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Issues Involved:
1. Whether the assessee-company is a company in which the public are substantially interested under section 2(18) of the Income-tax Act, 1961. 2. Interpretation of the term "public" in section 2(18) of the Income-tax Act, 1961. 3. The relevance of section 187B of the Companies Act, 1956, in determining the control and holding of shares by the public. Issue 1: Whether the assessee-company is a company in which the public are substantially interested under section 2(18) of the Income-tax Act, 1961. The main question was whether the assessee-company, whose majority shares were held by charitable trusts, could be considered a company in which the public are substantially interested as per section 2(18) of the Income-tax Act, 1961. The assessee-company argued that since the majority of the shares were held by public charitable trusts, the shares were beneficially held by the public. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) rejected this contention, stating that the company was controlled by three persons holding more than 99% of the voting power, thus not meeting the criteria under section 2(18)(b)(iii). Issue 2: Interpretation of the term "public" in section 2(18) of the Income-tax Act, 1961. The Tribunal held that the shares held by the trusts should be considered as held by the public since the trusts were for public benefit. However, the Supreme Court decisions in Raghuvanshi Mills Ltd. v. CIT, CIT v. Jubilee Mills Ltd., and CIT v. East Coast Commercial Co. Ltd. established that the term "public" refers to those who hold shares for their own benefit and not for the benefit of another. The Supreme Court emphasized that the voting power must be free and not controlled by a block of shareholders acting in unison. Therefore, the shares held by the trustees for the benefit of the public could not be considered as beneficially held by the public under section 2(18)(b)(i). Issue 3: The relevance of section 187B of the Companies Act, 1956, in determining the control and holding of shares by the public. The Tribunal accepted an alternative argument that under section 187B of the Companies Act, the voting power exercisable by the public trustee should be considered as control by the public. However, the court found this reasoning untenable. Section 187B only transfers the right to vote from the trustee to the public trustee; it does not divest the trustee of the shares or make the public trustee a member of the company. The court concluded that the Tribunal's view was based on a misconception of the scope and effect of section 187B. Conclusion: The court concluded that the shares held by the three public charitable trusts could not be considered as held by the public for the purposes of section 2(18) of the Income-tax Act, 1961. The trustees did not hold the shares for their own benefit but for the benefit of the public, which disqualified them from being considered as "public" under the Act. Consequently, the assessee-company could not be considered a company in which the public are substantially interested. The question referred to the court was answered in the negative and in favor of the Revenue, with the assessee-company being liable to pay the costs of the reference.
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