carried forward from the immediately preceding year, that is, the assessment year 1964-65. If the provisions of section 79 were not invoked in the assessment years 1962-63, 1963-64 and 1964-65, whatever was allowed to be set off in those previous years cannot be reopened and nullified so far as the assessment year 1965-66 is concerned. IT may be open to the assessing authorities to apply other provisions of law, say for example, reopening, rectification, revision, if the conditions of any of these provisions are satisfied to reopen the assessment proceedings are reopened or renewed or revised or rectified in accordance with the appropriate provisions of law so far as the assessment year 1965-66 is concerned, the assessing authority must proceed upon the footing that the provisions of section 79 can apply only so far as the assessment year 1965-66 is concerned in respect of the business losses which have been carried forward from assessment year 1964-65 and which are sought to be set off against the profits and gains in the assessment years 1965-66. We are unable to agree with be held that regards its conclusion of the Tribunal on this question regarding in which particular year the provisions of section 79 can be invoked is not correct in law. It must be pointed out, however, that if the provisions of section 79 were to be read in isolation, there may be prima facie some justification for the conclusion reached by the Tribunal because on the face of it when section 79 is looked at in isolation, it appears that the provisions of section 79 can be invoked, if the change in shareholding has taken place in any particular previous year in the case of a company when the company is one in which the public are not substantially interested and under these provisions any loss incurred in any particular part of the previous year shall be carried forward and set off against the income of the previous year meaning thereby the previous year in which the change in the shareholding took place. The provisions of clause (a) refer to two situations, namely, the situation of the shareholding of the company as on the last day of the previous year in which the change in shareholding took place and the 1st day of the previous year or years in which the loss was incurred. But clause (a) of section 79 deals with the facts as they prevailed at the relevant time of change in shareholding and not with reference to the situation which prevails in any subsequent years. However, if section 79 cannot be looked at in isolation and has to be read as part of the entire scheme of Chap. VI and particularly in the light of the provisions of s. 72, it is obvious that the conclusion of the Tribunal cannot be sustained in view of the use of the word 'shall be carried forward to the following assessment year and so on ' occurring in s. 72(1)(ii).

18. As regards the next contention of Mr. Kaji regarding whether development rebate and depreciation allowance which have been carried forward from a year prior to the previous year in which the change in the shareholding take place or whether only the business losses are covered by section 79 in our opinion, section 79 itself gives the answer. section 79 contemplates that no loss incurred in any year prior to the previous year can be carried forward if the other conditions of section 79 are satisfied. This section 79 forms part of Chap. VI and it is connected with the carry forward and set off of losses which are provided for in s. 72 onwards. Morever, s. 32(2) which deals with depreciation allowances and carrying forward of unabsorbed depreciation allowance and s. 33(2) which deals with the carrying forward of development rebate which has not been absorbed in the proceedings assessment year, deal with certain allowances being made while computing the total income from profits and gains from business. These are allowances which are being permitted to the assessee and it is very difficult to say that a depreciation allowance is incurred or development rebate is incurred in view of the language of s. 32 and s. 33. It must be held that depreciation of the relevant section are satisfied but they are not incurred by the assessee. Therefore, by the use of the words 'loss incurred' and the reference to the chapter in which section 79 occurs, it is obvious that the reference to the chapter in which section 79 occurs, it is obvious that the contention urged on behalf of the Revenue that the provisions of section 79 apply to unabsorbed development rebate which has been carried forward from the immediately preceding assessment year, must be rejected. In our opinion, on a pure grammatical construction, in view of the reference to the chapter incurring of loss and in view of the fact that section 79 forms apart of the whole scheme adumbrated from s. 72 onwards, this contention urged on behalf of the Revenue must be rejected.

19. The question then arise whether the provisions of section 79 can be applied if both the cls.(a) and (b) are satisfied, or, the ban put by section 79 is removed when the case of the assessee does not fall in either of these two conditions. In short, whether the provisions of cls. (a) and (b) of section 79 are to be read cummulatively or alternatively. Mr. Kaji for the Revenue contended that the word 'or' occurring between cls. (a) and (b) should be read conjunctively and disjuctively. However, on a pure grammatical meaning of the provisions of section 79 it is carrying forward and set off of the loss of the previous year if a change in the shareholding has taken place in a particular previous year in the case of a company which is not a company in which the public are substantially interested. However, the Legislature says that this ban against the carrying forward of loss from a year prior to the previous year when the change in shareholding takes place and setting it off against the income of the relevant previous year, in which the change took place, is not to operate if clause (a) or clause (b) is satisfied. Clause (a) requires that on the last day of the previous year in which the change took place the shares of the company carrying not less than fifty-one per cent. of the shares of voting powers must have been beneficially held by person 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. Secondly, the Legislature says in cl.(b) that if the ITO is satisfied that the change in the shareholding was not effected with a view to avoiding or reducing any liability to tax, the ban set out in the main body of section 79 is not to operate. The word 'unless' according to grammatical meaning is equivalent to 'if not' and thus word followed by the disjunctive 'or' occurring between cls. (a) and (b) clearly is a grammatical interpretation goes to show that cls. (a) and (b) are to be applied disjunctively and if either of these clauses is satisfied, the ban created by section 79 cannot apply.

20. To illustrate this meaning of the use of the word 'unless' followed by 'or', a simple illustration will suffice to show the absurdity of the contention urged on behalf of the Revenue. If A says to B : 'We will go out together tomorrow unless you or I fail ill ', it will be sufficient if on the following day either A or B fall sill which would render their excursion impossible. It is absurd to urge that in order that the excursion is to be put off, both A and B must fall ill. This is what follows from the use of the words 'unless' and 'or' in conjunction with one another.

21. In view of this grammatical meaning which is the only meaning to be attached to the clause in this case, it must be held that so far as the provisions of section 79 are concerned, the ban created by section 79 against carrying forward and setting off of business losses of years prior to the previous year relevant to the assessment year 1962-63, since that was the previous year in which the change in the shareholding took place, cannot be carried forward and set off against the income of the year relevant to the assessment year 1962-63 and subsequent years if the assessee satisfied the condition set out either in cl.(a) or cl.(b).

22. So far as cl.(a) is concerned, it is obvious that the shares as of the end of the previous year relevant to the assessment year 1962-63 were to held so far as fifty-one per cent. of the voting power was concerned by the very person who beneficially held the shares at the end of the year or years in which the loss was incurred by this company. All the 21,000 shares of the company were transferred by Somani group and their nominees to Vadilal Lallubhai group and their nominees on December 14, 1961, and that being the case, the condition of clause (a) can never be said to have been satisfied by the assessee.

23. The question, therefore, arises whether the question of motive of change in the shareholding which is covered by clause (b) of section 79 can be decided in favour of the assessee or against the assessee on the facts of this case. The Addl. Commissioner and the ITO concerned, who adopted his reasoning held that taking the facts of the case into consideration in view of the different aspects of the case, the question of motive was established against the assessee and they held that the change in the shareholding was effected with a view to avoiding or reducing in the shareholding was effected with a view to avoiding or reducing liability to tax. Each of the factors which weighed with the departmental authorities was considered by the Tribunal and on an assessment of the facts the Tribunal held that the motive for the change in the shareholding, namely, that it was effected with a view to avoiding or reducing the liability to tax had not been established and that it was merely a commercial enterprise on the part of Vadilal Lallubhai group to buy over the shareholding of the assessee-company. In this connection the Tribunal's conclusion on the question of motive were as follows. In para. 13 of its order, the Tribunal observed :

'We have pondered deeply upon the submission made by the learned Advocate-General as well as the departmental representative on this issue (issue of motive). In our opinion, so far as the assessee was concerned any motive to save or reduce its tax liability consequent to the acquisition of the shareholding could not be attributed to it, because whether its shares were held by Somanis or Sayaji Mills Ltd. Since it was an independent unit and was assessed as a company, it would have, as per the provisions of the Act, got the benefit of the carry forward and set off of the losses.'

24. Secondly, the factor which weighed with the Tribunal in deciding in favour of the assessee on motive was that the Department had not led any evidence in proof of such an intention or motive, namely, that the real intention of the Sayaji Mills Ltd., was to get such a benefit. The Tribunal observed :

'It is not the case of the Department that even when the Sayaji Mills Ltd. had wide choice of making investment in one or more textile mills, it chose to invest in the assessee-company alone.'

25. According to the Tribunal, one must take the transaction from the point of view of the investor who wanted to make the investment and being on a look out for making an investment in a textile miss and in spite of choice, if he had chosen to invest in a mill like the assessee, then it could be said that its motive was to avoid or reduce the tax liability. According to the third conclusion of the Tribunal on the aspect :

'By investing the amount, Sayaji Mills acquired a textile unit, which it badly needed for its commercial enterprise and also tried to make that venture a profitable one by running it efficiently.'

26. It was found that o far as Vadilal Lallubhai group was concerned, it had a minority interest in Rajesh Textile Mills Ltd., was concerned, Vadilal group was not running Rajesh Mills Ltd. and it had no textile unit under its immediate control. The Tribunal observed that interest which Vadilal group had in Rajesh Mills Ltd., being a minority interest, the question of its exercising administrative, technical or commercial control over Rajesh Mills did not arise. It was found on the facts that after acquiring the entire shareholding of the assessee-company on December 14,1961, Vadilal group had acquired New Prahlad Mills in 1962, but the Tribunal held that question was of no consequence as that transaction took place about a year after the transaction under discussion, namely, the transaction in connection with the change in shareholding of the assessee-company. The Tribunal found that there was no material on record that the negotiations to acquire interest in New Prahlad Mills were already carried on by the Vadilal group when the transaction in the instant case was finalised. It was contended in connection with the issue of motive before the Tribunal so far as the Department was concerned that Vadilal group knew that the assessee-company had already turned the corner in 1960 and so it would make profits in the subsequent years. But this contention was rejected because the assessee was automatically to get the benefit of carry forward and set-off of loss even if there was no change in the ownership of the shareholding. It was urged before the Tribunal that the Vadilal group disposed of its shareholding in the assessee-company in a subsequent year and that too cheaply was of no consequence at all, as it was a development which took place subsequently in a later year, with which the Tribunal was not concerned and the Tribunal held that Department had not been successful to prove that the motive was to reduce or avoid the tax liability by making investment in Subhlaxmi Mills Ltd. So far as the new shareholder were concerned, the Tribunal had to told even if in fact there was such a reduction or avoidance of tax, the provisions of section 79(b) would not be attracted. It must be pointed out that so far as section 79(b) is concerned, the facts have to be considered from the point of view of the motive on the part of the person acquiring the shares in the company concerned when the change in the shareholding takes place and what has to be ascertained is, what was that motive, namely, whether it was a motive of avoiding or reducing any liability to tax. It must be pointed out that the satisfaction which the ITO is required to reach is a negative satisfaction, namely, the ITO must be satisfied that the change in the shareholding was not effected with a view to avoiding or reducing any liability to tax. The use of this negative form with reference to the satisfaction to be reached by the ITO would mean placing the burden on the assessee because the assessee would have to satisfy, the assessee itself being in possession of all the relevant facts and the special facts being within its knowledge, that it was not effected with a view to avoiding or reducing any liability to tax.

27. However, so far as the conclusion of the Tribunal in the present case are concerned, the Tribunal has taken into consideration factors which were relevant for coming to this conclusion regarding motive. It had not overlooked any contention urged on behalf of Revenue so far as this question of motive was concerned. Even if the conclusion of the Tribunal on one of two factors on which it reached its conclusion regarding motive may not be sustainable, if the Tribunal on an appreciation of all the facts came to the conclusion that the motive of the Sayaji Mills Ltd., at the time when it acquired the shareholding was a commercial enterprise, it cannot be said that that conclusion was perverse or unreasonable or based on no evidence. It is well-settled law that a conclusion on a question of fact reached by the Tribunal cannot be challenged on a reference before the High Court unless a question has been sought to be raised in an application under s. 256(1) of the I.T. Act, 1961, before the Tribunal are not to be disturbed by the High Court on a reference unless it appears that there was no evidence before the Tribunal upon which they, as reasonable men, could come to the conclusion to which they have come; and this is so, even though the High Court would on the ground that there is no evidence to support it or that it is perverse. It has been further held in that case that when a conclusion has been reached on an appreciation of number of facts established by the evidence, whether that is sound or not must be determined, not by considering the weight to be attached to each single fact in isolation, but by assessing the cumulative effect of all the facts in their setting as a whole. Where an ultimate finding on an issue is an reference to be drawn from the facts it is a mixed question of law and fact, and the inference from the facts found is, in such a case, a question of law. In that case it has also been held that where the point for determination is a mixed question of law and fact, while the finding of the Tribunal on the facts found is final, its decision as to the legal effect of those findings is a question of law which can be reviewed by the court.

28. Applying these principles to the finding regarding motive reached by the Tribunal, it must be held that the ultimate finding on this particular question is an inference to be drawn from the facts found on the application of known principles of law and hence it is a mixed question of law and fact and the inference regarding motive is, in this case, a question of law. However, even in this connection the finding of the Tribunal on the facts found is final. It is only its decision as to the legal effect of those findings which is a question of law that can be reviewed by this court. Here we find that the Tribunal on an appreciation of the facts before it has reached this particular conclusion regarding motive. The factors and on the facts found by the Tribunal, the inference in law regarding the motive at the time of purchasing these shares is, in our opinion, correct and if the Tribunal on an appreciation of the facts before it has reached this particular conclusion regarding motive, it cannot be said that the Tribunal was not justified in reaching its conclusion on the issue of motive.

29. It appears to us that so far as the question of motive is concerned, motive has to be inferred as a matter of fact from the facts and circumstances of the case and even subsequent events may throw light as to what the motive or intention must have been at the time when the change in the shareholding took place. But it cannot be said that the motive which has to be judged is on any date other than the date on which the change in the shareholding has taken place. It is with reference to that date that the motive or intention has to be inferred and the inference can only be drawn from the relevant facts which helped the fact finding authority in drawing the necessary inference. In the light of the principles laid down in Sree Meenakshi Mills Ltd.'s case : [1957]31ITR28(SC) , we have t accept the findings of the Tribunal as to facts to be correct and as stated above. There has been no challenge to these findings of fact on the ground that they are perverse or based on no evidence and if the Tribunal on an appreciation of the facts before it has reached this particular conclusion regarding motive, it cannot be said that the Tribunal was not justified in reaching its conclusion on the issue of motive. As we have pointed out, the Tribunal has not relied on any material which was no on record. It cannot be said that there was no evidence before the Tribunal nor can be said that, looking to the totality of the factors, the conclusion of the Tribunal on the facts from which an inference of motive was drawn is perverse or unreasonable. We are not sitting in appeal on a conclusion of fact reached by the Tribunal and, therefore, it is not for us to draw any inference to arrive at out own conclusion regarding the facts which go in the determination of the question as to motive. The Tribunal cannot be said to have misdirected itself in law in view of the findings of fact reached by it on the issue of motive. It cannot be said that any material aspect of the case has been overlooked by the Tribunal in arriving at its conclusion of fact from which an inference as to motive was drawn.

30. Under these circumstances it must be held that the conclusion of the Tribunal that the motive in acquiring the shares of the assessee-company by the Sayaji Mills Ltd. was not to reduce or avoid the tax liability cannot be said to be unjustified. Looking to the totality of the circumstances, once the Tribunal came to the conclusion that it was ordinary commercial enterprise on the part of Vadilal group to acquire, the entire shareholding of the assessee-company, it must follow that the intention was to go in for a commercial enterprise and not to reduce or avoid the tax liability, even if in arriving at its conclusion the Tribunal emphasised one aspect of the factors more than the other. The question is whether, on an overall consideration, the Tribunal could have reached its conclusion and we must answer that question by stating that the Tribunal could have come to this conclusion even though the entire process of reasoning adopted by the Tribunal may not be justified. It is the overall conclusion which must matter in a case like the present.

31. Under the circumstances, out conclusions are that it was open to the taxation authorities to invoke the provisions of section 79 so far as the assessment year 1965-66, was concerned but those provisions can only be applied to the quantum of business losses which had been allowed to be carried forward after the set-off in assessment proceedings of the assessment year 1964-65. Our conclusion also is that so far as the development rebate is concerned, in view of the fact that the development rebate was not created in the year of installation of the plant or machinery concerned, it could not be allowed in the assessment year 1965-66, or any of the assessment years under reference before us. So far as depreciation allowance is concerned the provisions of section 79 cannot apply to unabsorbed depreciation allowance.

32. We, therefore, answer the questions referred to us as follows : In Income-tax Reference No. 65 of 1974 :

Question No. (1) : In the affirmative, that is, in favour of the Revenue and against the assessee.

Question No. (2) : In the negative, that is, in favour of the assessee and against the Revenue.

Question No. (3) : In the negative, that is, in favour of the assessee and against the Revenue.

Question No. (4) : In the affirmative as to first part. Second part does not arise in view of our answers to the previous questions.

Question No. (5) : In the affirmative, that is, in favour of the assessee and against the Revenue.

Question No. (6) : In the negative as to first part, that is the conditions of the exception clause (b) of section 79 is satisfied. In the negative as to second part, that is, in favour of the assessee and against the Revenue since we hold that loss incurred in any year prior to the previous year corresponding to the assessment year can be carried forward and set off against the income of profits and gains of the said previous year.

Question No. (7) : As observed above, in view of the decision in the case of this very assessee as reported in [1975] 100 ITR 188, the question is answered in the negative, that is, against the assessee and in favour of the Revenue.

33. So far as Income-tax Reference No. 98 of 1974 is concerned, we answer the question as follows :

Question No. (1) : In the affirmative, that is, in favour of the Revenue and against the assessee.

Question No. (2) : In the negative, that is, in favour of the assessee and against the Revenue.

Question No. (3) : In the negative, that is, in favour of the assessee and against the Revenue.

Question No. (4) : In the affirmative as to first part; second part does not arise in view of our answer to the previous questions.

Question No. (5) : In that affirmative, that is, in favour of the assessee and against the Revenue.

34. In view of the fact that in each of these reference, each side has partly succeeded, there will be no order as to costs in either of these two references.


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