Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX BIHAR, PATNA
Vs.
RESPONDENT:
SAHU JAIN LIMITED
DATE OF JUDGMENT16/02/1976
BENCH:
GOSWAMI, P.K.
BENCH:
GOSWAMI, P.K.
FAZALALI, SYED MURTAZA
CITATION:
1976 AIR 1141 1976 SCR (3) 398
1976 SCC (2) 510
CITATOR INFO :
F 1987 SC1643 (5)
ACT:
Income Tax Act 1922-Section 23A(1)-Undistributed
profits of a company-Company in which public are
substantially interested-Acting in concern-Relationship
amongst shareholders if decisive-Family concern.
HEADNOTE:
Sahu Jain was a private limited company during the
assessment years l952-53 and 1953-54. All the shareholders
of the company are the family member J of Mr. S. P. Jain
except two employees who held 20 out of 50,000 shares and
excepting the three Companies which were also sister
concerns. Under s. 23A of the Income Tax Act, 1922, prior to
its amendment in the year 1955, where the Income Tax officer
is satisfied that in respect of any previous year the
profits and gains distributed as dividends by any Company
are less than 60 per cent of the assessable income of the
company as reduced by the Income Tax and Super Tax payable
by the company in respect there of, he shall unless he is
satisfied that having regard to the loss incurred by the
company in earlier years or to the smallness of the profit
made, the payment of a dividend or a larger dividend than
declared would be unreasonable, make an order in writing
that the undistributed portion of the income of the company
of that previous year as computed for income tax purposes
and reduced by the amount of income tax and supertax payable
by the company in respect thereof shall be deemed to have
been distributed as dividends amongst the shareholders. The
proviso to the said section provides that the provisions of
the section would not apply to any company in which the
public are substantially interested if shares of the company
carrying not less than 25 per cent of the voting power have
been allotted unconditionally to or acquired unconditionally
by the public or beneficially held by public. The Income Tax
officer held that the provisions of s. 23A were attracted in
the case of the company for both the years. The Appellate
Assistant Commissioner confirmed the order of the Income Tax
officer. The Tribunal held that s. 23A was not applicable to
the company in respect of both the assessment years. The
Tribunal held that unless. it is presumed that because of
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relationship Shri S. P. Jain, Smt. Rama Jain and Shri A. K.
Jain should be regarded as acting in concert there is no
other material on record on the basis of which such a
conclusion could be supported. On a reference made by the
Tribunal, The High Court answered the question in favour of
the assessee and against the Revenue.
In an appeal by special leave the appellant contended:
1. 80 per cent of the share capital was held by S. P.
Jain and his wife and two sons. One of whom was a minor
throughout the period and another for a portion of the
period and that the remaining shares were held by tho
company which were under the control of S. P. Jain and that
only 20 share out of 50,000 shares were held by two
employees under the control of S. P Jain.
2. A. K. Jain was appointed as a Director when he was a
minor and he became a Managing Director on a salary of Rs.
6,000/- per month when he was 20 years old.
3. S. P. Jain who was a Director resigned making room
for his Private Secretary for appointment as Director.
4. The Company showed a loss of Rs. 2 lacs and odd in a
transaction in hessian and the same was shown as profit by
Smt. Rama Jain wife of S. P. Jain.
5. S. P. Jain, A. K. Jain. R. Sharma and N. C. Jain
were the promoters of the company ant were signatories to
the Memorandum of Association.
399
The respondent contended:
1. Smt. Rama Jain and A. K. Jain were independent
assessees. A. K. Jain was taking independent decisions as a
competent Director. Mere relationship would not lead to the
conclusion that the said two shareholders acted in concert
with S. P. Jain.
2. A. K. Jain was an independent shareholder and was
not under the control of S. P. Jain or any other Director or
shareholder.
3. N. C. Jain was Director from 1950 to 1954 and S. P.
Jain became Managing Director subject to the approval of the
Government. A. K Jain was appointed as Deputy Managing
Director on a remuneration of Rs. 6,000/- per month subject
to the approval of the Central Government.
4. The transactions like one of hessian are common
transactions and no undue importance can be attached to it.
5. Merely because some persons are promoters or
employees of a Company that would not affect their character
as shareholders of the Company.
Allowing the appeals by special leave,
^
HELD: 1. The controversy is whether the company is one
in which the public has 25 per cent or more shares. [404C]
2. This Court held in the case of Commissioner of
Income Tax West Bengal v. East Coast Commercial Co. Ltd.,
[1967] (1) SCR 321 that the word ’public’ is used in the
explanation to s. 23A in contra-distinction to one or more
persons who act in unison and amongst whom the voting power
constitute-s a block. This Court also held that the Tribunal
had to decide in the first instance wreathe there was a
group of persons acting in concert holding a sufficient
number of shares which may control the voting as a block.
But the existence of block is not decisive. The company
would still be a company in which public are substantially
interested if 25 per cent or more of the voting power has
been allotted unconditionally to and beneficially held by
the public. This Court also held that the relationship and
position as Director are not by themselves decisive. But if
the relatives act not freely but with others they cannot be
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said to belong to the public. 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.
[406A, C-D, H, 407A]
3. It is clear that this company was a family concern
with only 20 shares out of 50,000 shares allotted to the two
outsiders who again happened to be paid employees. The
presence of these two outsiders is of the least significance
in the matter of management of the affairs of the company.
A. K. Jain became a Director even when he was a. minor. He
would not ordinarily be able to play the role he is supposed
to have done in the Board meetings unless S. P. Jain was
confident that the Board was carrying out its mandates with
regard to the affairs of the Company. The fact that A. K.
Jain and others were authorised to sign agreements on behalf
of the Company is not of great significance. There is no
evidence whatsoever to show that Rama Jain wife of S. P.
Jain was at all independently acting. [409G, H, 410]
4. When a company is composed mostly of family member
owning lion’s share in the entire share capital of the
company the onus to keep clear of the reach of s. 23A will
be on the shareholders by adducing some positive evidence
about the absence of control by the controlling
shareholders. [410-B]
5. No single factor can be decisive but having regard
to the totality of the circumstances revealed in the case
and the conduct of the transactions of the company taken
with the relationship which in the circumstances of this
case is not a negligible element this Court is dearly of the
opinion that it is a case in which it cannot be said that
the public is substantially interested in 25 per cent or
more shares of the company. [410D-E]
6. Even if A. K. Jain is said to be a member of the
public, his shares together with the shares of Ashoka
Agencies Limited is 500 less than the r minimum shareholding
requisite to earn the benefit of the third proviso to s. 23A
read with the explanation. [410-E]
400
7. Between August 11, 1951 and May 1, 1952, A. K. Jain
and 2 employee Directors apparently took all decisions for
the company in the Board’s meetings. This is not ordinarily
possible but for collaboration with the major shareholders.
This is a case where more is meant than meets the eye.
[410E-F]
8. It is A clear case of all the shareholders acting in
concert and in unison and the two employee Directors were
merely dummies. There is not the slightest inkling of the
public being interested far less substantially interested in
this company. [410G]
9. The intimate relationship of the shareholders, with
not the least evidence of disconcert amongst them, the
ordinary expectation for individual profit in commercial
undertaking, the history of the company and its continued
smooth working is inconsistent with anything but full unison
amongst the shareholders. The Board’s meetings are evidence
of well organised, well knit, close unity of vie vs in all
affairs which in ordinary course of human conduct would not
have been at all possible but for a single or concerted
action in the company management by a controlling group.
[410D-F]
JUDGMENT:
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CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 761 &
762. of 1971.
(Appeals by Special Leave from the Judgment and order
dated the 14-3-1969 of the Patna High Court in M.J.C. Nos.
182 and 183 of 1962).
B. Sen, T. A. Ramachandran and S. P. Nayar, for the
appellant.
Hardayal Hardy, and Bishamber Lal, for respondent.
The Judgment of the Court was delivered by
GOSWAMI, J. These two appeals by special leave are
directed against the common judgment of March 14, 1969, of
the Patna High Court in the matter of two references under
section 66(1) of the Indian Income-tax Act, 1922, relating
to assessment years 1953-54 and 1954-55 of the respondent
(hereinafter to be referred to as the company) .
The case has a rather chequered history as will appear
from the facts narrated below:-
The company at the material time was a private limited
company and at the end of the relevant previous years,
namely, August 31, 1952 and August 31, 1953, the
shareholding was as follows:-
--------------------
Number of shares on:
31-8-1952 31-8-1953.
---------------------
1. Sri Ashok Kumar Jain, 10,000 10,000
Managing Director.
2. Sri R. Sharma Director 10 10
3. Sri N. C. Jain Director 10 10
4. Sri S. P. Jain 10,000 10,000
5. Smt. RamaJain 10,000 10,000
6. Sri Alok Prakash Jain 10,000 10,000
7. Sri Rishabh Investment Ltd 5,000 5,000
8. Dalmia Jain Co. Ltd. 2,000 2,000
9. Universal Bank of India Ltd 980 980
10.Ashoka Agencies Ltd. . . .. . 2,000 2,000
----------------------
50,000 50,000
----------------------
401
Of these shareholders Rama Jain is the wife of S. P.
Jain and Alok Prakash Jain and Ashok Kumar Jain are the sons
of S. P. Jain and Rama Jain. Ashok Kumar Jain (briefly A. K.
Jain), the Managing Director, attained majority on March 5,
1952, while Alok Prakash Jain was a minor during both the
accounting years. The three companies, namely, Rishabh
Investment Ltd., Dalmia Jain Co. Ltd. and Universal Bank of
India Ltd., are companies to which the provisions of action
23A of the Income-tax Act, 1922 (briefly the Act) prior to
its-amendment by the Finance Act 1955, applied. S. P. Jain
was the principal shareholder of the Universal Bank of India
Ltd. holding 980 shares. Ashoka Agencies Ltd. with 2000
shares was a company to which admittedly section 23A did not
apply. R. Sharma and N. C. Jain holding 10 shares each were
employees, N. C. Jain being the Secretary of S. P. Jain.
The Income-tax officer by his orders of September 25,
1957 and October 30, 1957, held that section 23A was
attracted in the case of the company for both the years. On
appeal, the Appellate Assistant Commissioner remanded the
matter back to the Income-tax officer for a finding on
certain additional facts. The Income-tax officer in his
remand report submitted certain additional facts to the
Appellate Assistant Commissioner who in due course affirmed
the orders of the Income-tax officer. The company appealed
to the Income-tax Appellate Tribunal, Bihar, at Patna. The
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Tribunal allowed the appeal by its order of January 26, 1961
(7) and held that section 23A was not applicable to the
company in respect of both the assessment years. At the
instance of the Commissioner Income-tax, Bihar, the
following question was referred by the Tribunal to the High
Court:
"Whether on the facts and circumstances of the
case the Tribunal was justified in holding that the
provisions of section 23A of the Income-tax Act were
not applicable to the assessee company for the
assessment years 1953-54 and 1954-55" ?
The High Court by its order of December 9, 1965, in
view of two decisions of this Court, namely, Raghuvanshi
Mills Ltd. v. Commissioner of Income-tax, Bombay,(l) decided
on December 7, 1960 and Commissioner of Income-tax Bombay v.
Jubilee Mills Ltd.(2) Bombay, decided on September 1, 1962,
directed the Tribunal to submit a supplementary statement of
case to it:
"Whether bearing in mind the principles laid down
by the Supreme Court in Raghuvanshi Mills Ltd. v.
Commissioner of Income-tax (41 Income Tax Reports 613)
and Commissioner of Income-tax, Bombay City v. Jubilee
Mills Ltd. (48 Income Tax Reports 9) Shrimati Rama Jain
and Sri Ashok Kumar Jain, or either of them could be
safely taken to have acted in concert with Sri S. P.
Jain during the years in question, in respect of the
affairs of the assessee company" ?
(1) [1961] 2 S.C.R. 978. (2) [1963] Supp. 1 S.C.R. 83.
402
The High Court also directed that "the Tribunal may take
additional evidence, if it considers it necessary to enable
it to state the supplementary case as directed above".
The Tribunal thereafter, after hearing the parties,
submitted a supplementary statement of case to the High
Court on September 30, 1966. A controversy arose before the
Tribunal with regard to entertainment of additional evidence
which the Revenue wanted to adduce before it, particularly
in view of the direction of the High Court, but the Tribunal
did not accede to the request and additional evidence was
not received. The matter then came up before the High Court
resulting in the impugned order against the Revenue. Hence
these two appeals by special leave.
The Revenue reiterated its grievance before the High Court
about the Tribunal’s refusal to entertain additional
evidence without success and the matter is no longer in
controversy in view of a decision of seven Judges of this
Court in The Keshav Mills Co. Ltd. v. Commissioner of
Income-tax, Bombay North,(1) affirming the earlier decisions
of this Court in the case of the New Jehangir Vakil Mills
Ltd. v. The Commissioner of Income-tax, Bombay North(’) and
The Petlad Turkey Red Dye Works Co. Ltd. Petlad v. The
Commissioner of Income-tax, Bombay, Ahmedabad(3). It is now
well-settled that when the Tribunal has disposed of the
matter and is preparing a statement of the case either under
Section 66(1) or under section 66(2), there is no scope for
any further or additional evidence and the power of the High
Court under section 66(c) can be exercised only in respect
of material and evidence which has already been brought on
the record.
It was contended on behalf of the Revenue before the
High Court that the finding of the Tribunal was perverse.
Mr. Sen appearing on behalf of the Revenue before us has
fairly and, in our opinion, rightly not pressed this
submission before us. Similarly on behalf of the company
also it was contended before the High Court that there was
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no principle of law involved in drawing any inference in the
cases answer to the plea of the Revenue that the finding
whether section 23A was not attracted was a mixed question
of law and fact. It is not possible to hold that the
question referred to the High Court is not a question of law
as undoubtedly on the statement of case an important
question of law does arise and the composite reference was
competent.
The question that arises for consideration is whether
on the facts and circumstances that are established before
the Tribunal the company in the two assessment years can
escape the reach of section 23A of the Act.
(1) [1965] 2 S.C.R. 908.
(2) [1960] 1 S.C.R. 249.
(3) [19631 Supp. 1 S.C.R. 871.
403
Section 23A prior to its amendment in 1956 and so far
as it is material read as follows:-
"23A (1) . Power to assess individual members of
certain companies.-
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
dividend 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 assessable income of the company of that
previous year as computed for income-tax purposes 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 share-holders as at the date of the general meeting
aforesaid, and 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:
Provided further that this sub-section shall not
apply to any company in which the public are
substantially interested
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 .... 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 .. and if any such shares have in the
course of such previous year been the subject of
dealings in any stock exchange or are in fact freely
transferable by the holders to other members of the
public’‘.
In this case the company did not declare any dividend
for the assessment year 1953-54. In the next assessment year
1954-55, only a sum of Rs. 50,000/- was distributed as
dividend. It is not in dispute that the company had
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sufficient requisite assessable income out of which
sufficient or larger dividend could have been paid. There is
no dispute that the payment of an adequate dividend for the
first year and larger dividend for the next year would have
been
404
at all unreasonable in respect of these two assessment
years. The only controversy between the parties is with
regard to the exclusion of the company from the application
of section 33A in view of the third proviso read with the
Explanation. In other words, is the company one in which the
public are substantially interested ? It could be so in
terms of the Explanation if 25 per cent shares of the
company or more had been allotted unconditionally to, or
acquired unconditionally by, and are at the end of the
previous year beneficially held by the public and if any
such shares in the course of such previous year were in fact
freely transferable by the holders to other members of the
public. It was not in dispute that the shares of the company
were in fact freely transferable by the holders to other
members of the public. The controversy, therefore, is within
a very narrow compass, namely, whether, as stated earlier,
the company is one in which the public has 25 per cent or
more shares allotted unconditionally to, or acquired
unconditionally by it and are at the end of the previous
year beneficially held by it.
It may be mentioned that section 23A(l), as it stood
before the amendment by the Finance Act 1956, did not
authorise amalgamation of the shares held by "relatives" as
if they represented a single shareholder. It will,
therefore, be a question of fact and a matter of inference
in each case whether any "relatives" forming themselves into
a company acted as a group or block in concert in
controlling the affairs of the company. Relationship would
not, per se, lead to such a conclusion.
The Tribunal in its order observed:
"Sri A. K. Jain became major on 5-3-1952.
Therefore, as at the end of the two previous years, his
holding of 10,000 shares cannot ipso facto be
amalgamated with the shareholding of Sri S. P. Jain as
if he was the nominee of his father The shareholding of
10,000 shares by Mrs. Rama Jain has also to be left out
of account since, as already observed, there is no
finding that Sri S. P. Jain provided the consideration
for the acquisition of 10,000 shares held by her.
Assuming, therefore, that Sri S. P. Jain was
controlling shareholder, the shares held by the members
of the ’public’ which would include Sri A. K. Jain and
Mrs. Rama Jain would be at least 22,000 shares". " G
In the supplementary statement of case filed by the
Tribunal enclosing various orders and other documents, it is
shown that S. P. Jain was Director of the company from
August 3, 1950 to September 25, 1950. He was appointed
Managing Director from June 6, 1953, subject to approval of
the Government. A. K. Jain was Director of the company from
August 3, 1950 even when he was a minor (his date of birth
being March 5, 1934) and was appointed Deputy Managing
Director from June 6, 1953, subject to approval of the
Government. R. Sharma was Director from 3-8-1950 to
405
7-9-1956. He was Secretary of R. K. Dalmia and employee of
Sahu Jain Limited. H. C. Jain was Director from 25-9-1950 to
25-3-1954. He was Secretary of S. P. Jain and employee of
Ashoka Agencies Limited.
From the above it appears that the Deputy Managing
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Director and the two other Directors held amongst themselves
10,000 shares and out of the balance 30,000 shares were held
by the relations of the Managing Director, namely, by the
father, the mother and the minor brother. It also appears
that S. P. Jain along with Ashok Kumar Jain, R. Sharma and
N. C. Jain were the promoters and subscribed to the
Memorandum of Association at the start of the company in
July 1950. It also appears Ashok Kumar Jain, Director, was
getting a remuneration of Rs. 6,000/- per month w.e.f.
September 1951 in accordance with the resolution passed in
an extra-ordinary general meeting of the shareholders on
October 1, 1951. At the meeting of the Board of Directors
dated November 29, 1950, Ashok Kumar Jain and R. Sharma,
Directors of the company, were authorised to execute
managing agency agreements with different companies. Ashok
Kumar Jain was generally presiding over the meetings from
November 1950.
The Tribunal further observed in its statement of case
that-
"A perusal of the minutes or the proceedings of
the general meetings does not lead to any inference
that Sri S. P. Jain, Smt. Rama Jain and Sri A. K. Jain
were necessarily acting in concert. On the other hand,
it appears that despite his young age, Sri A. K. Jain
seems to have been taking active interest in the
management of the affairs of the asses see-company and
the companies managed by it. Unless it is to be
presumed that because of relationship, Sri S. P. Jain,
Smt. Rama Jain and Sri A. K. Jain should be regarded as
acting in concert, there is no other material on record
on the basis of which such a conclusion could be
supported".
The Tribunal also observed:
"that in spite of opportunity afforded by the Appellate
Assistant Commissioner, the Income-tax officer had not
brought on record materials to show that the voting
rights of Mrs. Rama Jain or Sri A. K. Jain were
controlled by Sri S. P. G
The Tribunal concluded by observing that-
" The revenue had failed to establish that Sri S. P.
Jain, his wife and his son Sri A. K. Jain were acting
in concert".
Section 23A again came up for consideration before this
Court in Commissioner of Income-tax, West Bengal v. East
Coast Commercial
406
Co. Ltd.(l). This Court made a reference to the Raghuvanshi
Mills’ case (supra) where it was observed:
"The word ’public’ is used (in the Explanation) in
contradistinction to one or more persons who act in
unions and among whom the voting power constitutes a
block. If such a block exists and possesses more than
seventy-five per cent of the voting power, then the
company cannot be said to be one in which the public
are substantially interested ...... the test is first
to find out whether there is an individual or -. group
which controls the voting power as a block. If there be
such a block, the shares held by it cannot be said to
be ’unconditionally’ and ’beneficially’ held by members
of the public".
This Court further observed: "
The Tribunal had to decide in the first instance
whether there was a group of persons acting in concert
holding a sufficient number of shares which may control the
voting as a block. But the existence of a block is not
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decisive. If there be a group of persons holding control
over voting, the Company would still be a Company in which
the public are substantially interested, if twenty-five per
cent or more of the voting power has been allotted
unconditionally to and beneficially held by the public and
the shares were in the previous years subject of dealings in
any stock exchange in the taxable territories or were in
fact freely transferable by the holders to other members of
the public. The two enquiries are distinct".
This Court further referred to Jubilee Mills’ case (supra)
and Raghuvanshi Mills’ case (supra) and observed as
follows:-
"But in Commissioner of Income-tax, Bombay City-l v.
Jubilee Mills Ltd. (supra) this Court held that no direct
evidence of overt act or concert between the members of the
group having control over voting was necessary to prove that
the Company was not one in which the public were
substantially interested. It was observed in Raghuvanshi
Mills’ case (supra) that ’in deciding if there is such a
controlling interest, there is no formula applicable to all
cases. Relationship and position as director are not by
themselves decisive. If relative act, not freely, but with
others, they cannot be said to belong to that body, which is
described as ’public’ in the Explanation’. In Jubilee Mills’
case (supra) this Court elaborated those observations and
stated:
The test is not whether they have actually acted
in concert but whether circumstances are such that
human experience tells us that it can safely be taken
that they must
(1)[1967] I S.C.R. 821.
407
be acting together. It is not necessary to state the
kind of evidence that will prove such concerted
actings. Each case A must necessarily be decided on its
own facts".
This Court finally in the above East Coast Commercial
Company’s case concluded as follows:-
"On an analysis of the reasons recorded by the Tribunal
and the High Court, it is clear that the Tribunal held
that the Kedias did not form a controlling group
because there was no evidence that they actually
controlled the voting, even though they held more than
seventy-five per cent of the shares issued by the
Company: the High Court observed that the members of
the Kedia family held 4,016 shares of the Company and
were in a position to control the affairs of the
Company, but there was no evidence to show that they
did in fact act in concert and controlled the affairs
of the Company as a block. But, as already observed, if
the members of the Kedia family formed a block and held
more than seventy-five per cent of the voting power, it
was not necessary to prove that they actually exercised
controlling interest. It is the holding in the
aggregate of a majority of the shares issued by a
person or persons acting in concert in relation to the
affairs of the Company which establishes the existence
of a block. It is sufficient, if having regard to their
relation etc., their conduct, and their common
interest, that it may be inferred that they must be
acting together; evidence of actual concerted acting is
normally difficult to obtain, and is not insisted
upon".
We may also observe in passing that it does not appear
that the East Coast Commercial Company’s case (supra) was
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referred to during the hearing in, nor was lt noticed by,
the High Court.
The Tribunal in the supplementary statement observed as
follows:-
" Unless it is to be presumed that because of
relationship, P Sri S. P. Jain, Smt. Rama Jain and Sri
A. K. Jain should be regarded as acting in concert,
there is no other material on record on the basis of
which such a conclusion could be supported".
The High Court also observed to the same effect:
" It may be that in view of the relationship of the
parties as to a group consisting of the father, two
minor sons and their mother, a possible inference was
that the relationship was such that they could
reasonably be taken to be acting as a group in
concert...." but "the assessee could not be placed in
the category of such a company accordingly because of
close relationship".
Keeping in the forefront the test laid down by this
Court in East Coast Commercial Company’s case (supra), Mr.
Sen on behalf of the
408
Revenue submitted for our consideration the following facts
and circumstances from which, according to counsel, an
inference can be reasonably drawn about the controlling
power in a block confined to a family group holding more
than 75 per cent shares:
(1) 80 per cent of the share capital (40,000 out
of 50,000) is held by S. P. Jain, his wife
and two sons, one of whom was a minor
throughout the period of the two accounting
years and the other son, A. K. Jain, for a
portion of the period upto March 1952. The
remaining 20 per cent of the shares was held
by the companies which were under the control
by S. P. Jain and out of which 20 shares were
held by two employees under the control of S.
P. Jain.
(2) A. K. Jain was appointed as Director in the
company in August 1950 when he was a minor,
aged 16 years, and he became the Managing
Director on 1-2-1954 at a salary of Rs.
6,000/- per month. According to counsel this
could not have been possible if he was not
the son of the controlling shareholder, S. P.
Jain.
(3) S. P. Jain who was a Director resigned making
room for his Private Secretary N. C. Jain for
appointment as Director.
(4) During the assessment year 1953-54 the
assessee company claimed Rs. 2,02,500/- as
loss in a transaction in hessian through
Messrs Kabra & Co. in settlement of August
18, 1952, and the same amount was shown as
profit in hessian through the same broker by
Smt. Rama Jain wife of S. P. Jain in the
settlement.
(5) S. P. Jain, A.K. Jain, R. Sharma and N. C.
Jain were the promoters of the company and
were the signatories to the Memorandum of
Association.
Mr. Hardy, the learned counsel for the respondent, on
the other hand, replied to the submissions as follows:-
(1) Rama Jain and A. K. Jain are independent
assessees. The minutes of the Board’s
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meetings clearly show A. K. Jain as a
competent Director taking independent
decisions. Mere relationship, therefore,
would not lead to the conclusion that these
two shareholders acted with S. P. Jain in
concert. He, however, admits that S. P. Jain
may be said to control the voting power of
the minor son, Alok Prakash Jain, as his
natural guardian. According to Mr. Hardy if
Rama Jain and A. K. Jain are holding 20,000
shares out of 50,000, they cannot be held to
be acting in concert with S. P. Jain and
section 23A will not be attracted.
(2) With regard tn the second submission of Mr.
Sen, Mr. Hardy submits that there is
sufficient evidence
409
in the record, which is even referred to in
the further A statement of the case, that A.
K. Jain was an in dependent shareholder and
was not under the control of S. P. Jain or
any other Director or shareholder. He further
submits that there is no evidence whatsoever
that the money for purchasing the shares of
A. K. Jain or even of Rama Jain was advanced
by S P Jain.
(3) With regard to the third submission of Mr.
Sen, Mr. Hardy had to admit that N. C. Jain
was Director from 1950 to 1954 and S. P. Jain
was Director from August 3, 1950 to September
25, 1950 and S. P. Jain became Managing
Director of the company on June 6, 1953,
subject to the approval of the Government on
a remuneration of Rs. 8,000/- per month and
A. K. Jain was appointed as Deputy Managing
Director on a remuneration of Rs. 6,000/ per
month subject to the approval of the Central
Government (vide minutes of Board’s meeting
of June 6, 1953). According to Mr. Hardy,
appointment of Directors or even Managing
Director is a regular matter of the company
and no particular significance should be
attached to these appointments.
(4) With regard to the fourth. submission Mr.
Hardy submits that such transactions are
common with brokers and even the purchaser is
not known in most of the cases. Hence no
undue importance should be attach ed to the
hessain transaction so as to influence the
conclusion. It is also pointed out that there
was no controversy about the genuineness of
the hessian transaction.
We are of the view that the genuineness of the
aforesaid transaction is, however, irrelevant for the
purpose of considering its effect in acting in concert by
the shareholders.
(5) With regard to the fifth submission Mr. Hardy
submits that it is true that S. P. Jain, A.
K. Jain R. Sharma and N. C. Jain were the
promoters of The company but admittedly two
of them, namely, R. Sharma and N. C. Jain
were outsiders. That they were employees
would not affect their character as
shareholders of the company or even as
Directors.
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It is clear that this company was a family concern with
only 20 shares out of 50,000 shares allotted to two
outsiders who again happened to be paid employees. The
presence of these two outsiders is of the least significance
in the matter of management of the affairs of the company.
It is true that most of the meetings of the Board of
Directors were presided over by A. K. Jain with either of
the two employees or one of them attending the same. It
must, how- ever, be noted that A. K. Jain became a Director
even when he was a minor aged 16 years. He would not
ordinarily be able to play the role he is supposed to have
done in the Board’s meetings unless S. P.
410
Jain was confident that the Board was carrying out his
mandates with regard to the affairs of the company. It is
also true that A. K. Jain and the other Directors were
authorised to sign agreements on behalf of the company, but
this is not of great significance since this was in
pursuance of a decision of the Board’s meeting which could
not have been passed but for the concurrence of S. P. Jain.
There is no evidence whatsoever to show that Rama Jain, wife
of S. P. Jain, was at all independently acting.
When a company is composed mostly of family members
owning lion’s share in the entire share capital of the
company the onus to keep clear of the reach of section
23A(l) will be on the shareholders by adducing some positive
evidence about the absence of control by the controlling
shareholders.
So far as Rama Jain is concerned it is not possible to
hold that S. P. Jain would not be able to control his wife’s
voting power along with that of his minor son, Alok Prakash
Jain. It is true that mere relationship or being a Director
is not decisive. As a matter of fact no single factor can be
decisive but having regard to the totality of the
circumstances revealed in the case and the conduct of the
transactions of the company taken with the relationship
which, in the circumstances of the case is not a negligible
element, we are clearly of the opinion that it is a case in
which it cannot be said that the ’public’ is substantially
interested in 25 per cent or more shares of the company.
Even if we allow A. K. Jain to be a member of the ’public’,
he only holds 10,000 shares and taken with 2,000 shares of
Ashoka Agencies Ltd., the total shareholding comes only to
12,000 shares, that is to say, 500 less than the minimum
shareholding requisite to earn the benefit of the third
proviso to section 23A read with the Explanation.
Further, between August 1], 1951 and May 1, 1952, A. K.
Jails and two employee-Directors, the latter having a
modicum of 10 shares each, apparently took all decisions for
the company in the Board’s meetings. This is not ordinarily
possible but for collaboration with the major shareholders.
This is a case where more is meant than meets the eye. We
are unable to hold in this case, in absence of any reliable
evidence to the contrary, that the voting power of the three
Directors was free and uninhibited and not within the orbit
of control of the other major shareholders, S. P.‘ Jain and
Rama Jain acting in concert. It is a clear case of all the
shareholders acting in concert and in unions and the two
employee-Directors were merely dummies. There is not the
slightest inkling of ’public’ being interested, far less
substantially interested, in this company. There was no one
who could come within the term ’public’ outside the ring of
the shareholders acting in concert for their own ends with a
common purpose. There is no evidence whatsoever in this case
that the shareholders did not cohere together in the matter
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of transaction of the company’s affairs. When the reality is
manifest some reliable evidence within the special knowledge
of the assessee must be forthcoming from its side to
contradict the obvious in order to be covered by the
exception. This has not happened in this case.
411
Unless the two employees were nominees of the major
shareholders it is ordinarily absurd to suppose that they
could aspire to be and become Directors of the company. The
Appellate Assistant Commissioner in his order, which is
annexed with the statement of the case, mentions that-
"In fact Shri S. P. Jain as a controlling
shareholder had brought himself in as a Director of the
company right from the inception of the company and was
the first Director of the company from 3-8-SO to 25-9-
50. From September ’SO to March ’54, however, he
temporarily gave up the directorship by putting in an
employee as a nominee-director, Sri N. C. Jain, for the
intervening period so that there may be no hitch in the
appellant-company being appointed as Managing Agent of
certain other companies under his control on which also
Sri S. P. Jain was a Director, such as the Rohtas
Industries Ltd., Bharat Collieries Ltd., S. K. G. Sugar
Ltd., Dehri Rohtas Light Railway Co. Ltd. and New
Central Jute Mills Ltd. As soon as this objective was
achieved, Sri S. P. Jain staged a come back as a
Director of the appellant company on 25-3-54 when the
nominee-director Sri N. C. Jain re signed his
directorship to make room for his master Sri S. p
Jain".
The factual position, not the opinion, revealed in the above
extract is more than eloquent with regard to the core of the
company.
Having regard to the intimate relationship of the
shareholders, with not the least evidence of any disconcert
amongst them, the ordinary expectation for individual profit
in commercial undertakings, natural reluctance to forego the
same, the history of the company and its continued smooth
working in a manner which is normally inconsistent with
anything other than full unison amongst the shareholders in
decisions about the conduct of company’s affairs in common
inter est of all, this was a company of one paramount mind
operating with out the least doubt. The Board’s meetings are
evidence of a well organised, well-knit close unity of views
in all affairs and which in ordinary course of human conduct
would not have been at all possible but for a single or
concerted action in the company’s management by a
controlling group. When all the above conditions are present
in a company, the onus would be on the assessee to satisfy
by some reliable evidence that what appears on the surface
is that which is real. That is not to say that the Revenue
has no burden to bring the case within the mischief of
section 23A.
Application of law cannot be bereft of commonsense. The
object of section 23A being to prevent avoidance of super-
tax by the share holders by piling up the profits of the
company in its own hands, the facts and circumstances
revealed in this case clearly bring the company within the
reach of that section. We are unable to accede to the
submission of Mr. Hardy in this case that because A. K. Jain
and Rama Jain were independent assessees and A. K. Jain was
pre siding in the Board’s meetings and as such was taking
independent
412
decisions and was also doing extra work for the company in
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Calcutta on salary basis, they should be held to be members
of the ’public’ who were substantially interested in the
company with the requisite shareholding for the purpose of
the Explanation read with the third proviso.
The High Court was therefore, not right in answering
the question in favour of the assessee and against the
Revenue. We, therefore, answer the original question in the
negative and the revised question in the affirmative both in
favour of the Revenue. The appeals are allowed but we leave
the parties to pay and bear their respective costs.
P.H.P. Appeals allowed.
413