Ramanujam, J.:— The assessee who is the same in both the cases is a private limited company. In the assessment year 1973-74, corresponding to the previous year ending with March 31, 1973, 3,482 equity shares of the erstwhile shareholders were purchased by M/s. S.K Khanna and others. Prior to this year of change, the assessee had incurred losses. The unabsorbed business loss, depreciation, development rebate and allowance under s. 80J up to and inclusive of the assessment year 1972-73 were as follows:
Rs.
Business loss
1,96,433
Depreciation
3,62,421
Development rebate
1,97,440
80J allowance
2,58,052
2. In the assessment year 1973-74 also, the assessee had incurred loss to the tune of Rs. 54,390. The assessee claimed that the unabsorbed losses and allowances should be carried forward and added to the loss of the assessment year 1973-74 and allowed to be carried forward further. The ITO, however, did not accept the claim of the assessee on the ground that in view of the change in the shareholding of the company, the provisions of s. 79 were attracted, and, therefore, the claim to carry forward the unabsorbed prior losses and allowances cannot be allowed. He, therefore, determined the net loss for the assessment year 1973-74 at Rs. 51,927 only and held that this amount alone could be carried forward to the next assessment year. In the next assessment year 1974-75 also, the assessee claimed that the prior losses incurred even before the year of change should be brought forward and set off in addition to the loss determined in the preceding assessment year. The ITO found that the assessee had a total income of Rs. 1,97,263 and allowed a set-off of a sum of Rs. 43,463 only as the loss of the preceding assessment year carried forward to this assessment year and determined the total taxable income at Rs. 1,55,240.
3. The assessee appealed to the AAC for both the assessment years 1973-74 and 1974-75. For the assessment year 1973-74, the AAC held that there being no income for the year, there was no necessity for applying s. 79, and for the assessment year 1974-75, he held that the change in the shareholding that took place in the year 1973-74 was with a view to avoiding or reducing the liability to tax, and, therefore, the provisions of s. 79 has rightly been applied by the ITO, and, therefore, no loss incurred prior to the change could be carried forward for being set off against the income of that assessment year. He thus confirmed the assessment for both the years.
4. The assessee appealed to the Income-tax Appellate Tribunal against the order of the AAC for both the years. It was contended before the Tribunal that the AAC was in error in assuming that the question of application of s. 79 did not require to be considered in the assessment year 1973-74 merely because there was no income in that year in respect of which the assessee could claim set off for past losses, and that the provisions of s. 79 applied only to the year in which there was a change in the holdings, and, therefore, the ITO was called upon to give his decision only in that year. It was also contended that on a proper interpretation of s. 79, the satisfaction of the ITO on the question whether the change in the shareholding was effected with a view to avoiding or reducing any liability to tax must be based on relevant material, and that the ITO not having given any reasons for his decision, his order cannot be sustained in law. As regards the assessment year 1974-75, the assessee contended before the Tribunal that the provisions of s. 79 were applicable only to the year of change and that the past losses could be set off against the profits of the years subsequent to the year of change, and, therefore, the assessee's claim to the set off of the losses against the income of the subsequent years should have been allowed. As against the said contention, the Revenue took the stand that the scope of s. 79 was to wipe of all the prior losses up to the year of change if it is found that the change in the shareholdings took place with a view to avoiding or reducing the tax liability, that the finding of the ITO that the change was with a view to avoid tax liability should be accepted and consequently the assessee's claim to set off the prior losses in any of the assessment years subsequent to the year of change has been rightly rejected. It was also further contended that even assuming that a finding on that question is unnecessary in the year of change for the reason that there was no profit in that year against which the assessee could claim set-off of the prior losses, the finding on such a question became necessary in the subsequent assessment years, and, therefore, the ITO was justified in giving a finding on that question. After considering the rival contentions and after examining the scope of s. 79, the Tribunal found that there are two conditions which have to be satisfied before applying s. 79, namely, (1) 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, and (2) that the ITO is satisfied that the change in the shareholding was not effected with a view to avoiding or reducing any liability to tax, and that on the facts of this case, the first condition cannot be taken to have been satisfied, and that as regards the second condition, the Tribunal felt that in the assessment year 1973-74, the change in the shareholding cannot be said to have been effected with a view to avoiding or reducing the tax liability, and, therefore, the provisions of s. 79 are not attracted. It also held, agreeing with the assessee's contention, that s. 79 applied only to the year of change and not to the subsequent years. In view of this finding that s. 79 will apply only to the year of change and not to the subsequent years, the assessee was held entitled to carry forward the losses prior to the year of change as well as the loss of the preceding year and set them off against the assessment year 1974-75. Aggrieved by the decision of the Tribunal, the Revenue has sought and obtained a reference to this court under s. 256(1) of the I.T Act on the following questions of law:
For 1973-74:
“(i) Whether the Appellate Tribunal was right in holding that clauses (a) and (b) of section 79 are cumulative in effect and the assessee was entitled to the carry forward and set off of the earlier years' losses, had there been an income for the assessment year under review?”
For 1974-75:
“(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of section 79(b) can have no application to the assessment years subsequent to the assessment year in which the change in the shareholdings took place and accordingly the losses of the earlier years can be carried forward and set off against the income of the assessment year 1974-75?”
5. From the facts stated above, it will be seen that the case involves the determination of the true scope and ambit of s. 79 of the I.T Act. Section 79 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 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.”
6. As per the above section, a company in which the public are not substantially interested is disentitled to carry forward and set off an earlier year's loss against the income of the accounting year if 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 not beneficially held by persons on the last day of the year in which the loss was incurred, if the change in the shareholding was effected with a view to avoid or reduce any tax liability. According to the Revenue, cls. (a) and (b) of s. 79 should be understood as disjunctive and not as cumulative in effect as has been held by the Tribunal. Kanga and Palkhivala in 7th Edn., Vol. I, p. 636, proceeded on the basis that cls. (a) and (b) are cumulative and state:
“Even if shares carrying 51 per cent. of the voting power cease to be held by the same group, the section would not apply to the company if ‘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’. If the change in the shareholding was effected not with that object but with some other object in view, the section would not apply and the company's right to carry forward and set off the loss would not be lost even though the result of the change in the shareholding may be negation or reduction of tax liability.”
7. As against this, Chaturvedi and Pithisaria, in their book Income Tax Law, 2nd Edn., Vol. 2, p. 1150 state:
“The word ‘or’ between clauses (a) and (b) shows that either of the two circumstances is enough to bring the case under the mischief of section 79 so as to bar a carry forward and set off. It may also be noted that clause (a) refers to 51 per cent. of the voting power to be beneficially held by a person or a group of persons, meaning thereby that such person or persons may or may not be the registered shareholders.”
8. In Sampath Iyengar's Law of Income Tax, 6th Edn. 1973, at pp. 1253 and 1254, the learned author has stated:
“When the carry forward is permitted: The carry forward of an earlier year's loss in a company in which the public are not substantially interested (with a view to set off the same against the subsequent year's income of such a company) is permitted only if shares in the company carrying not less than fifty-one per cent. of the voting power, were beneficially held by one and the same person or persons, both on the last day of the year in which the loss arose and also on the last day of the accounting year in which the brought-forward loss is sought to be adjusted. This provision has been introduced by the 1961 Act to check the malpractice of buying of losses in a company to reduce the incoming shareholders' tax liability (section 79(a)).
The carry forward to be set off is permissible though fifty-one per cent. of the voting power in the company is not held as aforesaid, if the Income-tax Officer is satisfied that the change in the shareholding was not made with a view to avoid or reduce the tax liability of the shareholders (section 79(b)).”
9. Thus there appears to be a conflict in the interpretation of s. 79 between the various authors. Section 79 came up for consideration before the Bombay High Court in Italindia Cotton Co. P. Ltd. v. Commissioner Of Income-Tax, [1978] 113 ITR 58. In that case, a question arose whether the Italindia Pvt. Ltd. was entitled to carry forward loss of the earlier years and set off the same during the assessment year 1963-64, during which period there was a change in the shareholding. The ITO had taken the view that in view of s. 79 of the Act, the assessee became disentitled from claiming such a setoff in view of the change in the shareholding, without going into the question as to whether the change in the shareholding was brought about for avoiding or reducing the tax liability. The assessee's contention that both the conditions mentioned in cls. (a) and (b) of s. 79 should have been satisfied before the assessee could be deprived of the benefit of set-off of the earlier years' losses and that merely because there was a change in the shareholding of the company, to the extent contemplated by cl. (a), the assessee cannot be deprived of the benefit of set-off, and that on the facts of that case, the change in the shareholding cannot be taken to have been made with a view to avoid or reduce the tax liability. This contention of the assessee though not accepted by the ITO was accepted by the AAC on appeal. There was a second appeal to the Tribunal. The Tribunal took the view that the two specific conditions mentioned in cls. (a) and (b) were not cumulative, but they were alternative, and if any one of the conditions applied, then the company automatically becomes disentitled from claiming set-off of the prior years' losses and that cls. (a) and (b) applied independently, and they did not come into play simultaneously before an assessee-company could be said to be disentitled from the set-off of the loss as provided for in the substantive provision contained in the section. When that matter came to the High Court of Bombay on a reference, the court held that cls. (a) and (b) are not independent, that cl. (b) will apply where the benefit under cl. (a) is not available to the assessee, and that it is erroneous to hold that cls. (a) and (b) are totally independent and that there is no inter-connection between the two. The same view has been taken in CIT v. Shri Subhlaxmi Mills Ltd. (see p. 863 infra (Appx.)). In that case, it was held that s. 79 should not be looked at in isolation and it should be read as part of the entire scheme of Chap. VI and particularly in the light of s. 72, and that in applying the provisions of s. 79, only business loss should be taken into account and not unabsorbed depreciation and unabsorbed development rebate, and that cl. (a) of s. 79, refers to two situations, namely, the situation of the shareholding of the company as on the last day of the previous year in which the change in shareholding took place and the 1st day of the previous year or years in which the loss was incurred, and that the provisions of s. 79 can be applied if both the cls. (a) and (b) are satisfied. The ban put by s. 79 is removed when the case of the assessee does not fall in either of the two conditions, and that, in short, the provisions of cls. (a) and (b) of s. 79 are to be read cumulatively and not alternatively. We are inclined to hold, agreeing with the view expressed in Italindia Cotton Co. P. Ltd. v. Commissioner Of Income-Tax, [1978] 113 ITR 58 (Bom) and CIT v. Shri Subhlaxmi Mills Ltd. (see p. 863 infra (Appx.)) that conditions (a) and (b) of s. 79 are cumulative in effect and that unless both conditions are satisfied, the Revenue cannot deprive the assessee of the benefit of s. 72. It is seen that there was no similar provision as s. 79 of the 1961 Act in the Indian I.T Act, 1922, and that when the I.T Bill, 1961, was moved in the Lok Sabha, cl. 79 contained only provisions which included merely cl. (a) and there was no reference therein to cl. (b) at all. The Bill was referred by the Lok Sabha to a Select Committee and the Select Committee by its report presented on 10th August, 1961, in para. 41, stated “the Committee think that the provisions of this clause should be applied where a change in the shareholding of the company has been brought about with the intention of reducing tax liability. The clause has been redrafted accordingly”. It is as a result of this report of the Select Committee that cl. (b) had been introduced in s. 79 before it was passed by Parliament. Therefore, it is clear that the object of introducing cl. (b) was to see that the assessee is not deprived of the benefit of s. 72 merely on the ground that there has been a change in more than 51% of the voting power, unless the change in the shareholding has been made with a view to avoid or reduce the tax liability. If the contention of the Revenue that the two clauses are independent and that the assessee can be deprived of the benefit of s. 72 if any of the conditions of the section is satisfied, is accepted, it will mean that any change in the shareholding will be a matter to be taken into account by the ITO under cl. (b) and, in that event, cl. (a) will become unnecessary or otiose. So a close reading of s. 79 would lead to the inference that the assessee, who is normally entitled to the benefit of the provision of s. 72, can be deprived of that benefit if there is a change in the shareholding to the extent of 51 per cent. But, such a deprivation will not take place if such change in the shareholding has not taken place to evade or reduce the tax liability. In this view of the matter, we have to answer question No. 1, in the affirmative and against the Revenue.
10. Coming to question No. 2, in view of the answer to the first question, that the benefit of s. 72 cannot be deprived in view of the finding of the Tribunal that the change in the shareholding was not effected with a view to avoid or reduce the tax liability, and, therefore, the assessee is entitled to carry forward and set off even in the year of change, there is no question of lapsing of that benefit for the subsequent years. We do not, therefore, propose to answer this question. The tax cases are, therefore, disposed of accordingly. The Revenue will pay the costs to the assessee. Counsel fee Rs. 500.