1985 (9) TMI 50 - HC - Income Tax

Summary

Issues:
Determining whether Indo-Nippon Chemical Co. Ltd. was a company in which the public were substantially interested within the meaning of section 2(18) of the Income-tax Act, 1961.

Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961, to determine if the company in question met the criteria of being a company in which the public were substantially interested. The relevant facts revealed that the company had issued shares, with a significant portion held by a private limited company and the Japanese company. The Tribunal found that the Japanese company was a company in which the public were substantially interested, based on the certificate of the auditors. The Tribunal did not allow the Revenue to challenge this certificate. The primary issue was whether the Japanese company's status as a company in which the public were substantially interested extended to the assessee company as well.

The relevant provision of section 2(18) of the Income-tax Act, 1961, was examined to determine the criteria for a company to be considered as one in which the public were substantially interested. The provision outlined conditions related to the allocation and ownership of shares carrying voting power. The argument was made that the shares of the assessee company were not freely transferable due to a specific article in the company's articles of association. However, this argument was dismissed, citing a Supreme Court decision that emphasized the need for evidence of directors exercising power to restrict share transfers. Additionally, the contention that the Japanese company did not qualify as a company in which the public were substantially interested was refuted. The court held that the term "public" should not be limited to Indian citizens only and that the Japanese shareholders could be considered part of the public.

In conclusion, the court answered the referred question in the negative, in favor of the assessee company. The judgment rejected the arguments presented and upheld the status of the company as one in which the public were substantially interested. The Commissioner was directed to pay the costs associated with the case.