Decided on December 07,1960



HIDAYATULLAH, J.: - (1.)THE following Judgment of the courtwas delivered by
(2.)THE Raghuvanshi Mills Ltd., Bombay (apublic limited Company), has filed this appeal by specialleave against the judgment and orders of.the High court ofBombay dated 10/03/1953, and 1/09/1955. By thefirst order, the Bombay High court directed the Income-taxTribunal to submit a supplementary statement in the case inthe light of its judgment, giving the parties liberty tolead further evidence, if any. By the second order, theHigh court re-framed the question, and answered it againstthe assessee.
The assessee Company's issued and subscribed capital was, atthe material time, Rs. 10,00,000.00 divided into 10,000.00 sharesof Rs. 100.00 each. Prior to 14/11/1941, one Maganlal Parbhudas, who was aDirector of the Company, held 6,344 shares. On 14/11/1941, he made a gift of 1,000.00 shares to each of his fivesons, Ravindra, Surendra, Bipinchandra, Hareshchandra andKrishnakumar. We are concerned with the account year of theCompany, 1/04/1942, to 31/03/1943, the assessmentyear being 1943-44. In that year, the dividend which wasdeclared at the Annual General Meeting held on 17/12/1943, was less than what was required under s. 23A of theIndian Income-tax Act. The question, therefore, arosewhether the Company could be said to be one to which s.23A(1) of the Act was applicable, regard being had to thethird proviso and the Explanation under it.During the accounting period, the Company had eightDirectors, whose names along with the shares respectivelyheld by them are given below: JUDGEMENT_743_AIR(SC)_1961Html1.htm

Out of the balance of the shares, 4,754 shares were held bythe relatives of some of the above-named Directors, asstated below: JUDGEMENT_743_AIR(SC)_1961Html2.htm

The remaining 551 shares were held by the members of the public, who were not connected with the Directors of theCompany in any way.

Before March, 1942, Messrs. Ravindra Maganlal and Bros.were the Managing Agents of the Company. Maganlal Parbhudaswas the sole proprietor of that firm. On 7/03/1942, theCompany appointed Ravindra Maganlal and Co. Ltd. as theManaging Agents for. a period of 20 years. The ManagingCompany had a total issued and subscribed capital of Rs.5,000.00 and the five sons of Maganlal Parbhudas who have beennamed before had subscribed that capital equally. Duringthe account year, Maganlal Parbhudas and two of his sons,Ravindra Maganlal and Surendra Maganlal, were three of theDirectors of the Company. Ravindra, Surendra andBipinchandra were Directors of the Managing Company.

(3.)ON these facts, the Income-tax Officer applied s. 23A (as itstood prior to its amendment by the Finance Act, 1955) tothe Company, holding that this was not a Company in whichthe public were substantially interested. The order of theIncome-tax Officer was confirmed on appeal, both by theAppellate Assistant Commissioner and the Tribunal. TheTribunal also refused to state a case under s. 66(1) of theIncometax Act, but the High court of Bombay acting unders. 66(2) called for a statement of the case on thequestion:'Whether on the facts and circumstances of thecase the provisions of s. 23A of the Indian Income-tax Act(XI of 1922) are applicable to the petitioners?' In statingthe cases the tribunal pointed out that probably thequestion ought to have been:'Whether on the facts and circumstances of the case 1,000shares each held by Bipinchandra, Haresh chandra andKrishnakumar in the capital of the assessee Company are heldby members of the public within the meaning of theExplanation to the third proviso to s. 23A?'
The members of the tribunal in deciding the appeal beforethem, gave slightly different reasons. According to theAccountant Member, the shares held by persons interested inthe Managing Company were under the control of the Directorsof the appellant Company, and those persons could not beconsidered to be members of the public. The Judicial Memberheld that the Directors were controlling the shareholders ofthe Company, that their relatives were mere nominees, whosevoting power was controlled by the Directors, and that thepublic could not, therefore, be said to be substantiallyinterested, as required by the Explanation to the thirdproviso to the section.

When the High court heard the case, the learned Judgesaddressed themselves to the question, what was the propermeaning of the expression 'held by the public' in theExplanation. They came to the conclusion that the object ofthe third proviso and the Explanation was that the votingpower to be exercised by the public should be independent ofthe control of the Directors, and that the word 'Public' wasused in contradistinction to the Directors. They apparentlythought that a holding by a Director could not be described,in any event, as a holding by the public. The High courtcame to the tentative opinion that both the tests stated bythe Accountant Member and the Judicial Member wereincorrect, and held that what the law required was de factocontrol, 4 c a control which is, in fact, exercised,' andthat no finding appeared to have been given on that point bythe tribunal. The case was accordingly remitted tothe tribunal for submission of a fresh statement of the casewhether the Directors were exercising de facto control. overany of the other shareholders, who belonged to the secondcategory mentioned by us above. The tribunal thereupon re-stated the case, and after examining further evidence, gavethe finding that the Directors, particularly the three sonsof Maganlal Parbhudas who formed the Directors of theManaging Company were under the de facto control of theirfather. At no stage in the case did the tribunal alter thefinding reached by the Department that the shares of theCompany were not, in fact, freely transferable by theholders to members of the public.


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