1970 (4) TMI 29 - SC - Income Tax

Assessee was a company which had to be deemed as one in which public were substantially interested as per the Explanation to s. 23A(1) - Since the shares were fully dealt on stock exchange, it was not necessary to consider whether the shares were in fact freely transferable by holders - appeal of assessee s allowed

Summary

Issues:
Interpretation of section 23A(1) of the Income-tax Act, 1922 regarding the distribution of dividends by a company and the conditions for a company to be deemed a company in which the public are substantially interested.

Detailed Analysis:
The case involved an appeal brought by the assessee company against the judgment of the Calcutta High Court regarding the assessment years 1948-49 and 1949-50. The primary issue was whether the Income-tax Officer was justified in passing an order under section 23A(1) of the Income-tax Act for the mentioned assessment years. The company was a limited by shares, and the dispute arose as no dividends were declared in the general meetings despite sufficient profits being available for distribution.

The key contention was whether the company met the conditions specified in section 23A(1) to be considered a company in which the public are substantially interested. The section required that shares carrying not less than 25% of the voting power must be beneficially held by the public and have been the subject of dealings in a stock exchange or freely transferable. The Income-tax Officer had made orders under section 23A(1) based on the company's shareholding structure and the restrictions on share transfers in the articles of association.

The Appellate Tribunal concluded that the shares met the first condition but failed to satisfy the second condition as per the Explanation to the section. The Tribunal found that the shares were not freely transferable due to restrictions in the articles of association, and there was no evidence of share dealings on the stock exchange. The High Court upheld the Tribunal's decision, leading to the appeal in the Supreme Court.

In its judgment, the Supreme Court analyzed the conditions laid down in section 23A(1) in detail. The Court emphasized that for a company to be substantially interested by the public, both conditions must co-exist: shares must be beneficially held by the public and have been the subject of dealings on a stock exchange or be freely transferable. The Court directed the Income-tax Appellate Tribunal to provide additional information on specific points related to share dealings on the stock exchange.

Upon receiving the supplementary statement from the Tribunal, which confirmed share quotations, actual transactions, price fluctuations, and daily share transactions, the Court held that both conditions were satisfied. As a result, the Court allowed the appeals, answering the question in the negative and directing the Commissioner to pay the costs of the company in the court.

In conclusion, the judgment clarified the interpretation of section 23A(1) and affirmed that the company met the criteria to be considered a company in which the public are substantially interested, leading to the allowance of the appeals.