1979 (2) TMI 60 - HC - Income Tax

Summary

Issues: Validity of the Income-tax Officer's order under section 23A for assessment years 1960-61 to 1962-63.

Analysis:
The High Court of Bombay addressed the issue of the validity of the Income-tax Officer's order under section 23A of the Indian Income-tax Act for the assessment years 1960-61 to 1962-63. The Income-tax Officer had imposed penal super-tax at a rate of 50% of the distributable profit for each of the assessment years, considering the assessee-company as not substantially interested to the public. However, the Appellate Assistant Commissioner (AAC) later canceled the penal super-tax for all years, emphasizing that three companies held 50% of the shareholding, and these companies were considered to be public limited companies. The Tribunal further examined the shareholding structure and concluded that the shares were held by the public, and the company's affairs were controlled by more than six persons, making the provisions of the Companies Act unnecessary. The Tribunal dismissed the appeals filed by the revenue, leading to the reference to the High Court.

The circular issued by the Central Board of Direct Taxes dated 5th April 1974 was brought to the attention of the court during the proceedings. The circular highlighted an amendment in the definition of a company substantially interested to the public, clarifying that companies meeting specific criteria would be regarded as such. Referring to a decision by the Kerala High Court, the circular emphasized that even before the amendment, the law considered companies meeting certain conditions as substantially interested to the public. The circular's contents and the Kerala High Court decision indicated that the three companies holding more than 50% of the shares in the assessee-company were companies substantially interested to the public, thus exempting the assessee-company from the provisions of section 23A of the Indian Income-tax Act.

In light of the circular and the legal position established by the Kerala High Court decision, the court concluded that the three companies holding the majority of shares in the assessee-company were substantially interested to the public. Consequently, the provisions of section 23A of the Indian Income-tax Act did not apply to the assessee-company for the assessment years in question. The court ruled in favor of the assessee, directing that the question referred to them be answered in the negative. The assessee was also awarded costs for the reference proceedings.