TaxTMI 
TaxTMI 
1976 (1) TMI 2
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....ons of section 79 of 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 as....
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.... that the condition of the exception 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 subs....
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....; Rs. Rs. 1953-54 & ... 5,72,300 ... 1954-55 1958-59 2,34,595 2,62,401 86,944 1959-60 4,84,173 2,25,581 1,20,275 1960-61 3,77,778 2,94,844 2,10,034 1961-62 ... ... 1,79,605 (i.e., year ending 31-12-1960). -----------------------------------------------------------  ....
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....and by his order in appeal, the AAC confirmed the order of the ITO. Against the order of the AAC for the assessment year 1966-67 and against the order of the Addl. Commissioner in revision so far as the assessment year 1965-66 was concerned, the assessee preferred two appeals to the Appellate Tribunal. These two appeals were disposed of by a common judgment. Before the Tribunal it was first contended that the provisions of s. 79 could not be invoked in respect of the assessment years 1965-66 and 1966-67 because these provisions were not invoked by the Department in respect of the assessment year 1962-63 since in the previous year relevant to the assessment year 1962-63, there was change in the shareholding of the assessee-company and s. 79 became applicable, if at all, in the assessment year 1962-63. The contention before the Tribunal was that as the Department failed to invoke the provisions of s. 79 in the assessment year 1962-63, the Department had lost the right to apply the provisions of that section in subsequent years. The Tribunal accepted this contention of the assessee. The second contention urged on behalf of the assessee before the Tribunal was that even assuming that t....
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....n of the machinery. The Tribunal directed that the development rebate, which was not set off, should be carried forward and set off against future profits, if reserves were created in the subsequent years. In view of these different conclusions of the Tribunal on different contentions raised before it, the seven questions which we have set out hereinabove have been referred to us for our opinion. As regards question No. (7) which is concerned with the question of the year in which the development rebate is required to be created, in the case of this particular assessee with reference to an earlier assessment year, there is a decision of this High Court in Addl. CIT v. Shri Subhlaxmi Mills Ltd. [1975] 100 ITR 188. In that case the High Court was concerned with the assessment year 1962-63 and this court examined the legal position in the light of the provisions of ss. 33 and 34 and particularly in the light of the Explanation to s. 34(3) which was added with retrospective effect that irrespective of the result of the profit and loss account shown by the books of the assessee, the reserve fund can be created merely by book entries, that is, by debiting the amount of the reserve to ....
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.... the negative, that is, in favour of the Revenue and against the assessee. It is common ground that the development rebate reserve was not created in the year of installation of the machinery concerned and hence there was no question of allowing development rebate in the year of installation in order to its being allowed to be carried forward in any subsequent year. We will now take up the various contentions which have been urged by Mr. Kaji for the Revenue as regards the conclusion of the Appellate Tribunal regarding the contentions that had been raised before it. The first submission of Mr. Kaji is that the assessee is a company in which the public are not substantially interested and for that purpose the material date that should be taken into consideration is December 14, 1961, and not any other date. His next submission was that the conclusion of the Tribunal that s. 79 can be invoked in the first previous year in which the change took place was not correct and if that was not done, it cannot be done so in a subsequent year was contrary to the provisions of s. 79 itself and the scheme as to development rebate depreciation allowance and business loss and the carry forward a....
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....such necessity arises, it is not necessary for us nor is it proper for us to decide this question as to whether the assessee-company is a company in which the public are or are not substantially interested as on December 14, 1961. Before starting to deal with the second submission of Mr. Kaji, it is necessary that we should refer to the provisions of s. 79 of the Act. Section 79 has been brought on the statute book by the Act of 1961 and it was at the stage of the Select Committee when this Act was enacted that several changes were made in the language of the section and the provisions of the section. Section 79 as it now stands is as follows: " 79. Notwithstanding anything contained in this Chapter, where a, change in shareholding has taken place in a previous year in the case of 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 beneficially held by persons who beneficially held sh....
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....ntained the following provision in cl. 79: " Notwithstanding anything contained in this Chapter, no loss incurred in any year prior to the previous year in the case of a company, not being a company in which the public are substantially interested, shall be carried forward and set off against the income of the previous year, unless on the last date 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. " Therefore, in the clause as originally drafted there was no provision similar to cl. (b) of s. 79 as it was finally enacted by Parliament. Regarding cl. 79 the Select Committee observed: " The Committee thought that the provisions of the clause should be applied only when the shares of the company which has incurred loss are acquired by new shareholders with the object of getting the benefit of those losses and thus avoiding taxation liability. " The clause has been redrafted accordingly. It may be pointed o....
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....he transaction and behind the facade of corporate entity. It is well recognised in modern jurisprudence that notwithstanding the fact that a corporation, that is, an incorporated company, is a legal person in the eye of the law, it is open to the Legislature and even to the courts in certain cases to lift this veil and look at the realities and that is precisely what the Legislature has done in the instant case and we must keep this object of the Legislature in view while interpreting the provisions of s. 79. As observed above, it was contended before the Tribunal, and that contention was accepted by the Tribunal, that since the Revenue had not invoked the provisions of s. 79 for the assessment year 1962-63, which is the first assessment year after the change in the shareholding which took place on December 14, 1961, it was not open to the Revenue to invoke these provisions for the assessment years 1965-66 and 1966-67. It must be borne in mind that s. 79 occurs in Chap. VI which deals with aggregation of income and set off or carry forward of loss. Section 66, which is the first section in this chapter, mentions that in computing the total income of an assessee, there shall be incl....
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....inally incurred and if the loss which has been carried forward from the previous year is not wholly so set off, the amount of loss not so set off has to be carried forward to the following assessment year from year to year and that is the only meaning that can be attached to the words " and so on " occurring in s. 72(1)(ii) which we have emphasized above. Under these circumstances the contention urged by Mr. Patel on behalf of the assessee before us which was the same contention urged on behalf of the assessee before the Tribunal, that s. 79, not having been invoked in 1962-63, could not be invoked in any subsequent year, cannot be accepted, because, if that contention were to be accepted, it would mean going contrary to the entire scheme of carrying forward and set-off of business losses from previous years. It is true that under s. 72(3) no loss other than the loss referred to in the proviso to sub-s. (1) of s. 72, shall be carried forward under s. 72 for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. Thus, the maximum period for which the business loss can be carried forward is eight years, computed from the fir....
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.... assessing authorities to apply other provisions of law, say for example, reopening, rectification, revision, if the conditions of any of these provisions are satisfied to reopen the assessment proceedings for those assessment years. But unless and until those assessment proceedings are reopened or reviewed or revised or rectified in accordance with the appropriate provisions of law so far as the assessment year 1965-66 is concerned, the assessing authority must proceed upon the footing that the provisions of s. 79 can apply only so far as the assessment year 1965-66 is concerned in respect of the business losses which have been carried forward from assessment year 1964-65 and which are sought to be set off against the profits and gains in the assessment year 1965-66. We are unable to agree with the Tribunal as regards its conclusion on this aspect of the case and it must be held that the conclusion of the Tribunal on this question regarding in which particular year the provisions of s. 79 can be invoked is not correct in law. It must be pointed out, however, that if the provisions of s. 79 were to be read in isolation, there may be prima facie some justification for the conclusion....
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....ess. These are allowances which are being permitted to the assessee and it is very difficult to say that a depreciation allowance is incurred or development rebate is incurred in view of the language of s. 32 and s. 33. It must be held that depreciation is allowed and development rebate is allowed if the conditions of the relevant sections are satisfied but they are not incurred by the assessee. Therefore, by the use of the words " loss incurred " and the reference to the chapter in which s. 79 occurs, it is obvious that the contention urged on behalf of the Revenue that the provisions of s. 79 apply to unabsorbed depreciation allowance which has been carried forward or to unabsorbed development rebate which has been carried forward from the immediately preceding assessment year, must be rejected. In our opinion, on a pure grammatical construction, in view of the reference to the chapter, incurring of losses and in view of the fact that s. 79 forms part of the whole scheme adumbrated from s. 72 onwards, this contention urged on behalf of the Revenue must be rejected. The question then arises whether the provisions of s. 79 can be applied if both the cls. (a) and (b) are satisfie....
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....ill which would render their excursion impossible. It is absurd to urge that in order that the excursion is to be put off, both A and B must fall ill. This is what follows from the use of the words " unless " and " or " in conjunction with one another. In view of this grammatical meaning which is the only meaning to be attached to the clauses in this case, it must be held that so far as the provisions of s. 79 are concerned, the ban created by s. 79 against carrying forward and setting off of business losses of years prior to the previous year relevant to the assessment year 1962-63, since that was the previous year in which the change in the shareholding took place, cannot be carried forward and set off against the income of the year relevant to the assessment year 1962-63 and subsequent years if the assessee satisfies the conditions set out either in cl. (a) or cl. (b). So far as cl. (a) is concerned, it is obvious that the shares as of the end of the previous year relevant to the assessment year 1962-63 were not held so far as fifty-one per cent. of the voting power was concerned by the very persons who beneficially held the shares at the end of the year or years in which ....
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.... the Department that even when the Sayaji Mills Ltd. had wide choice of making investment in one or more textile mills, it chose to invest in the assessee-company alone. " According to the Tribunal, one must look at the transaction from the point of view of the investor who wanted to make the investment and being on a look out for making an investment in a textile mill and in spite of choice, if he had chosen to invest in a mill like the assessee, then it could be said that its motive was to avoid or reduce the tax liability. According to the third conclusion of the Tribunal, on this aspect: "By investing the amount, Sayaji Mills acquired a textile unit, which it badly needed for its commercial enterprise and also tried to make that venture a profitable one by running it efficiently. " It was found that so far as Vadilal Lallubhai group was concerned, it had a minority interest in Rajesh Textile Mills Ltd., and Rohitbhai group had the majority shares but so far as Rajesh Mills Ltd. was concerned, Vadilal group was not running Rajesh Mills Ltd. and it had no textile unit under its immediate control. The Tribunal observed that the interest which Vadilal group had in Rajesh M....
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....the ITO must be satisfied that the change in the shareholding was not effected with a view to avoiding or reducing any liability to tax. The use of this negative form with reference to the satisfaction to be reached by the ITO would mean placing the burden on the assessee because the assessee would have to satisfy, the assessee itself being in possession of all the relevant facts and the special facts being within its knowledge, that it was not effected with a view to avoiding or reducing any liability to tax. However, so far as the conclusions of the Tribunal in the present case are concerned, the Tribunal has taken into consideration factors which were relevant for coming to this conclusion regarding motive. It had not overlooked any contentions urged on behalf of the Revenue so far as this question of motive was concerned. Even if the conclusions of the Tribunal on one or two factors on which it reached its conclusion regarding motive may not be sustainable, if the Tribunal on an appreciation of all the facts came to the conclusion that the motive of the Sayaji Mills Ltd., at the time when it acquired the shareholding was a commercial enterprise, it cannot be said that that c....
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....s which is a question of law that can be reviewed by this court. Here we find that the Tribunal on an appreciation of the facts before it has reached this particular conclusion regarding motive. The factors that the Tribunal has taken into consideration were all relevant factors and on the facts found by the Tribunal, the inference in law regarding the motive at the time of purchasing these shares is, in our opinion, correct and if the Tribunal 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. It appears to as that so far as the question of motive is concerned, motive has to be inferred as a matter of fact from the facts and circumstances of the case and even subsequent events may throw light as to what the motive or intention must have been at the time when the change in the shareholding took place. But it cannot be said that the motive which has to be judged is on any date other than the date on which the change in the shareholding has taken place. It is with reference to that date that the motive or intention has to be infer....
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.... by stating that the Tribunal could have come to this conclusion even though the entire process of reasoning adopted by the Tribunal may not be justified. It is the overall conclusion which must matter in a case like the present. Under these circumstances, our conclusions are that it was open to the taxation authorities to invoke the provisions of s. 79 so far as the assessment year 1965-66, was concerned but those provisions can only be applied to the quantum of business losses which had been allowed to be carried forward after the set-off in assessment proceedings of the assessment year 1964-65. Our conclusion also is that so far as the development rebate is concerned, in view of the fact that the development rebate was not created in the year of installation of the plant or machinery concerned, it could not be allowed in the assessment year 1965-66, or any of the assessment years under reference before us. So far as depreciation allowance is concerned, the provisions of s. 79 cannot apply to unabsorbed depreciation allowance. We, therefore, answer the questions referred to us as follows: In income-tax Reference No. 65 of 1974 : Question No. (1): In the affirmative, that....