1996 (1) TMI 91 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of section 2(18)(b)(B)(iii) of the Income-tax Act, 1961.
2. Determination of whether the assessee-company is a company in which the public are substantially interested.

Issue 1: Interpretation of section 2(18)(b)(B)(iii) of the Income-tax Act, 1961

The core issue revolves around the interpretation of section 2(18)(b)(B)(iii) of the Income-tax Act, 1961. The Tribunal had to determine whether the assessee-company, formed to take over the Indian business of a foreign company, Harrisons and Crossfield (India) Limited, was a company in which the public are substantially interested. The company was formed on November 1, 1977, with seven shareholders, and the formalities of amalgamation were completed with the High Court's approval on December 18, 1979. The Income-tax Officer refused to accept the company as one in which the public are substantially interested because more than 50% of the voting power was controlled by five persons during the relevant accounting period.

Issue 2: Determination of whether the assessee-company is a company in which the public are substantially interested

The assessee contended that the company must be deemed to have existed from November 1, 1977, due to the High Court's order approving the amalgamation. The Commissioner of Income-tax (Appeals) held that the Income-tax Officer had taken a narrow view, noting that the amalgamation was approved with effect from November 1, 1977, and the scheme envisaged a widely based shareholding, including 40% by the foreign company. The appellate authority concluded that the company should be treated as one in which the public are substantially interested since the shares carrying more than 50% of the voting power had not been controlled by five persons or less.

The Department appealed to the Income-tax Appellate Tribunal, arguing that the relevant shareholding during the accounting period showed that five persons controlled 50% of the voting power. The Tribunal, after considering the submissions and relevant documents, held that the company's claim could not be accepted based on a literal application of the provisions. However, it also noted that the company was formed to take over the Indian business of the foreign company, and the shares were allotted from the beginning with an understanding that necessary permissions would be obtained. The Tribunal observed that the provisions regarding control of the company's affairs and holding 50% or more of its shares are intended to prevent benefits from being restricted to a small group of people. Since there were no affairs to be controlled, no dividend to be declared, and no benefits to be derived during the relevant period, the Tribunal held that the assessee was a company in which the public were substantially interested.

Before the High Court, the Revenue contended that the Tribunal had found that five persons held 50% of the voting power, and thus, it should not have approached the question differently. The Court, however, agreed with the Tribunal's purposive approach, noting that the initial formation and share allotment were temporary arrangements pending the High Court's final order. The Court held that the assessee-company is a company in which the public are substantially interested, entitling it to the reduced rate of tax.

Conclusion:

The High Court answered the question in the affirmative, in favor of the assessee and against the Department, affirming that the assessee-company is a company in which the public are substantially interested.