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TMI Blog1958 (3) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee company. The managing agency firm consisted of 14 partners, seven of them being the directors, and the other seven partners held between them 41,659 ordinary shares. 9,899 ordinary shares were held by persons who were represented by the directors either as kartas or as guardians. 75 shares were held by the firm of Girdhardas Co. Ltd., which is a company to which the provisions of section 23A are applicable. The question that fell for determination by the Tribunal was whether on these facts it could be said that the company was a company in which the public were substantially interested. If the public were substantially interested, then section 23A had no application. The expression the public are substantially interested has been defined in section 23A and that is to be found in the explanation to sub-section (1), which provides : ...a company shall be deemed to be a company in which the public are substantially interested if shares of the company (not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in profits) carrying not less than twenty-five per cent. of the voting power have been allotted uncondi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lic did not have voting power to the extent of 25 per cent. ? The contention of the Department broadly is-which contention seems to have been accepted by the Tribunal-that we have here a group of shareholders who constitute the managing agency firm and this group between themselves hold 77,128 shares out of 1,00,000 shares. Therefore, it is clear that the public shareholding is less than 25 per cent. From this point of view it is unnecessary to consider the question with regard to the 9,899 shares or the 75 shares or any other shares, because if the view taken by the Department or the Tribunal is sound, then it is sufficient to dispose of this question on a mere consideration of the fact that you have a company here managed by a managing agency firm the partners of which between them hold more than 75 per cent. of the voting power of the shares. Now this is not a matter which is res integra. An almost identical question came up for consideration before this court and the court clearly laid down what constitutes the public and under what circumstances it could be said that certain shareholders were or were not members of the public. We had to consider this question in Raghuvans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law, therefore, was clearly laid down; and we make bold to say that there was no ambiguity as to what we had decided. It is surprising that, notwithstanding this decision, in the first place, the Department should have taken a view which is diametrically opposed to what we have decided. Instead of trying to establish by evidence, either direct or indirect, that the members of the managing agency firm other than the directors where controlled by the directors, the Department merely relied on a legal principle that, because the managing agents managed the company and because seven of the partners of the managing agency firm were directors of the company, therefore necessarily the other partners of the managing agency firm were controlled by the directors. This is exactly the proposition which we had emphatically rejected in Raghuvanshi Mill s case (supra). What surprises us more is that the Tribunal, before whom this decision was cited, has again decided on a principle which appeared to us in Raghuvanshi Mill s case (supra) to be erroneous. This seems to us to be the ratio of their decision : The group of 14 individuals collectively constitute this firm called Mangaldas Mehta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal to consider the decision of the Privy Council if it was at variance with our decision, but to follow our decision till the Supreme Court laid down the correct principle. But even when we turn to the Privy Council decision, it is difficult to understand the decision of the Tribunal. The main difference between the decision of the Privy Council and the decision in Raghuvanshi Mill s case (supra) is this. Whereas the distinction that we drew was between the directors and the public, the Privy Council drew the distinction between controlling interest and the public. We said that the public contemplated by section 23A is the public which is independent of the directors. What the Privy Council said was that the public contemplated was the public which was in contra-distinction to that element among the shareholders which had the controlling interest of the company, and, according to the Privy Council, if a shareholder had 51 per cent. interest, he had the controlling interest, and anybody else who was not controlled by that shareholder was a member of the public. The Privy Council went further and said that, in order to establish that some other shareholder or shareholders we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his is what their Lordships say : It was said in the course of the argument that if the requisite percentage of voting power is not held by one individual but held by more than one individual, a controlling interest cannot be said to arise unless it is shown that the individuals who together hold the requisite percentage are acting in concert. In the case before their Lordships over 51 per cent. of the voting power was held by the respondent, a single individual, and consequently the question does not arise. Their Lordships express no opinion upon the questions which would arise when the requisite percentage is not held by a single individual but only by a group, or by overlapping groups, of individuals. Therefore, in essence Mr. Palkhivala is right, that to the extent that the Privy Council decides that directors must be considered as members of the public, the decision helps him and the shares held by the directors cannot be considered per se to be held by persons who are not members of the public. But the Privy Council decision is relied upon by the Tribunal for a different purpose and the view that they have taken is that, just as in the Privy Council case the directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to accede to the application of the Department, we will really permit the Department to have a second innings. Our attention has also been drawn to what the House of Lords said in Fattorini Ltd. v. Inland Revenue Commissioners [1943] 11 ITR (Suppl.) 50 at p. 60 that this was a highly penal section ; and the consequences of applying section 23A undoubtedly are very serious. If, therefore, the Department with the knowledge of the law, with the knowledge of what facts have to be established and what evidence has to be led, does not choose to do so, it cannot at the reference stage ask this court to call for a supplemental statement of the case in order to permit it to make up the lacuna which exists in the case, and make section 23A applicable to the assessee. Section 66(4) strictly applies when we find that we cannot dispose of a reference in the absence of additional facts. Now the question that we have to decide is whether, on the facts and in the circumstances of the case, the assessee company is a company in which the public are substantially interested for the purposes of section 23A of the Act; and on the facts and circumstances which appear from the statement of the case we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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