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TMI Blog1960 (4) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 3,50,000. Under the articles of association, the holder of a preference share was entitled to obtain a cumulative dividend of 7 1/2 per cent on the shares held by him. But he was not entitled to any further rights in the profits made by the company. In the meetings of the company, his position was equal to that of the holder of an ordinary share. There was no difference in the voting powers of the preference and ordinary shareholders. The company was managed by a partnership concern. It is sufficient, for the purpose of this reference, to state that, after the death of Nageswara Rao the firm of partners, who managed the business, consisted of Ramayamma, his widow, Kamakshi Amma, his daughter, Sambu Prasad, his son-in-law, and Ramachandra Rao, the brother of Ramayamma. Six persons were in the directorate of the company. Amongst them, were Sambu Prasad and Ramachandra Rao; the others were strangers. During the period, to which this reference relates, namely, 1st April, 1946, to 31st March, 1949, the share holdings did not undergo any substantial change. Of the 3,000 preference shares, not more than 382 were held by the directors; the balance was held by persons other than th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he liberty of declaring any higher dividend, till the reserve funds was oakum accumulated to the extent of ₹ 3,00,000. Two further reasons were given for not declaring dividends commensurate with the total profits earned, (1) that, according to the provisions of the Public Companies (Limitation of Dividends) Ordinance, 1948, which became effective on October 29, 1948, the company was precluded from declaring any dividend in excess of six per cent; and (2) that the Ordinance was followed by the Public Companies (Limitation of Dividends) Act 1949, which limited the declaration of dividends to six per cent. 3. The Income Tax Officer overruled the contentions of the company, and passed an order under section 23A deeming the undistributed profits as having been distributed amongst the shareholders. This was affirmed by the Appellate Assistant Commissioner on appeal, and by the Appellate Tribunal on further appeal. The following questions were, thereupon, referred for the decision of this court under section 66(1) : (1) Whether section 23A of the Indian Income Tax Act is intra vires ? (2) Whether the serving of the orders on April 1, 1953, for the assessment years 1947-4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charging provision. No period of limitation has been prescribed in the Act for initiation of proceedings under section 23A by the Income Tax Officer. It may be that, after the order under section 23A is passed, if the shareholders are sought to be assessed on the dividends which are deemed to have been received by them, the time limit prescribed under section 34 would apply. The mere circumstance that an actual assessment on the shareholder consequent on a declaration under section 23A would be barred, is no reason for imposing any such time limit for initiation of proceedings under section 23A, when the statute provides no such limit. This was the view of the Bombay High Court in Kasturchand Ltd. v. Commissioner of Income Tax. This view was accepted in Spencers case to which we have made reference. Recently, we had occasion to consider in W. P. No. 886 of 1957, whether the time limit prescribed under section 34 would apply to the assessment proceedings, consequently upon the order under section 23A. We held that the period of four years prescribed in section 34 would apply in a case of assessment, consequent upon an order under section 23A. That does not mean that, for the proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for Income Tax purposes and reduced by the amount of Income Tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose shall be included in the total income of such shareholder for the purpose of assessing his total income : ... Provided further that this sub-section shall not apply to any company in which the public areas substantially interested... Explanation. - For the purpose of this sub-section... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the explanation and, if a company does not come within the terms of the explanation, it could not be held to be one in which the public have a substantial interest. To put it in other words, the word deemed in the explanation is sought to be made equivalent to means . Pursuing that line, the learned counsel contended that, in the computation of the voting power, the ordinary shares alone should be taken into account, as preference shareholders were expressly excluded by the terms of the explanation. If that test were to be applied, Ramayamma would have 89 per cent of the ordinary shares. This would make her a person in control of the company, and the rest of the shareholders who can be said to be members of the public, would not be entitled to 25 per cent of the ordinary shares. 12. Prima facie, the terms of the explanation cannot be construed as limiting the operation of the third proviso only to those companies, which come under the explanation. The use of the word deemed creates a fiction. A company, which cannot in reality be styled as one in which the public are substantially interested, is deemed to be such by the explanation. I can only be an addition to the categ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the law at the date of the passing of the Act - not only the common law, but the law as it then stood under previous statues in order properly to interpret the statue in question. 15. Section 23A was first enacted in 1930, following legislation in England. The object of the Act and the mischief it was intended to prevent have been considered in Spencers case. Shortly stated, it was enacted to hit at the various devices adopted by the individuals to avoid super-tax. Originally, super-tax was charged only on individuals; the companies were not liable, at any rate, to the extent to which the individuals were made liable. This led to an individual adopting the device of transferring his assets to a company, very often a one man company. The income of the individual would then be depending on the amount of dividend declared and distributed to him depending on the amount of dividend declared and distributed to him by the company. There was no obligation on the company to declare dividends. The individual could regulate the declaration of dividends, so as to be within the limits which would enable him to avoid super-tax. The undistributed profits could be accumulated. Devices were ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have set out above, explain the real possibilities of evasion by a person or group of persons by resort to the device of a corporate personality. The income does in reality belong to them, and is under their control all the time. The evasion of liability to super-tax is equally real. That in such companies there might be an individual member or two in a minority unable to force a factual distribution at any given point of time, cannot affect the reality of the situation which section 23A was designed to meet. The basic assumption that underlies section 23A is the identity of the interests of the shareholders and the control company. That assumption is founded on reality. The shareholder created a veil of a corporate personality as legally distinct from his juristic personality. That was legal. The Legislature countered that with a legal fiction. That was also legal. If both are forgotten the taxpayer and the taxgatherer proceed on the realities of the situation. The profits are taxed. 17. In the case of controlled companies, an order under section 23A could be avoided only by satisfying the Income Tax Officer that, having regard to the loss incurred by the company in earlier y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons. In Commissioner of Income Tax v. Jeewanlal Ltd. the Supreme Court has observed that, in common parlance, a person is said to have a controlling interest in a company when such a person acquires, by purchase, or otherwise, the majority of the vote carrying shares in that company, for the control of the company resides in the voting powers of its shareholders. It was held in that case that the directors of the company might be regarded as having a controlling interest in the company, when they held the majority of shares which, on the articles of association of the company, carried the right to vote at the meetings. In Raghuvanshi Mills Ltd. v. Commissioner of Income Tax the Bombay High Court held that the expression public , in the explanation to section 23A of the Indian Income Tax Act was used in contra-distinction to the directors, and that it could not be given its ordinary natural meaning. It was held that if members of the public, who were shareholders, were under the control of the directors, and if their voting power was controlled by the directors, the votes cast by them being not their own votes but in substance the votes of the directors, then, for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the proviso. The Privy Council held that, in the absence of evidence that the brother had also joined with the respondent in the case, the mere relationship would not be sufficient to consolidate the shares of the brothers, and view the matter as one in which, as against the rest of the public, the brothers had 99.96 per cent of the shares, making the company one in which the public were not substantially interested. The decision of the privy Council was considered in Jubilee Mills Ltd. v. Commissioner of Income Tax. The learned judges of the Bombay High Court adhered to their own view in Raghuvanshi Mills Ltd. v. Commissioner of Income Tax in preference to the one adopted by the Privy Council. We, however, prefer to follow the decision of the Privy Council. 22. On that conclusion, it would follow that, before section 23A can be applied to a public limited company, it has to be seen whether any person is in a position to control the company, be he a director or member. There may be cases in which, though the shares are distributed, a person will have a factual control over them. Such a case would depend on the existence of facts which establish a de facto control. But, where n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax v. H. Bjordal the brother of the major shareholder had held shares commanding more than 25 per cent of the voting power. The Privy Council held that the company was one in which the public were substantially interested. We are of opinion that the voting power for the purpose of the explanation would depend on the articles of association. In the present case, there is no distinction between a preference shareholder and an ordinary shareholder, in the matter of voting rights. Therefore, the voting power should be ascertained with respect to both preference and ordinary shares held. Ramayamma has got only about 40 per cent of the total number of shares. She cannot, therefore, be held to be in a position to control the company. Even combining the shares held by Ramayamma, her daughter, her brother and son-in-law, the total percentage is only about 47 per cent. Therefore, even if it were to be held that the third proviso of the section is governed by the explanation thereto in its entirety, the position is that the public are having more than 25 per cent of the voting power and, therefore, the company is one in which the public would be substantially interested. 26. The r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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