TMI Blog1976 (1) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 1962-63, cannot be invoked for the assessment year 1965-66, is erroneous in law ? (2) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that in applying section 79 of the Act, only the business loss should be taken into account and not the unabsorbed depreciation or unabsorbed development rebate is erroneous in law ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that in order to invoke the provisions of section 79 of the Act, the department must prove not only that there was a transfer of the shareholding of not less than 51 per cent. of the voting power as per clause (a) of section 79 but also that such a transfer was with the intent to reduce or avoid the tax liability as per clause (b) of section 79 ? (4) Whether, on the facts and in the circumstances of the case, it is established from the material on record of the case that the condition of the exemption clause (a) of section 79 of the Act is not fulfilled and, therefore, no loss incurred in any year prior to the previous year corresponding to the assessment year under reference could be carried forward and set off against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not fulfilled and, therefore, no loss incurred in any year prior to the previous year corresponding to the assessment year under reference could be carried forward and set off against the income of the said previous year ? (5) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the motive in acquiring shares of the assessee-company by the Sayaji Mills Ltd., was not to reduce or to avoid the tax liability was justified ?" Since the questions which arise are common in both the cases, we will briefly mention at this stage the facts arising in Income-tax Reference No. 65 of 1974. The assessee before us is a public limited company having a textile mill in Cambay in Gujarat State. Its issued and subscribed capital was Rs. 21,00,000 divided into 21,000 shares of Rs. 100 each. Up to December 14, 1961, the majority of the shares were held by Somani group or its nominees and the assessee-mill was under the management of Somani group. On December 14, 1961, all the shares were purchased by the Sayaji Mills Ltd., Ahmedabad, and thus the assessee became the wholly owned subsidiary of the Sayaji Mills Ltd. from December 14, 1961, onwards. Up to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 and 1964-65 the total income of the assessee-mills, prior to the set-off on account of carried forward losses, carried forward unabsorbed depreciation and carried forward unabsorbed development rebate was as under : Rs. Assessment year 1962-63 1,28,339 Assessment year 1963-64 6,57,496 Assessment year 1964-65 2,99,807 For the assessment year 1965-66 the business income without considering the carried forward business loss, unabsorbed depreciation and unabsorbed development rebate was Rs. 5,05,488 and there was an amount of capital gains to the extent of Rs. 3,522. From this, the unabsorbed business losses carried forward for the assessment year 1960-61 amounting to Rs. 29,292 and unabsorbed brought forward depreciation for the assessment year 1963-64 amounting to Rs. 4,79,718 were set off and the total income was computed at nil under the ITO's order under s. 143(3) of the Act. This order was passed by the ITO on March 24, 1970. In the course of the assessment proceedings for the assessment year 1966-67, the ITO took the view that the provisions of s. 79 of the I.T. Act, 1961 (hereinafter referred to as "the Act"), were applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 79 could not be given a wider interpretation but it must be restricted to " brought forward business loss " only. It was next contended by the assessee before the Tribunal that s. 79 could be applied only if the Department could prove that both the conditions laid down in s. 79(a) and s. 79(b) were complied with in the assessee's case and not otherwise. The Tribunal held that in order that the assessee should be disentitled to carry forward business losses, it should be necessary for the Department to prove not only that the change in the shareholding which had been effected was 51% or more but (that it) was also with a view to reduce or avoid tax liability, and that, for the assessee, it would be enough to prove that the change in the shareholding was less than 49 per cent. or alternatively that it had not been effected with the intention to reduce or avoid the tax liability. The Revenue contended before the Tribunal that the change in the shareholding was brought about with view to reduce the tax liability by the assessee and various factors dealing with questions of fact were relied upon by the Revenue before the Tribunal. In this connection the Tribunal held that the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t rebate as a deduction in respect of the previous year in which the ship was acquired or the machinery or plant was installed and this can be done only if the profit and loss account, before it was finally made up, shows the necessary debit entry for credit entry for the reserve account. If this is not done, the condition for getting the benefit of development rebate will not be satisfied and the development rebate cannot be allowed and once it is found that it cannot be allowed in the relevant previous year in which the machinery or plant was installed or the ship was acquired, it cannot be allowed to be carried forward in any subsequent year. Moreover, if the assessee were to wait for funds before creating a reserve, in a conceivable case the assessee concerned may not get any profit for several years after installation and only in the eighth year he may acquire sufficient profits for the creation of the reserve. Then the reserve itself having to be set apart for a period of eight years from the date of its creation, it would mean that a total of sixteen years must expire before the reserve is finally exhausted or brought to an end. In view of this reasoning on the legal aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the conditions laid down in these two clauses must be read as cumulative and not disjunctive and if either of these conditions is not satisfied, s. 79 will not apply. He lastly submitted that on the facts the conclusion of the Tribunal regarding the motive of the assessee in acquiring this particular company as a wholly owned subsidiary being part of the ordinary commercial enterprise of the assessee-company was not correct and the conclusion of the Tribunal on this aspect of the case was not justified on the facts of the case. He contended that the motive of the assessee was to reduce or to avoid the tax liability and this was amply borne out by the material on record and, therefore, the conclusion of the Tribunal which was on a mixed question of law and fact was not justified on the facts and circumstances of this case. As regards the first submission of Mr. Kaji it must be pointed out that in its order as shown at the end of para. 6, the Tribunal has left the question open as to whether the assessee was a company in which the public are substantially interested or not. In para. 6 the Tribunal has pointed out: It was, however, further submitted by the Revenue that the qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urring losses in the past and which has substantial carried forward losses. So far as an incorporated company is concerned, there is no succession to the company since by a legal fiction until it is wound up, even if shareholders may go on changing, the company continues as a legal entity and hence this section has been enacted with a view to lifting the veil of incorporation and looking at the realities of the situation. Section 79 gives a mandate to the Revenue authorities not to carry forward losses when a change in the shareholding has taken place in a particular previous year under the conditions mentioned in the section. It is necessary at this stage to refer to some of the changes which have taken place and what was stated in the Objects and Reasons at the time when the provisions were enacted. As the Addl. Commissioner has pointed out, s. 79 was brought on the statute book as a result of the recommendations of the Direct Taxes Administration Inquiry Committee. In its report of November 1959, at para. 7. 81(12) the committee observed : "There have been many instances, where persons acquired companies, which had sustained losses in earlier years, carried on profitable b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir income-tax laws to provide for carrying back business losses, the Bill tries to abridge even the limited right of carrying forward business losses. The principle of corporate entity, which is the very foundation of company law, is sought to be undetermined by clause 79. The draft of this clause puts the onus on the assessee to prove that the change in the shareholding was not effected with a view to avoiding or reducing tax liability. This is clearly putting the onus on the wrong side. This clause should be omitted. But if it is sought to be retained at all, it should apply in cases where the circumstances show that the change in the shareholding was effected with a view to avoiding or reducing tax liability, without casting the onus on the taxpayer to prove the negative." Thus so far as this minute of dissent was concerned, the only objection was about the onus of proof being cast on the assessee rather than on the Department and the minute of dissent wanted that the change should be effected to cast the onus on the Revenue rather than on the assessee. In accordance with the recommendations of the majority of the Select Committee the clause was redrafted by the addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e particular assessment proceedings. Section 72 deals with the carry forward and set-off of business losses. Under sub-s. (1) of s. 72 : " Where for any assessment year, the net result of the computation under the head ' Profits and gains of business or, profession ' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where the assessee has income only under the head 'Capital gains' relating to capital assets other than short-term capital assets and has exercised the option under subsection (2) of that section or where he has no income under any other head, the whole loss shall, subject to the provisions of this Chapter, be carried forward to the following assessment year." and under cl. (i) of s. 72(1): "(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year: Provided that the business or profession for which the loss was originally computed continued to be car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is obvious that in each assessment year, the ITO concerned or the assessing authority has to ascertain as to what is the amount of business loss which have been carried forward from the immediately previous assessment year. That being the case, if the conditions of s. 79 are otherwise satisfied and s. 79 can be invoked, the question that has to be asked is : whether in the eye of the law so far as the assessment year 1965-66 is concerned, there was any business loss validly carried forward from the immediately preceding assessment year. It is obvious that if the conditions of s. 79 are otherwise satisfied, there could not have been any carrying forward and set off of the business losses incurred by the assessee-company prior to 1962-63 so far as the assessment year 1963-64 or 1964-65 was concerned and similarly each subsequent assessment year was concerned. But once it is found that the provisions of s. 79 can be invoked because the conditions and requirements laid down in s. 79 are satisfied with reference to the assessment year 1962-63, business losses which are claimed as being carried forward and which are sought to be set off against profits and gains from business so far as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income of the previous year meaning thereby the previous year in which the change in the shareholding took place. The provisions of cl. (a) refer to two situations, namely, the situation of the shareholding of the company as on the last day of the previous year in which the change in shareholding took place and the 1st day of the previous year or years in which the loss was incurred. But cl. (a) of s. 79 deals with the facts as they prevailed at the relevant time of change in shareholding and not with reference to the situation which prevails in any subsequent years. However, if s. 79 cannot be looked at in isolation and has to be read as part of the entire scheme of Chap. VI and particularly in the light of the provisions of s. 72, it is obvious that the conclusion of the Tribunal cannot be sustained in view of the use of the word " shall be carried forward to the following assessment year and so on " occurring in s. 72(1)(ii). As regards the next contention of Mr., Kaji regarding whether development rebate and depreciation allowance which have been carried forward from a year prior to the previous year in which the change in the shareholding took place or whether only the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slature has created a ban, a mandate, against carrying forward and set off of the loss of the previous year if a change in the shareholding has taken place in a particular previous year in the case of company which is not a company in which the public are substantially interested. However, the Legislature says that this ban against the carrying forward of loss from a year prior to the previous year when the change in shareholding takes place and setting it off against the income of the relevant previous year, in which the change took place, is not to operate if cl. (a) or cl. (b) is satisfied. Clause (a) requires that on the last day of the previous year in which the change took place the shares of the company carrying not less than fifty-one per cent of the voting power must have been 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. Secondly, the Legislature says in cl. (b) that if the ITO is satisfied that the change in the shareholding was not affected with a view to avoiding or reducing any liability to tax, the ban set out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the assessee or against the assessee on the facts of this case. The Addl. Commissioner and the ITO concerned, who adopted his reasoning, held that taking the facts of the case, into consideration in view of the different aspects of the case, the question of motive was established against the assessee and they held that the change in the shareholding was effected with a view to avoiding or reducing liability to tax. Each of the factors which weighed with the departmental authorities was considered by the Tribunal and on an assessment of the facts the Tribunal held that the motive for the change in the shareholding, namely, that it was effected with a view to avoiding or reducing the liability to tax had not been established and that it was merely a commercial enterprise on the part of Vadilal Lallubhai group to buy over the shareholding of the assessee-company. In this connection the Tribunal's conclusions on the question of motive were as follows. In para. 13 of its order, the Tribunal observed : " We have pondered deeply upon the submissions made by the learned Advocate-General as well as the departmental representative on this issue (issue of motive). In our opinion, so f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ussion, namely, the transaction in connection with the change in the shareholding of the assessee-company. The Tribunal found that there was no material on record that the negotiations to acquire interest in New Prahlad Mills were already carried on by the Vadilal group when the transaction in the instant case was finalised. It was contended in connection with the issue of motive before the Tribunal so far as the Department was concerned that Vadilal group knew that the assessee-company had already turned the corner in 1960 and so it would make profits in the subsequent years. But this contention was rejected because the assessee was automatically to get the benefit of carry forward and setoff of loss even if there was no change in the ownership of the shareholding. It was urged before the Tribunal that the Vadilal group disposed of its shareholding in the assessee-company in a subsequent year and that too cheaply was of no consequence at all, as it was a development which took place subsequently in a later year, with which the Tribunal was not concerned and the Tribunal held that the Department had not been successful to prove that the motive was to reduce or avoid the tax liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. CIT [1957] 31 ITR 28, that findings on questions of pure fact arrived at by the Tribunal are not to be disturbed by the High Court on a reference unless it appears that there was no evidence before the Tribunal upon which they, as reasonable men, could come to the conclusion to which they have come; and this is so, even though the High Court would on the evidence have come to a conclusion entirely different from that of the Tribunal. In other words, such a finding can be reviewed only on the ground that there is no evidence to support it or that it is perverse. It has been further held in that case that when a conclusion has been reached on an appreciation of a number of facts established by the evidence, whether that is sound or not must be determined, not by considering the weight to be attached to each single fact in isolation, but by assessing the cumulative effect of all the facts in their setting as a whole. Where an ultimate finding on an issue is an inference to be drawn from the facts it is a mixed question of law and fact, and the inference from the facts found is, in such a case, a question of law. In that case it has also been held that where the point for determina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal on an appreciation of the facts before it has reached this particular conclusion regarding motive, it cannot be said that the Tribunal was not justified in reaching its conclusion on the issue of motive. As we have pointed out, the Tribunal has not relied on any material which was not on record. It cannot be said that there was no evidence before the Tribunal nor can it be said that, looking to the totality of the factors, the conclusion of the Tribunal on the facts from which an inference of motive was drawn is perverse or unreasonable. We are not sitting in appeal on a conclusion of fact reached by the Tribunal and, therefore, it is not for us to draw any inference to arrive at our own conclusions regarding the facts which go in the determination of the question as to motive. The Tribunal cannot be said to have misdirected itself in law in view of the findings of fact reached by it on the issue of motive. It cannot be said that any material aspect of the case has been overlooked by the Tribunal in arriving at its conclusions of fact from which an inference as to motive was drawn. Under these circumstances it must be held that the conclusion of the Tribunal that the motive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the Revenue. Question No. (6): In the negative as to first part, that is, the conditions of the exemption cl. (b) of s. 79 is satisfied. In the negative as to second part, that is, in favour of the assessee and against the Revenue since we hold that loss incurred in any year prior to the previous year corresponding to the assessment year can be carried forward and set off against the income or profits and gains of the said previous year. Question No. (7): As observed above, in view of the decision in the case of this very assessee as reported in [1975] 100 ITR 188, the question is answered in the negative, that is, against the assessee and in favour of the Revenue. So far as Income-tax Reference No. 98 of 1974 is concerned, we answer the questions as follows: Question No. (1): In the affirmative, that is, in favour of the Revenue and against the assessee. Question No. (2): In the negative, that is, in favour of the assessee and against the Revenue. Question No. (3): In the negative, that is, in favour of the assessee and against the Revenue., Question No. (4): In the affirmative as to first part; second part does not arise in view of our answer to the previous qu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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