Full Judgment Text
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PETITIONER:
PILANI INVESTMENT CORPORATION LTD.
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME TAX (CENTRAL)
DATE OF JUDGMENT09/01/1973
BENCH:
KHANNA, HANS RAJ
BENCH:
KHANNA, HANS RAJ
REDDY, P. JAGANMOHAN
CITATION:
1973 AIR 1030 1973 SCR (3) 206
1973 SCC (3) 571
ACT:
Income-tax Act (11 of 1922), s. 23A and Explanation-Memoran-
dum and Articles of Association empowering directors to
refuse to register transfer of shares without assigning any
reason-If element of free transfer eliminated.
HEADNOTE:
This Court, in Shree Krishna Agency Ltd. v. C. I. T.
(Central) Calcutta, (1971) 82 I.T.R. 372, had held that in
the absence of evidence to show that the directors had been
exercising their power to. decline to register any transfer
of shares freely and had thus virtually eliminated the
element of free transferability of the shares in the
,company, the mere existence of a power in the Memorandum
and Articles of Association giving such as discretion could
not be said to affect the free transferability of the shares
as contemplated by the Explanation to s. 23A, of the Income-
tax Act, 1972. [20GD-E]
In the present case, more than 75% of the shares of the
assessee company were held not by a group or partners but by
two public companies in which the Tribunal found, the public
were substantially interested : there was no material to
show that any group acting in concert was in control of the
assessee company, and.. though the Memorandum and Articles
of Association gave a discretion to the directors to
decline to register a transfer of shares there was not
evidence to show. that the directors had eliminated the
element of transferability of shares.
Shree Krishna Agency Ltd. v. Commissioner of Income-tax,
(Central) ,Calcutta, [1971] 82 I.T.R. 372, followed.
Commissioner of Income-tax, West Bengal v. Tona Jate Co.
Ltd., [1963] 48 I.T.R. 902, overruled.
East India Corporation Ltd. v. Commissioner of Income-tax,
[1966] I.T.R. 16 and Raghuvanshi Mills Ltd. v. Commissioner
of Income-tax, [1969] 74 I.T.R. 823, approved.
Commissioner of Income-tax v. Jubilee Mills Ltd., [1963] 48
I.T.R. 9, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 2177 & 2178
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of 1969.
Appeals by certificate from the judgment and order dated
February 24, 1969 of the Calcutta High Court in Income-tax
Reference Nos. 210 and 211 of 1964.
B. Sen, Leila Seth, U. K. Khaitan and B. P. Maheshwari for
the- appellant.
B. B. Ahuja, S. P. Nayar and R. N. Sachthey, for the
respondent.
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The Judgment of the Courts was delivered by
KHANNA, J. These two appeals on certificate are directed
against the judgment of Calcutta High Court whereby it
answered the following question in the affirmative and in
favour of the revenue :
"Whether in the facts and circumstances of the case, the
provisions of section 23A were rightly invoked."
The matter relates to assessment years 1952-53 and 1953-54.
It would, however, be convenient to set out the facts
relating to the year 1952-53 because the decision in regard
to the assessment for that year would also govern the
assessment for the following year. The assessee appellant
is a limited company. Proceedings under section 23A of the
Indian Income Tax Act, 1922 (hereinafter referred to as the
Act) were started against the appellant company as it had
not declared any dividend during the year. The Income Tax
Officer found that the income of the assessee company had
been determined in regular assessment to be Rs. 22,65,227
and despite that it had not declared any dividend. The
Income Tax Officer observed that there were only two big
shareholders of the assessee company, namely, Jiyajeerao
Cotton Mills Ltd., Birlanagar (Gwalior) (hereinafter
referred to as JC Mills) and Punjab Produce and Investment
Co. Ltd. (hereinafter referred to as PPI Co.). JC Mills, in
the opinion of the Income Tax Officer, could not be regarded
as a member of the public as it was being represented on the
Board of Directors through its General Manager D. P.
Mandalia. PPI Co. was found to be a company to which the
provisions of section 23A of the Act were applicable. These
two companies between themselves held 3,21,594 shares out of
the total shareholding of 3,70,000 shares. As the shares
held by the public, in the opinion of the Income Tax
Officer, came to less than 25 per cent of the total
shareholding, the assessee company was held to fall within
the purview of section 23A of the Act. The Income Tax
Officer also referred to article 33 of the Memorandum and
Articles of Association of that assessee company, according
to which the directors could without assigning any reason
decline to register a transfer to a transferee of whom they
did not approve. This fact was held to be a definite
restriction on the transfer of shares. It was further
observed that the shares of the assessee company were not
quoted in stock exchange. After deducting Rs. 8,40,524 on
account of tax payable on Rs. 22,65,227 the balance of Rs.
14,23,703 was deemed by the Income Tax Officer to have been
distributed amongst the shareholders.
On appeal before the Appellate Assistant Commissioner, it
was urged on behalf of the assessee company that JC Mills
and PPI Co. were companies in which the public was
substantially interested and, as such, the share-holding of
these public companies
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should be considered to be shares held by the members of the
public. The’ Appellate Assistant Commissioner did not go
into the question as to whether or not the above mentioned
two companies were such in which the public was
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substantially interested. He observed that groups of the
two companies were controlling the affairs of the assessee
company and as such, the, shares he-Id by them could not be
considered to be shares held by the members of the public.
The appeal filed by the, assessee was accordingly dismissed.
The matter was then taken up by the assessee in appeal
before the Income Tax Appellate Tribunal. It was urged
before the Tribunal that JC Mills was a public limited
company to which the provisions of section 23A of the Act
were not applicable. It was also pointed out that the PPI
Co. was a company to which the provisions of section 23A did
not apply. A copy of the order of Appellate Assistant
Commissioner made in appeal filed by PPI Co. was produced
before the Tribunal. The Appellate Assistant Commissioner
had by that order set aside the order of Income Tax Officer
and had held that section 23A of the Act did not apply to
PPI Co. The Tribunal observed that both JC Mills and PPI Co.
were public companies in which the public were substantially
interested and, therefore, it was not correct to say that
the shares held by the two companies were controlled by a
group of persons as distinguished from members of the
public. The Tribunal further observed that the usual clause
in the Memorandum and Articles of Association expowering the
directors to decline to register a transfer of shares
without assigning any reason did not mean any restriction on
the transferability of shares by one holder to another. The
Tribunal also found that there was nothing to show that the
shares were not in fact freely transferable, The Tribunal
consequently upheld the assessee’s contention that it was a
public limited company in which the public was substantially
interested and its share were freely transferable. The
provisions of section 23A of the Act were held to have been
wrongly invoked. The order of the Income Tax Officer in
this respect was consequently set aside. The question
reproduced above was thereafter referred to the High-Court.
The High Court by a short order answered the question in the
affirmative and in this connection relied upon an earlier
decision of the Calcutta High Court in Commissioner of
Income-tax, West Bengal v. Tona Jute Co. Ltd. (1).
In appeal before us, Mr. Sen on behalf of the appellant has
contended that the, decision of Calcutta High Court in
Commissioner of Income-tax, West Bengal v. Tona Jute Co.
Ltd. (supra) has been impliedly overruled by a decision of
this Court in the
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case of Shree Krishna Agency Ltd. v. Commissioner of Income-
tax (Central), Calcutta(1). This contention in our opinion
is well founded. In the case of Tona Jute Co. (supra) the
Calcutta High Court had expressed the view that a public
limited company whose directors had absolute discretion to
refuse to register transfer of a share to any person whom it
would, in their opinion, be, undesirable in the interest of
the company to admit to membership and were not obliged to
give any reason for refusal to register, was not a company
the shares of which were freely transable to other members
of the public within the meaning of section 23A of the Act.
A view contrary to that of Calcutta High Court was taken by
the Madras High Court in East India Corporation Ltd. v.
Commissioner of Income-tax (2 ) and the Bombay High Court in
Raghuvanshi Mills Ltd. v. Commissioner of Income-tax(3).
This Court in the case of Shree Krishna Agency Ltd. (supra)
approved the view taken by the Madras and Bombay High
Courts. This Court in that case dealt with article 37 of
the Articles of Association of the assessee company which
was a public company and which provided that the directors
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might at any time in their absolute and uncontrollable
discretion and without assigning any reason decline to
register any proposed transfer of shares. It was held that
in the absence of evidence to show that the directors had
been exercising their power under article 37 freely and had
virtually eliminated the element of free transferability of
the shares in the company, the mere existence of an article
like article 37 could not be said to affect the free
transferability of the shares as contemplated by the
explanation to section 23A of the Act.
There is in the present case also no evidence to show that
the directors had eliminated the element of transferability
of shares. As such, we find that the decision of the, High
Court in answering the question against the assessee cannot
be sustained.
On an earlier date of hearing Mr. Ahuja, on behalf of the
revenue, prayed for adjournment to ascertain whether there
was any cogent material on the record to show that there was
any group acting in concert which was in control of the
assessee company. The adjournment was granted. When the
hearing of the case was resumed thereafter, Mr. Ahuja on
behalf of the department frankly stated that he had not been
able to find any cogent material to show that there was any
group acting in concert which was in control of the assessee
company. He, however, prayed that the case be remanded to
the authorities concerned for going into. this-question. As
the matter relates to the assessment year 195253 and as Mr.
Ahuja in spite of adjournment has not been able to find any
cogent material to warrant the plea that a group acting
(1) [1971] 82 I.T.R. 372. (2) [1966] 61 I.T.R. 16,
(3) [1969] 74 I.T.R. 823.
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in concert was in control of the assesee company, we are of
the opinion that we should not accede to the prayer of Mr.
Ahuja in this respect. The fact that two public limited
companies were holding between themselves more than 75 per
cent of the shares of the assessee company was not
sufficient to attract section 23A of the Act.
The case of Commissioner of Income-tax v. Jubilee Mills Ltd.
(1) referred to by Mr. Ahuja cannot be of much assistance to
him. In the said case the Managing Agents of a company were
partners of a firm who held between themselves more than 75
per cent of, the voting power. It was held that as more
than 75 per cent of voting power was held by a group, the
company was not a company in which the public were
substantially interested within (the meaning of section 23A.
In the present case as appears from the resume of facts,
more than 75 per cent of shares of the assessee company are
held not by a group of partners, but by two public companies
in which public are substantially interested. ’This is also
no material to show that any group acting in concert is in
control of the assessee company. As such, the case of
Jubilee Mills cannot be said to have any material bearing.
We accordingly accept the appeals, set aside the judgment of
the High Court and discharge the answer given by it to the
question referred to it. We answer the said question in the
negative and in favour of the assessee. The assessee-
appellant shall also be entitled to the costs of this Court
and in the High Court. One set of hearing fee.
V.P.S. Appeals
allowed.
(1) [1963] 48 I.T.R. 9.
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