9911796707
TMI Blog1998 (7) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was a wholly-owned subsidiary of a company incorporated in the United Kingdom known as Gulf Oil ('Great Britain) Ltd., London (hereinafter for the sake of convenience, referred to as "the U.K. company"). The said U.K. company itself was also a subsidiary of another company incorporated in the U.S.A., viz., Gulf Oil Corporation, Pittsburgh (hereinafter for the sake of convenience, referred to as "the U.S. company"). In the course of assessment of the income of the assessee-company under the IT Act, 1961, for the asst. yrs. 1971-72 to 1975-76 a controversy arose in regard to the appropriate rate of income-tax applicable to it. The rates of tax applicable for the asst. yr. 1971-72 are prescribed in the Finance (No, 2) Act, 1971 (hereinafter referred to as "the Finance Act"). para F of the Finance Act contains the rates applicable to "companies" other than the LIC of India. For the purpose of rate of income-tax, companies are divided into two broad categories, viz. "domestic company" and "company other than domestic company". Domestic companies are again sub-divided into two categories, viz., (i) a company in which the public are substantially interested, and (ii) not a company in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As is evident from a reading of question No. 1 itself, the real controversy is whether the assessee-company was a company in which the public are substantially interested as defined in s. 2(6)(a) of the Finance Act for the purpose of the First Schedule to the said Act. The First Schedule to the Finance Act deals with the rates of income-tax applicable to different categories and sub-categories of assessees. In sub-s. (6) of s. 2 of the Finance Act, certain expressions have been defined for the purpose of the First Schedule. Clauses (a), (b) and (c) thereof define a company in which the public are substantially interested, a domestic company, and an industrial company, respectively. In cl. (e) of sub-s. (6) of s. 2, it has been further provided that the words and expressions used in s. 2 or in the First Schedule to the said Finance Act which are not defined in s. 2(6) of the Finance Act but are defined in the IT Act shall have the meanings, respectively, assigned to them in that Act. Sub-s. (6) of s. 2, insofar as it has a bearing on the controversy in this case, reads as below : (6) For the purposes of this section and the First Schedule,--- (a) 'company in which the public are s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case, is set out below : " Paragraph F In the case of a company, other than the LIC of India established under the Life insurance Corporation Act, 1956 (31 of 1956), Rates of income-tax I. In the case of a domestic company (1) where the company is a company in which the public are substantially interested, (i) in a case where the total income does not exceed Rs. 50,000 45% of the total income; (ii) in a case where the total income exceeds Rs. 50,000 &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; pursuance of an agreement made by it with the Indian concern after the 29th Feb., 1964 and where such agreement has, in either case, been approved by the Central Government 50%; (ii) on the balance, if any, of the total income 70%" 5. It may also be expedient at this stage also to set out s. 108 of the IT Act which has been incorporated by reference in the definition of "company in which the public are substantially interested" contained in s. 2(6)(a) of the Act. Sec. 108 reads : "108. Savings for company in which the public are substantially interested--- Nothing contained in s. 104 shall a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) if it is a company owned by the Government or the Reserve Bank of India or in which not less than 40% of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank; or (aa) if it is a company which is registered under s. 25 of the Companies Act, 1956 (1 of 1956); or (ab) if it is a company having no share capital and if, having regard to its objects, the nature and composition of its membership and other relevant considerations, it is declared by order of the Board to be a company in which the public are substantially interested : Provided that such company shall be deemed to be a company in which the public are substantially interested only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration; or (b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely : (A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantially interested also includes "a subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year". Apparently, the object of redefining the expression "company in which the public are substantially interested" in s. 2(6)(a) of the Finance Act for the purpose of the First Schedule when the very same expression has been defined in the IT Act in s. 2(18), is to widen its scope so as to bring within its ambit a wholly-owned subsidiary company of "such company" also. In other words, the benefit of the lower rate of income-tax under cl. (1) of sub-para I of para F of the Finance Act applicable to a domestic company "which is a company in which the public are substantially interested" has also been extended to a wholly-owned subsidiary of such company. This clearly and unambiguously presupposes that the parent company is a domestic company in which the public are substantially interested, If the parent company is not a domestic company, sub-para I of para F will not apply to it. In that event, the question of its applicability to a wholly-owned subsidiary of such c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitions contained in s. 2(6) of the Finance Act. The Tribunal did not consider this aspect of the matter and straightaway proceeded to interpret s. 108 of the IT Act. Sec. 108 of the IT Act will undoubtedly be relevant but not independently of para F of the First Schedule and s. 2(6)(a) of the Finance Act. Sec. 108 has been incorporated by reference in the special definition of "company in which the public are substantially interested" contained in s. 2(6)(a) of the Finance Act only for the limited purposes of the said section and the First Schedule. This act of the legislature cannot be an exercise in futility. The legislature definitely intended to give a different meaning to the expression "company in which the public are substantially interested" for the purposes of interpretation of the First Schedule to the Finance Act than the one given under the IT Act by the definition contained in s. 2(18) of the Act. Sub-paras I(1) and 1(2) of para F of the First Schedule to the Finance Act deal with the rates of income-tax applicable to the two categories of domestic companies. In our opinion, it is permissible for this Court to examine the question referred to it in the proper perspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was "income from business" and accordingly dismissed the appeal filed by the Revenue. On a reference at the instance of the Revenue, the Revenue for the first time contended before the High Court that the Tribunal laboured under an erroneous assumption that liability to additional surcharge was not attracted if the sum of Rs. 19 represented business income and that whether that amount was business income or income from other sources, the liability to additional surcharge was attracted. The assessee submitted that it was not open to the Revenue to take the new stand inasmuch as it had agreed before the Tribunal that liability to additional surcharge was not attracted in case the amount constituted business income. On an examination of the relevant Finance Act, the High Court held that the assumption made by the AAC and the Tribunal was erroneous and that, in such a situation, it possessed the power to correct the error. The assessee appealed to the Supreme Court and contended that the High Court had no such jurisdiction. The Supreme Court, affirming the decision of the High Court, held that the High Court cannot be called upon to act on an erroneous assumption of law and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue is that it falls in cl. (2) of sub-para I. 13. We should, therefore, concentrate on the language of cl. (1) of sub-para I of the para F to the First Schedule to decide whether the assessee-company meets the description of the "company" specified therein. The said cl. (1) of Sub-para I is in the following terms : "Rates of income-tax I. In the case of a domestic company (1) where the company is a company in which the public are substantially interested,- (i) in a case where the total income does not exceed Rs. 50,000 45% of the total income; (ii) in a case where the total income exceeds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax under the IT Act for the assessment year commencing on the 1st April, 1971, and has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preferences shares) payable out of such income in accordance with the provisions of s. 194 of that Act. Evidently, the U.S. and U.K. companies were not domestic companies. It is also not the case of the assessee that any of these companies during the assessment year commencing on the 1st April, 1971, was liable to pay income-tax in India under the IT Act. The contention of the assessee is that the U.S. company being a company in which the public were substantially interested within the meaning of s. 108 of the IT Act, it would fall within s. 2(6)(a) of the Finance Act. The Tribunal has also proceeded on the same assumption that the U.S. company was a company in which the public were substantially interested within the meaning of s. 2(6)(a) of the Finance Act. In our opinion, the question whether the U.S. company is a company in which the public were substantially interested will be relevant only if it is a domestic company. According to the assessee, it is not necessary fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate changes". It was observed . "Secs. 23, 24 and 25 (of the Land Acquisition Act, 1894), lay down the principles for ascertaining the amount of compensation payable to a person whose land has been acquired. We do not see any difficulty in applying those principles for paying compensation in the matter of requisition of land. While in the case of land acquired, the market value of the land is ascertained, in the case of requisition of land, the compensation to the owner for depriving him of his possession for a stated period will be ascertained, It may be that appropriate changes in the phraseology used in the said provisions may have to be made to apply the principles underlying those provisions." It was further observed: "If instead of the word 'acquisition' the word 'requisition' is read and instead of the words 'the market value of the land' the words 'the market value of the interest in the land' of which the owner has been deprived are read, the two sub-sections of the section can, without any difficulty, be applied to the determination of compensation for requisition of a land. So too, the other sections can be applied". 16. We do not propose to refer to othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the said company were at all material times during the relevant years subject to dealings in the stock exchange, New York and other stock exchanges and were freely transferable by the holders to the other members of the public. Counsel for the assessee contended before us that as controversy did not arise before the Tribunal or any of the authorities below or it was never an issue raised by the Revenue before any of the authorities below that to fall within s. 2(6)(a) of the Finance Act r/w s. 108 of the IT Act, the U.S. company and the U.K. company should also be domestic companies within the meaning of s. 2(6)(b) of the Finance Act, the necessary facts were not brought by the assessee on record to that effect. We asked learned counsel for the assessee to inform us as to whether it was the case of the assessee that the U.S. company and the U.K. company were also domestic companies within the meaning of s. 2(6)(b) of the Finance Act. Counsel expressed his inability to make any statement in that regard at this juncture. 18. We have considered the objections of learned counsel for the assessee. We have held that in order to give the benefit to the assessee-company of the rates of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en defined in the IT Act. There is no dispute about the fact that the said expression is most commonly used in the Companies Act. Under the circumstances, the question that arises for consideration is whether the meaning of the said expression given in the Companies Act can be applied for the purposes of s. 2(6)(a) of the Finance Act r/w cl. (b) of s. 108 of the Act. The expression "subsidiary company" has been defined in s. 4 of the Companies Act as under : "4. (1) For the purposes of this Act, a company shall, subject to the provisions of sub-s. (3), be deemed to be a subsidiary of another if, but only if,--- (a) that other controls the composition of its board of directors; or (b) that other--- (i) where the first-mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company; (ii) where the first-mentioned company is any other company, holds more than half in nominal value of its equity share capital; or (c) the first-mentioned company is a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 144 ITR 57 (SC) : TC 19R.493, wherein the Supreme Court observed : " There is no reason why the sense conveyed by the law relating to contracts should not be imported into the definition of 'speculative transaction"'. In that case, the controversy pertained to the true meaning of the expression "speculative transaction" which is defined in sub-s. (5) of s. 43 of the IT Act, 1961, to mean a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts. The Supreme Court referred to the provisions of ss. 63 and 73 of the Contract Act for interpreting the above expression. We do not propose to multiply authorities on this point in view of the clear decisions of the Supreme Court in Howrah Trading Co. Ltd. vs. CIT and CIT vs. Shantilal (P) Ltd. 22. Following the ratio of the above decisions of the Supreme Court, once we import the meaning given to the expression "subsidiary company" for interpreting cl. (b) of s. 108 of the IT Act, the conclusion is inevitable that a sub-subsidiary which fulfils the requirements of that clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in cl. (1) of sub-para I of para F of the First Schedule to the Finance (No. 2) Act, 1971, which is applicable to "domestic companies", every company, whether a holding company as well as the subsidiary or subsidiary of a subsidiary company, must be a domestic company and should also meet the requirements of s. 2(6)(b) of the Finance Act, r/w s. 108 of the IT Act, 1961. If a company is not a domestic company, cl. (1) of sub-para I of para F of the Finance Act will not be applicable to such a company and in that event its benefit will not be available to its subsidiary or sub-subsidiary also. If the subsidiary company, which is an Indian company, is a domestic company, it will get the benefit of the rates prescribed for that category of companies viz., not a company in which the public are substantially interested, In other words, in order to get the benefit of the lower rates of income-tax applicable to a company in which the public are substantially interested in the capacity of a subsidiary of a company in which the public are substantially interested by reference to cl. (b) of s. 108 of the Act, it is necessary that the parent company or the holding company should also be a do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. As such the question of denial of liability did not arise. As regards the second contention of the assessee that it had a reasonable cause, the Tribunal held that it was without merit as in its opinion, once the assessee had admittedly delayed filing of the return beyond the time allowed the provisions for charging of interest were automatically attracted and as there is no separate right of appeal against the charge, the assessee was not entitled to agitate the same by way of an appeal. In view of the above factual position, if the assessee can succeed in satisfying the Tribunal that it was a company in which the public are substantially interested in the manner set out above, the contention of the assessee that no interest was at all leviable might amount to denial of the liability and an appeal against levy of interest would be maintainable. But if the decision on that count is against the assessee and it is found that the assessee is chargeable to interest, the denial of the liability on the ground of existence of reasonable cause will not fall within the ambit of denial of the liability. It will tantamount to going into the merits of the levy of interest which is not permis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee claims to be a company in which the public are substantially interested within the meaning of s. 2(6)(a) of the Finance Act. The Revenue disputes the claim of the assessee. 4. The basic controversy arising in this reference is as to whether the assessee is "a company referred to in s. 108(b) of the IT Act, 1961" for purpose of the Finance (No. 2) Act, 1971, and the First Schedule appended thereto. The assessee is an Indian company. The assessee is thus a domestic company within the meaning of the expression "domestic company" as defined in S. 2(6)(b) of the Finance (No. 2) Act, 1971. The assessee is wholly owned subsidiary of Gulf Oil (Great Britain) Ltd., London, hereinafter referred to as the "U.K. company" for the sake of convenience. At all material times, all the shares of the assessee-company were held by the U.K. company. The U.K. company is a wholly owned subsidiary of Gulf Oil Corporation, Pittsburgh, hereinafter referred to as the "U.S. company". The U.S. company does not hold any share of the assessee-company. The assessee is not a subsidiary of the U.S. company. There is no dispute that the U.S. company is a company in which the public are substantially interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1971, provides that "all other words and expressions used in this section and the First Schedule but not defined in this sub-section and defined in the IT Act shall have the meanings, respectively, assigned to them in that Act". Both the Acts above referred to are statutes in pari materia. It is necessary to refer to some other provisions of the two Acts also for the purpose of interpreting s. 2(6)(a) of the Finance (No. 2) Act, 1971, and s. 108 of the IT Act, 1961, as indicated below. Sec. 2(17) of the Act defines expression "company" so as to include any body corporate incorporated by or under the laws of a country outside India. The definition of expression "company" shall have to be treated as incorporated in ss. 108(a) and 108(b) of the IT Act, 1961, wherever the expression "company" appears therein unless there is something in the context or operative part of s. 108 to compel the Court to ignore the said definition. Sec. 2(18) of the Act defines expression "company in which the public are substantially interested". In view of the contentions urged at the Bar, it is necessary to refer to the definition of the expression "domestic company" as set out in s. 2(6)(b) of the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; (i) in a case where the total income does not exceed Rs. 50,000 45% of the total income; (ii) in a case where the total income exceeds Rs. 50,000 55% of the total income..." The Court is required to consider and decide as to whether the assessee fulfils the prescribed conditions so as to be entitled to avail of the above referred to rate of income-tax prescribed by s. 2 of the Finance (No. 2) Act, 1971, r/w para F-I(1) of the First Schedule appended thereto. If the assessee is not so entitled, the rate of chargeable tax would be higher than the above referred to rate. 7. Before I discuss the rival contentions of learned counsel urged at the Bar, it is necessary to preface the discussion by formulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Companies Act (1 of 1956), defines the expression "subsidiary company" for purposes of the Companies Act, 1956. According to the said definition, a subsidiary of the subsidiary is deemed to be a subsidiary of the holding company for purposes of the Companies Act. The expressions "holding company" and "subsidiary company" are not defined by the IT Act, 1961. The expression "subsidiary company" used in s. 108(b) of the Act should be, therefore, interpreted to mean and include a sub-subsidiary company also. If s. 4 of the Companies Act (1 of 1956), is treated as incorporated in s. 108(b) of the IT Act, 1961, for the purpose of interpreting the expression "subsidiary company", it would become clear that the assessee-company fans under s. 108(b) of the Act although it is not a subsidiary of the parent company, i.e., the U. S. company as such. 9. I am not impressed by the submissions of learned counsel. I see no merit in these submissions. I shall discuss the contentions urged at the Bar little later. 10. Learned counsel for the Revenue has submitted as under : (a) The U.S. company falls under s. 108(a) of the Act. The U.K. company being the wholly owned subsidiary of the U.S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1961. Learned counsel wants the Court to read to s. 108(b) of the Act as under : "to a subsidiary company of such a 'domestic company' if the whole of the share capital. . . " Sec. 108(a) of the Act does not limit its applicability to a domestic company. Sec. 108(b) of the Act does not limit its applicability to subsidiary of a domestic company. Secs. 108(a) and 108(b) of the company use the expression "the company", the said expression having been defined by s. 2(17) of the Act. This contention was never urged by anyone before any of the authorities below. Mr. Dastur, learned counsel for the assessee, submitted that this aspect of the controversy was not covered by the question referred to this Court and did not arise out of the order of the Tribunal. On the merits, Mr. Dastur submitted as under Sec. 2(6)(a) of the Finance (No. 2) Act, 1971, defined company in which the public are substantially interested as a company referred to in s. 108 of the IT Act, 1961. The two Acts contemplate uniform construction of s. 108 of the IT Act, 1961, for purposes of both the Acts and not different construction thereof for the purpose of the Finance Act. There was no warrant for restricting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act for the purpose of its applicability is not satisfied. The shareholding of the assessee-company is not held by a company falling under s. 108(a) of the Act, i.e., the U.S. company in this case. The U.K. company holds the shares of the assessee in its own right and title as a separate corporate body and not as nominee of the U.S. company. A person can be considered as a nominee of another only if the alleged nominee has no beneficial title to the asset. In this case, the U.K. company as a separate legal entity is entitled to shares held by it in the assessee-company in its own right and title and it has legal and beneficial interest both in the shares of the assessee-company. In theory of law, the assets of the U.K. company do not belong to the U.S. company merely because of the control exercised by the U.S. company over affairs of the U.K. company. The separate corporate personality of the U.K. company as well as the U.S. company cannot be ignored. Thus, on a plain reading of s. 2(6)(a) of the Finance (No. 2) Act, 1971, and ss. 108(a) and 108(b) of the Act, I have reached the conclusion that the assessee cannot be treated as a company referred to in s. 108 of the IT Act, 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot fan under s. 108(b) of the Act. In my opinion, there is no scope for introducing such fiction in s. 108(b) of the Act. All the prescribed conditions must be plainly and clearly satisfied if an assessee desires to avail of s. 108(b) of the IT Act, 1961. Sec. 4 of the Companies Act, 1956, reads as under : "4. Meaning of 'holding company' and 'subsidiary'.-(1) For the purpose of this Act, a company shall, subject to the provisions of sub-s. (3), be deemed to be a subsidiary of another if, but only, if,--- (a) that other controls the composition of its board of directors, or (b) that other--- (i) where the first-mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company; (ii) where the first-mentioned company is any other company, holds more than halt in nominal value of its equity share capital; or (c) the first-mentioned company is a subsidiary of any company which is that other's subsidiary. Illustration Company B is a subsidiary of compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made for the following year under this Act. The question before the Court was as to whether the assessee was a "shareholder" within the meaning of s. 18(5) of the Indian IT Act, 1922, so as to be entitled to avail of the said provision, The apex Court held that according to the common meaning of the expression shareholder, it was required that the name of the person claiming to be a shareholder must be on the register of the company. In this context, the Supreme Court took assistance also of the meaning of the word " shareholder" as used in the Companies Act (1 of 1956). With respect, this case has no relevance for the purpose of interpretation of s. 108(b) of the IT Act, 1961, when the said section is sought to be interpreted in conjunction with s. 4 of the Companies Act (1 of 1956). Learned counsel for the assessee also relied upon the judgment of this Court in the case of CIT vs. Swadeshi Match Co. (1982) 26 CTR (Bom) 240 : (1983) 139 ITR 833 (Bom). In this case, the Court was required to interpret Explanation II of para D of Part II of the First Schedule to the Finance (No. 2) Act of 1962 . The Court was required to find out as to whether the concerned company held more than h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Aluminium Corporation Ltd. (Hindalco) had established a factory in Uttar Pradesh for manufacture of aluminium and Renusagar Power Co., was a wholly owned subsidiary of Hindalco. The question before the Court was as to whether Hindustan Aluminium Corporation Ltd. was consuming the self-generated power within the meaning of s. 3(1)(c) of the U.P. Electricity (Duty) Act, 1952. Having regard to the totality of facts and circumstances of the case and the conduct of the parties including the Electricity Board, the Supreme Court held that Renusagar's power plant must be treated as the "own source of generation" of Hindalco and Hindalco was liable to pay electricity duty on this basis as permissible under s. 3(1)(c) of the U.P. Electricity (Duty) Act, 1952. With respect, this case has no relevance for the purpose of resolving controversy arising in this case. 18. Learned counsel for the assessee cited several other cases. It does not appear to me to be necessary to refer to all these cases as none of these cases appear to have any bearing on the issue before the Court. 19. One more aspect of the problem was debated at the Bar as indicated below: The question to be asked is as to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the IT Act, so as to prescribe additional conditions for applicability of the said section. Sec. 108(b) of the IT Act must be interpreted on its own terms. The construction of s. 108(b) of the Act has to be uniform for purposes of the IT Act as well as the Finance Act. Sec. 2(17) of the IT Act must be read in s. 108 of the Act wherever the expression 'company" appears therein. The heading and sub-heading affixed to para F of the Schedule are for purposes of applying the prescribed rate of tax to specified categories of assessees. Sec. 108(b) of the Act does not state that the said section shall be applicable only to subsidiary companies of which the holding company is a domestic company. It is therefore irrelevant to enquire as to whether the U.S. company or the U.K. company was a "domestic company" within the meaning of the said expression as defined in s. 2(6)(b) of the Finance Act, 1971. If the definition of the expression "domestic company" is to be read in s. 108(b) of the Act, for purposes of further restricting the applicability of s. 108(b) of the Act to subsidiaries, it would lead to anomaly. The definition of the expression "company in which the public are substantially i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is reference. S.N. VARIAVA, J.: This is a reference under s. 256(1) of the IT Act, 1961, whereby the Tribunal had referred the following questions of law to this Court for opinion : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-company was not a company in which public are substantially interested as defined in the Finance (No. 2) Act of 1971 for the purpose of the First Schedule to the said Finance Act? 2. Whether, on the facts and in the circumstances of the case, the Tribunal rightly held that no appeal lies against charge of interest under s. 139 of the Act ?" The reference was heard by a Division Bench of this Court. The two Judges took differing views. Therefore, the reference has been referred to this Court. 2. Under s. 259 of the IT Act, in cases of difference of opinion, the judges should state the point of law upon which they differ. The case should then be heard upon that point of law only by one or more Judges of the High Court. Unfortunately, the point of law upon which the Judges differed has not been stated. It is now not possible to have the point of law stated as one of the learned Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; "Para F In the case of a company, other than the LIC of India established under the Life Insurance Corporation Act, 1956 (31 of 1956),- Rates of income-tax I. In the case of a domestic company- (1) where the company is a company in which the public are substantially interested,- (i) in a case where the total income does not exceed Rs. 50,000 45% of the total income; (ii) in a case where the total income & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical services received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 29th February, 1964, and where such agreement has, in either case, been approved by the Central Government 50%; (ii) on the balance, if any, of the total income 70%" 6. Thus, if the assessee is a "domestic company" and is a "company in which the public are substantially interested" then under clause I(1)(ii) the rate applicable would be 55% of the total income. This is so because admittedly the total income of the assessee-company exceeds Rs. 50,000. If, on the other hand, the assessee is not "a company in which the public are substantially interested", then under cl. (2)(ii) the rate w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conditions specified either in item (A) or in item (B) are fulfilled, namely:--- (A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder ; (B)(i) shares in 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 50% of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by--- (a) the Government, or (b) a corporation established by 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 conditions laid down in cl. (b) of s. 108 (hereafter in this clause referred to as the subsidiary company), or (d) the public (not being a director, or a company to which this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blic in India, but also included public outside India. The circular also clarifies that one of the consequences of interpreting the expression "public" in a restricted manner would be that companies in which 50% or more of the shares are held by foreign companies (the bulk of whose shares are held by the public outside India) would have to be treated as those in which the public are not substantially interested, This circular shows how the CBDT interprets the word "public". Even otherwise s. 2(17) of the IT Act also provides that even a body corporate incorporated by or under the laws of a country outside India is a "company" within the meaning of the IT Act. (ii) Mr. Dastur also relied upon the authority in the case of CIT vs. Indo-Nippon Chemical Co. Ltd., (1986) 50 CTR (Bom) 85 : (1986) 161 ITR 635 (Bom) : TC 24R.424, in support of this proposition. In this case, the question was whether the shareholders of a Japanese company were members of the public within the meaning of s. 2(18) of the IT Act. The Division Bench of this Court held that the Japanese shareholders of a Japanese company would be members of the public within the meaning of s. 2(18). (b) the U.S. company falls ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case the question was whether the loss suffered by the assessee was or was not a loss incurred in a speculative transaction within the meaning of s. 43(5) of the IT Act, 1961. In this case the Supreme Court held that there was no reason why the sense conveyed by the law relating to contracts should not be imported into the definition of "speculative transaction" in the IT Act. Thus, in this case, the Supreme Court was importing the meaning as understood in the Contract Act into the IT Act. (iii) Mr. Dastur also relied upon the case of CIT vs. Swadeshi Match Co. (1982) 26 CTR (Bom) 240 : (1983) 139 ITR 833 (Bom). In this case, the question before this Court was whether, on the facts and circumstances of that case, 330 equity shares held by one Western India Match Co. Ltd. (WIMCO) could be said to have been "held" by the assessee-company within the meaning of that expression occurring in Expln. II of para D of Part II of the First Schedule to the Finance (No. 2) Act, 1962. In this case, the question was whether, in the absence of certain portion of the definition of "subsidiary company" occurring in s. 4 of the Companies Act, which were found lacking in Expln II of the Finance (No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Ltd., and Renusagar Power Company should be treated as one concern. On this basis, the Supreme Court held that the consumption of energy by Hindustan Aluminium Corporation Ltd., was to be treated as consumption from own source of generation by Renusagar Power Company. (v) Mr. Dastur submitted that the definition under s. 4(1)(c) of the Companies Act must be imported into s. 108 of the IT Act. He submitted that even on the doctrine of lifting of corporate veil it would be found that 100% of the shares of the assessee-company were held by the U.K. company and 100% of the shares of the U.K. company were held by a U.S. company. He submitted that it must therefore be held that the sub-subsidiary is also a subsidiary of the U.S. company and fell within s. 108(b) of the IT Act. 9. On the other hand, Mr. Deodhar submitted that the first requirement under para F was that the assessee must be a domestic company. He submitted that the term "domestic company" was governing cl. I in para F of the Schedule to the Finance (No. 2) Act. He submitted that therefore a company would be a company in which the public are substantially interested only provided that company as well as all parent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early lay down that definitions given in the Companies Act must be imported into the IT Act. 11. In this case, the IT Act nowhere defines what is a "subsidiary company". The Finance (No. 2) Act also does not define what is a "subsidiary company". There would be a dichotomy if the assessee-company were to be a subsidiary company of the U.S. company for the purposes of the Companies Act, but were deemed not to be a subsidiary of the U.S. Company for the purposes of the IT Act. I am in agreement with the view expressed by my Brother Dr. Saraf J., that the meaning given to the term "subsidiary company" under s. 4(1)(c) of the Companies Act must be imported into s. 108 of the IT Act. Of course, the further condition laid down under s. 108(b) must also be fulfilled. Thus, a sub-subsidiary would be a subsidiary under s. 108(b) if the whole of its share capital has been held by the parent company or its nominees throughout the previous year. If that meaning is incorporated then it is very clear that the assessee is a subsidiary within the meaning of s. 108(b) of the IT Act. This is so because, admittedly, the U.S. company is a company in which the public are substantially interested an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. Thus the legislature was well aware that a company can be a company in which the public are substantially interested by being a subsidiary or a subsubsidiary of a company which is not a domestic company. Knowing this the legislature, in para F, has only provided that the assessee is to be a domestic company. If the intention of the legislature was that not only the assessee but its parent company/companies should be domestic company/companies, then the legislature would have had to specifically so provide, In that case the legislature could not/would not have, by virtue of s. 2(6)(a) imported s. 108 of the IT Act. In that case, the legislature would have in cl. I(1) of para provided words to the effect "where the company and its parent company/companies is/are domestic company/companies in which the public are substantially interested". The legislature has purposely omitted to do so and the Court cannot add words. 14. If it is held that the words "domestic company" in the opening part of cl. I, of para F govern the entire cl. I, then there would be a conflict between cl. I and s. 108 of the IT Act. To avoid that conflict one would have to add words to s. 108(b) of the IT Act t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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