Commissioner of Income Tax vs Malabar Trading Corporation P. Ltd.

K.S. Paripoornan, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal (in short, "the Tribunal") has referred the following question of law for the decision of this court :

"Whether, on the facts and in the circumstances of the case and also in view of the fact that there was a change of more than 51 per cent. of the voting power, the assessee is entitled to the benefit of set off of carried forward losses of earlier years having regard to the correct interpretation of Section 79 of the Income Tax Act, 1961 ?"

The respondent (assessee) is a private limited company. We are concerned with the assessment year 1979-80. The previous year ended on December 31, 1978. The assessee made a net profit of Rs. 11,994. The assessee put forward a plea to carry forward the loss of the earlier assessment years amounting to Rs. 39,097. The return was filed on June 23, 1979, declaring a net loss of Rs. 33,730. The Income Tax Officer found that there was a change of shareholding in the previous year by more than 51 per cent. of the voting power. He also held that Section 79 of the Income Tax Act forbids carry forward of the loss incurred in the earlier assessment years. In appeal, the Commissioner of Income Tax (Appeals) held that the shares carrying voting power of not less than 51 per cent. had changed hands in the previous year relevant to the assessment year 1979-80. Even so, the Commissioner of Income Tax (Appeals) held that the change was not effected with a view to avoid or reduce the tax liability within the meaning of Section 79(b) of the Act. Reliance was placed on.a decision of the Bombay High Court in Italindia Cotton Co. P. Ltd. Vs. Commissioner of Income Tax, . The Revenue filed an appeal before the Tribunal. The Tribunal concurred with the decision of the Commissioner of Income Tax (Appeals). The Tribunal stated that the Revenue did not furnish any facts to establish that any tax liability was sought to be avoided or reduced by the change in the shareholding. It finally held that the change in the shareholding in the instant case was not for the purpose of avoiding or reducing tax liability. The order passed by the Commissioner of Income Tax (Appeals) was confirmed. Thereafter, at the instance of the Revenue, the question of law, formulated hereinabove, has been referred for the decision of this court.

We heard counsel. Section 79 of the Income Tax Act provides 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 a 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 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 ; or

(b) the Income Tax Officer is satisfied that the change in the shareholding was not effected with a view to avoiding or reducing any liability to tax."

The decision of the Bombay High Court, relied on by the Commissioner of Income Tax (Appeals) and the Appellate Tribunal, reported in Italindia Cotton Co. P. Ltd. Vs. Commissioner of Income Tax, , was affirmed by the Supreme Court in Commissioner of Income Tax, Bombay Vs. Italindia Cotton Co. (P) Ltd., . The Supreme Court held that Section 79 of the Income Tax Act is an exception to the scheme enacted in Chapter VI of the Act, which enables the carry forward and setting off of a loss incurred in any earlier year against the income of the relevant previous year. Section 79 interdicts the carrying forward of loss incurred in any year prior to the previous year against the income of the previous year unless it is established either (a) that both on the last day of the previous year and on the last day of the year in which the loss was incurred, the shares of the company carrying not less than 51 per cent. of the voting power were beneficially held by the same persons or (b) that the Income Tax Officer is satisfied that the change in the shareholding was not effected with a view to avoiding or reducing any liability to tax. The two conditions envisaged by Sections 79(a) and 79(b) are alternative ; either Clause (a) or Clause (b) of Section 79 should be satisfied. The benefit will be available notwithstanding the change in the shareholding of the previous year, if the shares representing not less than 51 per cent. of the voting power remained beneficially held by the same persons on the relevant dates. Similarly, the benefit is available, notwithstanding the change in the shareholding in the previous year if the change was not effected with a view to avoid or reduce any liability to tax. At page 165 of the Reports ( Commissioner of Income Tax, Bombay Vs. Italindia Cotton Co. (P) Ltd., ) the Supreme Court held thus :

"In our opinion, to avoid falling within the scope of Section 79, it is sufficient for the assessee to show that the case attracts either Clause (a) or Clause (b). If the assessee succeeds in doing so, he will be entitled to the benefit of the provisions of the Income Tax Act, entitling him to claim a carry forward and set-off of losses suffered by the company in an earlier year or years against the income of the previous year."

The above decision of the Supreme Court clearly lays down that the burden is on the assessee to show that the claim attracts either Clause (a) or Clause (b) of Section 79. In this case, in paragraph 6 of the order of the Appellate Tribunal dated November 30, 1984, the Tribunal has approached the question stating that "the Revenue did not furnish any facts and figures to establish that any tax liability was sought to be avoided or reduced''by the change in the shareholding". This is a fundamentally wrong approach to the question that arose for consideration before the Appellate Tribunal. We are of the view that, on a reading of paragraph 6 of the order of the Appellate Tribunal as a whole, the Tribunal approached the question from a wrong angle or perspective, forgetting the fact that the burden of proof is on the assessee to show that either Clause (a) or Clause (b) of Section 79 is attracted. In this case, it is admitted that there was a change of more than 51% in the voting power during the relevant dates. If that be so, it was for the assessee to show that Clause (b) is attracted. The matter should be approached from that perspective or angle. The Tribunal has failed to approach the question from that angle. We are of the view that the Tribunal erred in law in coming to the conclusion which it did, based on the above erroneous approach of the question involved. In this view of the matter, we decline to answer the question referred to us ; but at the same time, we direct''the Income Tax Appellate Tribunal to restore the appeal to its file and decide the matter afresh in the light of the decision of the Supremo Court in Commissioner of Income Tax, Bombay Vs. Italindia Cotton Co. (P) Ltd., , particularly bearing in mind the observations contained in page 165, extracted hereinabove. It is open to the parties to lead fresh material to substantiate their pieas.

A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.