V.K.SINGHAL, J. - (1.) THE Tribunal has referred the following question of law arising out of its order dt. 20th April, 1981, in respect of the asst. year 1973 -74 : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that provisions of S. 104 are not attracted -
(2.) THE brief facts of the case are that the assessee had not declared any dividends within a period of 12 months immediately following the expiry of the previous year relevant to the asst. year 1973 - 74. The ITO has issued a show -cause notice to the assessee as to why the provisions of S. 104 of the IT Act be not applied and why additional tax should not be levied on the assessee's income. The contention of the assessee was that the provisions of S. 104 are not applicable in view of the fact that the majority of the shares were held by M/s National Engineering Industries Limited, which is a company in which the public are substantially interested. The details of the shareholders of the company were as under :
(3.) THE ITO took the view that before deciding the point as to whether the provisions of S. 104 of the Act are applicable or not it has to be seen as to whether the company was saved either under s. 108(a) or S. 108(b) of the IT Act. It has been observed that in accordance with the provisions of s. 2(18), a company can be said to be a company in which the public are substantially interested when it satisfies all the conditions laid down under S. 2(18)(b), item (B), cls. (i), (ii) and (iii). All these conditions have to be fulfilled cumulatively before a company can be treated as a company in Sl. No. Name of the shareholders No. of shares held 1. M/s National Engg. Industries Ltd., Calcutta 44,995 2. M/s Rajasthan Industries Ltd., Jaipur 5,000 3. Shri J. D. Thirani (nominee of N. E. I. Limited) 1 4. Shri H. R. Saboo (nominee of N. E. I. Limited) 1 5. Shri V. N. Dhurka (nominee of N. E. I. Limited) 1 6. Shri R. K. Birla (nominee of N. E. I. Limited) 1 7. Shri R. K. Sarda (nominee of N. E. I. Limited) 1 . Total 50,000." which the public are substantially interested. According to the ITO, the first condition of item (B) of s. 2(18)(b) is that shares in the company carrying not less than fifty per cent. of the voting power have been allotted unconditionally to, or acquired unconditionaly by, and were throughout the relevant previous year beneficially held by the persons mentioned in cls. (a), (b), (c) and (d). In the case of the assessee -company more than 50 per cent. of the voting power were continuously held by the two companies mentioned above. It was held that if the shares are held by a group or block then it cannot be said that it is a company in which the public is substantially interested. The words "unconditionally" and "beneficially" were interpreted to mean that the voting power of the holders of the shares should be free and not within the control of some other shareholders or other persons, and the registered shareholder should not be a nominee of other. It can also be examined as to whether any individual or a group, acting in concert controls or control the affairs of the company to the exclusion of others and if on the basis of the evidence, it is found that the shareholders are acting in a group, the shares were not freely transferable. Reliance was placed on the decisions of the apex Court in Pilani Investment Corporation Ltd. vs. CIT 1973 CTR (SC) 149 : (1973) 89 ITR 53 (SC) and Raghuvanshi Mills Ltd. vs. CIT (1961) 41 ITR 613 (SC). The ITO came to the conclusion that the shares were not held "unconditionally" and "beneficially" and the shares in fact were not freely transferable and the shareholders of the assessee -company are acting in concert as a group. The fact that since the inception, the assessee -company has not declared any dividend in spite of the fact that profits are being made each year was also taken into consideration. The person of normal business prudence would not make and continue investments if he is not assured of any return and on that basis the ITO came to the conclusion that the shareholders are acting in concert as a group to subserve larger interests of somebody from outside who is exercising actual control. The provisions of cl. 46 of the articles of association were also taken into consideration where the directors of the company were empowered to decline to register any transfer of shares without assigning any reason for such refusal. According to cl. 56, the directors may compel that member to transfer all shares standing in his name to the nominee of the director at the value to be fixed by the auditors of the company if the member is guilty of acting in derogation of the interest of the company. Earlier 45,000 shares were held by N. E. I. Ltd., and its nominees 2,500 shares by M/s Rajasthan Industries Ltd., and 2,500 shares were held by Birla Gwalior (P) Ltd. till 31st March, 1971. From 1st April, 1971, 45,000 shares, were held by M/s N. E. I. Ltd. and its nominees and 5,000 shares by M/s Rajasthan Industries Ltd. Birla Gwalior (P) Ltd. is also a company of the Birla group and its name has been included in the report of the Industrial Licensing Policy Enquiry Committee. Thus, the ITO came to the conclusion that from the very beginning the shares have been held by one group and shares have never been transferred to any member of public and that the shares are not freely transferable. The additional tax was accordingly levied. Before the CIT (A), the matter was examined and it was observed that there is a clear distinction between the shareholding by individuals and HUF and shareholding by limited companies. Since, in the present case, the shareholding of the public company is not held by individuals but by two limited companies who are legal entities and these shareholdings are being shown in the balance -sheet of these companies which are audited. It cannot be, therefore, said that the shareholding of the appellant -company is not "beneficially" and "unconditionally" held by the two companies shareholders. The CIT (A) also came to the conclusion that the restriction placed under Art. 46 is of a negative type and under Arts. 56 and 57, it completely forecloses the rights of any shareholder by forcing him to transfer his shares at a particular price and this would certainly amount to substantial restriction of the rights of the members to transfer their shares and, therefore, it was held that the shares were not freely transferable.;