1981 (9) TMI 49 - HC - Income Tax

Summary

Issues Involved:
1. Whether 330 equity shares of WIMCO registered in the names of the nominees of the assessee-company could be said to have been 'held' by the assessee-company within the meaning of Explanation II of Para. D of Part II of the First Schedule to the Finance Act, 1963.

Detailed Analysis:

Issue 1: Interpretation of 'Held' in Explanation II of Para. D of Part II of the First Schedule to the Finance Act, 1963

The primary issue revolves around the interpretation of the term 'held' as used in Explanation II of Para. D of Part II of the First Schedule to the Finance Act, 1963. Specifically, whether shares registered in the names of nominees can be considered as 'held' by the assessee-company for the purpose of claiming a higher super-tax rebate.

The assessee, a non-resident company, claimed a higher rebate of 50% on dividends received from WIMCO, asserting that it held more than half of WIMCO's equity share capital. The Income Tax Officer (ITO) allowed only a 30% rebate, arguing that the 330 shares held by nominees could not be counted as held by the assessee.

Analysis by Appellate Authorities:

1. Appellate Assistant Commissioner (AAC):
- The AAC accepted the assessee's submission, distinguishing the term 'holds' from 'holder of shares' or 'shareholder.'
- The AAC referenced Section 4 of the Companies Act, 1956, noting that the provisions of Explanation II were similar to those in Section 4.
- The AAC upheld the appeal and directed the ITO to allow the higher rebate of 50%.

2. Income Tax Appellate Tribunal:
- The Tribunal agreed with the AAC, noting that the term 'holder of shares' was broader than 'shareholder.'
- It concluded that the legislature's choice of terminology indicated that holding by nominees was permissible under the Finance Act.

Arguments by the Department:

- The Department, represented by Mr. Joshi, argued that the term 'holds' should be interpreted narrowly, meaning only direct ownership should be considered.
- Mr. Joshi cited recent decisions and sections from the Income Tax Act, 1961, to support his argument that nominee holdings should be excluded.

Court's Analysis:

- The Court noted that there was no dispute that the nominees held the shares for the benefit of the assessee.
- The Court examined Section 4 of the Companies Act, 1956, and its provisions related to holding and subsidiary companies.
- It observed that Explanation II to the Finance Act retained only part of the definition found in Section 4(1)(b)(ii) of the Companies Act, focusing on nominal value of equity share capital.

Precedents and Interpretation:

- The Court referenced the Supreme Court's decision in Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1 (SC), which distinguished between beneficial ownership and registered shareholders.
- The Court also considered the decision in Mafatlal Gagalbhai & Co. Pvt. Ltd. v. CIT [1980] 122 ITR 382 (Bom), which emphasized that the definition in Explanation II should be strictly followed.

Conclusion:

- The Court concluded that the term 'held' in Explanation II should include shares held by nominees, as the nominees were merely ostensible owners and the assessee was the beneficial owner.
- It emphasized that adopting a broader interpretation would prevent inconsistencies between the Companies Act and the Income Tax Act.
- The Court reframed the question to refer to the Finance Act, 1963, and answered it in the affirmative, favoring the assessee.

Final Judgment:
The Court ruled that the 330 equity shares of WIMCO registered in the names of the nominees of the assessee-company could indeed be said to have been 'held' by the assessee-company within the meaning of Explanation II of Para. D of Part II of the First Schedule to the Finance Act, 1963. The Commissioner was directed to pay the costs of the reference to the assessee.