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TMI Blog1994 (9) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that all the shares of the company need not possess the character of transferability in order to fulfil the provisions of section 2(18)(b)(B)(ii) ? " These questions relate to the assessment years 1967-68 to 1973-74. Since the questions are common and based on identical facts, all these cases are decided by this common order. The assessee-company has during these years claimed that it should be treated as a company in which the public are substantially interested. The Income-tax Officer noticed that the assessee-company has technical collaboration with Messrs. Joseph Lucas Industries Limited of the United Kingdom and the said foreign company holds 60 per cent. of the share capital of the assessee-company and also 60 per cent. of the voting rights. The Income-tax Officer, however, held that even though the foreign company is not a private company, the shareholdings of the said company have not been analysed to show that they have not been controlled by five or less persons. Unless this was proved, the question of treating the assessee-company as a company in which publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that : " the right to transfer shares is restricted in the manner hereafter prescribed ". Article 2(c) further provides that " any invitation to the public to subscribe for any share in or debentures of the company is prohibited ". Article 5(b) provides that " except as hereinafter provided no shares in the company shall be transferred unless and until the rights of pre-emption hereinafter conferred shall have been exhausted ". Clauses (c), (d), (e), (f) and (g) of this article confer this right of pre-emption on existing members, authorises the board of directors to fix the price of the shares to be transferred and after obtaining consent of the members interested in purchase and allocate the shares to or among the members. It is only when the members do not exercise the right of purchase as aforesaid, the transfer of shares to any other person is permitted. Even such transfer has to be approved in writing-by the company. Clause (g) puts a further rider on the right of transfer and vests right of approving transfer by both Joseph Lucas Industries Company of United Kingdom and T. V. Sundaram Iyengar Private Limited. Clause (g) of this article provides that the board of directors m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fifty per cent. 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 clause (b) of section 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 clause does not apply) ; (ii) the said shares were, during the relevant previous year, freely transferable by the holder to the other members of the public ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a share capital, is held by one or more bodies corporate, the private company shall,--- (a) on and from the date on which the aforesaid percentage is first held by such body or bodies corporate, or (b) where the aforesaid percentage has been first so held before the commencement of the Companies (Amendment) Act, 1960, on and from the expiry of the period of three months from the date of such commencement unless within that period the aforesaid percentage is reduced below twenty-five per cent. of the paid-up share capital of the private company, become by virtue of this section a public company : Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of section 3 and the number of its members may be, or may at any time be reduced, below seven : Provided further that in computing the aforesaid percentage, account shall not be taken of any share in the private company held by a banking company, if, but only if, the following conditions are satisfied in respect of such share, namely : (a) that the share--- (i) forms part of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany for all purposes. The question requiring consideration in such a case is whether it has ceased to be a private company ? It is clear that as long as the company continues to be a private company as defined under section 3(1)(iii) of the Companies Act, it would not be entitled to be declared as a company in which public are substantially interested. Section 3(1)(iii) of the Companies Act provides that a company which, by its articles, (a) restricts the right to transfer its shares, if any ; (b) limits the number of its members to fifty ; and (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company, would be a private company. As long as these three characteristics are found existing, the company will not be able to shake off its characteristics as a private company. Can it, therefore, be said that a company having these characteristics but acquiring the status of public company under section 43A of the Companies Act ceases to be a private company ? The first proviso to section 43A of the Companies Act gives discretion to the company to retain its private character even after acquiring the new status. In the instant case, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he action taken by them to get their private character changed to a public character. This judgment would, therefore, be of no help to the respondent-assessee. Though the aforesaid is in our opinion sufficient to hold that the respondent -assessee is not entitled to the benefit of section 2(18) of the Income-tax Act, it may be examined whether the shares of the company were freely transferable. Article 2 of the articles of association which had been reproduced earlier clearly and specifically mentions that it is a private company and invitation to the public to subscribe for any shares in the company is prohibited. It is also clear that the number of members of the company cannot exceed 50. Under the circumstances, all the three basic requirements of a private company remain fulfilled. In Needle Industries (India) Ltd.'s case [1981] 51 Comp Cas 743, the Supreme Court has held that the right to renounce shares in favour of any person as provided by section 81(1)(c) of the Companies Act cannot apply to a deemed public company under section 43A of the Act as exercise of this power in favour of a non-member would result violation of the restrictions contained in section 3(1)(iii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not the mere possibility. The fact in the instant case is that restrictions continue to operate as no decision under clause (h) of article 5 had been taken by the board of directors. Hence, it is not possible to hold that the shares were freely transferable during the year under consideration. It is, therefore, not possible for this court to accept the view taken by the Tribunal. The aforesaid would be sufficient to answer questions Nos. 1 and 2 of the reference. As regards the third question, learned counsel for the respondent -assessee has stated before us that the question is only academic as in the instant case all shares of the assessee-company possess the similar character of transfer. Since the company is registered as a private company and the legal provisions concerning it do not justify having shares with different characters of transferability, the statement of learned counsel finds full legal support. The view taken by the Tribunal that only more than 25 per cent. of the shares should be transferable is not a correct reading of the provision. The free transferability clause has relevance to the word "share" appearing in the beginning of the provision and has no rela ..... X X X X Extracts X X X X X X X X Extracts X X X X
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