Commissioner of Income Tax vs Ahmedabad Flexible Tubs Mfg. Co. Ltd.

G.T. Nanavati, J.—In this reference made u/s 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has referred the following two questions to this court for its opinion :

"1. 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?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal has been right in law in holding that section 79 of the Income Tax Act, 1961, was not attracted in the instant case and, consequently, the assessee was entitled to the adjustment of carry forward of previous loss and also unabsorbed depreciation as well as adjustment of development rebate?"

The assessee is a private limited company. The accounting year of the assessee is the calendar year. The company was till 1973 carrying on the business of manufacturing flexible tubes. It incurred losses and they were brought forward from year to year. It had also unabsorbed depreciation and development rebate. The shares of the company were till August, 1973, held by the members of the Parekh family. Between August, 1973, and December, 1973, all those shares were taken over by the members of the Shah family. After the shares were thus transferred, the assessee could not manufacture flexible tubes for want of raw material. It, therefore, approached the High court for permission to amend the memorandum of association and objects of the company so as to enable it to start a new business of doubling of yarn. After obtaining permission, during the last three months of 1974, it started the new business and also started making profits. It appears that during the assessment year 1974-75, the point in issue had not arisen as a result of this share transfer. As the assessee had made profits in the year corresponding to previous year 1975-76, a question was raised in that yea, whether the assessee was entitled to the adjustment of carry forward of previous losses and unabsorbed depreciation as well as adjustment of development rebate. The Income Tax officer held that in this case section 79 was attracted and, therefore, the assessee''s claim for set off, depreciation and development rebate was not allowable.

The assessee preferred an appeal to the Appellate Assistant Commissioner. As regards the point with which we are concerned in this reference, the Appellate Assistant Commissioner allowed the appeal and he was of the view that section 79 was not attracted in this case.

The Revenue approached the Tribunal by way of an appeal. In the two subsequent assessment years, viz., 1976-77 and 1977-78, a similar view was taken by the Income Tax Officer and the Appellate Assistant Commissioner and, therefore, the Revenue had filed in all three appeals before the Tribunal. All these appeals were heard together and it was held by the Tribunal that the onus was on the assessee to establish that the motive was not avoidance of or reduction in the tax liability, and that the assessee had satisfactorily proved that when the Shah family acquired the shares, its motive was not to avoid or reduce any tax liability. The Tribunal further held that for that reason section 79 was not attracted. Taking this view, the Tribunal dismissed all the three appeals filed by the Revenue.

The Revenue then moved the Tribunal to refer to this court the following four question :

"1. Whether, on the facts and in the circumstance of the case, the Appellate Tribunal has been right in law in holding that section 79 of the Income Tax Act, 1961, was not attracted in the instant case and, consequently, the assessee was entitled to the adjustment of carry forward of previous loss and also unabsorbed depreciation as well as unadjusted development rebate?

Whether the finding of the Appellate tribunal that when the shares were acquired by the purchasers from Parekh family, the motive was not to avoid or reduce any tax liability is correct in law?

Whether the finding of the Appellate Tribunal that condition (b) was not being fulfilled and section 79 of the Income Tax Act, 1971, was not attracted is correct in law and sustainable from the material on record?

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 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 ?"

The Tribunal declined to refer questions Nos. 2 and 3. It declined to refer question No. 2 on the ground that the finding that the shares were not acquired with a motive to avoid or reduce the tax liability is purely a finding of fact as the conclusion drawn in that behalf was on the basis of appreciation of factual evidence. It declined to refer the third question on the ground that the Tribunal has recorded the finding after considering the material on record. Whether the Tribunal was justified in not referring question No. 2 and 3 is not for us to decide, as the Revenue has remained satisfied with the reference made with respect to question Nos. 1 and 4 only. We are emphasising this fact because learned counsel for the Revenue made an attempt before us to show that the finding of the Tribunal that the shares were acquired by the Shah family not with a motive of avoiding any tax liability was not sustainable on the material on record and really it should have been held that the assessee had failed to discharge the onus of proving that the Shah family had acquired the shares without such a motive.

So far as question No. 1 is concerned, it appears that the Tribunal has referred the same to us under some misapprehension. The Tribunal has not held that in order to invoke the provisions of section 79 of the Act, the Department has to 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. The Tribunal did not specifically decide the question of onus. On the contrary, it proceeded on the basis, and, in our opinion rightly, that the onus was on the assessee to prove that it had no such motive. Thereafter it appreciated the material on record and came to the conclusion that the Shah family had not acquired the shares with the motive of avoiding any tax liability. If the Tribunal, by referring to question No. 1, desired that it should be decided whether only one condition is required to be fulfilled or both the conditions should be fulfilled, then the question now stands answered by the decision of the Supreme Court it Commissioner of Income Tax, Bombay Vs. Italindia Cotton Co. (P) Ltd., wherein it is held that the two conditions specified in clauses (a) and (b) of section 79 are intended to operate as alternative to one another. If the terms of either clause (a) or clause (b) are satisfied, the disqualification suffered by the company, by reason of a charge in shareholding in the relevant previous year in removed and the company is entitled to the benefit of the provisions relating to carry forward and set-off of losses.

So far as question No. 2 is concerned, we have already stated above that the Tribunal has, as a matter of fact, found that at the time when the Shah family acquired the shares that was not done with the motive of reducing the tax liability of the assessee. That being a finding of fact, we have to accept it and, obviously, the question which is now referred to us will have to be answered in the context of the facts as found by the Tribunal. Since the Tribunal has found that the acquisition of shares was not with a view to reduce or avoid any tax liability, the disqualification contemplated by section 79 was, therefore, not attracted in this case and the Tribunal was right in taking that view.

For the reasons stated above, we decline to answer question No. 1. Question No. 2 is answered in the affirmative, that, is, against the Revenue and in favour of the assessee. No order as to costs.