1974 (3) TMI 20 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of section 2(18)(b)(ii) of the Income-tax Act, 1961.
2. Whether the assessee company qualifies as a company in which the public are substantially interested.

Issue-wise Detailed Analysis:

1. Interpretation of section 2(18)(b)(ii) of the Income-tax Act, 1961:
The primary issue revolves around the interpretation of section 2(18)(b)(ii) of the Income-tax Act, 1961. The clause states:
"the said shares were at any time during the relevant previous year the subject of dealing in any recognised stock exchange in India or were freely transferable by the holder to the other members of the public."

The Income-tax Officer interpreted the phrase "at any time" to mean that the shares must be freely transferable throughout the entire relevant previous year. This interpretation was challenged by the assessee, who argued that "at any time" should mean "at any one point of time" during the relevant previous year.

The Appellate Assistant Commissioner disagreed with the Income-tax Officer's interpretation, stating:
"Wherever the legislature has intended that a certain happening must have persisted throughout the relevant previous year, it has used the corresponding expression... Reverting back to sub-clause (ii), the expression 'at any time' during the relevant previous year governs not only the dealing in any recognised stock exchange, but also the free transferability of the shares."

The Tribunal affirmed this view, emphasizing the rule of noscitur a sociis, which means that words take their meaning from their context. The Tribunal noted:
"If the legislature wanted that the transferability to the members of the public should operate for every minute of the year then they could expressly have said so."

The High Court agreed with the Tribunal's interpretation, asserting that the phrase "at any time" should be read with both alternatives in clause (ii) and would mean "at any one given point of time."

2. Whether the assessee company qualifies as a company in which the public are substantially interested:
The assessee company claimed that it was a company in which the public were substantially interested, as per section 2(18) of the Act. The Income-tax Officer rejected this claim based on his interpretation of section 2(18)(b)(ii).

The Appellate Assistant Commissioner allowed the appeal, concluding:
"Since it is an admitted fact that before the end of the relevant previous year the appellant-company has amended its articles of association removing all restrictions on the free transferability of shares the condition laid down in sub-clause (ii) of clause (b) of section 2(18) stood fulfilled."

The Tribunal upheld this decision, applying the principle of lesser burden, which favors the taxpayer in cases of reasonable doubt. The Tribunal stated:
"As the matter is extremely doubtful, we would like to apply a well-known rule of construction of taxing statutes, viz., that in case of doubt the more favourable constructions should be adopted."

The High Court concurred with the Tribunal, emphasizing the rule that in cases of fiscal statute interpretation, the construction most beneficial to the taxpayer should be adopted. The Court concluded:
"We are, therefore, of the opinion that the view adopted by the Appellate Assistant Commissioner and affirmed by the Tribunal is correct."

Conclusion:
The High Court answered the referred question in the affirmative, in favor of the assessee and against the department, affirming that the assessee is a company in which the public are substantially interested.