1. under Section 256(1) of the I.T. Act, 1961, the following question has been referred to us:
' Whether, on the facts and in the circumstances of the pase, it has been rightly held by the Appellate Tribunal that the provisions of Section 79 would not apply to unabsorbed depreciation and development rebate?'
2. For the assessment year 1969-70, there was an assessment on 23rd March, 1970, fixing the total income at Rs. 90,790. After adjusting the losses brought forward from the preceding three years, the ITO determined the total income at nil. He recorded also in his order that the following amounts be carried forward :
Losses to be carried forward :
Asstt. yearBusiness lossUnabsorbed depreciation
3. The Addl. CIT initiated proceedings under Section 263 of the Act as he found that the ITO had allowed set-off of the earlier years' losses against the profits of the year under consideration, without considering the question of the applicability of Section 79. After giving necessary opportunity to the assessee, the Commissioner came to the conclusion that prima facie Section 79 of the Act was applicable to the assessee's case, but as the assessee had not been given an opportunity to satisfy the ITO regarding Clause (b) of Section 79, he set aside the assessment and directed the ITO to complete the assessment afresh. Against the order of the Commissioiner, the assessee appealed to the Tribunal. The Tribunal set aside the order of the Commissioner and directed the ITO to modify the assessment by adjusting the unabsorbed depreciation and development rebate relating to the years prior to the assessment year 1968-69, and also to modify the carryforward of the losses in the light of the modification relating to unabsorbed depreciation and development rebate. In effect it was held that Section 79 did not apply to unabsorbed depreciation and development rebate. This order of the Tribunal has given rise to the present reference at the instance of the CIT.
4. Section 79 of the I.T. Act, 1961, runs as follows :
' 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-
2(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.'
5. There was no corresponding provision in the Act of 1922. The provision, on its own language, shows that it applies to a company in which the public are not substantially interested. The section was intended to prevent evasion by what was called ' purchase of losses '. Where there is a change in the shareholding in a company which is a closely-held company, no loss incurred in any year prior to the previous year would be carried forward and set off against the income of the previous year, unless, on the last day of the previous year, at least fifty-one per cent, of the shares or the voting power was held by the same persons as held the shares or the voting power previously. Even where the change in shareholding was substantial, the company could satisfy the ITO that the change in the shareholding was not effected with a view to avoiding or reducing any liability to tax. In other words, so long as the shareholding substantially continued to be the same, the section was not intended to be applied. Even when the shareholding was substantially altered, if it was shown that it was in the normal course and was not with a view to avoid any liability to tax, the provision preventing carry forward and adjustment of losses would not apply. The result of a substantial change in the shareholding of a company was to treat the company as if it was newly incorporated and had not incurred any losses prior to the previous year, unless it came within the exception provided in the statute.
6. Learned counsel for the revenue contended that the Tribunal was not justified in picking out unabsorbed depreciation and development rebate and treating them as if they were not covered by the restrictions in Section 79 in the present case. It may be stated here that there is no dispute about the fact that as far as the general loss is concerned, the provisions of Section 79 would apply in the present case. The only point is whether unabsorbed depreciation and development rebate stand out differently from the general loss to which Section 79 admittedly applies.
7. Learned counsel for the Commissioner relied on the opening words of the section, ' Notwithstanding anything contained in this Chapter... ' as showing that this provision is an independent and overriding provision so that one has to look only to Section 79 and not to any other provision in the said Chapter. We do not consider that this is the proper way to interpret Section 79. The words, ' Notwithstanding anything contained in this Chapter ' have been used only for the purpose of showing that whatever may have been provided in the other provisions of the Chapter as regards carry forward of losses, those provisions would not apply as Section 79 made a departure from those provisions. The overriding nature of Section 79 is not to disturb the concept of loss as envisaged in these provisions but only to prevent the adjustment of brought forward loss in certain cases. The anomaly in the interpretation placed by the learned counsel for the revenue would be evident if we examine it more closely. If there had been an undisturbed shareholding of a company which is closely held, then the concept of loss would be the same without any change in its content as now contended. Because there has been a change in the shareholding in one year, the contention is that the term 'loss' has to be understood differently. The result of the acceptance of this interpretation would involve the disturbance of the computation of the loss of the earlier years only in the case of the companies in which Section 79 is actually applied. The section does not appear to envisage or involve this anomaly of the word having different meaning for different assessees.
8. Learned counsel for the revenue relied on two decisions as supporting his stand that ' loss ' includes whatever has been included in it by way of unabsorbed depreciation and development rebate. The two decisions relied on are CIT v. Chugandas and Co. : 55ITR17(SC) and CIT v. Cocanada Radhaswami Bank Ltd. : 57ITR306(SC) . In CIT v. Chugandas and Co. : 55ITR17(SC) , the assessee, which was a firm dealing in securities, was assessed to tax under the Indian I.T. Act, 1918. It received substantial amounts as interest on securities in the years 1946 and 1947. The business was discontinued on 30th June, 1947. The question was whether the interest on securities formed part of the business income of the assessee for the purpose of exemption from tax under Section 25(3) of the Indian I.T. Act, 1922. It was held that the business income was broken up under different heads only for the purpose of computation and that by the process of breaking up, the income did not cease to be the income of the business, the different heads of income being only the classification prescribed by the I.T. Act, for computation. This decision, as seen already, has been rendered only with reference to Section 25(3) of the 1922 Act which was in the nature of a special provision to give the benefit to an assessee who had actually been doubly taxed by the introduction of the 1922 Act. The proposition that profit from business may, in some cases, include the interest on securities does not affect the question whether the loss can, where required by the statute, be taken to exclude the unabsorbed depreciation and development rebate. We do not consider that there is anything by way of a principle laid down in this decision which would assist us in construing Section 79 of the Act. Similarly, in CIT v. Cocanda Radhaswami Bank Ltd. : 57ITR306(SC) , the assessee was carrying on banking business holding securities as part of its trading assets. It had incurred a loss in 1949-50 under the head ' Business ' and had earned interest income from securities. The net loss was determined after adjusting the interest income from securities against the loss computed under the head ' Business ' for three succeeding assessment years and the loss was allowed to be set off against the income under the head ''Business'. However, when it came to the fourth year, the ITO refused to do so, pointing out that the income from securities was different from the income from business. The Supreme Court pointed out, whether a particular income is part of the income of the business, falls to be decided, not on the basis of the provisions of Section 6 of the 1922 Act but on commercial principles. This decision also was rendered in relation to Section 24(2) of the Indian I.T. Act, 1922, and does not appear to us to throw any light on the interpretation of Section 79.
9. The whole Chapter in which Section 79 occurs has made specific provisions as to how the losses are to be computed and carried forward. Those provisions would have to be applied in the present case and as far as those provisions are concerned, it has been already held that development rebate would not come within the scope of those provisions in view of the language of Section 33 (vide T.C. No. 163 of 1975, order dated January 22, 1979--CIT v. Madras Wire Products [since reported in : 119ITR454(Mad) ]) In other words, as held in that case, there is a difference between depreciation and development rebate in the manner of allowance in tne hands of an assessee. In the case of depreciation, it is straightaway allowed as a deduction and the result can be a negative figure. As far as development rebate is concerned, there is no straight deduction to the extent of leaving the profits at a negative figure, as the section envisages the adjustment of the development rebate only to such an extent as to leave the total income to be nil. Therefore, there would be no loss which would come in for adjustment under Chap, VI of the I.T. Act of 1961.
10. As far as depreciation is concerned Section 32(2) itself provides that where, in the assessment of the assessee, full effect cannot be given to any allowance under Clause (i), (ii), (iv) or (v)of Section 32(1) or under clause (i) of Section 32(1 A) in any previous year owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then the allowance or part of the allowance to which effect has not been given is to be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, it should be deemed to be allowance for the subsequent year and so on. The result is, the treatment of depreciation is different from loss as seen from s 12(2) itself. That is why Section 72(2) also provides for a priority in the matter of carry forward and set off of unabsorbed depreciation before the loss is set off. If, therefore, for the purpose of Section 72, losses would not include depreciation, then, as far as Section 79 also is concerned, the same position would have to hold good. In. the interpretation that we have placed on Section 79, the contention of the learned counsel for the revenue that once a loss is computed after allowance of depreciation, the loss would have to be taken as such without taking up its content cannot be accepted. This point has been considered also in Tax Case No. 28 of 1975 (CIT v. Nagapatinam Import and Export Corporation) disposed of on January 2, 1979 [since reported in : 119ITR444(Mad) ]. The result is that the question referred to us has to be answered in the affirmative and in favour of the assessee. The assessee will be entitled to its costs. Counsel's fee Rs. 500.