9911796707
TMI Blog1969 (7) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... arch 31, 1943, for which the relevant assessment year was 1943-44, the dividend declared by the company in its annual general meeting was less than what was required under section 23A of the Income-tax Act, 1922. A question, therefore, arose whether the assessee-company was one to which the provisions of the said section were applicable. Now, the company's issued and subscribed capital consisted of 10,000 shares of Rs. 100 each. During the relevant accounting period, 4,695 of the shares were held by the 8 directors of the assessee-company together including amongst them Maganlal Prabhudas and his two sons, Ravindra Maganlal and Surendra Maganlal, their shareholdings being: Maganlal Prabhudas 1,344 shares Ravindra Maganlal 1,168 " Surendra Maganlal 1,100 " 4,754 shares were held by the relations of the directors including three other sons of Maganlal Prabhudas, viz., Bipinchandra Maganlal, Harischandra Maganlal and Krishnakumar Maganlal and his wife, Kantabai Maganlal. Each of the three sons held 1,000 shares and the wife held 771 shares. The remaining 551 shares were held by the members of the public. During the material time, Ravindra Maganlal Co., which was a private ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares held by the directors and the shares held by the relations of the directors could not qualify as shares held by the members of the public. When the matter came to this court on a reference under section 66(2), this court pointed out that it could not be said that in the case of every managing agency company the shareholders are controlled by the directors of the managed company and it was possible to have a managing agency company in which the shareholders may have no relationship with the directors of the managed company. The reason given by the Tribunal, therefore, that the shares held by the persons interested in the managing agency had to be excluded because such persons were under the control of the directors of the managed company was not correct and what was required to be found was whether they were in fact so controlled. Similarly, merely because the shareholder was a relation of the director was not sufficient to make the shares held by the shareholder as shares not held by the public. Mere relationship was not sufficient but what was further required to be found was that the shareholding of the relations was in fact controlled by the director. This court, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be said to be unconditionally and beneficially held by the members of the public. In the category of shares held by the public, only those shares could be counted which were uncondi tionally and beneficially held by the public, or, in other words, which were uncontrolled by the group which controlled the affairs of the company. The group itself might be composed of directors or their relations or nominees in different companies, but none could be said to belong to that group be he a director or a relative, unless he did not hold the shares unconditionally and beneficially for himself. According to the Supreme Court, therefore, since the view taken by the High Court that the shares held by the directors could not be said to be shares held by the members of the public was erroneous on the mere finding that Maganlal Prabhudas controlled the shareholding of his three sons, Bipinchandra MaganlaI, Harischandra Maganlal and Krishnakumar Maganlal, the applicability of section 23A to the assessee-company could not be sustained since the total shareholding of Maganlal Prabhudas and his three sons would together come to 4,344 shares only. In order to decide whether section 23A could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to decline to register any transfer of shares and that amounted to a restriction on the transfer of shares and they could not, therefore, be said to be freely transferable. There was considerable controversy before this court on the question as to whether the said contention was permissible to be raised by the department as arising on the order of the Tribunal. This court took the view that the department would be entitled to raise the said contention. It, however, found that, although the contention arose on the order of the Tribunal, the Tribunal had not applied its mind to it. This court, therefore, called upon the Tribunal to furnish a further supplementary statement recording its conclusion in respect of this contention. The Tribunal accordingly has submitted a further supplementary statement recording its conclusion in favour of the assessee that its shares are in fact freely transferable by the holders thereof to the other members of the public. The assessee in the meanwhile had gone to the Supreme Court in an appeal against the order of this court calling for this further supplementary statement. It has, however, withdrawn the said appeal reserving to itself the liberty to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance is placed on a decision of the Calcutta High Court in Commissioner of Income-tax v. Tona Jute Co. Ltd., where it has been held that a public company whose directors have absolute discretion to refuse to register the transfer of any share to any person whom it shall in their opinion be undesirable in the interest of the company to admit to membership, and are not obliged to give any reason for refusal to register, is not a company the shares of which are freely transferable to other members of the public within the meaning of section 23A of the Income-tax Act. Now, it may be pointed out that the articles of association of the assessee-company do not contain any restriction on the transfer of shares by one shareholder to another such as to be found, as for instance, in the articles of association of a private company. Article 55, to which reference has been made, is not by itself a restriction on the transfer of shares by a shareholder to another shareholder. It only gives the power to the directors to refuse to acknowledge the transfer or to register the transfer. A free transferability of the shares is a normal feature of the public limited companies and the articles like 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee-company in such a manner as to create a fetter on the free transferability of the shares and to render them as not freely transferable. On the facts and circumstances of the present case, therefore, there is no difficulty in holding that the shares of the assessee-company are, in fact, freely transferable by the holders thereof to the other members of the public. The view that we are taking finds support from a decision of the Madras High Court in East India Corporation Ltd. v. Commissioner of Income-tax which has disagreed with the Calcutta decision in Commissioner of Income-tax v. Tona Jute Co. Ltd. relied upon by the department, though not on precisely the same reasoning as we have adopted. As we have already pointed out earlier, this court has earlier held on the earlier occasion that the shares carrying more than 25 per cent. of the voting power are held by the public and in view of our finding now that its shares are also, in fact, 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 and is consequently outside the operation of section 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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