COMMISSIONER OF INCOME-TAX, BOMBAY vs. ITALINDIA COTTON CO. (P) LTD.

CIVIL APPEAL No. 1520/1986Supreme Court1988 INSC 26205 September 1988Bench: 2 JudgesAuthor: R.S. PATHAK, SABYASACHI MUKHERJI B7 pages
AI SummaryDismissed

What were the facts?

The assessee, Italindia Cotton Co. (P) Ltd., incurred a loss of Rs. 12,172 in the assessment year 1960-61. For the assessment year 1963-64, the assessee sought to set off this earlier loss against its income. However, the Income-tax Officer disallowed the set-off, citing Section 79 of the Income-tax Act, 1961, as there was a change in shareholding. The Appellate Assistant Commissioner held that a change in shareholding alone was insufficient to deny the set-off; it must also be with a view to avoiding tax. The Income Tax Appellate Tribunal observed that the denial of set-off was subject to two exceptions, which applied independently: (i) beneficial holding of at least 51% voting power remaining with the same persons, and (ii) the change not being effected to avoid or reduce tax liability. The Tribunal referred a question of law to the High Court.

What did the Supreme Court hold?

The Supreme Court held that the conditions in clauses (a) and (b) of Section 79 of the Income-tax Act, 1961, operate in the alternative, not cumulatively. If the assessee can satisfy either clause (a) or clause (b), the disqualification arising from a change in shareholding is removed, and the company is entitled to carry forward and set off losses. Clause (a) requires that shares carrying not less than 51% of the voting power were beneficially held by the same persons on the last day of the previous year and the year(s) in which the loss was incurred. Clause (b) requires the Income-tax Officer to be satisfied that the change in shareholding was not effected with a view to avoiding or reducing any liability to tax. The Court reasoned that the provision was enacted to discourage tax avoidance through acquisition of loss-making companies, and satisfying either condition would remove the prohibition. The appeal was dismissed.

What were the issues?

1. Whether both conditions mentioned in clauses (a) and (b) of Section 79 of the Income-tax Act, 1961, must apply cumulatively to disentitle the loss of a prior year from being allowed as set off? Assessee's contention: The assessee argued that the conditions in clauses (a) and (b) of Section 79 operate in the alternative, not cumulatively. Therefore, if either condition is met, the prohibition against set-off does not apply. Revenue's contention: The Revenue contended that both conditions must be satisfied for the assessee to claim the set-off. The High Court, in its advisory opinion, held in favour of the assessee, stating that even if there was a change in voting power of not less than 51%, the Revenue must prove the change was effected to avoid or reduce tax liability for denial of set-off.

Which sections of the Income-tax Act were involved?

Section 79

AI-generated summary — verify with the full judgment below

A B c D E F 0 H COMMISSIONER OF INCOME-TAX, BOMBAY v. ITALINDIA COTTON CO. (P) LTD. SEPTEMBER 5, 1988 [R.S. PATHAK, CJ. AND MUKHARJI, J.] Income Tax Act, 1961-S. 79-Carry forward and set-off of loss incurred in .any earlier year against income of the relevant previous year-Conditions provided in els. (a) milt (b) of s. 79 operate in the alternative, not cumulatively.

The respondent-assessee which had suffered a loss during the assessment year 1960-61, and whose share-holding had undergone a change subsequently, claimed a set-off.against the same in its assess- ment for the year 1963-64, but the Income-tax Officer turned it down on the ground thats. 79 of the Income-tax Act, 1961 dis-entitled the' asses- see from claiming such a set off since S 1 % of the voting power held by persons on the last day of the year in which the loss was suffered was no longer held by them on March 31, 1963. On appeal, the Appellate Assistant Commissioner held that before the right to set off a loss could be denied to an assessee, not only should there be a. change in the persons holding a voting power of not less than S 1 % but further the change should have been effected with

The order continues below.

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