9911796707
TMI Blog1988 (3) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be allocated unconditionally or acquired unconditionally and held throughout the relevant previous year by a company in which the public are substantially interested or its subsidiary, or the public other than the director or a company which is not a company in which the public are substantially interested. (ii) The second condition is that those shares should be freely transferable by the holder to the other members of the public. (iii) The third condition is that the affairs of the company or the shares carrying more than 60 per cent of the total voting power were at no time during the previous year controlled or held by 5 or less persons. These conditions are cumulative. That is in order to consider the company as a company in which the public are substantially interested, all the 3 conditions should be satisfied. 3. Now we will show how the shares were held. For the first four years, the shares were held as follows : S. Narayanan 5 C. Rambhupal Reddy 1,000 T. V. S. Charities 895 Sundaram Industries 100 Sundaram Charities 7,400 Southern Roadway Ltd. 4,000 Sundaram (P.) Ltd. 100 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Limited, being a Private Limited Company cannot be considered for this purpose. That leaves with Sundaram Industries Limited and Southern Roadways Ltd. Sundaram Industries Ltd. is a public limited company. It was initially a private limited company under section 43A. So also, its subsidiary Southern Roadways Ltd. These two companies having been deemed as public limited companies, we have to enquire whether they should be treated as a company in which the public are substantially interested. If they were found to be a company in which the public are substantially interested, then their shareholding when added up with shareholding of United India Insurance Corporation would make it more than 40 per cent of the total shares issued and subscribed. Thus, it will enable the assessee to satisfy the first condition. 7. However, our enquiries on this line showed that these two companies, although deemed to be public limited companies under section 43A of the Companies Act, nevertheless one, are not the companies in which public are not substantially interested. The Commissioner (Appeals) has looked into this problem in her order dated 29-8-1986 while disposing of the appeals for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Union Co. Ltd. v. CIT [1983] 139 ITR 143. In that case, the High Court has held that the public trust would be considered as has to fall in the category of public. 9. There is no gainsaying that the category coming under the expression 'public' is very wide and normally charitable trusts could be considered as falling under this category. However, it is not enough that a substantial shareholding is by a charitable trust. There is one more test which has to be applied before any one holding shares could be considered as coming under the category of public. the category of public. These tests are laid down by the Supreme Court in the case of Raghuvanshi Mills Ltd. v. CIT [1961] 41 ITR 613. It would be remembered that although the shareholding by the public is qualified in section 2(18) and the qualification is that the shares should have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant year previous year beneficially held by the public. The Supreme Court decision in Raghuvanshi Mills Ltd.'s case is relevant for the qualification that the shares are allocated and acquired unconditionally. This is what is stated at pate 620 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forming a block in voting. It is in the application of this test that a divergence has emerged. The department had applied this test and had held that Sundaram Charities being connected with the industrial house to which the assessee belongs would naturally form a block. Of course, the orders of the Commissioner (Appeals) have not exactly used these wordings but this in substance is their finding. This finding is also sought to be supported by the decision of the Bombay High Court in the case of Indian Hotels Co. Ltd. v. CIT [1983] 141 ITR 343. The case of the assessee, on the other hand, is merely because there is some connection it cannot be said that Sundaram Charities would form a blocks for this purpose. Reliance had been placed on a number of decisions and mainly we would refer to the decision of the Calcutta High Court in the case of Union Co. Ltd. and the decision of the Madras High Court in the case of CIT v. G. Vendataraman [1975] 101 ITR 673. 11. We will first take up the decision of the Calcutta High Court. They were considering the same provision but the assessment years were 1963-64 and 1964-65. The question was whether the Income-tax Officer could take proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usts. The Bombay High Court observed as follows on these facts : "The shares are also not acquired by the beneficiaries. The shares are acquired by the trustees for the trustees for the beneficiaries. The conclusion appears to us to be inescapable that 81 per cent of shares which are held by the trustees for the beneficiaries under the public trusts cannot be said to be shares held by the public. Even so far as the controlling interest is concerned, it is difficult to resist the conclusion that the three public trusts hold a controlling interest in the company. No doubt, some of the trustees in the three trusts are different. But so far as the Lady Tata Memorial Trust and Sir D. J. Tata Trust are concerned, three trustees are common and the first trust has 1,400 shares and the second trust has 2,995 shares. As a matter of fact in all the three trusts the first name of the trustee, the first name of the trustee, which would normally be the name first recorded as the holder of the shares, is the same, namely, Lady Navajbai Patan Tata. Normally, these trustees would be expected to act in concert. Similarly, the remaining shares are held either by Tata Sons Pvt. Ltd. to the extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . By section 5 of the Societies Registration Act, the properties belonging to the society are vested in the governing body of the society. In all proceedings, civil and criminal, the properties may be described as the property of the governing body of such society. In this connection, the decision of the Andhra Pradesh High Court in the case of Pamulapati Buchi Naidu College Committee v. Government of Andhra Pradesh AIR 1958 AP 773 may be cited. It is held therein : "By reason of the provisions of the Societies Registration Act, 1860, once the society is registered with the Registrar, by the filling of the memorandum and certified copy of the rules and regulations and the Registrar has certified that the society is registered under the Act, it enjoys the status of a legal entity a part from the members constituting the same and is capable of suing or being sued. But the members of the society or the members of the governing body do not have any proprietary or beneficial interest, in the property the society holds. It follows that upon its dissolution they cannot claim any interest in the property of the dissolved society. The Societies Registration Act, therefore, does not create ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . One of the legatees wanted to see the books of a company, the share of which were held by the executor. The court of appeal held that the legatee was not entitled to call on the defendants, i.e. the executors to use their powers as directors as though they held those powers on trust for the plaintiff. The rights of the beneficiaries were that they will be treated as though they were registered shareholders in respect of the trust shares with the advantages and disadvantages which would be involved in that position and they could compel the trustee directors if necessary, to use their vote as the beneficiaries, thought proper, even to the extent of altering the articles of association if the trust shares earned votes sufficient for that purpose. This decision was cited by Sri Swaminathan to short the real beneficiary of the shareholding is not the nominal person in whose name the shares stand but the beneficiary in whose name the shares are held. In our opinion, this principle will not be applicable on the facts of this case as we have already pointed out that the shares ar held by the society on their own rights. Even if the society has charitable objectives no member of the publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances are such that human experience tells us that it can safely be taken that they must be acting together. With this end in view, we have aim attempted to find out who are the directors of the companies and who are the members of the Managing Committee of the society. On going through the materials placed before us, we find that the promoters of Southern Roadways were T. S. Rajam and his brothers Srinivasan, Santhanam and Krishna. They are directors and substantial shareholders of the holding company T. V. Sundaram Iyengar Sons Ltd. as it then was. The then secretary and the Manager of that company are also shown as promoters. For the accounting year under consideration, the directors of the company were entirely different persons. But, these directors are only nominee directors. The company is a complete subsidiary of the holding company. They could be deemed to be controlled by another company within the meaning of section 4(2) of the Companies Act. Therefore, the persons are representating the holding company and the subsidiary company would be accepted to act in concert. With regard to the two charitable societies, we understand from the assessee that the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntil the rights of pre-emption hereinafter conferred shall have been exhausted. (b) Every member or other person referred to in the Transmission Article o Table A, who intends to transfer shares (hereinafter called 'the vendor') shall give notice in writing to the Board of his intention. That notice shall constitute the Board, his agent for the sale of the said shares in one or more lots at the discretion of the Board to members of the company in the proportion in which those members already hold shares in the company at a price to be agreed upon by the vendor and the Board, or, in default of such agreement on the application of either party at a fair market value thereof, as jointly certified by the auditors for the time being of the company and an Independent Chartered Accountant to be nominated by the President, for the time being, of the Institute of Chartered Accountants of India, to be in their opinion the fair selling value thereof as between a willing vendor and a willing purchaser and in making such valuation, such Auditors and the Independent Chartered Accountant shall act as experts and not as arbitrators. If such Auditors and Independent Chartered Accountants are unab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany of the transferor or other company approved by the Board of directors; (ii) a transfer by a shareholder who is holding the shares as trustee for any other company or body to another body holding as trustee for the same beneficiary or to the said beneficiary. (g) The Board may, in its absolute discretion, annul the operation of the provisions of clauses (a) to (f) of this article either temporarily or permanently, and generally or in respect of a specific class or number of shares and on such annulment the provisions of the said clause shall become inoperative and of no effect." It will be seen from the above that there is no free transfer ability of the shares. No shareholder can transfer until and unless the rights of presumption conferred to the other shareholders are exhausted. The rest of clause (10) deals with how the Board of directors would determine whether the right of pre-emption has been exhausted by others and how the value of he shares would be fixed. Now when we say the shares are freely transferable, it would mean that a shareholder can transfer that shares to anyone he likes. He can also transfer the shares to any price which he finds suitable, He can als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clauses (b) to (g) either temporarily or permanently. The Board could straightway or in other words in absolute discretion accept any transfer without going to the formalities as provided in clauses (b) to (g). That being so, it is clear that no restrictions would be operative. Accordingly, the power of transfer is freely exercisable by the Board, meaning thereby that the shares are capable of being transferred freely. In the free power of transferability exercisable under clause (h) the only limitations to the Board would be to restrict the maximum of its members to 50 and also prohibit invitation to the public to subscribe. These two limitations by themselves cannot be called restrictions on the free transferability of the shares. Even with these limitations a share could be freely transferred and that is why clause 5(h) of the article of association does, i.e., it enables the Board to have free transfer of the shares. In other words, we may emphasise that the shares of the assessee-company are capable of possessing the character of free transferability under clause (h) of article 5 and that in the absence of any shares factually transferred, it could not be said that the Board h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Shree Krishna Agency Ltd. but of the other existing members. The other existing members have the right of pre-emption. This right will exist at any time, any member wants to transfer the shares. Therefore, it would not be correct to consider these two types of restrictions on the same plane. Whereas, the right of pre-emption is a condition precedent, the right of a director to refuse to register a transfer would be more like a condition subsequent. It is well settled that in the case of condition precedent, the conditions must be satisfied before an effective transfer takes place. In the case of condition subsequent what has already been transferred or what has already been vested gets divested on the happening of the condition. It is well settled that the question of registration of the shares would come only after the transfer has taken place. In the case of Sheila Devi Chamaria v. Tara Chand Saraogi [1987] 163 ITR 406, the Culcutta High Court has held that a transfer of shares in a company is complete as soon as the shares are handed over along with the blank transfer form. Non-recording of transfer in books of the company does not invalidate the gift. For This decision, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has been reopened undersection 147(a). The Commissioner (Appeals) had upheld the validity of the reopening of the assessment. Sri Swaminathan submitted that there has been no default on the part of the assessee and all the materials required have been fully and truly disclosed before the Income-tax Officer in the course of the original proceedings itself. In support of this submission, he had placed before us a copy of the letter of the assessee dated 26the September, 1975 addressed to the Income-tax Officer which was an enclosure to the balance sheet as on 31-3-1975 and the Schedules for the balance sheet and profit and loss A/c. The Schedule is the list of the share capital as on the last date. The list given the entire shareholding. Although, initially Sri Radhakrishnamurthy for the department submitted that the letter and the schedules to the balance sheet were not available later on going through the records carefully they were traced out. Thus, in the course of original proceedings itself, the assessee had furnished the list of the shareholders. It is this list of shareholders which is material. That material has been fully disclosed. Therefore, the assessee cannot said to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s finding that 40(c) r/w the first proviso to section 40A (5) would apply, we cannot go into this question. We must proceed on the basis that 40(c) would apply, In section 40(c), there is no question of classifying the remuneration into perquisites and salary. Therefore, the questing whether the house rent allowance and other payments would be perquisites really do not arise. Since the point has been taken before us, we must point out that these cash payments are not perquisites but at the same time, we must state that they are in the nature of remuneration. They will go enlarge the salary received by the Executive Director. In this connection, we would refer to the decision of the Special Bench decision in the case of Glaxo Laboratories (India) Ltd. v. Second ITO [1986] 18 ITD 226 (Bom.). The Bench had observed : "So far as the position under section 40(c) was concerned, it was clearly against the assessee because the word 'perquisite' does not appear in section 40(c)(i) which only uses he words 'remuneration or benefit or amenity'. Further, the restrictive phrase 'whether convertible into cash or not is missing in the said sub-section. Under these circumstances, the reimburseme ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
