COMMISSIONER OF INCOME-TAX, BOMBAY v. ITALINDIA COTTON CO. (P) LTD.

The Judgment of the Court was delivered by

PATHAK, CJ: This appeal by special leave is directed against the judgment of the Bombay High Court construing the provisions of s. 79 of the Income-tax Act, 1961 in favour of the assessee. E Three private limited companies, the Italindia Cotton Co. (P) Ltd., who is the assessee before us, the India Corporation (P) Ltd. and the International Cotton (P) Ltd. were controlled by three groups of share holders, who may be described as the Chunilal Group, the Babubhai Group and the Purushottam Group. There was a change in F the share holding of the three companies during the accounting year ending 31 March, 1963. The Chunilal Group acquired controlling interest in India Corporation (P) Ltd., the Babubhai group acquired controlling interest in the assessee company and the Purushottam Group acquired controlling interest in International Cotton (P) Ltd.

O The assessee suffered a loss in the accounting year ending 31 March 1960, relevant to the assessment year 1960-61, in the amount of Rs.12, 172. This was available for a set off in a subsequent year. But having regard to the change in the share holding of the assessee during the accounting year ending 31 March, 1963 relevant to the assessment :. year 1963-64, the question arose whether the assessee was entitled to J-t the benefit of carrying forward that loss for the purpose of computing

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its assessable profits for that assessment year. The Income-tax Officer A held that s. 79 of the Income-tax Act, 1961 disentitled the assessee from claiming such a set off. He said that 51 % of the voting power held by persons on the last day of the year in which the loss was suffered was no longer held by them on 31 March, 1963. On appeal by the asses- see, the Appellate Assistant Commissioner of Income-tax took a diffe- rent view. He held that before the right to set off a loss could be denied B to an assessee, not only should there be a change in the persons hold- ing a voting power of not less than 51 % but further the change should have been effected with a view to avoiding or reducing the liability to tax. The Revenue appealed to the Income Tax Appellate Tribunal. Upon an analysis of s. 79 the Tribunal observed that the denial of the set off of a loss incurred in an earlier year was subject to two excep- tions, the first being that the beneficial holding representing not Jess c than 51 % of the voting power should not change hands between the last day of the year in which the loss was incurred and the last day of the relevant previous year, and the second exception was that any change in the share-holding contemplated by the parent provision should not have been effected with a view to avoiding or reducing any liability to tax. According to the Tribunal the two exceptions applied independently, and if either came into play the prohibition contained in s. 79 against the setting off of a loss could not be invoked by the Revenue. It appears to have been admitted before the Tribunal that the assessee was not entitled to the benefit of the first exception, and in the view which it took it rendered no definite finding on whether the assessee fell within the terms of the second exception .

At the instance of the assessee the Tribunal referred the follow- ing question to the Bombay.High Court for its opinion:

"Whether both the conditions mentioned in clause (a) and clause (b) of s. 79 must apply for disentitling the loss of a prior year being allowed as set off ·in accordance with the substantive provisions of s. 79 of the Income-tax Act, 1961?"

The High Court answered the question in favour of the assessee. G holding that even if a change in the voting power of not less than 51 % between the two. relevant dates has taken place, for the Revenue to succeed such change should be effected with a view to avoiding or reducing any liability to tax. It observed that as the Tribunal had not considered the question whether the change in the voting power had taken place with a v,iew to avcliding or reducing any liability to tax that H

818 SUPREME COURT REPORTS [1988] Supp. 2 .S.C.R.

question should now be decided by theTribunal before the claim for a A set off could be finally disposed of. And now this appeal.

Chapter VI of the Income-tax Act, 1961 contains a number of provisions entitling the assessee to the carry forward and set off of a lo~s suffered by him. Section 70 provides for the set off of a loss from B one source against income from another source under the same head of income. Section 71 provides for the set off of a loss from one head against income from another head. Section 72 entitles an assessee to carry forward and set off a business loss which could not be set off wholly during the year in which it arose. Then follow provisions relat- ing to the setting off of losses in certain particular cases. Section 79, with which we are concerned, provides: c "Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previ- ous year in the case of a company, not being a company in which the public are substantially interested, no loss incur- D red 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 benefi- cially 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 share-holding was not effected with a view to avoiding or reducing any liability to tax."

Section 79 is an exception to the scheme enacted in Chapter VI for the carry forward and setting off of a loss incurred in any earlier year against the income of the relevant previous year. The provision was enacted in the Income-tax Act 1961 for the first time in order to deny that benefit to companies not being companies in which the ( public are substantially interested. On its plain terms s . .79 provides that in the case of such companies, if a change in shareholding has taken place in a previous year, no loss incurred in any year prior to the previous year shall be carried forward or set off against the income of the previous year unless (a) both on the last day of the previous year

C.I.T. v. ITALINDIA COTTON .CO. [PATHAK, CJ.] 819

arnd on the last day of the year or years in which the loss was incurred the shares of the company carrying not loss than 51 per cent of the voting power were beneficially held by the same persons (b) the Income-tax Officer is satisfied that the change in the share in holding w:as not affected with a view to avoiding or reducing any liability to tax. The question before us is whether the two conditions operate cumuiatively or in the alternative. In other words, should both condi- B tions exist together to nullify the prohibition against carry forward and set off of the loss? Upon careful consideration we are of opinion that the conditions are intended to operate as alternative to one another. If the terms of either cl.(a) or cl.(b) are satisfied, the disqualification suffered by a company, by reason of a change in share-holding in the previous year, is removed, and the company is entitled to the benefit of the provisions in Chapter VI relating to the carry forward and set off c of losses. The benefit is available notwithstanding the change in share- holding in the previous year, if shares representing not less than 51 % of the voting power remain beneficially held by the same petsoris on tlie relevant dates. Similarly, the benefit is available notwithstandil)g • the change in shareholding in the previous year if the change was not effected with a view to avoiding or reducing any liability to tax.

The object sought to be served by enacting section 79 appears to be to discourage persons claiming a reduction of their tax liability on the profits earned in companies which had sustained losses in earlier years. It was not unusual for a group of persons to acquire a company, which had suffered losses in earlier years, in the expectation that the company would earn substantial profits after such acquisition, and they would benefit by a reduction of the tax liability on those profits on a set off of losses carried forward from earlier years before the acquisi- tion. The acquisition of a company in such a case would be effected by a change in its share holding and the control over the company could be ensured by securing the beneficial ownership of shares·.carrying 51 per cent or· more of the voting power. If the change in share hoiding did not result in holding voting power of 51 per cent or it was estab- lished that the shares of the company carrying not less than 51 per cent of the voting power were beneficially held by the same persons, both on the last day of the previous year as well as the last day of the year or years in which the Joss was incurred, it could be presumed that there was no change in the control over the company, and the disqualifica- ' tion imposed on the company because of the change in its share hold- ing would stand removed.

But there may be a change in the share-holding, and it may result H

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in a change of control of the company. Yet every such change of shareholding need not fall within the prohibition. There can be a case where persons already owing a shareholding carrying less than 51 per cent of the voting power in the company may enlarge their share- holding during the previous year in order that control over the com- pany may pass to them. Attempts to acquire control over a company by controlling a majority of the share-holding are not unknown. The acquisition of control over a company provides a source of both direct and indirect financial benefit as well as power over its policies and activities. On the other side, there can be a case where the change is affected with a view to avoiding or reducing some liability to tax. The change is effected not for business or commercial reasons but in order that tax liability may be avoided or reduced. In that event, the change c in the share-holding will tend to bring about the result which s. 79 was designed to prevent. In our opinion, to avoid falling within the scope of s. 79 it is sufficient for the assessee to show that the case attracts either cl. (a) of cl. (b). If the assessee succeeds in doing so, he will be entitled to the benefit of the provisions of the Income Tax Act entitling o him to claim a carry forward and set off losses suffered by the company in an earlier year or years against the income of the previous year. We are fortified in our conclusion by the view expressed by the Gujarat High Court in Commissioner of Income-tax, Gujarat-/// v. Shri Sub- halaxmi Mills Ltd., [1983] 143 I.T.R. 863 and by the Madras High Court in Commissioner of Income-tax v. Saravanabhava Mills Pvt. E Ltd., [ 1983] 143 I.T.R. 856.

In our judgment, the High Court is right in the view taken by it and the appeal must be dismissed.

The appeal is dismissed with costs. F H.L.C. Appeal dismissed.