JUDGMENT
Rajesh Balia, J.
1. At the instance of the CIT, the Tribunal, Ahmedabad Bench ‘A’ has referred the following three questions of law arising out of its order dt. 24th Aug., 1981 in ITA No. 1224/Ahd/80 relating to the asst. yr. 1974-75 :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the ITO was not justified in invoking the provisions of s. 147(b) of the Act ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the claim of the assessee for set off of carried forward losses against the income of the year ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the assessee-company was an industrial company ?”
2. The facts as found by the Tribunal are that the assessee had claimed set off in respect of carried forward business loss and unabsorbed depreciation. In the first instance the ITO has completed the assessment as per the claim of the assessee. However, proceedings under s. 147(b) were initiated against the assessee and as a result of reassessment the ITO withdrew the set off in respect of carried forward business losses and unabsorbed depreciation, and taxed the assessee at the rate applicable to trading company at 65% along with surcharge and not as industrial company.
3. The assessee appealed and contended that no material had come in the possession of the ITO subsequent to the assessment to confer jurisdiction on him to invoke s. 147(b) of the IT Act, and proceedings for reassessment have been initiated merely on change of option. It was also contended that the ITO initially rightly allowed set off of the carried forward business losses and unabsorbed depreciation and that the assessee ought to be treated as industrial company and no reason has been assigned by the ITO for levying tax at the rate of 65% and surcharge thereon.
4. The assessee had raised the same contention before the ITO. As regards the contention of the assessee that the assessment has been reopened without jurisdiction, the same was rejected by stating that there was information that the income chargeable to the tax has been underassessed. However, what was that information and whether that information having any nexus with the escapement of assessment came to the knowledge of the Assessing Officer (AO) after the assessment was not stated. On merit it was held by the ITO that the two conditions prescribed under s. 79 for disallowing set off of carry forward losses and unabsorbed depreciation of earlier years in the relevant previous years are disjunctive and even if one of them is not satisfied the assessee is not entitled to set off the carry forward losses. However, nothing was stated whether the assessee is an industrial company or trading company, but tax was charged at 65% along with surcharge.
5. The CIT(A) allowed the appeal, accepted all the contentions of the assessee and the order has been affirmed by the Tribunal.
6. So far as question No. 1 is concerned, it is not in dispute that resort to reopening of assessment was made under clause (b) of s. 147 and not under clause (a), viz., that there has been no failure on the part of the assessee to disclose truly and fully all material facts necessary for the assessment of his income. For assuming jurisdiction under clause (b) of s. 147, as it was in force during the relevant period, it is a condition precedent that such action may be initiated only where as a consequence of information in his possession, the ITO had reason to believe that income of the assessee chargeable to tax has escaped assessment for the assessment year. In order to invoke jurisdiction under clause (b) the logical sequence of formation of belief must be that the AO must have in his possession certain information which has come to him subsequent to earlier assessment and that information must have nexus with the formation of belief about escapement of income from being assessed to tax. Unless the information finds its place in the reasons recorded by the ITO for initiating proceedings, disclosing nexus between the subsequent acquisition of information and its connection with the escapement of income from being assessed to tax, the initiation of proceedings itself becomes bad. Where the AO gets no information subsequent to earlier assessment order, but merely proceeds to reopen the earlier assessment without any fresh facts or materials or without any enquiry into the materials which form part of the record, it amounts to mere change of opinion and cannot be foundation for initiating proceedings under s. 147(b).
7. As the facts disclosed in the Tribunal’s order as well as in the assessment order, we are of the opinion that it is a case of mere change of opinion and the ITO had no subsequent information in his possession on the basis of which he could initiate proceedings. Moreover, as we shall presently see, while discussing question No. 2, the issue has become of academic importance.
8. Question No. 2 raises issue about applicability of s. 79 in respect of carry forward of business losses. The provisions is applicable to a company in which the public are not substantially interested. It provides with the non obstante clause, that where a change in the shareholding has taken place in the previous year in the case of a company in which the public are not 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. However, it provides exception as follows :
“(a) on the last day of the previous year the shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company, or carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred; or
(b) the AO is satisfied that the change in the shareholding was not effected with a view to avoiding or reducing any liability to tax.” A bare perusal of the aforesaid provision leaves no room for doubt that mere change in shareholdings does not result in disallowance of carry forward of business losses incurred in earlier years. Where there is no change in at least 51% of the shareholdings having 51% of the voting power, the provision does not apply, and also where the AO is satisfied that change in the shareholdings was not effected with a view to avoiding or reducing any liability to tax, the provision does not apply. The crux of applicability of s. 79 is that change in the shareholding of a company in which public are not substantially interested, unless intended with a view to avoid or reduce the liability to tax, does not affect its right to carry forward the loss of earlier years and set off against the income of the previous year in question. Two conditions are not disjunctive but alternative, satisfaction of either of which saves the assessee from the operation of s. 79. We are fortified in our view by a decision of the Supreme Court in the case of CIT vs. Italindia Cotton P. Ltd. (1988) 174 ITR 160 (SC), wherein the Supreme Court has observed as follows :
“… The question before us is whether the two conditions operate cumulatively or in the alternative. In other words, should both conditions exist together to nullify the prohibition against carry forward and set off of the loss ? Upon careful consideration, we are of the opinion that the conditions are intended to operate as alternative to one another. If the terms of either clause (a) or clause (b) are satisfied, the disqualification suffered by a company, by reason of a change in the shareholding in the previous year, is removed, and the company is entitled to the benefit of the provisions in Chapter VI relating to the carry forward and set off of losses. The benefit is available notwithstanding the change in the shareholdings in the previous year, if shares representing not less than 51% of the voting power remain 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 avoiding or reducing any liability to tax.
….. every such change of shareholding need not fall within the prohibition. There can be a case where persons already owning a shareholding carrying less than 51% of the voting power in the company may enlarge their shareholding during the previous year in order that control over the company may pass to them. Attempts to acquire control over a company by controlling a majority of the shareholding are not unknown. The acquisition of control over a company provides a source of both direct and indirect financial benefit as well as power over its policies and activities. On the other side, there can be a case where the change is effected with a view to avoiding or reducing some liability to tax. The change is effected not for business or commercial reasons but in order that tax liability may be avoided or reduced. In that event, the change in the shareholding will tend to bring about the result which s. 79 was designed to prevent. In our opinion, to avoid falling within the scope of s. 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 IT 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.”
Coming to this conclusion, the Supreme Court approved the decision of this Court in CIT vs. Shri Subhalaxmi Mills Ltd. (1983) 143 ITR 863 (Guj), and the decision of the Madras High Court in CIT vs. Saravanabhava Mills P. Ltd. (1983) 143 ITR 856 (Mad). Accordingly we answer question No. 2 in the affirmative, i.e., in favour of the assessee and against the Revenue.
9. Coming to question No. 3 we find that the Tribunal has referred to its order in assessee’s own case for the asst. yr. 1975-76 which has been followed by it, and while deciding the appeal out of which this reference has arisen it recorded the finding that major portion of the assessee’s income pertains to processing of marbles, and has also recorded that the ITO himself in his order has observed that the assessee-company has got business as in past, namely, cutting and processing of marble slabs. On the aforesaid premises and more particularly in view of absence of any material showing that the assessee was engaged in any other business, in our opinion, the Tribunal has rightly come to the finding that the assessee is an industrial company and has to be charged to tax at the rate applicable to industrial company.
10. Accordingly the reference stands disposed of with no order as to costs.