1972 (6) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee-companies satisfy the requirements of section 2(18) of the Income-tax Act, 1961, and hence are companies in which the public are substantially interested.

Detailed Analysis:

1. Interpretation of Section 2(18) of the Income-tax Act, 1961:
The primary issue was whether the assessee-companies qualify as companies in which the public are substantially interested under section 2(18) of the Income-tax Act, 1961. The relevant period for assessment was from December 31, 1960, to December 31, 1961, for I.T.R. No. 31 of 1970, and from December 31, 1962, to December 31, 1963, for I.T.R. No. 32 of 1970. During these periods, Messrs. J. H. Vavasseur & Co. Ltd. held more than 50% of the equity shares in the assessee-companies.

2. Status Determination by Income-tax Authorities:
The Income-tax Officer initially treated the assessee-companies as private limited companies. However, the Appellate Assistant Commissioner, while agreeing that the companies were not private limited companies, concluded that they were not companies in which the public were substantially interested. The Tribunal, on the other hand, held that the companies were indeed companies in which the public were substantially interested, leading to the present references.

3. Legislative History and Interpretation:
The court reviewed the legislative history of section 2(18) and its predecessors under the Indian Income-tax Act, 1922. The provision was designed to prevent tax avoidance through accumulation of profits in private companies. The court noted that the definition of a company in which the public are substantially interested has evolved but retained a core principle that such companies must have a significant portion of their shares held by the public or public entities.

4. Definition and Scope of "The Public":
The term "the public" in section 2(18)(b)(i) was crucial. The court emphasized that this term, though not explicitly defined, includes a wide range of entities and individuals, excluding directors or companies to which the clause does not apply. The court interpreted the exclusion of certain categories (directors and specific companies) as indicative that other entities, including companies in which the public are substantially interested, fall within "the public".

5. Judicial Precedents and Interpretations:
The court referred to the Supreme Court decision in Shree Changdeo Sugar Mills Ltd. v. Commissioner of Income-tax, which supported the inclusion of companies in which the public are substantially interested within the definition of "the public". This precedent reinforced the interpretation that such companies are part of the public for the purposes of section 2(18).

6. Clarification by 1965 Amendment:
The 1965 amendment to section 2(18) was argued by the department as a change in the law. However, the court concluded that this amendment merely clarified the existing position rather than altering it. The amendment expanded the definition to explicitly include companies in which the public are substantially interested, confirming the court's interpretation of the pre-amendment law.

7. Tribunal's Decision Affirmed:
Based on the legislative history, judicial precedents, and the interpretation of "the public", the court upheld the Tribunal's decision that the assessee-companies were companies in which the public are substantially interested. The court answered the references in the affirmative, against the department, and directed that a copy of the order be sent to the Income-tax Tribunal as required by section 260 of the Income-tax Act, 1961.

Conclusion:
The judgment affirmed that the assessee-companies met the criteria under section 2(18) of the Income-tax Act, 1961, to be considered companies in which the public are substantially interested. The court's detailed analysis of legislative history, judicial interpretations, and statutory provisions led to the conclusion that the Tribunal's decision was correct.