1969 (7) TMI 8 - HC - Income Tax

Whether the assessee-company was a company in which the public are substantially interested and was consequently outside the operation of s. 23A(1) by reason of third proviso thereto - since shares carrying more than 25 % of the voting power are held by the public and its shares are also, freely transferable by the holders thereof to the other members of the public, it must be held that the assessee-company is a company in which the public are substantially interested

Issues Involved:
1. Applicability of Section 23A of the Indian Income-tax Act, 1922.
2. Determination of whether the shares held by certain individuals qualify as shares held by the public.
3. Free transferability of the shares.
4. Costs of the appeal in the Supreme Court.

Issue-wise Detailed Analysis:

1. Applicability of Section 23A of the Indian Income-tax Act, 1922:
The central question was whether the provisions of Section 23A of the Indian Income-tax Act, 1922, applied to the assessee-company. Section 23A was applicable to companies in which the public were not substantially interested. The determination of public interest was based on whether shares carrying at least 25% of the voting power were held unconditionally and beneficially by the public and whether such shares were freely transferable.

2. Determination of Whether the Shares Held by Certain Individuals Qualify as Shares Held by the Public:
The assessee-company's shareholding structure was scrutinized. The Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal all initially concluded that the shares held by the directors and their relatives could not be considered as held by the public. This conclusion was based on the fact that these shares exceeded 75% of the total shares, thus failing the public interest requirement of Section 23A. The Tribunal's supplementary statement indicated that the shares held by the three sons of Maganlal Prabhudas were under his de facto control. The Supreme Court, however, clarified that the shares held by directors or their relatives could only be excluded if they were controlled as a block, not merely on the basis of relationship. The Supreme Court remanded the case back to the High Court to reconsider the applicability of Section 23A based on this principle.

3. Free Transferability of the Shares:
The court examined whether the shares of the assessee-company were freely transferable. Article 55 of the company's articles of association gave directors the discretion to refuse to register share transfers. The Tribunal's supplementary statement and historical transfer records showed that the company had allowed transfers freely, except in one isolated case. The court concluded that the shares were, in fact, freely transferable, as the directors had not used their discretionary power to restrict transfers generally. This finding was significant because free transferability was a condition for determining whether the public were substantially interested in the company.

4. Costs of the Appeal in the Supreme Court:
The assessee argued for costs of the appeal in the Supreme Court. The Supreme Court had allowed the assessee to withdraw its appeal with liberty to argue certain points before the High Court. However, since the assessee did not argue those points before the High Court, the court concluded that the assessee was not entitled to costs for the Supreme Court appeal.

Conclusion:
Based on the findings, the court held that more than 25% of the shares were held by the public and that the shares were freely transferable. Consequently, the assessee-company was deemed to be a company in which the public were substantially interested, making Section 23A inapplicable. The court answered the original question in the negative and ordered the Commissioner to pay the costs of the reference throughout in the High Court. The assessee was not entitled to the costs of the Supreme Court appeal.

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