C.S.P. Singh, J. - (1.) THE following two questions have come up for our opinion at the instance of the assessee: "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal erred in holding that the assessee was not a company in which the public are substantially interested for purposes of assessment ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the contribution made by the members at the rate of Rs. 20 per mensem per vehicle were taxable as the assessee's income ?"
(2.) THE questions relate to the assessment years 1968-69, 1969-70, 1970-71 and 1971-72. THE assessee-company was incorporated in 1948, being a company limited by guarantee. It had 149 members and, inter alia, its business was to manage the vehicles of its constituent members. By Clause 27 of the memorandum and articles of association, the company was entitled to retain or charge a commission at such rate as may be determined from time to time by the members, in their general meeting, on the total amount fetched for each trip or on the total gross monthly income of each vehicle. THE company had been charging a commission of 6% on the total gross monthly income of each vehicle of its constituent members. It used to maintain an account of the gross monthly income of each vehicle of its constituent members, and also the commission collected from them. Apart from this, it also maintained accounts of its management unit. Separate balance-sheets used to be prepared, but in pursuance of the directions issued by the Registrar of Companies, a consolidated balance-sheet, as required by Section 227 of the Companies. Act, was prepared and it was found that the company incurred a loss of Rs. 1,88,754'21 which was attributable mainly to the management Section of the company. In order to cover up this loss, the general body passed a resolution No. 5 in its meeting held on September 30, 1967, resolving unanimously that the losses be neutralised by contribution by deduction of Rs. 20 per month from the gross income of each vehicle till such time that the losses were wiped off. As a result of the resolution, the company received amounts of Rs. 32,720 in *the assessment year 1968-69, Rs. 40,090 in the assessment year 1969-70, Rs. 69,986 in the assessment year 1970-71 and Rs. 13,671 in the assessment year 1971-72. In all these years, two other disputes were raised before the ITO, in regular assessment or in proceedings for reassessment: one as to the rate of tax on the income of the assessee, the assessee's contention being that the rate should be calculated at 45% as it was a company in which the public were substantially interested, and the other as to whether the amounts received by the company in pursuance of the resolution of the general body referred to earlier was its income. All the authorities have held against the assessee. We may dispose of the first question at the outset. The expression "company in which the public are substantially interested" is defined in Section 2(18) of the Act of 1961, the relevant part of which reads as under : "2. (18) 'Company in which the public are substantially interested' --A company is said to be a company in which the public are substantially interested- (a) if it is a company owned by the Government or the Reserve Bank of India or in which not less than forty per cent. of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank ; or (b) if it is not a private company as defined in the Companies Act, 1956, and (i) its shares (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 fifty per cent. of the voting power having been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by- (a) the Government, or (b) a corporation established by a Central, State or Provincial Act, or (c) any company to which this clause applies or any subsidiary company of such company where such subsidiary company fulfils the conditions laid down in Clause (b) of Section 108 (hereinafter in this clause; referred to as the subsidiary company), or (d) the public (not being a director, or a company to which this clause does not apply); (ii) the said shares were at any time during the relevant previous year the subject of dealing in any recognised stock exchange in India or were freely transferable by the holder to other members of the public; and (iii) the affairs of the company, or the shares carrying more than fifty per cent. of its total voting power were at no time during the relevant previous year, controlled or held by five or less persons. Explanation 1.--In computing the number of five or less persons aforesaid,-- (i) the Government or any corporation established by a Central, State or Provincial Act or company to which this clause applies or the subsidiary company of such company shall not be taken into account, and (ii) persons who are relatives of one another, and persons who are nominees of any other person together with that other person, shall be treated as a single person. Explanation 2.--In its application to an Indian company whose business consists wholly in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, sub-clause (b) shall have effect as if for the words 'not less than "fifty per cent.' and 'more than fifty per cent.', the words 'not less than forty per cent.' and 'more than sixty per cent.' had been substituted." As will be seen before the company can claim advantage of this provision, each and every one of the conditions laid down in this provision has to be satisfied. We have perused the memorandum of the association, and agreed with the view of the Tribunal that the company does not satisfy the requirements of Section 2(18); The assessee rightly conceded before the Tribunal that all the conditions laid down under Section 2(18) were not fulfilled, and thus the mere fact that the assessee is a company will not entitle it to the benefit of Section 2(18) of the Act.
(3.) NOW, coming to the second question. It has been noticed that the assessee was receiving a commission of 6% of gross receipts of freight and fare from the individual owners of vehicles. Each of these individuals were members of the company. The managing unit of the company had been incurring loss, and as a result in the annual general meeting held on September 30, 1967, the following resolution was passed : "15. Consideration on the neutralization of the accumulated losses in the balance-sheets of the past several years, as well as financial condition of the company. Sri Kishanlal Agarwal, President, put forth in detail before the house, the ways and needs of neutralising the amount of the loss being accumulated for the last so many years as well as the going on increasing expenditure. It was unanimously resolved that in order to neutralise the accumulated losses each owner will allow voluntary deduction of Rs. 20 per cent, from each vehicle till such time as the entire loss is neutralized. This amount will in no way be refundable and the deduction will be stopped when the amount of loss is made good (Non-refundable deduction made voluntary to neutralize the accumulated loss of the balance- sheet). Also that the board of directors should give due attention in future to minimising expenditure and promoting the business." Consequently, on the passing of this resolution the company started deducting an amount of Rs. 20 per month per vehicle. The Tribunal has treated this income as additional commission for services rendered by the company, but not fully paid for earlier. Sri Ashok Gupta, counsel for the assessee contended that the amount did not represent the income of the assessee, because it did not arise out of the business conducted by the assessee. It was also urged that it was a donation made by members to cover up the losses, and being casual in nature did not have the characteristic of income. He invited our attention to a number of decisions of various courts, which we shall be presently referring to. Before we consider the section, it would be useful to quote Clause 27(a) of the memorandum and articles of association of the company. "27. The company shall be entitled to retain or charge a commission at such rate as may be determined from time to time by the members 'in their general meeting on the total amount fetched for each trip or on the total gross monthly income of each vehicles. (a) The board of directors is authorised to wipe off the whole amount of loss whenever occurring in a financial year after completion of the audit of that year by distributing the same equally among the vehicles of the members on roll in that financial year." ;