1958 (3) TMI 88 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 23A to the assessee company.
2. Determination of whether the public are substantially interested in the company.
3. Interpretation of the term "the public" under Section 23A.
4. Relevance of the Income-tax Officer's initial rebate decision.
5. Consideration of the Privy Council's decision and its impact on the case.
6. Request for remand by the Department.

Issue-wise Detailed Analysis:

1. Applicability of Section 23A to the Assessee Company:
The main question was whether the assessee company is a company to which Section 23A applies. The share capital of the company consisted of ordinary shares, cumulative preference shares, and second preference shares, all fully paid up. The relevant consideration under Section 23A is the voting power, specifically the ordinary shares. The directors and their associates held a significant portion of the ordinary shares, raising the question of whether the public held at least 25% of the voting power. The Tribunal had to determine if the company was one in which the public were substantially interested, as defined in the explanation to sub-section (1) of Section 23A.

2. Determination of Whether the Public are Substantially Interested:
The explanation to Section 23A(1) states 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 held by the public. The Department needed to establish that the public's voting power was less than 25% to apply Section 23A. The Tribunal accepted the Department's contention that the managing agency firm, comprising 14 partners (seven of whom were directors), held more than 75% of the shares, thus implying that the public shareholding was less than 25%.

3. Interpretation of the Term "the Public" under Section 23A:
The court referred to its previous decision in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax, which defined "the public" as independent of the directors' control. The court identified three categories: directors (per se outside the public), those prima facie members of the public but controlled by directors, and shareholders who are neither directors nor controlled by them. The court emphasized that actual control, not the mere possibility of control, must be established. The Tribunal's assumption that the managing agency firm's partners were controlled by the directors without evidence was contrary to this principle.

4. Relevance of the Income-tax Officer's Initial Rebate Decision:
Mr. Palkhivala argued that the Income-tax Officer's initial rebate decision implied that Section 23A did not apply. However, the court clarified that the rebate was granted because no order under Section 23A had been made at the time of assessment. The officer was competent to grant the rebate and later apply Section 23A after reviewing all materials.

5. Consideration of the Privy Council's Decision and Its Impact on the Case:
The Tribunal considered a Privy Council decision which distinguished between controlling interest and the public. The Privy Council held that the public includes shareholders not controlled by those with the controlling interest. The court noted that the Privy Council's decision was of persuasive authority post-1950 and that the Tribunal should have followed the Bombay High Court's decision in Raghuvanshi Mills. The Privy Council's decision did not directly apply to the case at hand, as it dealt with a single individual holding a controlling interest, not a group.

6. Request for Remand by the Department:
Mr. Joshi requested a remand to establish necessary facts, similar to Raghuvanshi Mills. The court rejected this, stating that the Department had sufficient knowledge of the law and facts but failed to provide evidence. Allowing a remand would give the Department an undue second chance. The court cited a Supreme Court decision rejecting a similar request due to the long lapse of time.

Conclusion:
The court held that the assessee company was one in which the public were substantially interested, as 41,659 out of 1,00,000 shares were held by shareholders not proved to be under directors' control. The Tribunal's decision was contrary to the established legal principles. The court answered the questions in the affirmative, except for the third question, which was deemed unnecessary. The Commissioner was ordered to pay three-fourths of the costs of the reference.