1976 (2) TMI 3 - SC - Income Tax

When shares carrying not less than 25 per cent. of voting rights were held by the public in the absence of evidence that control was by the shareholders, whether the company can be said to be one in which public were substantially interested - High Court was not right in answering the question in favour of the assessee

Issues Involved:
1. Applicability of Section 23A of the Indian Income-tax Act, 1922.
2. Whether the company was one in which the public was substantially interested.
3. Control and concerted action among shareholders.
4. Admissibility of additional evidence by the Tribunal.
5. Burden of proof and inference of concerted action among shareholders.

Detailed Analysis:

1. Applicability of Section 23A of the Indian Income-tax Act, 1922:
The Income-tax Officer initially held that Section 23A was applicable to the company for the assessment years 1953-54 and 1954-55. The Appellate Assistant Commissioner affirmed this decision after remanding the matter for additional facts. However, the Income-tax Appellate Tribunal overturned this decision, stating that Section 23A was not applicable. The Tribunal's decision was based on the interpretation that the company was one in which the public was substantially interested, thus exempting it from the provisions of Section 23A.

2. Whether the company was one in which the public was substantially interested:
The primary controversy revolved around whether the company could be considered one in which the public held at least 25% of the shares unconditionally and beneficially, as per the Explanation to Section 23A. The Tribunal and the High Court initially found that the public did hold the requisite percentage of shares. However, the Supreme Court disagreed, noting that the controlling interest by a family group meant that the public did not hold the required percentage of shares.

3. Control and concerted action among shareholders:
The Supreme Court examined whether the shareholders, particularly the family members of S. P. Jain, acted in concert to control the company's affairs. The Tribunal had found no evidence of concerted action. However, the Supreme Court, referencing previous judgments, held that the circumstances indicated that the family members acted as a block, controlling more than 75% of the voting power. The Court emphasized that the relationship and the conduct of the company's affairs suggested a concerted action among the family members.

4. Admissibility of additional evidence by the Tribunal:
The revenue's grievance regarding the Tribunal's refusal to entertain additional evidence was dismissed. The Supreme Court affirmed that once the Tribunal has disposed of the matter, no further or additional evidence could be introduced during the preparation of the statement of the case under Section 66(1) or 66(2). This principle was upheld in the decisions of Keshav Mills Ltd. v. Commissioner of Income-tax and other related cases.

5. Burden of proof and inference of concerted action among shareholders:
The Supreme Court held that the burden of proof to show that the public held the requisite percentage of shares lay with the company. The Court found that the evidence suggested that the family members acted in concert, controlling the company's affairs. The Tribunal and the High Court's conclusions that there was no concerted action were overturned. The Supreme Court noted that the relationship among the shareholders, their roles in the company, and the conduct of the company's affairs indicated a controlling block, thereby attracting the provisions of Section 23A.

Conclusion:
The Supreme Court concluded that the company did not meet the criteria to be considered one in which the public was substantially interested. The appeals were allowed, and the original question was answered in the negative, while the revised question was answered in the affirmative, both in favor of the revenue. The Court emphasized the importance of considering the totality of circumstances and the relationship among shareholders in determining the applicability of Section 23A.

← Previous Next →