Decided on April 30,1982



P.V.B. Rao, Judicial Member - (1.) THE assessee-respondent is a private limited company. It was formed in November 1971 with six brothers as shareholders. Each of the brothers had 310 shares at the time of formation of the company. THE business of the company consisted of mainly export of silk sarees and textiles and manufacture of special type of yarn. During the year 1974, the company started construction of a new textile processing division at Surat which was completed by the end of 1975. It appears that in the beginning of 1975 disputes between the brothers arose. THEre was practically a deadlock in the management and running of the business. A family friend was asked to arbitrate amongst the brothers and settle the disputes. It was decided by the arbitrator that four brothers, viz., S/Shri Mahesh, Dilip, Kirit and Satish, should go out of the company and dispose of the shares to the family members of the other two brothers, 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 happen to be the spouse and children of the existing shareholders. Thus, I am satisfied that the change in the shareholding has been effected with a view to avoid or reduce the liability of incoming shareholders to tax and I disallow the set off of brought forward loss of earlier years. The assessee carried the matter in appeal before the Commissioner (Appeals). He held that the IAC to whom the draft order of the assessment was sent merely directed that Clause (a) of Section 79 applies without considering whether Clause (b) would come to the aid of the assessee. Accordingly, he held that since there is no finding that the change in the shareholding was effected with a view to avoid or reduce the tax liability, the set off of losses cannot be disallowed. The Commissioner (Appeals) also referred to the decision of the Bombay High Court in the case of Italindia Cotton Co. (P.) Ltd. v. CIT[1978] 113 ITR 58.
(3.) THE revenue has come up in appeal before the Tribunal and the ground taken by it reads as follows : 1. On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in directing the ITO to allow carry forward and set off of the losses of the earlier years which claim was refused by the ITO as the case is covered by the provisions of Clause (a) of Section 79 of the Income-tax Act, 1961. In support of this ground, the learned senior departmental representative, Shri Vohra, contended that it is for the assessee to prove that the transfer of shares was not effected for avoiding or reducing the tax liability, since the assessee is claiming set off of the loss and that onus has not been discharged by the assessee in this case. THE ITO did not rest his decision only on Clause (a) of Section 79 but has also referred to Clause (b) and gave a clear finding that it would apply and as such, the assessee would not be entitled to the set off of the previous losses. In reply the learned counsel, Shri Trivedi, at the outset objected to the consideration of Clause (b) of Section 79, inasmuch as the revenue based its case only on Section 79(a) and in view of the decision of the Bombay High Court, the assessee has to succeed in view of the clear finding of the Commissioner (Appeals), which has not been challenged. Alternatively, he submitted that the transfer of shareholding took place under certain peculiar circumstances which were 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.;

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