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Issues Involved
1. Applicability of Section 23A of the Indian Income-tax Act, 1922. 2. Interpretation of "public" within the meaning of the third proviso to Section 23A. 3. Determination of whether the shares held by certain individuals are considered as held by the public. Issue-Wise Detailed Analysis 1. Applicability of Section 23A of the Indian Income-tax Act, 1922 The primary question was whether the provisions of Section 23A of the Indian Income-tax Act, 1922, applied to the assessee company. The Tribunal had to determine whether the company was one in which the public was substantially interested, as per the third proviso to Section 23A. The assessee company argued that 25% of its shares were beneficially held by the public, which would exempt it from the provisions of Section 23A. 2. Interpretation of "public" within the meaning of the third proviso to Section 23A The explanation to the third proviso to Section 23A states that a company is deemed to be one in which the public is substantially interested if shares carrying not less than 25% of the voting power have been unconditionally allotted to or acquired by, and are beneficially held by, the public. The Tribunal had to interpret whether the shares held by Bipinchandra Maganlal, Harischandra Maganlal, and Krishnakumar Maganlal could be considered as held by the public. The court emphasized that the term "public" is used in contradistinction to directors and that the purpose of the proviso is to ensure that voting power is exercised independently of the directors' control. The court rejected the argument that the term "public" should be interpreted in its broadest sense, which would include directors. Instead, it held that the term should be understood to exclude directors and those under their control. 3. Determination of whether the shares held by certain individuals are considered as held by the public The Tribunal had to decide whether the 3,000 shares held by Bipinchandra Maganlal, Harischandra Maganlal, and Krishnakumar Maganlal were held by the public. The court noted that the proper test was whether these individuals were under the de facto control of the directors. The Tribunal's finding was based on the assumption that shareholders of a managing agency company are always under the control of the directors of the managed company, which the court found to be too broad a proposition. The court referred to the English case of Tatem Steam Navigation Co., Ltd. v. Commissioners of Inland Revenue, which discussed control in the context of relatives and nominees. The court emphasized that in India, there is no statutory presumption of control, and each case must be examined on its facts to determine whether there is de facto control by the directors over the shareholders. The court found that the Tribunal did not make a clear or definite finding on whether the directors exercised actual control over the three shareholders. The Tribunal's conclusion was based on the incorrect legal proposition that any person connected with the business of the company or deriving personal benefit from it is under the directors' control. Conclusion The court remanded the case to the Tribunal for a supplementary statement of the case, directing the Tribunal to allow both the assessee company and the Commissioner to present further evidence if they wished. The Tribunal was instructed to make a clear finding on whether the directors exercised de facto control over the three shareholders, based on the correct legal principles outlined in the judgment. The case was remanded for further findings to enable the court to answer the questions raised.
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