2003 (1) TMI 225 - AT - Income Tax

Summary

Issues Involved:
1. Definition of "Company in which public are substantially interested" under Section 2(18)(b)(B)(c) of the Income-tax Act, 1961.
2. Whether the second subsidiary company of the first subsidiary company qualifies as a "widely held company."

Issue-wise Detailed Analysis:

1. Definition of "Company in which public are substantially interested" under Section 2(18)(b)(B)(c) of the Income-tax Act, 1961:

The core issue revolves around whether the second subsidiary company of the first subsidiary company, where the parent company is listed on a recognized stock exchange in India, falls within the definition of a "Company in which public are substantially interested" as per Section 2(18)(b)(B)(c) of the Income-tax Act, 1961. The section outlines that a company would be considered widely held if it is not a private company and meets either the conditions specified in item (A) or item (B). Item (A) requires the company's shares to be listed on a recognized stock exchange. Item (B) specifies that if the shares of the company, carrying not less than 50% of the voting power, are held unconditionally by the Government, a statutory corporation, or a widely held company, the company would be considered widely held.

2. Whether the second subsidiary company of the first subsidiary company qualifies as a "widely held company":

The assessees claimed the status of "widely held companies" under Section 2(18) of the Act. The Assessing Officer disagreed, stating that the companies holding 50% of the equity shares of the assessees were not listed in the Stock Exchange, and thus, the assessees could not be treated as "widely held companies." The CIT (Appeals) allowed the assessees' claim, following precedents from earlier years.

The Tribunal noted that the shares of the parent companies (Sifa Trading Co. Ltd. and Akash Agencies Ltd.) were listed on the Bombay Stock Exchange, fulfilling the criteria under Item (A). The subsidiary companies (Samudaya Investment Ltd. and Adavat Investment Ltd.) held not less than 50% of the voting power in the assessees, meeting the requirements under Item (B).

The Tribunal referenced Board Circular No. 372, which clarified that a company would be considered widely held if the shares carrying not less than 50% of the voting power were held by a widely held company or its wholly owned subsidiary. The Tribunal concluded that the assessees met the conditions specified in Section 2(18)(b)(B)(c) and should be treated as companies in which the public are substantially interested.

The Tribunal dismissed the Revenue's argument that the parent company should hold 100% of the shares in the second subsidiary. It emphasized that the statute does not require the parent company to hold any shares in the second subsidiary or that the first subsidiary should hold 100% shares in the second subsidiary. The Tribunal upheld the CIT(A)'s decision, affirming the assessees' status as widely held companies.

Conclusion:

The Tribunal concluded that the second subsidiary company of the first subsidiary company qualifies as a "widely held company" under Section 2(18)(b)(B)(c) of the Income-tax Act, 1961. The appeals by the Revenue were dismissed, and the assessees' claims were upheld.