GOVERDHAN LIMITED Vs. COMMISSIONER OF INCOME TAX
LAWS(BOM)-1962-9-13
HIGH COURT OF BOMBAY
Decided on September 18,1962

GOVERDHAN LTD. Appellant
VERSUS
COMMISSIONER OF INCOME TAX Respondents




JUDGEMENT

V.S.DESAI J. - (1.)THE assessee is a limited company registered as a public company some years ago. Its share capital consists of 50,000 shares subscribed and paid up. 47,493 out of these 50,000 shares are held by Shree Raghunatha Investment Trust Ltd., a company incorporated under the laws of Jammu and Kashmir and having its registered office there. Out of the remaining 2,507 shares, 2,500 shares are held by another limited company incorporated in India and having its registered office in New Delhi, and the remaining 7 shares are held by seven individuals. Shree Raghunatha Investment Trust Limited, which will here after be referred to as the Jammu Company, has a share capital consisting of 20,000 shares and these are held amongst seven persons, one of them L. Yodhraj holding 12,497 shares. Three other persons have a shareholding of 2,500 shares each and three more persons hold the remaining three shares one each. THE shares of the assessee company are not quoted on the stock exchange anywhere in India. THEre is, however, nothing in the memorandum or articles of association of the company putting any restriction on the free transfer of the shares of the company. During the asst. yrs. 1950-51 and 1951-52 corresponding to the previous years of the assessee ending on the 30th of Sept., 1949, and 30th Sept., 1950, respectively, the assessable income of the assessee was determined at Rs. 60,350 and Rs. 93,884 respectively. After the deduction of the taxes, which were payable, there was a balance of Rs. 35,834 in the first year and Rs. 53,103 in the second year. Since the assessee had not declared any dividends at its general meetings during either of these two years or within six months thereof the ITO issued a notice to the assessee to show cause why an order under s. 23A(1) should not be passed against it for the two years. THE assessee contended before the ITO that s. 23A was not applicable to it as it was a company in which the public were substantially interested within the meaning of the Explanation to the third proviso to s. 23A(1) of the IT Act. THE ITO did not accept the said contention, which was raised before him by the assessee, and passed an order under s.23A against the assessee in respect of the undistributed profits for the said two years. THE assessee went in appeal to the AAC and reiterated its contention before him. It was also further contended before the AAC that so far as the asst. yr. 1951-52 was concerned, the order under s.23A was not justified at all because the assessable profits as determined for the said assessment year included an amount of Rs. 70,895, which was the share of the assessee's income in its partnership with the Indian Steel Syndicate for the period between 30th Nov., 1950 and the 31st of March, 1951, which was after the account year of the company, which ended on the 30th Sept., 1950, and that amount, therefore, could not be regarded as part of the distributable profits of the company for the year ending 30th of September, 1950, for the purpose of s. 23A of the Indian IT Act. During the course of the appeal before the AAC, he asked the assessee to furnish him with information regarding the Jammu Company, which was the assessee's principal shareholder, (1) as to when the said company was incorporated; (2) whether it had any investments in India and (3) whether any assessment had been made on the said company in India at any time. Although several opportunities were given to the assessee to furnish the said information, the assessee failed to do so and pleaded its inability to supply it. THE appeals were ultimately decided by the AAC against the assessee. According to him, the Jammu Company was a company to which the provisions of s. 23A clearly applied and, consequently, the shares of the assessee company held by the Jammu Company could not be regarded as having been held by the public. Since the holding of the Jammu Company was more than 75 per cent. of the voting power of the company, he held that the assessee company was not a company in which the public were substantially interested and, therefore, came within the purview of s. 23A and that since the company had not distributed any dividend during the relevant assessment years, the order of the ITO under s. 23A was rightly passed against it. As to the further contention raised before him relating to the asst. yr. 1951-52, he took the view that what was to be considered for the purpose of s. 23A was the assessable income of the company for the previous year and this income included the share of the assessee's profits in its partnership with the Indian Steel Syndicate. According to him the circumstance that the account year of the assessee and account year of the partnership were different did not make any difference, because at the date of the general meeting of the assessee company held on the 17th of May, 1951, the accounting year of the partnership firm had also come to an end. THE assessee then took further appeals to the Tribunal. THE Tribunal agreed with the view taken by the IT authorities that the assessee company was one in which the public were not substantially interested within the meaning of s. 23A and that the order under s. 23A passed against the assessee by the IT authorities was valid and justified for both the assessment years. At the instance of the assessee, the Tribunal has drawn up a statement of the case and referred to this Court the following question as arising out of its order :
"Whether the orders passed against the assessee for assessment years 1950-51 and 1951-52 under s. 23A are justified and valid ?"

(2.)MR. B. A. Palkhivala, learned counsel appearing for the assessee, has argued before us that the assessee company does not come within the purview of s. 23A of the Indian IT Act and an order under the said section cannot, therefore, be validly passed against it. His further argument, which is restricted to the asst. yr. 1951-52, is that the order for the said year is also not justified. In support of his submission that s. 23A does not apply to the assessee company. MR. Palkhivala has urged that the assessee company is not a private controlled company, but is a company in which the public are substantially interested within the Explanation to the third proviso to s. 23A(1). Now, the third proviso to s. 23A(1), as it stood at the material time, was in the following terms :
"Provided further that this sub-section shall not apply to any company in which the public are substantially interested or..."

The Explanation to the said proviso states when a company can be regarded as "a company in which the public are substantially interested" for the purpose of s. 23A(1). That Explanation is as follows :

"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 subsection apply), and if any such shares have in the course of such previous year been the subject of dealings in any stock exchange in British India or are in fact freely transferable by the holders to other members of the public."

According to this Explanation, for a company to be considered as one in which the public are substantially interested, shares of the company carrying twenty-five per cent. or more of the voting power must have been allotted unconditionally to or acquired unconditionally by the public and the shares of the company must either have been dealt with on any stock exchange in the taxable territories in the course of the previous year or must have been, in fact, freely transferable by the holders to other members of the public. In prescribing the requirements that twenty-five per cent.or more of the voting power must be held by the public, it is provided that the word "public" will not include a company to which the provisions of this sub-section apply.

(3.)NOW, so far as the shareholding of the assessee company is concerned 47,493 out or the 50,000 shares of the company have been held by the Jammu Company. If these shares cannot be regarded as the shares allotted unconditionally or acquired unconditionally, and held at the end of the previous year beneficially by the public, the assessee company could not be said to be a company in which the public are substantially interested. Mr. Palkhivala's argument is that a company comes within the expression " Public" as used in this Explanation unless it is a company to which the provisions of s. 23A applied. According to him, the Jammu Company is not a company to which the provisions of s. 23A applied and, therefore, the shares held by the Jammu Company are shares held by the public within the meaning of the Explanation. He, therefore, argues that the assessee company is one in which shares carrying more than twenty-five per cent. of the voting power are held by the public; and although the shares of the assessee company have not been dealt with in any stock exchange in the taxable territories, they are, in fact, freely transferable by the holders to other members of the public inasmuch as there is nothing in the memorandum or the articles of association of the company, which puts any restriction on the fee transfer of the shares. According to Mr. Palkhivala, therefore, the assessee company is one in which the public are substantially interested within the meaning of the Explanation and it is, therefore, excluded from the operation of s. 23A of the Indian IT Act. This argument was also advanced before the income-tax authorities and the Tribunal but it was negatived by them on the ground that the Jammu Company, which held a large majority of the shares of the assessee company, was a company to which the provisions of s. 23A applied and the shares held by it, therefore, could not be regarded as held by the public. Mr. Palkhivala's grievance is that in negativing the argument, which was urged by him before the IT authorities and the Tribunal, they have not considered the different aspects of the argument, which he had urged before them and have not, therefore, arrived at the correct conclusion. His argument for contending that the Jammu Company is not a company to which the provisions of s. 23A will apply is threefold. He argues that in order that the provisions of s. 23A should apply to a company, it must be a company as defined under the Indian IT Act; secondly, the company must be such as to enable the ITO to apply the provisions of s. 23A to it, in other words, it must be a company carrying on business in the taxable territories and amenable to the provisions of the Indian IT Act, and thirdly, the company must be a private controlled company within the meaning of s. 23A. Mr. Palkhivala complains that one of the aspects of his argument, viz., that the company, in order that s. 23A should apply to it must be a company as defined under the Indian IT Act, has been lost sight of and ignored by the IT authorities as well as by the Tribunal. He has urged that he should be allowed to urge that aspect or if it is found necessary to call for a further supplementary statement of the case relating to this aspect before the point could be considered and determined, such a further statement should be called for from the Tribunal. He has invited our attention to the grounds of appeal, which he had taken before the Tribunal, where this specific contention was raised by him. It does appear to us from a perusal of the grounds of appeal, which the assessee had taken before the Tribunal, that the assessee had raised the contention before the Tribunal, that the Jammu Company, not being a company as defined under the Indian IT Act, could not be a company to which the provisions of s. 23A of the Act would apply so as to treat the shares of the assessee company held by it as shares not held by the public. From the order of the Tribunal as well as from the statement of the case, it also appears that this aspect of Mr. Palkhivala's contention has not been considered and dealt with by the Tribunal. In these circumstances it would have been necessary for us to ask for a supplementary statement of the case relating to this aspect. Mr. Joshi, the learned counsel for the Revenue, however, argued that it would not be necessary to call for a further supplementary statement because he would be in a position to establish on the definition of the word "company" as given in the IT Act that the Jammu Company was a company as defined therein. Moreover his further contention is that it is not essential or necessary to find out whether the Jammu Company was a company to which the provisions of s. 23A applied in order to determine whether the assessee company came within the purview of s. 23A, because even if the Jammu Company was not held to be a company to which the provisions of s. 23A applied the shares of the assessee company held by the Jammu Company could not be regarded as shares held unconditionally and beneficially by the public within the meaning of the Explanation. According to him, the assessee company also failed to qualify for being a company in which the public are substantially interested, because its shares have admittedly not been the subject of any dealing in any stock exchange in the taxable territories during the previous year and it has also failed to establish that they had, in fact, been freely transferable by the holders to other members of the public.
In our opinion, the submission of Mr. Joshi, that the shares held by the Jammu Company of the assessee company could not be regarded as shares held unconditionally and beneficially by the public irrespective of whether or not the Jammu Company is a company to which the provisions of s. 23A applied, is correct and since the rest of the shares of the assessee company are far less than twenty-five percent. Of the total number of shares of the company, the assessee company could not be regarded as one in which the public are substantially interested. In Raghuvan Mills Lid. vs. CIT (1961) 41 ITR 613, in dealing with the Explanation to the third proviso to s. 23A, with which we are concerned, it was held :

"The essence of the Explanation lies not in the percentage which only shows the limit of the minimum holding by the public, but lies in the words ` unconditionally ` and ` beneficially . These words underline the fact that no person who holds a share or shares not for his own benefit but for the benefit of another and who does not exercise freely his voting power, can be said to belong to that body, which is designated ` public `. The word ` public ` is used in contradistinction to one or more persons who act in unison 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 ... Such a group may be formed by the directors of a company acting in concert, or by some directors acting in concert with others, or even by some shareholder or shareholders, none of whom may be a director."



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