9911796707
TMI Blog1992 (4) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... and from June 2, 1977 to June 23, 1982, respectively. The aforesaid company was incorporated in the year 1946 with the sole object of carrying on the business of the investment trust by investing in shares, stocks, debentures and other types of securities. The memorandum of association will clearly bring out the aforesaid object and, accordingly, the shares and other securities were bought for investment and were kept for long-term and sold only rarely. In the year 1975, the objects clause of the memorandum of the company was enlarged, empowering the company to undertake certain other activities like hire-purchase, leasing, industrial financing etc. However, even after such amendment, the basic character of the company as an investment company continued unchanged, and the company continued to acquire shares as a result of which, the earnings from investments rose from 0.91 lakhs in 1976 to 2.42 lakhs in 1979. Further, this company has also been classified by the Central Government as an investment and trust company in the Central Government publication Directory of Joint Stock Companies issued in 1980. While so, the respondent, the Registrar of Companies, by letter dated January ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its business in 1975, the company's income from investments is meager and ranks III or IV place as per the details given in the counter. Inasmuch as the company is changed to a financial company and the income from the financial business is the major income of the company, the company is not an investment company. Again, regarding the term "Principal business" though there is no definition under the Act as commonly understood, principal business means the prime business carried on by the company at the relevant point of time and the major source of income, etc. Applying these principles and also as revealed by the company's own account that the income from investment business forms only a negligible part in the total turnover of the company, the company ceased to be an investment company. Clauses 7, 8, 8A and 8B of the memorandum of association referred to by the petitioners are in the nature of incidental objects with wide clauses covering many business. However, since the company is not engaged in the business of financing the financial enterprises in India as seen from its balance-sheet, there is no question of applying section 372(14) for exemption. It is incorrect to state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst proviso to section 372(2) of the Companies Act, 1956, and that those investments were made without following the procedures mentioned in section 372(4). Consequently, the respondent directed the petitioners to show cause why penal proceedings should not be initiated against the company for such violations. The petitioner-company seems to have sent a detailed reply on October 29, 1984, followed by a further reply dated January 12, 1985, stating that the show-cause notice issued by the respondent is not sustainable on several grounds as stated in the reply letters. Notwithstanding the sending of such replies, the petitioners would apprehend that the respondent may initiate criminal proceedings and so they have approached this court, praying that this court should exercise its powers under section 633(2) of the Companies Act, and relieve the petitioners from any liability resulting from the contravention of the proviso to section 372(2) and section 372(4) of the Companies Act as set out in the respondent's show-cause notice dated September 26, 1984. Learned senior counsel, Mr. Govindswaminathan, appearing for the petitioners, submitted that the show-cause notice dated Septembe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntures and securities, it has, however, in the year 1975, changed its activities to those of hire-purchase, leasing, real estate, etc., and that from a perusal of the balance-sheets submitted by the company at the relevant point of time it will undoubtedly reveal that financial activities other than investments have become the prime business. He, therefore, contended that the company had lost its character of an investment company. In support of the contention, learned counsel for the respondent would rely upon the following figures: Sources of major income of the company from 1979 to 1982 1 2 1979 1980 1981 1982 1. Finance charges 29,52,273 57,22,260 77,31,504 91,89,036 2. Service charges 4,40,610 7,01,352 8,54,4005 8.62,935 3. Interest on mortgage loans 35,380 36,840 50,528 4,67,948 4. Lease rentals 19,356 56,289 7,65,606 19,50,574 5. Dividends 2,41,926 3,10,113 3,46,393 3,70,237 6. Interest on debentures 317 4, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is not sustainable in law. Section 372, sub-section (14) reads: "372(14). This section shall not apply, ( a )to any banking or insurance company; ( b )to a private company, unless it is a subsidiary of a public company; ( c )to any company established with the object of financing, whether by way of making loans or advances to, or subscribing to the capital of, private industrial enterprises in India, in any case where the Central Government has made or agreed to make to the company a special advance for the purpose or has guaranteed or agreed to guarantee the payment of moneys borrowed by the company from any institution outside India; ( d )to investments by a holding company in its subsidiary;" A perusal of the above provision will make it clear that unless the company is established with the object of financing private industrial enterprises in India, the question of seeking exemption will not arise. In the present case, the balance-sheets of the company will reveal that the company, of course, engaged in financing, but not to any private industrial enterprises in India to any company and so, it is not a subsidiary of any public company as mentioned in sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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