TMI Blog1990 (2) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... cted with a view to avoiding or reducing any liability to tax ? (c) Whether, on the facts and in the circumstances of the case, there was any material before the Tribunal to hold that the change in the shareholding of the assessee-company was effected with a view to avoiding or reducing any liability to tax within the meaning of section 79 of the Income-tax Act, 1961 ? (d) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in rejecting the assessee's claim for set off of the loss for the year 1976 against the profits of the year 1977 though there was no change in the shareholding within the meaning of section 79 of the Income-tax Act after January 10, 1976 ? " The facts relating to this case, shortly, are as follows: The assessment year in question is 1978-79 for which the relevant year of account is the year ending on December 31. The assessee is a resident-company. It owns a tea garden and is engaged in the business of cultivation, manufacture and sale of tea. The assessee-company keeps accounts on mercantile basis. In the course of the assessment proceedings for the assessment year 1978-79, the Income-tax Officer noticed that there h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He also pointed out that conditions (a) and (b) of section 79 are both cumulative in effect and unless both the conditions are affirmatively satisfied against the assessee-company, the benefit of carrying forward business loss cannot be deprived to an assessee. The Commissioner of Income-tax (Appeals) further held that, in the instant case, there was no doubt that the first condition of section 79 was satisfied, inasmuch as there had been a change in the shareholding structure of the assessee-company in the sense that shares carrying more than 51% of the voting power which were previously held by the Guha Roy Group are now held by the Mehra Group. But the Commissioner of Income-tax (Appeals) held that the change in the shareholding had taken place in this case not with a view to reduce the tax liability but as a bona fide business transaction. The Commissioner of Income-tax (Appeals), accordingly, directed the Income-tax Officer to allow the assessee-company the benefit of setting off its brought forward losses in respect of the earlier years against its business income for the assessment year 1978-79, in as much as, in his view, section 79 had no application in this case. The Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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." Mr. Poddar, learned counsel for the assessee, referred to the decision of the Supreme Court in CIT v. Italindia Cotton Co. (P.) Ltd. [1988] 174 ITR 160. In this case, the Supreme Court held that the two conditions specified in clauses (a) and (b) of section 79 of the Income-tax Act, 1961, which applied to a company which is not a company in which the public are substantially interested, are intended to operate as alternative to one another. If the terms of either clause (a) or clause (b) are satisfied, the disqualification suffered by the company, by reason of a change in the shareholding in the relevant previous year, is removed and the company is entitled to the benefit of the provisions relating to carry forward and set-off of losses. The benefit is available notwithstanding the change in the shareholding in the previous year if the change was not effected with a view to avoiding or reducin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o on account of lack of proper management as Mr. B. C. Guha Roy, who was then managing the company, was seriously ill and he ultimately died in August, 1976. The assessee-company was also passing through a great financial crisis, as it could not repay the overdraft taken from the bank. The bank also had initiated civil and criminal suits against the company and its erstwhile directors which were pending in different courts. The bank also refused to extend overdraft facility to the assessee-company on the hypothecation of crops. In this situation, one of the creditors of the company, viz., the Mehra Group, came forward and purchased the controlling interest from the Guha Roy Group. Mr. Poddar, therefore, submitted that it was clearly case of a bona fide commercial transaction and there was no intention to reduce or avoid any tax liability. It was further submitted that the Tribunal, in holding that the change in shareholding was effected in this case from the Guha Roy Group to Mehra Group, with a view to avoiding or reducing liability to tax, did not refer to any fact or material whatsoever on record. The Tribunal only referred to the inference drawn by the Income-tax Officer. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the 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 shareholding 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 the shareholding 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 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 loss was incurred, it could be presumed that there was no change in the control over the company and the disqualification im ..... X X X X Extracts X X X X X X X X Extracts X X X X
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