TMI Blog1982 (9) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... rried forward further. The ITO, however, did not accept the claim of the assessee on the ground that in view of the change in the shareholding of the company, the provisions of s. 79 were attracted, and, therefore, the claim to carry forward the unabsorbed prior losses and allowances cannot be allowed. He, therefore, determined the net loss for the assessment year 1973-74 at Rs. 51,927 only and held that this amount alone could be carried forward to the next assessment year. In the next assessment year 1974-75 also, the assessee claimed that the prior losses incurred even before the year of change should be brought forward and set off in addition to the loss determined in the preceding assessment year. The ITO found that the assessee had a total income of Rs. 1,97,263 and allowed a set-off of a sum of Rs. 43,463 only as the loss of the preceding assessment year carried forward to this assessment year and determined the total taxable income at Rs. 1,55,240. The assessee appealed to the AAC for both the assessment years 1973-74 and 1974-75. For the assessment year 1973-74, the AAC held that there being no income for the year, there was no necessity for applying s. 79, and for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary in the year of change for the reason that there was no profit in that year against which the assessee could claim set-off of the prior losses, the finding on such a question became necessary in the subsequent assessment years, and, therefore, the ITO was justified in giving a finding on that question. After considering the rival contentions and after examining the scope of s. 79, the Tribunal found that there are two conditions which have to be satisfied before applying s. 79, namely, (1) 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, and (2) that the ITO is satisfied that the change in the shareholding was not effected with a view to avoiding or reducing any liability to tax, and that on the facts of this case, the first condition cannot be taken to have been satisfied, and that as regards the second condition, the Tribunal felt that in the assessment year 1973-74, the change in the shareholding cannot be said to have been eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding was not effected with a view to avoiding or reducing any liability to tax. " As per the above section, a company in which the public are not substantially interested is disentitled to carry forward and set off an earlier year's loss against the income of the accounting year if 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 not beneficially held by persons on the last day of the year in which the loss was incurred, if the change in the shareholding was effected with a view to avoid or reduce any tax liability. According to the Revenue, cls. (a) and (b) of s. 79 should be understood as disjunctive and not as cumulative in effect as has been held by the Tribunal. Kanga and Palkhivala in 7th Edn., Vol. I, p. 636, proceeded on the basis that cls. (a) and (b) are cumulative and state : "Even if shares carrying 51 per cent. of the voting power cease to be held by the same group, the section would not apply to the company if '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'. If the change in the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1963-64, during which period there was change in the shareholding. The ITO had taken the view that in view of s. 79 of the Act, the assessee became disentitled from claiming such a setoff in view of the change in the shareholding, without going into the question as to whether the change in the shareholding was brought about for avoiding or reducing the tax liability. The assessee's contention that both the conditions mentioned in cls. (a) and (b) of s. 79 should have been satisfied before the assessee could be deprived of the benefit of set-off of the earlier years' losses and that merely because there was a change in the shareholding of the company, to the extent contemplated by cl. (a), the assessee cannot be deprived of the benefit of set-off, and that on the facts of that case, the change in the shareholding cannot be taken to have been made with a view to avoid or reduce the tax liability. This contention of the assessee though not accepted by the ITO was accepted by the AAC on appeal. There was a second appeal to the Tribunal. The Tribunal took the view that the two specific conditions mentioned in cls. (a) and (b) were not cumulative, but they were alternative, and if any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Select Committee by its report presented on 10th August, 1961, in para. 41, stated " the Committee think that the provisions of this clause should be applied where a change in the shareholding of the company has been brought about with the intention of reducing tax liability. The clause has been redrafted accordingly ". It is as a result of this report of the Select Committee that cl. (b) had been introduced in s. 79 before it was passed by Parliament. Therefore, it is clear that the object of introducing cl. (b) was to see that the assessee is not deprived of the benefit of s. 72 merely on the ground that there has been a change in more than 51% of the voting power, unless the change in the shareholding has been made with a view to avoid or reduce the tax liability. If the contention of the Revenue that the two clauses are independent and that the assessee can be deprived of the benefit of s. 72 if any of the conditions of the section is satisfied, is accepted, it will mean that any change in the shareholding will be a matter to be taken into account by the ITO under cl. (b) and, in that event, cl. (a) will become unnecessary or otiose. So a close reading of s. 79 would l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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