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TMI Blog1972 (3) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 2(41) and section 104 read with section 108 of the Act and the provisions of the Finance Act, 1964 (5 of 1964), authorising levy of super-tax at a rate higher than 25 per cent. of the total income, the Finance Act, 1966 (13 of 1966), authorising levy of income-tax at a rate higher than 55 per cent., the Finance Acts, 19 of 1968 and 14 of 1969, authorising levy of income-tax at the rate of 65 per cent. of the total income of a company which does not fall within the definition of "company in which the public are substantially interested" are void as they offend articles 14 and 19(1)(c) and (f) of the Constitution. The Act makes a distinction between companies "in which the public are substantially interested", for short "widely held companies", and those "in which the public are not substantially interested", for short go closely held companies. "In respect of undistributed income all companies are under the provisions of the Act liable to pay additional income-tax, but widely held companies are excluded from such liability. For closely held companies rates higher than those for widely held companies for assessment of tax have been fixed by the Finance Acts. In the Finance Act o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a Central, State or Provincial Act, or (c) any company to which this clause applies or any subsidiary company of such company where such subsidiary company fulfils the condition laid down in clause (b) of section 108 (hereinafter in this clause referred to as the subsidiary company), or (d) the public (not being a director, or a company to which this clause does not apply) ; (ii) the said shares were at any time during the relevant previous year the subject of dealing in any recognised stock exchange in India or were freely transferable by the holder to other members of the public; and (iii) the affairs of the company, or the shares carrying more than fifty per cent. of its total voting power were at no time, during the relevant previous year controlled or held by five or less persons. Explanation 1.- In computing the number of five or less persons aforesaid,-- (i) the Government or any corporation established by a Central, State or Provincial Act or company to which this clause applies [or the subsidiary company of such company] shall not be taken into account, and (ii) persons who are relatives of one another, and persons who are nominees of any other person together wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debentures. All other companies are public. All private companies are closely held companies. All companies owned by Government or the Reserve Bank of India or in which they or a corporation owned by the Reserve Bank of India hold not less than 40 per cent. of the shares are widely held companies. Public companies the affairs of which or the shares in which carrying more than 50 per cent. of its total voting power were at no time during the relevant previous year controlled or held by five or less persons are also widely held companies. Besides them, some other public companies are also widely held companies provided they satisfy certain conditions regarding ownership and transferability in respect of their shares carrying not less than 50 per cent. of the voting power. As regards ownership, it should have been acquired unconditionally and was throughout the relevant previous year beneficially held by the Government or a corporation established by Central or State Act or it should have been so acquired and held by any other public company or by any subsidiary company of such company and the whole of the share capital of such subsidiary company had been held by the parent company or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards the main effect of the tax structure prevailing there, there is criticism that it only encourages retention as opposed to distribution of profits. So goes the argument of counsel appearing for the petitioners. There was this classification in the previous Indian Income-tax Act. Section 23A was included in that Act by an amendment in 1930. That section empowered the Income-tax Officers to assess companies to super-tax on undistributed income and that in the case of closely held companies alone. The constitutional validity of that section arose for consideration in several decisions and it was held that it did not offend articles 14 and 19(1)(f). C. W. Spencer v. Income-tax Officer, Madras, is a decision to that effect of the Madras High Court. It was observed there: "The legal fiction enacted by section 23A does correspond to reality, if the veil of the legal personality of the corporate person, the company, is pierced, in order to look at the real person behind that corporate personality........... The basic assumption that underlies section 23A is the identity of the interests of the shareholders and the controlled company. That assumption is founded on reality. The shareho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of the shareholders as income received, by them, the section would prevent the members of such a group from evading by the exercise of their controlling power over the company, payment of tax on income that would have come to them ...... It is further quite clear that in the absence of a provision like section 23A, it is possible so to manipulate the affairs of a company of this kind as to prevent the undistributed profits from ever being taxed and experience seems to have shown that this has often happened. The following passage from Simon's Income Tax, second edition, volume 3, page 341, fully illustrates the situation : 'Generally speaking, surtax is charged only on individuals, not on companies or other bodies corporate. Various devices have been adopted from time to time to enable the individual to avoid surtax on his real total income or on a portion of it, and one method involved the formation of what is popularly called a "one-man company". The individual transferred his assets, in exchange for shares, to a limited company, specially registered for the purpose, which thereafter received the income from the assets concerned. The individual's total income for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... system of taxation or from effecting a change in its system in all proper and reasonable ways nor to require the States to adopt an ironclad rule of equality to prevent the classification of property for purposes of taxation or the imposition of different rates upon different classes. " As regards taxing statutes, the Supreme Court said in Khandige Sham Bhat v. Agricultural Income-tax Officer, Kasaragod : "........ the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the legislature in the matter of classification, so long as it adheres to the fundamental principles underlying the said doctrine. The power of the legislature to classify is of 'wide range and flexibility' so that it can adjust its system of taxation in all proper and reasonable ways." In Kunnathat Thathunni Moopil Nair v. State of Kerala: " It must, therefore, be held that a taxing statute is not wholly immune from attack on the ground that it infringes the equality clause in article 14, though the courts are not concerned with the policy underlying a taxing statute or whether a particular tax could not have been imposed in a different way or in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sage quoted above from Venugopala Ravi Varma Rajah v. Union of India was followed by the same court in T. G. Venkataraman v. State of Madras. In the latter case, as a result of certain legislative and executive measures, sales of cane jaggery were made liable to tax under the Madras General Sales Tax Act and sales in palm jaggery remained exempt from sales tax and the question was whether such classification and exemption were valid. After quoting the above passage from Venugopala Ravi Varma Rajah v. Union of India the Supreme Court held that, in imposing liability to tax on sales of cane jaggery and exempting palm jaggery, no unlawful discrimination denying the guarantee of equal protection was practised. It is true that the Companies Act does not make a distinction between widely held and closely held companies. But that does not mean that there is no real distinction between the two types of companies. The objects of the two Acts, the Companies Act and the Income-tax Act, are different. Unlike closely held companies, in the case of widely held companies, public have a predominant voice in their management. For tax evasion it is not unusual to find companies resorting to ploughi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance with human nature, members of a family do tend to act in concert, when it is to their common advantage, the test of relationship is extremely relevant and is not an extraneous consideration ..... Section 104 does not stand as a bar to anybody to enable him to associate with others in the formation of a company. What it does provide is that if the distribution of shares of any company is not sufficiently widespread, the company will have to pay some additional tax. Having regard to the economic objective of the State to bring about reduction in the inequalities of wealth amongst different sections of the public the classification of companies between widely-held and closely-held is fully justifiable." Economic developments involve differentiations and divisions. Tendencies to create monopolies have to be discouraged to prevent concentration of wealth to the common detriment. In the national interest there is reason for differentiating between widely held and closely held companies. There is, therefore, justification for the policy behind the higher rates of tax for closely held companies. Any way, it is not for the courts to evaluate the wisdom of the policy behind legislativ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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