1960 (4) TMI 96 - HC - Income Tax

Summary

Issues Involved:
1. Constitutional validity of Section 23A of the Indian Income Tax Act.
2. Validity of proceedings initiated under Section 23A based on the timing of notice service.
3. Correct application of Section 23A to the company in question.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Section 23A:
The first issue addressed the constitutional validity of Section 23A of the Indian Income Tax Act. The contention was that Section 23A violated Articles 14, 19(1)(f), and 31 of the Constitution. This issue had been previously considered in the case of Sponsor v. Income Tax Officer, Madras, where the contention was rejected. The court, bound by this precedent, followed the decision in Spencer's case and answered the question in the affirmative, upholding the constitutionality of Section 23A.

2. Validity of Proceedings Initiated Under Section 23A Based on Timing of Notice Service:
The second issue involved whether the notices served on April 1, 1953, for the assessment years 1947-48 and 1948-49 were valid. The company argued that proceedings under Section 23A should be treated as coming under Section 34 of the Act, which prescribes a four-year limitation period for initiation. If this contention were accepted, the notice for the year 1947-48 would be invalid as it was issued beyond the four-year period. Additionally, for the year 1948-49, although the notice was issued on the last day of the four-year period, it was served beyond it. The court, however, held that Section 23A is procedural and not a charging provision, and no period of limitation is prescribed for initiation of proceedings under Section 23A. Therefore, the provisions of Section 34 do not apply to Section 23A proceedings, and the court answered this question in the negative, against the assessee.

3. Correct Application of Section 23A to the Company:
The third issue questioned whether the provisions of Section 23A were correctly applied to the company for the relevant years. The company contended that it was one in which the public were substantially interested, thus exempting it from Section 23A under the third proviso. The analysis of shareholders showed that Ramayamma held about 40% of the shares, and the directors held less than 7%. Even if the shares held by Ramayamma, her daughter, son-in-law, and brother were consolidated, they would amount to about 47%, with the remaining shares held by the public.

The court examined whether the percentage of shares should be ascertained with regard to ordinary shares only, as preference shareholders were argued to be indifferent to dividend declarations. The court referred to the relevant provision of Section 23A, which deems a company to be one in which the public are substantially interested if shares carrying not less than 25% of the voting power are held by the public.

The court concluded that the term "public" should include all members other than those in control. It held that if no shareholder has 51% of the total voting power, the company would not come under Section 23A. In this case, Ramayamma and her associates did not hold more than 50% of the voting power, and the public held more than 25% of the voting power. Therefore, the company was deemed to be one in which the public were substantially interested, exempting it from Section 23A.

Conclusion:
The court concluded that the Income Tax Officer had no authority to take proceedings under Section 23A against the company. Consequently, the third question was answered in the negative, in favor of the assessee. The company was entitled to its costs, with an advocate's fee of Rs. 250.