http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

PETITIONER: COMMISONER OF INCOME TAX, BOMBAY

       Vs.

RESPONDENT: ITALINDIA COTTON CO. (P) LTD.

DATE OF JUDGMENT05/09/1988

BENCH: PATHAK, R.S. (CJ) BENCH: PATHAK, R.S. (CJ) MUKHARJI, SABYASACHI (J)

CITATION:  1988 AIR 2057            1988 SCR  Supl. (2) 814  1988 SCC  (4) 221        JT 1988 (3)   566  1988 SCALE  (2)654

ACT:     Income  Tax Act, 196i--5. 77--Carry forward and  set-off of loss incurred in .any earlier year against income of  the relevant previous year--Conditions provided in cls. (a)  and (b) of s. 79 operate in the alternative, not cumulatively.

HEADNOTE:     The respondent-assessee which had suffered a loss during the  assessment  year 1960-61, and whose  share-holding  had undergone  a change subsequently, claimed a set-off  against the  same  in its assessment for the year 1963-64,  but  the Income-tax  Officer turned it down on the ground that s.  79 of  the Income-tax Act, 1961 dis-entitled the assessee  from claiming  such a set off since 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 March 31,  1963.  On appeal,  the  Appellate  Assistant  Commissioner  held  that before  the  right to set off a loss could be denied  to  an assessee,  not only should there be a change in the  persons holding 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. On appeal by the Revenue, the Appellate  Tribunal observed that the denial of the set  off of  a  loss incurred in an earlier year was subject  to  two exceptions: (i) that the beneficial holding representing not less  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 (ii)  that any change in the share-holding should  not  have been  effected  with  a view to  avoiding  or  reducing  any liability   to  tax;  that  these  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. However, at the instance  of the  assessee, the Tribunal referred the following  question to the 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?"

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

                                                  PG NO 814                                                    PG NO 815     The If High Court answered the question in favour of the assessee, 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. Dismissing the appeal,     HELD: 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) or 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 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. [820C-D]     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 share-holding 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 and on the last day of the year or  years  in which  the  loss  was incurred the  shares  of  the  company carrying not less than 5l 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  holding was  not  effected with a view to avoiding or  reducing  any liability to tax. The question before us is whether the  two conditions  operate cumulatively or in the  alternative.  In other  words,  should  both  conditions  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 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 persons on the relevant dates. Similarly,  the  benefit is  available  notwithstanding  the                                                   PG NO 816 change  in shareholding in the previous year if  the  change was  not  effected with a view to avoiding or  reducing  any liability to tax. [818F-H, 819A-D]     Commissoner   of   Income-tax,   Gujarat-III   v.   Shri Subhalaxmi   Mills   Ltd.,  [1983]  143   I.T.R.   863   and Commissioner of Income-tax v. Saravanabhava Mills Pvt. Ltd., [1983]143I.T.R.856, approved.

JUDGMENT:    CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1520 (NT) of 1986.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

   From  the  Judgment  and Order dated  10.8.1977  of  the Bombay High Court in I.T.R. No. 34 of 1968. V.S. Desai and Ms. A. Subhashini for the Appellant.     Harish  Salve,  Mrs. A.K. Verma and Joel Peres  for  the Respondents. 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.     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 the share  holding of the three companies during the accounting year ending 3 1 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.     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 1964- 64,the  question arose whether the assessee was entitled  to of  carrying forward that loss for the purpose of  computing                                                   PG NO 817 its assessable profits for that assessment year. The Income- tax  Officer  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 assessee, the Appellate Assistant Commissioner of Income-tax took a different view. He held that before the right to  set off  a loss could be denied to an assessee, not only  should there  be a change in the persons holding 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 exceptions, the first  being that  the beneficial holding representing not less 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  following  question to the Bombay High  Court  for  its opinion:

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

"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. 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 view to avoiding  or  reducing any liability to tax that question should now be decided  by                                                   PG NO 818 the Tribunal before the claim for 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 loss suffered by him. Section 70  provides for  the  set off of a loss from 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 relating to the setting off of losses  in certain  particular  cases. Section 79, with  which  we  are concerned, provides: "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  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 and on the last day of the year or  years  in                                                   PG NO 819 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 was  not  affected with a view to avoiding or  reducing  any liability to tax. The question before us is whether the  two

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

conditions  operate cumulatively or in the  alternative.  In other  words,  should  both  conditions  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 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 persons on the relevant dates. Similarly,  the  benefit is  available  notwithstanding  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  acquisition. 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 holding did not  result in holding voting power of 51 per cent or it was established that  the  shares of the company carrying not less  than  51 percent  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  loss was incurred, it could be presumed that there was no  change in  the control over the company, and  the  disqualification imposed  on the company because of the change in  its  share holding would stand removed.     But  there may be a change in the share-holding, and  it may result in a change of control of the company. Yet  every                                                   PG NO 820 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 percent of the  voting power in the company may enlarge their share-holding  during the previous year in order that control over the company 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 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

Income  Tax Act entitling 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- III v. Shri Subhalaxmi Mills Ltd., [1983] 143 I.T.R. 863 and by  the Madras High Court in Commissioner of  Income-tax  v. Saravanabhava  Mills Pvt Ltd.,[1983] 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. H.L.C.                                     Appeal dismissed