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TMI Blog1976 (1) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, not having been invoked for the assessment year 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 refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 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. fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 applicable to the case of the assessee. He was also of the opinion that the provisions of s. 79 should be made applicable to the assessee even for the assessment year 1965-66 by the Department invoking the provisions of s. 263 of the Act. For the reasons stated by him in his order dated March 29, 1971, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 transaction of December 14, 1961, was entered into as an ordinary commercial transaction and by investing the amount, the Sayaji Mills Ltd. had acquired the textile unit for its commercial enterprise and not with the motive set out in s. 79(b) of the Act. There was one further question regarding the devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 this court had held in that case of this particular assessee that the development rebate could not be allowed and could not be carried forward since the development rebate reserve was not created in the year of the installation of the machinery. In view of this decision of our High Court, it must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular 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 question as to whether on or before 14-12-1961, the assessee was a company in which the public were substantially interested or not, has never been examined and that issue may be referred back to the Appellate Assistant Commissioner and we may proceed to decide the other issues in this appeal, leaving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business through them and were able to reduce their tax liabilities by setting off the earlier losses of the companies when the shares were held by different persons. To get over this position, we endorse the recommendations of the Taxation Inquiry Commission contained in para. 73 of Chapter IV of Volume II ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cl. (b) as it now stands and the section as recommended by the Select Committee was in the form in which it stands on the statute book today. This history of the enactment shows that the section was introduced in this Act for the first time so far as income-tax law in India is concerned. There was no provision si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 carried on by him in the previous year relevant for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on." We are not concerned with the rest of the provisions of s. 72. It is, therefore, clear, l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, 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 the assessment year 1965-66 is concerned, the ITO must ask himself the question whether any of these losses are from a date prior to the date of the commencement of the previous year relevant to the assessment year 1962-63. Of course, so far as the assessment year 1965-66 is concerned, the ITO or the assessing authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business losses are covered by s. 79, in our opinion, s. 79 itself gives the answer. Section 79 contemplates that no loss incurred in any year prior to the previous year can be carried forward if the other conditions of s. 79 are satisfied. This s. 79 forms part of Chap. VI and it is connected with the carry forward and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the main body of s. 79 is not to operate. . The word " unless " according to grammatical meaning is equivalent to " if not " and this word followed by the disjunctive " or " occurring between cls. (a) and (b) clearly on a grammatical interpretation goes to show that cls. (a) and (b) are to be applied disjunctively and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 far as the assessee was concerned, any motive to save or reduce its tax liability consequent to the acquisition of the shareholdings could not be attributed to it, because whether its shares were held by Somanis or Sayaji Mills Ltd. since it was an independent unit and was assessed as a company, it would have, as per the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 liability by making investment in Subhlaxmi Mills Ltd. So far as the new shareholders were concerned, the Tribunal had to hold that even if in fact there was such a reduction or avoidance of tax, the provisions of s. 79(b) would not be attracted. It must be pointed out that so far as s. 79(b) is concerned, the facts have to be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 determination is a mixed question of law and fact, while the finding of the Tribunal on the facts found is final, its decision as to the legal effect of those findings is question of law which can be reviewed by the court. Applying these principles to the finding regarding motive reached by the Tribunal, it must be held that the ultimate f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in acquiring the shares of the assessee-company by the Sayaji Mills Ltd. was not to reduce or avoid the tax liability cannot be said to be unjustified. Looking to the totality of the circumstances, once the Tribunal came to the conclusion that it was ordinary commercial enterprise on the part of Vadilal group to acquire, the entire s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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