INDIAN HUME PIPE COMPANY LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a public limited company. Out of the total of 30,000 shares of the assessee -company's capital, 29,893 shares are held by its parent company known as the Premier Construction Co. Ltd. The parent company is admittedly a company in which the public are substantially interested. The shares of the assessee -company held by the Premier Construction Co. Ltd. were not the subject of any dealings in any stock exchange and according to the finding of the Tribunal they were freely transferable.

(2.) IN the account year of the assessee ended 30th June, 1953, for which the assessment year was 1954 -55, the assessee's total computed income was Rs. 23,17.722. Income -tax and super -tax payable by the company excluding super -tax payable under Section 23A was Rs. 9,94,834. The assessable income of the company of the previous year as reduced by the amount of income -tax and super -tax payable by the company in respect thereof was, therefore, Rs. 13,22,988. The company had declared Rs. 7,00,000 to be distributed as dividend. Since the said amount was less than 60 per cent. of Rs. 13,22,988, which was the balance of the assessable income of the company after deduction therefrom of the income -tax and super -tax payable by it in respect thereof, the Income -tax Officer was of the opinion that the provisions of section 23A of the Income -tax Act, as it stood at the material time, were attracted. He, therefore, issued a notice to the assessee -company requiring it to show cause why an order under Section 23A should not be made against it. The assessee contended that it was excluded from the operation of Section 23A(1) by reason of the third proviso to that sub -section read with the Explanation thereto. It was contended that the assessee -company was a company in which the public were substantially interested and was also a subsidiary of a company in which the public were substantially interested and consequently was excluded from the operation of Section 23A(1). The claim of the assessee was not accepted by the Income -tax Officer and an order under Section 23A was made against it by him. The Appellate Assistant Commissioner agreed with the decision of the Income -tax Officer and dismissed the appeal. The assessee thereupon went in appeal to the Tribunal. In addition to the contentions urged before the Income -tax Officer and the Appellate Assistant Commissioner it was further argued before the Tribunal that, even if the provisions of Section 23A(1) were attracted in the case of the assessee -company, no order under the said section should have been made inasmuch as, having regard to the smallness of the profits in the previous year, it would be unreasonable to expect it to declare a larger dividend than what was declared by it. The Tribunal negatived all the contentions which were raised by the assessee -company. It held that the assessee was not entitled to exemption from the operation of Section 23A either on the ground that it was a company in which the public were substantially interested or on the ground that it was a subsidiary of a company in which the public were substantially interested. It also further held that the additional argument advanced before it, viz., that the order under Section 23A should not have been made against it having regard to the smallness of its profits, was not available to the assessee. It pointed out that, on the basis of the statement filed by the assessee in the course of the appeal, it had admittedly distributable surplus of Rs. 10,21,734 which was far in excess of the dividend of Rs. 7 lakhs which it had declared. It observed that, for a proper consideration of the matter from the angle as to whether an order under Section 23A was not justified against the assessee on the ground of smallness of profits, the assessee must have declared the whole of the commercial profits and not merely 60 per cent. thereof. In the view that it took, the Tribunal confirmed the orders made by the departmental authorities and dismissed the appeal. On the application under Section 66(1) of the Indian Income -tax Act, the assessee applied to the Tribunal for a reference to this court on the following three questions :

(3.) SO far as the first two questions are concerned, what is required to be considered is whether the assessee -company is exempted from the operation of Section 23A(1) by reason of the third proviso to the said section and the Explanation thereto. The said third proviso and the Explanation, as they stood at the material time, were as follows :