Kantawala, C.J.
1. International Cotton Co. (P.) Ltd., the assessee, is engaged in the business of dealing in cotton, both Indian and foreign. For the assessment year 1963-64, for which the accounting year is the financial year ending March 31, 1963, a question arose whether a carried forward loss of the earlier years is entitled to be set off during the assessment year in question. There are two other private limited companies, namely, India Corporation Private Ltd. and International Cotton Private Ltd. Broadly, three groups of shareholders, viz., Chunilal group, Babubai group and Purshottam group, held control of the assessee-company and the two other companies above mentioned, respectively. There was, however, a change in the shareholding of the three companies in the accounting year ended March 31, 1963. Chunilal group acquired controlling interest in India Corporation (P.) Ltd., i.e., the assessee, and Purshottam group acquired controlling interest in International Cotton Private Ltd. The assessee-company suffered a loss in the accounting year ended March 31, 1960, relevant to the assessment year 1960-61, in the amount of Rs. 12,172 which was available for a set-off in a subsequent year.
2. During the course of the assessment proceedings for the year under consideration in this reference a question regarding a claim for set-off of the prior year's loss came up for consideration before the Income-tax Officer. The Income-tax Officer took the view that having regard to the provisions of section 79 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), the assessee became disentitled from claiming such a set-off of loss. He observed that due to the change in shareholding 51% shareholders as on March 31, 1963. Accordingly, the brought forward loss of Rs. 12,172 of the assessment year 1960-61 would lapse under the provisions of section 79 of Act.
3. In an appeal by the assessee before the Appellate Assistant Commissioner, it was contended on behalf of the assessee that section 79 was no bar to the assessee being allowed a set-off of loss of the prior year. It was urged that under the said section both the conditions mentioned in clauses (a) and (b) thereof should have been satisfied before the assessee-company could be deprived of the benefit of the set-off the earlier year's loss. It was admitted on behalf of the assessee-company that the condition mentioned in clause (a) of the section was fulfilled in the case but it was urged that the condition mentioned in clause (b) could not be said be fulfilled. Hence it was argued that the assessee was entitled to the set-off the loss. Hence it was urged before him that the three groups of shareholders had common interest in three different companies and all three companies were carrying on similar business. It was decided to reshuffle the shares among the three groups only for the sake of convenience and even after the reshuffling the same business was being continued in the same manner. Therefore, the question of avoidance or reduction tax liability did not arise. The Appellate Assistant Commissioner accepted the contentions on behalf of the assessee. He took the view that the two conditions contained in clauses (a) and (b) of section 79 are cumulative and are not alternative. Therefore, before the loss incurred in the earlier year is allowed to be carried forward there should be such a change in the shareholdings as contemplate by clause (a) and further the Income-tax Officer should be satisfied that such a change in the shareholdings seems to have been brought about only with a view to continue the same business conveniently. He felt that it could not be said that the change in shareholding was effected with a view to avoiding or reducing any tax liability. Accordingly,he held that the provisions of section 79 did not debar the assessee from claiming set-off of the prior year's loss and allowed the appeal preferred by the assessee.
4. In a second appeal by the Income-tax Officer before the Tribunal, the Tribunal after referring to the provisions of section 79 of the Act observed that substantively if there was a change in the shareholding of a private limited company in a previous year, it shall not be entitled to the set-off of the prior year's loss. However, there were two savings to this. The first saving was that if the beneficial holding of shares to the extent of 51% remains the same in the previous year, as it was incurred, then there will be no disentitlement to the set-off of loss. The second saving was that if 'the change in the shareholding' which words could only refer back to the substantive provisions of the section and not to the provision contained in clause (a) of the section, was not effected with a view to avoiding or reducing any liability to tax, the company would again not to be disentitled from claiming the set-off of the loss. These two conditions mentioned in clauses (a) and (b) were specific. They were not cumulative but they were alternative. If any one of the conditions applied, then a company automatically becomes disentitled from claiming the set-off of the prior year's loss. Such savings were only of the kind that normally follow the substantive provisions of any section. According to the Tribunal clauses (a) and (b) of the section applied independently and they did not come into play simultaneously before an assessee-company, as in the present case, could be said to be disentitled from the set-off of the loss as provided for in the substantive provisions contained in the section. Since in this case admittedly the first saving did not help the assessee the Tribunal reversed the decision of the Appellate Assistant Commissioner based on the second saving as helping the assessee. The Tribunal did not give any definite finding as regards whether the second saving also applied to the assessee in the view that it took of the matter as stated above. A passing observation had been, however, made to the effect that the Appellate Assistant Commissioner in giving a final finding in favour of the assessee on this point had acted rather on inadequate material and had failed to give proper opportunity to the Income-tax Officer to bring on record such material as may be necessary for a proper adjudication of the matter. But for this passing observation no other finding was given by the Tribunal of the second saving.
5. From this order of the Tribunal at the instance of the assessee the following question has been referred to us for our determination :
'Whether both the conditions mentioned in clause (a) and clause (b) of section 79 must apply for disentitling the loss of a prior year being allowed as set-off in accordance with the substantive provisions of section 79 of the Income-tax Act, 1961 ?'
6. Mr. Patil on behalf of the assessee-company contended that on a proper reading and construction of section 79 of the Act, if on the last day of the previous year the shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred, then automatically under the substantive provisions of section 79, the assessee will be entitled to a set-off of the carried forward loss of the earlier years. He further submitted that clause (b) of section 79 may only apply in a case where there is a change in more than 51% of the voting power of the shares of the company on the last day of the previous year relevant to the assessment year as compared to the same on the last day of the year or years in which the loss was incurred. In such a case, the mere fact that there was such a change in the voting power of more than 51% at the two relevant dates will not by itself disentitle the assessee from claiming a set-off in respect with a view to avoid or reduce any liability to tax even then the case would be covered by clause (b) of section 79 and the assessee will be entitled to claim set-off off carried forward loss notwithstanding such change of more than 51% of the voting power at the two relevant dates. In support of his contention that this is the true interpretation of clauses (a) and (b) of section 79, he referred to the report of the Select Committee of the Income-tax Bill, 1961, where in paragraph 41, it has been stated that the original bill which merely contained provisions similar to clause (a) should be redrafted and the benefit of set-off should be disallowed only when notwithstanding such change in the shareholding, i.e., more than 51% of the voting power of the group at the two relevant dates, such change in the voting power has taken place with the intention of avoiding or reducing the tax liability. Mr. Joshi, on the other hand, on behalf of the revenue submitted that, as held by the Tribunal, clauses (a) and (b) of section 79 are independent clauses and when there is a change in the voting powers of the group at the two relevant dates of more than 51% then by the mere fact that such a change as contemplated by clause (a) is there, the assessee would be disentitled to set off carried forward loss. In such a case, when such a change has taken place in the voting powers there is no question of considering whether clause (b) would apply at all. He submitted that clause (b) will only apply whenever there is a change in the voting power irrespective of the percentage laid down in clause (a) and when such a change irrespective of the percentage of voting power has taken place with a view to avoid or reduce liability to tax, then clause (b) will be applicable and that by itself will be sufficient to disentitle the assessee from claiming set-off carried forward loss. In short, his submission is that clauses (a) and (b) are not interconnected at all and if either of the two clauses applies in the present case, then a claim for set-off under section 79 never arise of carried forward loss. He submitted that the Tribunal was right in coming to the conclusion that on the admission of the assessee company there was a change of more than 51% in the voting power of the group at the two relevant dates referred to in clause (a) and, therefore, existence of such circumstance by itself was sufficient to disentitle the assessee-company to claim set-off of carried forward loss.
7. Section 79 of the Act deals with carry forward and set-off losses in the case of certain companies and its provisions are as under :
'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 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.'
8. The question whether the carried forward loss of the previous year or years should be allowed to be set off in the relevant assessment year will depend upon the true construction of this section. Whenever on the last day of the previous year relevant to the assessment year the shares of a company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred, then clause (a) will be directly applicable and the assessee will be entitled to claim set-off of carried forward loss of the earlier year or years. In the present case, it is common ground that the loss was incurred in the accounting year ended March 31, 1960, relevant to the assessment year 1960-61, in the sum of Rs. 12,172. At that time, the assessee-company was controlled by Chunilal group. However, in the accounting year ended March 31, 1963, corresponding to the assessment year 1963-64, with which we are concerned, the assessee-company was controlled by Babubai group. Thus, this is on the admission of the assessee-company a case where it will not be entitled to claim benefit of the provisions of clause (a) of section 79.
9. It has next to be considered, when will the provisions of clause (b) be attracted Clause (b) contains the words 'the Income-tax Officer is satisfied that the change in the shareholding was not effected with a view to a avoiding or reducing any liability to tax'. The controversy between the parties centers round the correct interpretation of the expression 'the change in the shareholding was not effected'. The argument of Mr. Joshi on behalf of the revenue is that the expression 'the change' is not referable to a change of the type referred to in clause (a). He submitted that any change in the shareholding of the company will be governed by clause (b) irrespective of the percentage of change in the voting power as contemplated by clause (a). On the other hand, the argument of Mr. Patil on Behalf of the assessee is that the very fact that the expression 'the change' is used contemplates a change of the type referred to in clause (a), namely, that more than 51% of the voting power of the group at the two relevant dates had changed. He pointed out that in the operative part of section 79 legislature has chosen to use the expression 'a change' in the shareholding has taken place in the previous year, while in clause (b) the expression 'the change in the shareholding' has been used. He, therefore, submitted that if it was the intention of the legislature to apply clause (b) to any change in the shareholding then article 'the' would not have been used. The fact that article 'the' has been used in clause (b) shows that a change of the type referred to in clause (a), namely, that more than 51% of the voting power of the group at the two relevant dates had been changed. Even in such a case he submitted that the very fact that the benefit of clause (a) may not be available to such an assessee will not disentitle him to the benefit of clause (b) if he was entitled to the benefit of the same. In our opinion, the contentions of Mr. Patil appear to be right. If any change in the shareholding was intended within the meaning of clause (b) irrespective of the percentage of the voting power, the legislature would have repeated the expression 'a change in the shareholding' as used in the operative part of section 79. The very fact that the expression 'the change in the shareholding' has been used clearly shows that it contemplates a change of the type referred to in clause (a), namely, more than 51% of the voting power of the group had changed at the two relevant dates. Clause (b), in our opinion, would apply in a case where a change in the voting power of more that 51% of the shareholding of a company has taken place at the two relevant dates, namely, the last day of the earlier year or years in which the loss was incurred and was allowed to be carried forward and the last date of the previous year relevant to the assessment year in which the set-off is claimed. When such a change in the voting power of of more than 51% of the shareholding has taken place between these two relevant dates, then clause (b) further requires the Income-tax Officer to consider whether he is satisfied that such a change in the shareholding, change of more than 51% of the voting power, has taken place with a view to avoiding or reducing any liability to tax. If a change of more than 51% of the voting power between the two relevant dates has taken place with a view to avoiding or reducing any liability to tax, then the assessee will not be entitled to the benefit of set-off under clause (b) of the section. Clause (b) is not entirely independent of clause (a). Clause (b) will apply in a case where benefit under clause (a) is not available to the assessee. Still in such a case notwithstanding the fact that a change in the voting power of more than 51% of the shareholding has taken place between the two relevant dates he will be entitled to claim set-off of carried forward loss if such change in the voting power is not with a view to avoiding or reducing liability to tax. In our opinion, the Tribunal was in error in taking the view that the expression 'the change in the shareholding' used in clause (b) was only referable back to the substantive provisions of the section. The Tribunal was also in error in proceeding on the footing that clauses (a) and (b) are totally disconnected and have no inter-connection between the two. In our opinion, clause (b) will only apply to a case where the benefit of clause (a) will not be available to an assessee and notwithstanding a change of more than 51% of the voting power between the two relevant dates if a claim for set-off has to be made by the assessee, then it is for the assessee to satisfy the taxing authorities and the Tribunal that such change in the shareholding has not taken place with a view to avoiding any liability to tax and if the taxing authorities and the Tribunal are so satisfied, then, notwithstanding a change of more than 51% of the voting power between the two relevant dates, a claim for set-off will be permissible under clause (b) of section 79.
10. When the Income-tax Bill, 1961, was moved in the Lok Sabha, clause 79 of the Bill contained only provisions which included merely clause (a) and there was no reference therein to clause (b) at all. This Bill was referred by the Lok Sabha to a Select Committee and the Select Committee by its report presented on August 10, 1961, in paragraph 41 thereof 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 result of this report of the Select Committee that clause (b) had been introduced in a section 79 before it was passed by Parliament. Thus, it is clear that the object of introducing clause (b) was to consider when there was a change in more than 51% of the voting power on the last day of the previous year relevant to the assessment year as compared to the last day of the year or years in which the loss was incurred. This report of the Select Committee supports the contention of Mr. Patil.
11. The view that we have taken on the construction of section 79 is also supported by the commentary in Sampath Iyengar's Law of Income-tax, 6th edition, 1973. This is what the learned author says at pages 1253-54 :
'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 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).'
12. Thus, our answer to the question referred is as under : Even where a change in the voting power of more than 51% on the two relevant dates has taken place, unless such change is effected with a view to avoid or a reduce any liability to tax, the assessee will be entitled to the benefit of set-off under section 79(b). As in this case the Tribunal has not considered the question whether such change in the voting power has taken place with a view to avoid or reduce any liability to tax, that question shall have to be decided by the Tribunal before the question of claim for set-off can be finally decided. The revenue shall pay the costs of the assessee.