Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, BOMBAY
Vs.
RESPONDENT:
JUBILEE MILLS LTD., BOMBAY
DATE OF JUDGMENT:
05/12/1967
BENCH:
ACT:
Income Tax--Individual members of companies, assessment
of--Public substantially interested, meaning of--Group
controlling more than 15% voting power--Managing Agents
forming such a group--Indian Income-tax Act, 1922(11 of
1922), s. 23A.
HEADNOTE:
Section 23A of the income-tax Act, 1922, empowered the
Income-tax Officer to assess individual members of a company
in respect of undistributed assessable income of the company
in certain circumstances. The proviso to this section made
s. 23A inapplicable to a company in which the public was
substantially interested. The explanation to the proviso
laid down that a company shall be deemed to be one in which
the public was
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substantially interested if the shares of the company
carrying not less than 25% of the voting power had been
allotted unconditionally to or acquired by the public and
were held beneficially by the public. It was found that
though the directors ’of the company’s qua directors did not
hold more than 75% of the shares, the shares held by such
directors as were partners in the firm of the Managing
Agents of the company together with the shares held by other
partners of the Managing Agents and the shares held by the
members of the Managing Agency on behalf of minor children
exceeded 75% of the voting power.
Held, that the company was not one in, which the public was
substantially interested and s. 23A was applicable to it.
No person could be said to belong to the "public" unless he
held the shares unconditionally and beneficially for
himself. The words "unconditionally" and "beneficially"
indicated that the voting power arising from the holding of
those shires should be free and not within the control of
some shareholder and the holder should not be a nominee of
another. Directors, qua directors, were not without the
pale of the public as there was nothing that required them
to act in unison. What had to be seen was whether there was
any individual or a group holding the controlling interest
which group acting in concert could direct the affairs of
the company at its will. The partners of the Managing,
Agency constituted a group holding more than 75% of the
voting power in the company and they could not be counted as
public as they must be taken to act in their own interest in
unison".
Commissioner of Income-tax v. H. Bjordal, [1955] 28 I. T. R.
25, referred to.
Shri Changdeo Sugar Mills Ltd. v. Commissioner of Income-
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tax, Bombay, [1961] 41 1. T. R. 667 and Raghuvanshi Mills
Ltd. v. Commissioner of Income-tax [1961] 41 1. T. R. 613,
relied on.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 599 of 1961.
Appeal from the judgment and order dated March 13, 1958, of
the Bombay High Court in I.T. R. No. 40 of 1957.
R. Ganapathy Iyer and R. N. Sachthey, for the appellant.
A. V. Viswanatha Sastri and I. N. Shroff, for the respondent.
1962. September 17. The judgment of the Court was
delivered by
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HIDAYATULLAH, J.This is an appeal on a certificate of
fitness granted by the High Court of Bombay against the
judgment of the High Court dated March 13, 1958, on a
reference, made by the Income Tax Appellate Tribunal. The
Commissioner of Income Tax, Bombay City I, is the appellant
and the jubilee Mills Ltd., Bombay, the respondent. The
only question raised in this appeal is the application of
s.23A of the Income-tax Act to the assessee company.
The assessee company is a limited liability company with a
paid-up capital of Rs. 15,25,000/-. Its paid up capital is
made up as under:--
I Lakh Ordinary Shares of
Rs. 10 each Rs. 10,00,000
5,000 Cumulative Preference Shares of
Rs. 25 paid-up. Rs. 1,25,000
4,000 Second Preference Shares of
Rs. 100 each fully paid-up. Rs. 4,00,000
The Second Preference Shares do not entitle the holders to
vote. Thus shares of the assessee company carrying votes
are 1,05,000. This was the position on June 30, 1947. We
are concerned with the assessment year 1948-49 corresponding
to the previous year ended on June 30, 1947. In that year,
the company was assessed on a total income of Rs.
7,47,639/-. The Income Tax Officer calculated the tax at
Rs. 3,27,091, and t‘e balance available for distribution was
Rs.4,20,548. In that year, the company ought, if s. 23A was
applicable, to have distributed 60% of the above amount.
The company, however, declared dividends which in the
aggregate amounted to Rs. 24,750. The Income Tax Officer,
with the previous approval of the Inspecting Assistant
Commissioner applied the provisions of s. 23 A of the Income
Tax Act and held that the company was deemed to have
declared dividend of Rs. 3,97,788/-.
The assessee company was being managed by a firm called
Mangaldas Mehta & Co. That firm
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consisted of 14 partners of whom seven were the directors of
the assessee company. The members of the Managing Agents
who were also directors held between them 35,469 ordinary
shares and 880 First Preference Shares. The remaining seven
members of the Managing Agents, who were not directors of
the assessee company, held respectively 41,659 and 370
shares of the two categories. 75 shares were held by
Girdhardas & Co. Ltd. to which company admittedly s. 23 A
was applicable. Some of the members of the Managing Agency
firm held on behalf of their minor children or on behalf of
their joint families 9,899 Ordinary Shares and 937 First
Preference Shares. The following is a detailed break-up of
the share holdings:-
Category ’A’ ;
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Share in
Shares held by Directors Holding the part- Holding
who are partners in the of nership of the
firm of Managing Agents ordinary of firm 1st Pre-
shares of Mg. ference
Agents’ Shares
firm
1. ,, Shri Homi Mehta 50 8/128 Nil
2. ,, Sheth Mathuradas Man-
galdas Parekh 6,466 14/128 273
3. ,, Madanmohan
Mangaldas 11,052 14/128 273
4. ,, Madhusudan
Chamanlal Parekh 3,616 7/128 20
5. ,, Mahendra
Chamanlal Parekh 3,616 7/128 20
6. ,, Surendra Man-
galdas Parekh 7,053 14/128 274
7. ,, Indrajit
Chamanlal Parekh 3,616 7/128 20
-------- -------
35,469 880
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Category’B’:
------------------------------------------------------------
Share in
Shares; held by the partners Holding the part- Holding
of the Managing Agents of Ordi- nership of the
firm excluding the holding nary firm of 1st Pref.
of the Directors who are shares Mg. Shares.
also partners as shown Agents’
above. firm
1. Shri Harshavadan Mangaldas 11,053 14/128 274
2. Mrs.Savitagavri
Chamanlal Parekh 3,750 7/128 16
3. Shri Viren- a minor by
dra Chaman- his mother
lal Parekh and guardian
Mrs.Savitaga-
vri Chaman-
lal Parekh. 6,328 7/128 20
4. Shri Man-
mohan
Chamanlal
Parekh -do- 4,462 7/128 20
5. Shri Kamalnayan
Chamanlal
Parekh -do- 4,962 7/128 20
6. Shri Nutan
Chamanlal
Parekh -do- 4,962 7/128 20
7. Shri Hussein Essa 6,142 8/128 Nil
------ -----
41,659 370
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Category ’C’:
----------------------------------------------------------
Shares represented by the Holding of Pref. Shares
Directors ordinary Holding of
Shares the 1st.
1. Sheth Madhusudan
Chamanlal Parekh (No. 4
in ’A’ above) as Karta
of the joint Family estate
of Sheth Chamanlal
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Girdhardas Parekh 3,899 937
2. Sheth Mathuradas
Mangaldas Parekh
(No. 2 in ’A’ above)
as guardian and father
of minor, Ben
Purnima Mathuradas 1,000
3. -do- -do- Ben Veena 1,000
4. -do- -do- Ben Sunita 1,000
5. -do- -do- jagatkumar
Mathuradas 1,000
6. Sheth Surendra
Mangaldas Parekh
(No. 6 in ’A’ above)
As guardian and father
of minor Darshan Surendra
Parekh 1,000
7. -do- as guardian and
father of minor Ben Babi
Surendra Parekh 1,000
------- ------
9,899 937
It appears that in the past the assessee company incurred
heavy losses and it had to reconstruct its capital in 1930
because it had a debit balance of Rs. 12,75,OOO in the
Profit and Loss Account which had to be paid out of capital.
This was done by reducing the face value of the Ordinary
Shares from Rs. 100 to Rs. 10 each and of the Preference
Shares from Rs. 100 to Rs. 25 each, after obtaining the
approval of the High
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Court’ It is the reconstituted capital which has been shown
by us in an earlier part of this judgment. It also appears
that Income-Tax Officer granted to the assessee company a
rebate of one anna under proviso (a) to paragraph (B) of
part (1) of the, Second Schedule of the Finance Act, 1948.
This rebate was granted to those companies to which the
provisions of s. 23 A were not applicable. Subsequently,
the Income Tax Officer, as stated already,, applied s. 23 A
to this company and it was contended that he was incompetent
to do so as he must be; deemed to have impliedly held
already that s. 23 A was not applicable. Section 23 A
before its amendment in 1955, in? so far as it is material
read as follows:-
"23A. Power to assess individual members of
certain companies.- (1) Where the Income-tax
Officer is satisfied that in respect of any
previous year the profits and gains
distributed as dividends by any company up to
the end of the sixth month after-its accounts
for that previous year are laid before the
company in general meeting are less than sixty
per cent of the assessable income of the
company of that previous year, as reduced by
the amount of income-tax and super-tax payable
by the company in respect thereof he shall,
unless he is satisfied that having regard to
losses incurred by the company in earlier
years or to the smallness of the profit made,
the payment of a dividend or a larger dividen
d
than that declared would be unreasonable, make
with the previous approval of the Inspecting
Assistant Commissioner an order in writing
that the undistributed portion of the
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assessable income of the company of that
previous year as computed for income-tax pur-
poses and reduced by the amount of income-tax
and super-tax payable, by the company in
respect thereof shall be deemed to have been
distributed as dividends, amongst the
shareholders as at the date of the general
meeting aforesaid, and
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thereupon the proportionate share thereof of
each shareholder shall be included in the
total income of such shareholder for the
purpose of assessing his total income:
x x x x
x x x x
Provided further that this subsection shall
not apply to any company in which the public
are substantially interested or to a
subsidiary company of such a company if the
whole of’ the share capital of such subsidiary
company is held by the parent company or by
the nominees thereof
Explanation. For the purpose of this sub-
section,-
a company shall be deemed to be a company in
which the public are substantially interested
if shares of the company (not being shares
entitled to a fixed rate of dividend, whether
with or without a further right to participate
in profits) carrying not less than twenty-five
per cent of the voting power have been
allotted unconditionally to, or acquired
unconditionally by, and are at the end of the
previous year beneficially held by the public
(not including a company to which the
provisions of this sub-section apply), and if
any such shares have in the course of such
previous year been the subject of dealings in
any stock exchange in the taxable territories
or are in fact freely transferable by the
holders to other members of the public."
We are really concerned with the application of the
Explanation to the facts of this case. The Explanation, is
so far as it is relevant to our purpose, says that a company
shall be deemed to be a company in which the public are
substantially interested if the
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shares of the company carrying not less than 25% of the
voting power have been allotted unconditionally, to or
acquired unconditionally by the public and are: held
beneficially by the public.
The Income-tax Officer held that this was not a company in
which the public were substantially interested and that the
grant of the rebate earlier by him did not estop him from
applying s. 23A to this company. His order was upheld by
the Appellate Assistant Commissioner and the Tribunal on
both the points. The assessee company then applied for a
reference and the Tribunal referred the following questions
for decision by the High Court:--
"(1) Whether, on the facts and in the circums-
tances of the case, the Income-tax Officer was
competent to pass an order under Section
23A(1) of the Act after having allowed a
rebate of one anna per rupee in the assessment
under the proviso (a) to paragraph (B) of Part
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I of the Second Schedule of the Finance Act,
1948?
(2) If the answer to question No. 1 is in the
affirmative whether on the facts and in the
circumstances of the case, the assessee com-
pany is a company in which the public are
substantially interested for the purposes of
Section 23A of the Act?
(3) Whether the loss of Rs. 12,75,000
incurred by the company prior to its
reconstruction in 1930, could be taken into
consideration for purposes of the
applicability of Section 23A (1) of the Act?"
The High Court, by the judgment under appeal answered the
first two questions in the affirmative and in view of the
answer to Question No. 2 it considered it unnecessary to
answer the third. The Commissioner of Income Tax obtained a
certificate of fitness and filed the present appeal.
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The answer to the first question is in favour of the
Commissioner of Income Tax. The other side has not appealed
and Mr. Vishwanath Sastri for the assessee company conceded
before us that the High Court was right. The third question
depends on the answer to the first question but as it has
not been answered by the High Court we do not consider it
necessary to answer it here for the first time. We shall
now address ourselves to the second question.
The Tribunal in dealing with the question whether the public
could be said to hold 25% or more of the voting power in the
assessee company took into consideration a decision of the
Privy Council in Commissioner of Income Tax v. H.
Bjordal,(1) and held that though directors, qua directors,
do not cease to be members of the public, the holding of the
group of 14 individuals who collectively formed the Managing
Agency firm of Mangaldas Mehta & Co. could not be counted as
held by the members of the public in this case for purposes
of the Explanation. The Tribunal was further of the opinion
that this group of persons had a ’juristic personality’ and
it should be taken into account as a group in determining
where the Controlling power vested according to the test
laid down by the Privy Council in the said case.
The High Court reversed the decision of the Tribunal
following its earlier decision reported in Raghuvan8hi Mills
Ltd. v. Commissioner of Income-Tax(2). In that case the
High Court had held that directors, qua directors must be
contrasted with the public and if the directors held more
than 75% of the voting power then alone the company could be
said to be one in which the public were not substantially
interested. The High Court’s view was that the Managing
Agents act under the direction of the directors and unless
the directors were themselves controlling the voting power
above the limit stated by the Explanation, the company must
be regarded as one in which
(1) [1955] 28 I. T. R. 25.
(2) [1953] 24 I. T. R. 338.
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the public were substantially interested. Applying the same
test to the present case, the High Court found that the
directors between them held only the shares which we have
shown in tabular form: under category ’A’. ’Since the
number of these shares was not up to the mark to, attract s.
23A, the High Court answered the second question in favour
of the assessee company. The request of the Department that
a supplemental statement of the case be asked from the
Tribunal as to whether any person belonging to categories
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’B’ and ’C’ was so much within the control of the directors
as not to hold the shares unconditionally or beneficially
for himself was rejected by the High Court observing that
this would give a second chance to the Department to lead
further evidence. Following the decision of the House of
Lords in Thomas Fattorini (Lancashire) Ltd. v. Inland
Revenue Commissioner. (1) they refused to take action under
s. 66 (4). The High Court took notice of the fact that the
Privy Council in Bjordal’s case (supra) had indicated a test
to determine what is meant by "public" which was different
from that indicated by them in Raghutanshi case (supra).
They, however, held that after 1950 the decisions of the
Privy Council had only a persuasive authority and the
decision of the High Court was binding in the absence of’ a
decision by this Court. They therefore, applied their own’
decision in Raghuvanshi Mill’s case and decided this case
Accordingly.
It may be pointed out that the High Court did ’appreciate
the point of view expressed by tile Privy Council in the
above-mentioned case. They observed as follows:-
"It may be that our view is erroneous; and it
may be-and very probably it is -that the view
taken by the Privy Council is the right one.
But, as we have said, so long as the judgment
of the Bombay High Court stands,it was the
duty both of he Department and of the Tribunal
to give effect to that decision."
(1) [1942] A. C. 643,
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Section 23A is not applicable to a company in which the
public are substantially interested. What is "substantial"
interest of the public is stated in the Explanation. That
interest represented in terms of the share-holding must not
be less than 25% of the total number of the shares, but no
person can be said to belong to the "public" unless he holds
the shares unconditionally and beneficially for himself.
What is meant by (unconditionally" and "beneficially" was
explained by this Court in an appeal against the decision of
the High Court of Bombay in the Raghuvanshi Mills’ case.
The decision of this Court is reported in [1961] 41 I.T.R.,
613. This Court pointed out that by the words
"unconditionally" and "beneficially" is indicated that the
voting power arising from the holding of those shares should
be free and not within the control of some other shareholder
and the registered holder should not be a nominee of
another. It was pointed out again by this Court in Shri
Changdeo , Sugar Mills Ltd. v. commissioner of Income Tax
Bombay, (1) that by "unconditional" and. "beneficial"
holding is meant that the share,, are held by the holders
for their own benefit only and without any control of
another.
This Court approved the decision of the Privy Council in
Bjordal’s case that directors, qua directors, are not
without the pale of the public. This Court pointed out that
what one has to find out is whether there is an individual
who, or a group acting in concert which, controls or control
the affairs of the company to the exclusion of others by
reason of his or their voting power. Such person or group
of persons do not answer the description "public." There is
nothing inherent in the office of directors which would lead
one to think that the directors must act in unison. They
are persons in whom the shareholder,% have reposed
confidence and on whom they have conferred powers which
under the scheme’ of the Companies Act, have to be exercised
for the benefit
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(1) [1961] 41 1. T. R. 667.
95
of the shareholders. The directors are, in a manner of
speaking, trustees of these powers. It is the duty of the
directors to exercise these powers to the best of their
independent judgment. There is therefore, .-nothing in the
nature of things or at all that requires the directors to
act in unison. This Court pointed out in the Raghuvanshi
Mills’case (1) that such a group may be composed of
directors or their nominees or relations in different
combinations or may be composed of persons none of whom is a
director provided such a group forms a block which holds the
controlling interest in its hands.
It would, therefore, follow from what we have stated that we
have first to see whether there is an individual or a group
holding the controlling interest which group acting in
concert can direct the affairs of (lie company at its will.
The controlling interest, of course, is effective only if
the group owns 51 of the total shares. But the company will
still lie a company in which the public can be said to be
substantially interested because lo cease to be so the
holding of the group must be more than 75 %. In the group,
any person be he a director or a nondirector, a relative of
a director, a promoter of the company or a, stranger, may
be included but only if belonging to a group or as holding
the shares as a nominee of someone else belonging to the
group. We have indicated again the true test which was not
applied in the judgment of the Bombay High Court in the
Raghuvansi Mills’ case(-) and applying which we reversed
that decision.
Applying the above test, we have to see whether there is
such a group in this company. It is obvious from what we
have said that category ’A’ which consisted of the directors
could not be regarded as outside "public" merely by reason
that they were directors. But there is, however, an
intimate connection between category ’A’ and category ’B’ in
as much as both are members of the Managing Agency
(1) [1961] 41 I. T R. 613. (2) [1953] 24 I. T. R. 338.
96
firm. In other words, there is evidence of yet another
group, namely, the group of shareholders who constitute the
Managing Agency firm.
We agree with the High Court that Managing Agents act
under the control and direction of the directors. The
Managing Agents are also appointed by the company. The
control of the affairs of a company is ordinarily in the
hand of the directors of the company but there may be cases
in which the Managing Agents, by reason of their superior
holding of shares, may be able to appoint the directors and
generally to control the views of the directors. Where the
’Managing Agents hold an interest which is small and is thus
not capable of exercising an overriding power, other
evidence may be required to show that they, in conjunction
with others, are running the affairs of the company to the
exclusion of the public. Where, however, the Managing
Agents admittedly hold 51 % or more of the shares, it is
obvious that the controlling interest belongs to the
Managing Agents.’ When, therefore, the Managing Agents,
either by themselves or with those who act in concert with
them, hold shares above the 75% limit they can be regarded
as constituting a group which cannot be counted as "
public". In such a case the holding of the Managing Agents,
if above 75%, may furnish proof that the company is one in
which the public are not substantially interested. It was
contended before us that even among the Managing Agents some
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may take an independent view. Normally Managing Agencies
are not formed by parties except for the purpose of mutual
gain and the commonness of the interest lends a cohesion. to
the body which enables it to act in its own interest. When
such a body holds shares carrying more than 75% of the
voting power the company itself is run mainly as the
Managing Agents desire it to be run. Such a Managing Agency
could easily choose its own directors and the directors
would not be independent persons but mere nominees of the
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Managing Agents. In such a case the inference is
irresistible that we have a group, which as a group, can run
the company at its will and which not only controls the
voting at the meeting of the shareholders but, by selecting
its own directors, gets the directors to act according to
its own desires. No member of such a Managing Agency firm
can be regarded as belonging to "the public" and when this
happens the company comes within the reach of s. 23A.
Applying the above test to the present case, it is clear
that the Managing Agents, between them hold 77,128 out of
1,00,000 ordinary shares, well above the limit. They have
in addition 1,250 First Preference Shares out of 5,000 which
also carry voting power. To this must be added 75 shares
held by Girdhardas & Co. Ltd. to which s. 23A is admittedly
applicable. This brings the total holding to 78,453. 75% of
the total shares bearing votes is 78,750. This shows that
the holding of the Managing Agents is short by 298 shares
for the application of the Explanation to s. 23A. But when
we turn to category "C" we find that 6,000 shares were held
by the members of the Managing Agency on behalf of minor
children and the voting power arising from these shares was
in their own hands as guardians. There is no doubt that in
the present case shares carrying more than 75% of the voting
power are held by persons who form a group in the sense
indicated by this Court in Raghuvanshi Mills case and by us
here. The reason is this: Shares carrying more than 75% of
the voting power are held by the partners of the managing
agency or persons under its control. Now it seems to us
that it is to the interest of the partners of this firm to
exercise their voting power in one way, namely the way that
brings to them the largest profit out of the company. It is
true that the managing agents are the servants of the
company in a manner of speaking and not its masters and also
that the object of a firm of managing agents is to carry out
certain administrative
98
duties concerning the company under the control of the
directors of the company. That however is irrelevant and in
any case is far from the truth in the present case. Here
the partners of the managing agency practically own the
company.
At the hearing a point was raised that it has to be proved
as a fact that the persons constituting the oil which owns
shares carrying more than seventyfive percent of the voting
power, were acting in unison. The test is not whether they
have actually acted in concert but whether the circumstances
are such that human experience tells us that it can safely
be taken that they must be acting together. It is not
necessary to state the kind of evidence that will prove such
concerted actings. Each case must necessarily be decided on
its own facts. The exclusion of "public" in the manner
indicated generally from more than 75% of the shares and the
concentration of such a holding in a single person or a
group acting in concert is what attracts s. 23 (A).
In our opinion the High Court was not right in answering the
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second question in the affirmative. The appeal is allowed.
The answer of the High Court is sit aside and the question
is answered in the negative. The respondent shall pay the
costs here and in the High Court.
Appeal allowed.
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