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TMI Blog1976 (11) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... erred by the Tribunal pursuant to the order of this court referred to above and that is the subject-matter of T.C. No. 290 of 1975 and we shall refer to this question as the second question, while the former question will be referred to as the first question in the course of this judgment. The questions referred to above turn upon the interpretation of section 23A of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act ). As the questions themselves will indicate, the assessment years concerned are 1956-57, 1959-60 and 1960-61. The said provision, namely, section 23A of the Act, stood in one form before 1955 and it was amended in 1955 and again it was amended by the Finance (No. 2) Act of 1957. As far as the assessment year 1956-57 is concerned, the relevant provision will be as amended in 1955. As far as the assessment years 1959-60 and 1960-61 are concerned, the relevant provision will be as amended by the Finance (No. 2) Act of 1957. Since the construction of the provision has to be arrived at with reference to some decisions of the courts prior to the amendment of the section in 1955, we are extracting the statutory provision, as it stood before its amendme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses to make such an order, fails to make within three months of the receipt of such notice a further distribution of its profits and gains so that the total distribution made is not less than sixty per cent. of the assessable income of the company of the previous year concerned as reduced by the amount of income-tax and super-tax payable by the company in respect thereof : Provided further that this sub-section shall not apply to any company in which the public are substantially interested or to a subsidiary company of such a company if the whole of the share capital of such subsidiary company is held by the parent company or by the nominees thereof. 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 a fixed rate of dividend, whether with or without a further right to participate in profits) carrying not less than twenty-five per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and are at the end of the previous year beneficially held by, the public (not including a company to whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... past profits which have not been the subject of an order under this sub-section, exceed either the aggregate of-- (i) the paid up capital of the company exclusive of the capital, if any, created out of its profits and gains which have not been the subject of an order under this sub-section, and (ii) any loan capital which is the property of the shareholders, or the actual cost of the fixed assets of the company, whichever of these is greater, this section shall apply as if for the words 'sixty per cent. of the total income', wherever they occur, the words 'the whole of the total income' had been substituted. The Explanation occurring after sub-section (9) was : Explanation.--For the purposes of this section, a company shall be deemed to be a company in which the public are substantially interested-- (a) if it is a company owned by the Government or in which not less than forty per cent. of the shares are held by the Government ; (b) if it is not a private company as defined in the Indian Companies Act, 1913 (VII of 1913), and (i) its shares (not being shares entitled to a fixed rate of dividend, whether with or without a further right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to a reserve fund under section 17 of the Banking Companies Act, 1949 (10 of 1949), the Income-tax Officer shall, unless he is satisfied that, having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable, make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section 23, be liable to pay super-tax at the rate of fifty per cent. in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments, and at the rate of thirty-seven per cent. in the case of any other company on the undistributed balance of the total income of the previous year, that is to say, on the total income as reduced by the amounts, if any, referred to in clause (a), clause (b) or clause (c) and the dividends actually distributed, if any. The earlier Explanation became Explanation 1 and the same which was again placed after sub-section (9) was as follows : Explanation 1.--For the purposes of this section, a company shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 56, the share capital of the assessee-company was comprised of 23,505 ordinary shares of which 13,113 shares were held by a public limited company by name the Sheveroy Estates Ltd. It was common ground that the Sheveroy Estates Ltd. was a company in which the public were substantially interested. The position was more or less the same in the subsequent years also. From the shareholding referred to above, it is clear that more than 50% of the shares of the assessee-company was held by one single entity, namely, the Sheveroy Estates Ltd. The Income-tax Officer took the view that the assessee-company was one to which the provisions of section 23A of the Act applied. According to him, the company did not fulfil the requirements of a company in which the public are substantially interested as given in the Explanation to the section referred to above. The Income-tax Officer was of the view that the assessee-company did not satisfy the condition that 50% of the total voting power should not be held by less than six persons, the requirement of the Explanation (b)(iii). He also held that more than 50% of the shares was held by the Sheveroy Estates Ltd. and, therefore, the requirement of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming that section 23A of the Act applied to the assessee-company, whether the requirement as to declaration of any further dividend was unreasonable or not in the circumstances of the case. He was of the view that for the assessment year 1955-56, the Income-tax Officer was not justified in invoking the provisions of section 23A of the Act having regard to the financial position of the company. But with regard to the other three years, he held that it could not be said that the requirement as to the declaration of further dividend would be unreasonable, with the result he allowed the appeal of the assessee-company for the assessment year 1955-56 on both the grounds, namely, that section 23A of the Act did not apply to the assessee-company and that even if it applied, the levy of tax by the Income-tax Officer was not warranted. In respect of the other three years, the Appellate Assistant Commissioner allowed the appeals only on the ground that section 23A of the Act itself was not applicable to the assessee-company. Against this order of the Appellate Assistant Commissioner, the department preferred four appeals to the Income-tax Appellate Tribunal. There were two further appeals bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 23A by the Finance (No. 2) Act of 1957. A persual of the relevant statutory provisions will clearly show that for a company to be treated as a company in which the public are substantially interested, it has to satisfy all the requirements of the Explanation. When we come to the Explanation in section 23A as it stood at the relevant time--for the assessment year 1956-57--it is clause (b) of the Explanation that applies and under that clause, if a company is to be treated as a company in which the public are substantially interested, the requirements of all the three sub-clauses, namely, (i), (ii) and (iii) must be cumulatively satisfied. We are clearly of the opinion that in respect of this assessment year, the requirement of clause (iii) is not satisfied and, therefore, the assessee-company cannot be treated as a company in which the public are substantially interested. Clause (iii) as extracted above says : 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. We have already referred to the fact that more than 50% of the shares was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation of six persons referred to in sub-clause (iii) of clause (b) of the Explanation. If it is so excluded, admittedly the assessee-company cannot be said to be a company controlled by less than six persons. Consequently, the requirement of sub-clause (iii) of clause (b) of the Explanation is fulfilled for the two years in question. As we have pointed out already, the requirements of the other two sub-clauses also have to be cumulatively satisfied. The Tribunal has pointed out in its order that though the revenue had preferred the appeals, it did not challenge the interpretation of the Appellate Assistant Commissioner that the shares of the company were freely transferable. Therefore, the requirement of sub-clause (ii) of clause (b) of the Explanation also must be held to have been fulfilled by the assessee-company. Then there remains the only consideration, namely, whether the requirement of sub-clause (i) of clause (b) of the Explanation has been fulfilled or not. We have already extracted that sub-clause. According to that clause, in order to treat a company as a company in which the public are substantially interested, the shares of the company carrying not less than 50% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a statute, it will take its colour from the context in which it is used. It may mean, collectively the members of a society or a community or members of any section of a society or a community and, in addition to referring to the natural persons, it may also take in artificial persons like a company which is brought into existence by individuals. We may, for instance, refer to the provisions of the Companies Act, 1956, in this behalf. Section 3 of the Companies Act, while defining what a private company means, states that it means, a company which, by its articles, among others, prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company . Obviously, the expression public occurring in this provision will take in, not only individuals, but even corporate entities like an incorporated company or local authority or other institutions. We are referring to this merely for the purpose of showing that the word public is not one which under no circumstances will take in or comprehend a corporate entity like the company. Therefore, it is clear that the word 'public' is one, wide in its sweep and scope and capable of taking in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Show 506, 532, Lord Holt said : ' I think we should be very bold men, when we are entrusted with the interpretation of Acts of Parliament, to reject any words that are sensible in an Act. ' This rule has often been acted upon. Thus, in Green v. R [1876] 1 App Cas 513, 537, Lord Cairns stated, as a reason for differing from the court below, that 'the learned judges absolutely reduce to silence the second part of this sentence, and make it altogether inapplicable.' So in Cooper v. Slade [1858] 6 HLC 746, in the court below, Bramwell B. was inclined to treat the proviso at the end of section 2 of the Corrupt Practices Prevention Act, 1854, as mere surplusage ; but in his advice to the House of Lords, he stated that he had altered his opinion as to this, because it appeared that a reasonable construction could be put upon that proviso, and therefore that construction ought to be adopted, instead of treating that proviso as if it did not exist at all. Similarly in East London Ry. V. Whitechurch [1874] LR 7 HL 81, 91, Lord Cairns expressed a strong opinion against treating words in an Act of Parliament as surplusage, if any meaning can be put upon them. In that case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in section 2(18)(b)(B)(i) unaided by the exception, its meaning is ambiguous and its scope doubtful. But the words mentioned immediately after and put within brackets, namely, 'not being a director or a company to which this clause does not apply ' are stated by way of exception to the scope of the expression 'the public'. They throw considerable light upon the otherwise ambiguous import of the expression 'the public'. These words in brackets really act as a guide to understand the intention of the legislature. When the words in brackets exclude a company to which this clause does not apply, they necessarily imply that a company to which this clause applied will come within the scope of the expression 'the public'. Looking at the exception or proviso clause for purposes of ascertaining the meaning of the main provision of the enactment is recognised as a proper method of construction by the Supreme Court in the case of Hindustan Ideal Insurance Co. v. Life Insurance Corporation of India, AIR 1963 SC 1083. In support of this proposition, the Supreme Court also relies on a decision of the House of Lords. Craies on Statute Law also refers to this deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dressed to the Bombay High Court, based upon the expression, the public (not including a company to which the provisions of this sub-section apply) . The Bombay High Court observed at page 775 : The words in parenthesis are words of exclusion and state what is excluded so that the inquiry as to which shares are held by the 'public' unconditionally and beneficially will have to be made only with reference to the shares held by shareholders other than companies to which the provisions of the sub-section apply. They have not the effect of positively including within the ambit of the expression ' public ' any shareholder or category of shareholders without further inquiry. We are of the opinion that the above observations are not of any assistance to negative the claim of the assessee-company in the present case. In the first place, the Bench of the Bombay High Court was very careful when it stated that the exclusion did not have the effect of positively including within the ambit of the expression public any shareholder or category of shareholders without further inquiry. That means, the learned judges did not lay down as a rule of law that the express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the said voting power and they beneficially held the same throughout the previous year ? The answer of the Supreme Court is in the affirmative in its two decisions. In Shree Changdeo Sugar Mills Limited v. Commissioner of Income-tax [1961] 41 ITR 667, the Supreme Court was dealing with a case where out of 60,000 shares of the assessee-company, 11,880 shares were allotted to Mysore Merchants Ltd. and 4,320 shares to others and the total of these two was 16,200 which was more than 25% of the voting power. The statutory provision as it then stood required not less than 25% as against 50% we have in the relevant statutory provisions to which we have made a reference. In that context, the question for consideration was whether the Mysore Merchants Ltd. could be said to come within the scope of the expression the public . The Supreme Court, with regard to such a question, observed at page 670 : In applying the proviso and the Explanation, we have to give effect to the words ' not including a company to which the provisions of this sub-section apply' and have to determine whether Mysore Merchants Ltd. is a company to which the provisions of section 23A can be said to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act......... In the present case, as appears from the resume of facts, more than 75 per cent. of the shares of the assessee-company are held not by a group of partners, but by two public companies in which the public are substantially interested. This will also show that in the view of the Supreme Court, the holding of requisite percentage of shares or voting power by a company in which the public are substantially interested should be equivalent to the public holding those shares of voting power. Consequently, when sub-clause (i) of clause (b) of the Explanation is construed either way as shown above, it will follow that in the present case the Sheveroy Estates Ltd. in which the public were substantially interested was holding more than 50 per cent. of the shares of the assessee-company, that the requirement of Sub-clause (i) of clause (b) of the Explanation was fulfilled and that, therefore, the assessee-company must be treated as a company in which the public are substantially interested. If so, section 23A cannot be applied to the said company. Hence, our answer to the first question is in the affirmative and against the assessee as far as the assessment year 1956-5 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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