1964 (2) TMI 100 - HC - Income Tax

Summary

Issues Involved:
1. Justification of the Income-tax Officer's order under section 23A(1) of the Indian Income-tax Act for the assessment years 1948-49 and 1949-50.
2. Determination of whether the company qualifies as "a company in which the public are substantially interested" under the third proviso to section 23A(1) of the Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Justification of the Income-tax Officer's Order:
The primary question was whether the Income-tax Officer was justified in passing an order under section 23A(1) of the Indian Income-tax Act on the assessee-company for the assessment years 1948-49 and 1949-50. The Income-tax Officer concluded that 75% of the shares and the voting power of the company were held by persons who could not be regarded as belonging to "the public" and that the shares were not freely transferable under the company's articles of association. This order was affirmed by the Appellate Assistant Commissioner and the Tribunal.

2. Determination of "a company in which the public are substantially interested":
The main point of controversy was whether the company could lawfully claim to be "a company in which the public are substantially interested" within the meaning of the third proviso to section 23A of the Income-tax Act, 1922, before the amendment of 1955, read with the Explanation to sub-section (1) of section 23A.

Explanation and Proviso:
- The proviso exempts companies in which the public are substantially interested from the operation of section 23A(1).
- The Explanation defines a company in which the public are substantially interested if the shares carrying not less than 25% of the voting power are unconditionally and beneficially held by the public and if any such shares have been the subject of dealings in any stock exchange or are freely transferable by the holders to other members of the public.

Tribunal's Findings:
- The Tribunal found that more than 25% of the shares were held by the public, satisfying the first condition of the Explanation.
- However, the Tribunal concluded that the second condition was not met because there was no evidence of actual dealings in the shares in any stock exchange, and the shares were not freely transferable due to the restrictive clause in the articles of association.

Arguments and Court's Analysis:
- The assessee contended that the Tribunal's findings were based on conjecture and surmise.
- The court held that both conditions in the Explanation are conjunctive and must be proved for the company to be exempt from section 23A(1).
- The court agreed with the Tribunal's finding that the shares were not freely transferable due to the directors' absolute discretion to refuse registration of share transfers.
- The court also upheld the Tribunal's finding that the stock exchange quotations were not sufficient evidence of actual dealings in the shares.

Conclusion:
The court concluded that the Tribunal was justified in finding that the assessee did not meet the second condition of the Explanation, and therefore, the company could not be considered one in which the public were substantially interested. Consequently, the Income-tax Officer's order under section 23A(1) was justified.

Summary of Conclusions:
1. The Explanation of the third proviso to section 23A(1) requires both conditions to be met for exemption from the penal provisions.
2. The burden of proving these conditions is on the assessee.
3. The Tribunal found that more than 25% of the voting power was held by the public, but this alone was insufficient.
4. The second condition, requiring shares to be subject to dealings in a stock exchange or freely transferable, was not met.
5. The Tribunal's finding that the shares were controlled by the Bangur group and not freely transferable was upheld.
6. The restrictive clause in the articles of association impeded the free transferability of shares.

The question referred to the court was answered in the affirmative, and the applicant was ordered to pay costs to the respondent.