TaxTMI 
TaxTMI 
1982 (4) TMI 96
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....s, viz., S/Shri Kishore and Anil. In turn they were to take two divisions of the company. This arrangement was effected and the four brothers mentioned above, transferred their shares in favour of the spouse and children of the other two brothers. The company was suffering losses. The assessee's accounting year is the calendar year. The transfer of shares took place during the accounting year and in this year the company made profits and claimed set off of the previous losses. 2. The ITO disallowed losses on the ground that section 79 of the Income-tax Act, 1961 ('the Act') applies to the facts of the case. This is what the ITO stated in his order: "The face value of the share is Rs. 100 and the shares were sold to the above persons at Rs. 80 per share. The shares sold by the ex-shareholders have been purchased by the spouse and children of the remaining two shareholders. Had these shares been purchased by the remaining two shareholders, the question of applicability of section 79 would not have arisen. But these shares have been transferred to the spouse and children of the existing shareholders with a view to avoid or reduce the tax liability of the incoming shareholders, who h....
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....clearly brought out by the assessee before the assessing officer and which were not in dispute and as such, there was no question of avoiding or reducing the tax liability at all. On the other hand, the ITO has no material to hold that the object of the change in the shareholding was for the purpose of avoiding or reducing the tax liability. The argument proceeds further that the result may be reduction of tax liability and that is not sufficient, as the object is most relevant and such an object is absent in the facts and circumstances of the case. In this connection, he referred to the decision of the Gujarat High Court in the case of CIT v. Sakarlal Balabhai [1968] 69 ITR 186 affirmed by the Supreme Court in CIT v. Vadilal Lallubhai [1972] 86 ITR 2. He no doubt relied very strongly on the decision of the Bombay High Court on the basic question raised by the revenue about the construction of section 79. 5. Before dealing with the contentions, certain broad aspects have to be noticed. There is no dispute that there has been a change in the shareholding and the change is more than 51 per cent as the transfer of shares effected in this year indicates. There is thus no dispute that ....
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....n 79 are not unconnected and clause (b) depends on clause (a). This was reported in Italindia Cotton. The question posed for reference before the High Court was: "Whether both the conditions mentioned in clause (a) and clause (b) of section 79 must apply for disentitling the loss of a prior year being allowed as set-off in accordance with the substantive provisions of section 79 of the Income-tax Act, 1961 ?" This question was answered in favour of the assessee and their Lordships observed as follows: "... In our opinion, the Tribunal was in error in taking the view that the expression 'the change in the shareholding' used in clause (b) was only referable back to the substantive provisions of the section. The Tribunal was also in error in proceeding on the footing that clauses (a) and (b) are totally disconnected and have no inter-connection between the two. In our opinion, clause (b) will only apply to a case where the benefit of clause (a) will not be available to an assessee and notwithstanding a change of more than 51 per cent of the voting power between the two relevant dates if a claim for set-off has to be made by the assessee, then it is for the assessee to satisfy the t....
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....hen the facts are not in dispute and there is a finding by the ITO. In fact the Commissioner (Appeals) gave a finding that there was no material before the ITO to hold that the change in the shareholding was effected to reduce or avoid tax liability. 8. Then we come to the question whether on the facts of this case, it can be stated that the change in the shareholding was effected with a view to avoid or reduce tax liability. Clause (b) of section 79 enjoins upon the ITO to record a finding whether he is satisfied that the change was not effected with a view to avoiding or reducing the liability of tax. Unfortunately, here the ITO jumped to the conclusion that the change was effected with a view to avoiding or reducing any liability to tax on the basis of mere change in the shareholding. There is some substance in the contention of Shri Y.P. Trivedi that the ITO gave that finding abruptly, only by observing that the shares were transferred in favour of the spouse and children of the two brothers and the position would have been different if the transfer was in favour of the two brothers themselves. There is, thus, no material for coming to a conclusion that the change in the share....