1986 (10) TMI 26 - HC - Income Tax

Issues Involved:

1. Applicability of Section 23A of the Indian Income-tax Act, 1922.
2. Determination of whether the respondent-company was a company in which the public were substantially interested.
3. Interpretation of the term "public" under Explanation 1 to Section 23A(9) of the Indian Income-tax Act, 1922.
4. Control and management of the company by less than six persons.
5. Inclusion of shares held under blank transfers in the computation of voting power.

Issue-wise Detailed Analysis:

1. Applicability of Section 23A of the Indian Income-tax Act, 1922:

The primary issue was whether Section 23A of the Indian Income-tax Act, 1922, applied to the respondent-company. Section 23A aims to prevent the avoidance of income-tax and super-tax by companies through the accumulation of profits instead of distributing them as dividends. The provision is not applicable to companies in which the public are substantially interested. The court had to determine if the respondent-company fell within the scope of Section 23A.

2. Determination of whether the respondent-company was a company in which the public were substantially interested:

The court examined whether the respondent-company met the criteria set out in Explanation 1 to Section 23A(9) of the Act to be considered a company in which the public were substantially interested. The attributes of such a company are detailed in sub-clauses (a), (b)(i), (b)(ii), and (b)(iii) of Explanation 1. The court noted that the company was not owned by the Government, nor did the Government hold 50% or more of the shares. Therefore, the focus was on whether the company satisfied the conditions under clause (b) and its sub-clauses.

3. Interpretation of the term "public" under Explanation 1 to Section 23A(9) of the Indian Income-tax Act, 1922:

The court emphasized that the term "public" in this context refers to individuals who do not belong to a group acting in concert to control the company. The court cited previous Supreme Court decisions, including CIT v. Jubilee Mills Ltd. and CIT v. Sahu Jain Ltd., to explain that the public must hold shares unconditionally and beneficially, without control by a group. The court concluded that the group of Seth Banarsi Das and his family, who held a significant portion of the shares, did not qualify as the public.

4. Control and management of the company by less than six persons:

The court examined whether the management and control of the company were concentrated in the hands of less than six persons. The Tribunal had found that the number of directors was five, and the shares carrying more than 50% of the voting power were held by the group of Seth Banarsi Das. The court emphasized that both conditions-management and shareholding-must be fulfilled simultaneously to exclude the company from the scope of Section 23A. The court concluded that the respondent-company did not meet this requirement, as the management and control were indeed concentrated in fewer than six persons.

5. Inclusion of shares held under blank transfers in the computation of voting power:

The court addressed the issue of whether shares held under blank transfers should be included in the computation of voting power. The respondent-company argued that these shares should be excluded, but the court disagreed. Citing the Supreme Court decision in Howrah Trading Co. Ltd. v. CIT, the court held that shares held under blank transfers should be considered in determining the voting strength of the group. This inclusion further supported the conclusion that the group of Seth Banarsi Das controlled more than 50% of the voting power.

Conclusion:

The court held that the respondent-company fell within the mischief of Section 23A of the Act. The company did not satisfy the conditions required to be considered a company in which the public were substantially interested. The management and control were concentrated in the hands of fewer than six persons, and the shares held by the group exceeded the requisite percentage. Therefore, the provisions of Section 23A were applicable to the respondent-company. The court answered both questions referred to it in the negative, in favor of the Department and against the assessee. The Commissioner of Income-tax was entitled to costs assessed at Rs. 200.

← Previous Next →