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TMI Blog1950 (3) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... al Gagalbhai and Bhagubhai Mafatlal died on the 19th of July, 1944, and the 30th of September, 1944, and during the material period the shares which these two persons held were not transferred to any other shareholder, and therefore, according to Sir Jamshedji, in order to determine whether the directors had a controlling interest in the company or not, we must exclude 1,332 shares held by Mafatlal Gagalbhai and 5,604 shares held by Bhagubhai Mafatlal. If these shares were excluded, then undoubtedly the directors would have the majority of votes and, therefore, the assessee company would be a director-controlled company. In order to appreciate this contention we have to consider what is the true connotation of the expression used in the Excess Profits Tax Act with which we are concerned. In order that the company should be director-controlled, the directors must have the controlling interest in the company, and the question is, what exactly does the expression controlling interest mean. It is well settled that the interest which the directors must have need not be a beneficial interest in the shares of the company. Directors may be put on the register of a company as trustees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is from the strength of the holding of the shares that the voting strength has got to be determined. If the directors controlled a majority of such votes, then no further question arises. If they do not control a majority of such votes, then also no further question should arise because it would be impossible to investigate into what the position would be with regard to shareholders who control the majority of votes as to whether they choose to exercise all their votes or not. In this particular case, which we are considering, the total number of shares of the company is 15,600. Each share represents one vote, and therefore the total number of votes are 15,600. At the material date the directors could only control 7,471 votes because they held 7,471 shares. That was not the majority of the votes. Is it permissible to us to inquire as to whether the votes held by shareholders other than directors were effective or not during the material period ? Could we ask ourselves the question as to whether those votes were exercisable or not ? If we were allowed to ask ourselves that question, it is difficult to lay down any limit to such an inquiry. In this particular case Sir Jamshedji r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shedji has relied. Lord Russell at page 9 says : When the section speaks of directors having a controlling interest in a company, what it is immediately concerned with in using the words 'controlling interest' is not the extent to which the individuals are beneficially interested in the profits of the company as a going concern or in the surplus assets in a winding-up, but the extent to which they have vested in them the power of controlling by votes the decisions which will bind the company in the shape of resolutions passed by the shareholders in general meeting. Therefore, what is emphasised by the learned Law Lord is the power of controlling by votes the decision of the company. But the learned Law Lord does not refer at all to the distinction which Sir Jamshedji seeks to make that the votes must be effective votes, and votes which are not exercisable or which are not effective must be excluded from the consideration whether the directors controlled the votes or not. Then turning to Lord Simonds, the observations relied on are at page 15, and Lord Simonds asks himself the question, What constitutes a controlling interest in a company ? and this is the answer that he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be applied is the number of shares which the directors hold and it is only by reason of that holding that the directors must be in a position to control the affairs of the company. The other case is reported in the same volume, Commissioners of Inland Revenue v. B.W. Noble Ltd. [1926] 12 Tax Cas. 911, and the judgment of Mr. Justice Rowlatt is to be found at page 926, and Mr. Justice Rowlatt observed that the phrase controlling interest had a certain well known meaning and according to the learned Judge it meant the man whose share holding in the company was such that he was the shareholder who was more powerful than all the other shareholders put together in general meeting. Here again, the power of the shareholder was to be judged, not by any other circumstance, not by any other consideration, but by his holding of shares. In this particular case Mr. Justice Rowlatt held that the vote which the chairman had as a casting vote under the articles of association must be considered in deciding whether the directors had a controlling interest or not. Sir Jamshedji says that Mr. Justice Rowlatt actually considered what happened at the meeting because he had considered the possibil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecuted a valid proxy. The only narrow question that arose for his determination was whether the power-of-attorney executed by the shareholder validly transferred the voting right to the director, and that question he decided as I have already indicated. In the other case the two directors had 500 shares each out of 2,000 shares and there was a provision in the articles by which the directors could appoint one of the directors to be the chairman of the company, in which case he would have a casting vote. If no such appointment was made, the chairman had to be elected at the general meeting, and the question was whether the directors could be considered to have a controlling interest inasmuch as they were in a position to nominate one of the directors as chairman, who would then have a casting vote and would thereby have a majority of votes. The Special Commissioners held that they ought to have regard only to the facts as they existed at the general meetings of the company, and that the casting vote at those meetings was exercisable by the person who was in fact chosen as the chairman, and who was not a director, and that therefore the company was not a director-controlled company d ..... 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