1965 (7) TMI 1 - HC - Income Tax

Propriety of an order under section 23-A - direction given by the Tribunal under section 34(3) to reassess the shareholders as a consequence of section 23-A proceedings

Issues Involved:
1. Propriety of an order under section 23-A of the Income-tax Act, 1922.
2. Direction given by the Tribunal under section 34(3) to reassess the shareholders as a consequence of section 23-A proceedings.

Detailed Analysis:

Issue 1: Propriety of an Order Under Section 23-A
The primary issue concerns whether the shares of the assessee company were "in fact freely transferable by the holders to other members of the public" to avoid liability under section 23-A of the Income-tax Act, 1922. The Income-tax Officer initially found that the company was not one in which the public were substantially interested, based on two grounds:

1. Equity Shares Voting Power: The officer concluded that the equity shares carrying not less than 25% of the voting power were not beneficially held by the public at the end of the relevant previous year.
2. Transferability of Shares: The shares were not subject to dealings in any stock exchange, and the shares were not freely transferable by the holders to other members of the public.

The Appellate Assistant Commissioner reversed this order, arguing that since one of the shareholders, Saroja Mills, was a company in which the public were substantially interested, more than 25% of the voting power was held by that company. Additionally, he held that the general restriction found in clause 13 of the articles was only a 'de jure' restriction and did not affect the actual free transferability of shares.

The Tribunal upheld the Appellate Assistant Commissioner's view on the first ground but differed on the second, stating that clause 13 did impose restrictions on the free transfer of shares. The Tribunal concluded that the assessee failed to show that it was a company in which the public were substantially interested.

Upon review, the court noted that the argument regarding the tense of the phrase "are in fact freely transferable" was misplaced. The court emphasized that the focus should be on whether the shares had a factual tendency towards free transferability, subject to reasonable restrictions. The court concluded that the Tribunal needed to reassess the facts to determine whether the assessee was a company in which the public were substantially interested, considering transfers even subsequent to the relevant previous year.

Issue 2: Direction Under Section 34(3)
The second issue pertains to the validity of the Tribunal's direction under section 34(3) to reassess the shareholders. The Tribunal issued a direction to reassess the shareholders to prevent the assessments from becoming time-barred.

The court held that this direction was without jurisdiction. The Tribunal's jurisdiction under section 33 is confined to passing orders within the scope of the appeal. The second proviso to section 34(3) is intended to lift the time-limit in certain cases, not to extend the Tribunal's jurisdiction. The Tribunal was only concerned with the propriety of the order under section 23-A and not the consequences of such an order.

Conclusion
The court answered both questions in favor of the assessee and against the department, stating that:

1. The Tribunal must reassess whether the company was one in which the public were substantially interested, considering transfers even subsequent to the relevant previous year.
2. The direction under section 34(3) to reassess the shareholders was without jurisdiction.

The court awarded costs to the assessee, with counsel's fee set at Rs. 250.

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