9911796707
TMI Blog1986 (10) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellate Assistant Commissioner did not accept the assessee's contention that the Income-tax Officer wrongly invoked section 23A of the Act. He, therefore, confirmed the assessment on the legal issue but allowed some relief on the quantum of tax and the income liable to tax under section 23A of the Act. In the second appeal filed before the Income-tax Appellate Tribunal under section 33 of the Act, the first objection pressed before it was that the assessee was a company in which the public were substantially interested in the year in dispute for the reasons: (i) it was a public limited company; (ii) its shares were freely transferable by the shareholders to the other members of the public and the shares have been the subject-matter of dealing in the Delhi Stock Exchange; (iii) the finding of the Appellate Assistant Commissioner to the effect that less than 6 persons controlled the affairs of the company was erroneous and its shareholding carrying more than 50% of the voting power at no time during the previous year were held by less than six persons. The Department, however, contested the matter, inter alia, on the grounds that: (a) Bulk of the shares of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the shares of the assessee-company carrying not less than fifty per cent. of the voting power had been allotted unconditionally to or acquired unconditionally by and were throughout the previous year beneficially held by the public for the assessment year 1959-60 within the meaning of Explanation 1 to section 23A(9) of the Indian Income-tax Act, 1922 ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not a company in which the public were not substantially interested within the meaning of section 23A(9) of the said Act of 1922 ? The main and the only purpose of section 23A of the Act is to check the avoidance of income-tax and super-tax by some companies by the simple device of accumulating in its hands, the whole or a substantial part of profits and not to distribute them as dividend which would attract income-tax and super-tax in the hands of the shareholders. This device is resorted to by a company which in popular parlance is called a " closely held company". A family, its near relatives and fri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d; (ii) the said shares were at any time during the previous year the subject of dealings in any recognised stock exchange in India or were freely transferable by the holder to other members of the public; and (iii) the affairs of the company or the shares carrying more than fifty per cent. of the total voting power were at no time during the previous year controlled or held by less than six persons, and in computing the number of six persons aforesaid, the Government or any corporation established by a Central, State or Provincial Act or a company to which the provisions of this section do not apply shall not be taken into account, and persons who are relatives of one another and persons who are nominees of any other person together with that other person shall be treated as a single person, the expression 'relative' in this context meaning husband, wife, lineal ascendant or descendant, brother or sister : Provided that in the case of any such company as is referred to in clause (ii) of Explanation 2, this clause shall apply as if for the words 'more than fifty per cent.', the 'words more than sixty per cent.' had been substituted," At first blush, it appears that the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it is satisfied. We have our own doubts as to the correctness of the assumption with which we will deal later in this judgment. As regards sub-clause (ii), there seems to be no dispute between the parties that the shares of the company are the subject-matter of dealing at the Delhi Stock Exchange. Then we come to sub-clause (iii) which again is in two parts. One is that the affairs of the company and the shares carrying 50 per cent. votes are not concentrated in the hands of less than six persons. To put it differently, it means that neither the management nor the shareholding of 50 per cent. or more is concentrated in the hands of less than six persons taken together. The main controversy centres round this provision. The respondent-company claims that neither the affairs of the company were controlled by less than six persons nor was there a combination of less than six persons holding 50 per cent. or more vote carrying shares at any time during the previous year. The Department, on the other hand, controverted this assertion. Before we proceed to decide as to which of the rival contentions is correct, we wish to give a brief synopsis and the purpose of the particular prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roup who may have promoted the company and who act in unison or in concert. If such a group holds beneficially shares carrying 51% or more, shares for allotment to the public will always be less than 50% and as a result the condition mentioned in clause (b)(ii) will be violated. The number of shareholders belonging to the public become immaterial and irrelevant. This proposition emerges clearly from at least three decisions of the Supreme Court, the leading case being CIT v. Jubilee Mills Ltd. [1963] 48 ITR 9 (SC). In that case, the company was a closely held company. The question arose whether the company was one in which the public were substantially interested so as to escape the net of section 23A. The main controversy centred round the condition that 50% or more of the vote-carrying shares of the company were allotted to and beneficially held by the public. The company was managed by a firm of managing agents. It was found as a fact that there existed a group which acted in unison and concert. Some members of the group were on the board of directors and others were not. Bat all of them were partners of the firm of the managing agency which held a controlling interest in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g interest which group acting in concert can direct the affairs of the company at its will. The controlling interest, of course, is effective only if the group owns 51% of the total shares. But the company will still be a company in which the public can be said to be substantially interested because to cease to be so, the shareholding of the group must be more than 75%. In the group, any person, be he a director or a non-director, relative of a director, a promoter of the company, or a stranger, may be included but only if belonging to a group or as holding the shares as nominee of someone else belonging to the group." Applying the test, we have to see whether there is such a group to which the mischief of section 23A could be applied. At page 20 of the report, their Lordships observed as under: " At the hearing a point was raised that it has to be proved as a fact that the persons constituting the group, which owns shares carrying more than seventy five per cent. of the voting power, were acting in unison. The test is not whether they have actually acted in concert but whether the circumstances are such that human experience tells us that it can safely be taken that they must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of persons who act in unison and by virtue of their controlling interest can be said to be controlling the affairs of the company. As to the existence of such a group, there is no dispute about it as it has been conceded by the respondent-company. The total number of equity shares of the company is two lakhs and shares carrying fixed dividend, namely, preference shares, are 10,000, the total number of shares being 2,10,000. As per clause (b)(ii) of Explanation 1 to sub-section (9) of section 23A of the Act, the preference shares have to be excluded in order to ascertain the percentage of vote-carrying shares allotted to the public. Therefore, the shares which we have to take into consideration would be equity shares only which are two lakhs in number. Out of these shares, 1,66,720 shares are held by the Hindu undivided family of Sri Banarsi Das, of which 73,450 shares are held by the Hindu undivided family under blank transfer. A blank transfer means that the person holding such shares is the beneficial owner having in his possession a transfer deed executed by the transferor but the shares are not entered in his name in the shareholding register of the company. This type of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly assumed that the burden lay on the Revenue to investigate and record a finding as to the existence of such persons. This view is erroneous. When the members of the board of directors are less than the requisite number of six, the onus lay on the company to prove that there were persons other than those on the board who were exercising control over the affairs of the company. This is clear from the judgment of the Supreme Court in CIT v. Sahu Jain Ltd. [1976] 103 ITR 135 and the passage extracted therefrom in this judgment, We have already demonstrated that the real control was being exercised by the group of Seth Banarsi Das even though all of them were not on the board of directors and they were admittedly less than six. As to the second proposition, we have already pointed out above that the shares held under blank transfer have also to be taken into account while ascertaining the voting strength of the group. This view finds support from a decision of the Supreme Court in Howrah Trading Co. Ltd. v. CIT [1959] 36 ITR 215. While referring to blank transfer of shares, the Supreme Court has observed as under (at page 219): " During the period that the transfer exists betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
