1962 (9) TMI 92 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 23A of the Indian Income-tax Act to the assessee company.
2. Determination of whether the assessee company is a company in which the public are substantially interested.
3. Justification of the order under Section 23A for the assessment year 1951-52.

Issue-wise Detailed Analysis:

1. Applicability of Section 23A of the Indian Income-tax Act to the Assessee Company:

The primary issue is whether the assessee company falls within the purview of Section 23A of the Indian Income-tax Act. The assessee company argued that it is a company in which the public are substantially interested, and therefore, Section 23A should not apply. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal all disagreed, determining that the assessee company did not meet the criteria set forth in the Explanation to the third proviso to Section 23A(1). The Tribunal concluded that the Jammu Company, which held a majority of the shares, was a company to which Section 23A applied, thus disqualifying the assessee company from being considered as one in which the public are substantially interested.

2. Determination of Whether the Assessee Company is a Company in Which the Public are Substantially Interested:

The Explanation to the third proviso to Section 23A(1) specifies that a company is deemed to be one in which the public are substantially interested if shares carrying not less than 25% of the voting power are unconditionally and beneficially held by the public. The assessee company contended that the Jammu Company, which held 47,493 out of 50,000 shares, should be considered part of the public. However, the Tribunal and the High Court found that the Jammu Company was controlled by a small group of individuals, particularly Lala Yodhraj, who held a majority of shares in the Jammu Company. This concentration of control meant that the shares were not unconditionally and beneficially held by the public. The High Court referenced the Supreme Court decision in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax, which emphasized that shares controlled by a single entity or a group acting in unison do not qualify as being held by the public.

3. Justification of the Order Under Section 23A for the Assessment Year 1951-52:

For the assessment year 1951-52, the assessee argued that the order under Section 23A was not justified because the assessable profits included an amount of Rs. 70,895 from its partnership with the Indian Steel Syndicate, which was determined after the end of the account year. The High Court found merit in this argument, noting that the initial assessment for 1951-52 did not include the partnership income and was only rectified later. At the time of the general meeting on May 17, 1951, the company could not have reasonably declared a dividend based on profits that were not yet determined. The High Court concluded that it would be unreasonable to expect the company to have declared a dividend from profits that were not part of the account year's actual profits available for distribution.

Conclusion:

The High Court concluded that the orders under Section 23A were justified and valid for the assessment year 1950-51 but not for the assessment year 1951-52. The assessee company was found to be within the purview of Section 23A for 1950-51, but the inclusion of partnership income after the account year rendered the order for 1951-52 unjustified. Thus, the court answered the referred question affirmatively for 1950-51 and negatively for 1951-52, with no order as to costs.