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TMI Blog1974 (7) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... m of Rs. 2,32,873 in respect of Rs. 5,36,113 are valid ? The questions relate to the assessment year 1952-53 for which the relevant previous year of the assessee-company ends on October 31, 1951. While the assessment of the assessee-company was considered by the Income-tax Officer he also applied his mind to the question whether an order under section 23A of the Act, Explanation 2, can be passed against the assessee-company. The Income-tax Officer came to the conclusion on the relevant points for consideration on this issue as under : Rs. Total income assessed 16,63,725 Less: Tax payable thereon 6,84,877 ---------------- Balance 9,78,848 60% thereon 5,87,308 Dividend actually declared at the annual general meeting held on November 17, 1952. 2,81,200 In view of the findings as above, the Income-tax Officer took the view that the amount distributed as dividend was inadequate and the provisions of section 23A of the Act were attracted. While making an application for reference to the High Court the assessee raised two main points, namely : (1) that the assessee is not a company to which section 23A can be applied ; and (2) that the dividend declared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . At that time, the sons of Bholaram Subhkaran and Kesardeo--promoted a limited company by name Seksaria Industries Ltd. and this company thereafter took over the managing agency of the assessee-company in the year 1948. In or about the year 1942, Subhkaran and Kesardeo independently created two separate irrevocable trusts. The trust property under each trust comprised of 50 shares of Govindram Brothers Ltd. valued at Rs. 5,00,000. The beneficiaries under each one of these trusts were the wife and children of the settlor under each trust. After partition was effected the 50 shares of Govindram Brothers Ltd. which constituted the trust funds under each one of the two trusts were transferred to Govindram's branch and in exchange the two trusts got each 3,000 ordinary shares in the assessee-company as at that time Govindram Brothers Ltd. were holding 6,750 shares of the assessee-company. Even the remaining 750 shares were transferred to the new company, Seksaria Industries Ltd., which was promoted by Subhkaran and Kesardeo. Under the scheme of partition Seksaria Sugar Mills Ltd. which held 5,000 shares of the assessee-company transferred the same to Seksaria Industries Ltd. which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income :...... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... romoted the assessee-company ; that such promoters cannot be considered to be members of the public ; that so far as the shares held by the trustees is concerned, they cannot be considered as held by the public because the beneficial interest in the two trusts were of the respective wives of Subhkaran and Kesardeo and their children ; that there is a complete identity of interest among all the parties interested in the trusts and so far as the relevant assessment year is concerned, the very conduct of the trustees show that they were in the same group in which Subhkaran was interested and the group of Subhkaran was in fact a dominating and controlling group having regard to the other shares held by them. The third proviso to section 23A(1) shows that the provisions thereof 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. The Explanation added to this sub-section raises a conclusive presumption because it contains a deeming provision as regards a company which can be regarded as one in wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itionally to, or acquired unconditionally by, the public and they must be beneficially held by the public. The essence of the Explanation lies not in the percentage which only shows the limit of the minimum holding by the public, but lies in the words " unconditionally " and " beneficially ". These words underline the fact that no person who holds a share or shares not for his own benefit, but for the benefit of another and who does not exercise freely his voting power, can be said to belong to that body, which is designated " public ". The word " public " is used in contradistinction to one or more persons who act in unison and among whom the voting power constitutes a block. If such a block exists and possesses more than seventy-five per cent. of the voting power, the company cannot be said to be one in which the public are substantially interested. Such a group may be formed by the directors of a company acting in concert, or by some directors acting in concert with others, or even by some shareholder or shareholders none of whom may be a director. The test is first to find out whether there is an individual or a group which controls the voting power as a block. If there be such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the trustees at the various general meetings held of the assessee-company, they clearly lead to one and only one conclusion that the trustees of the two trusts, which in all held 6,000 shares, could not be regarded as entities which held those shares as members of the public. While narrating the facts we have given in chronological order the facts and circumstances about the incorporation of the assessee-company, the initial holding of its shares, the effect of the partition in the year 1948 between Govindram's branch and Bholaram's branch, the taking over of the shareholding of the assessee-company substantially by the sons of Bholaram, the creation of the two trusts by Subhkaran and Kesardeo, respectively, for the benefit of their wives and children, which clearly show that all these things were not done as isolated independent things without having any nexus inter se. Even the interest taken by the trustees of the two trusts while attending the general meetings of the assessee-company also shows that they were acting in concert with Subhkaran who formed a controlling group in the shareholding of the assessee-company. Subhkaran in his own right was a shareholder holding 10 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case is, are the circumstances sufficient to show that Subhkaran, Savitribai and Chandrakalabai were acting in concert when Subhkaran represented all the three, both in his capacity as a shareholder as well as holder of proxies from the other two ? As laid down in Jubilee Mills case, above referred to, in order to decide whether a company was controlled by a group, the test is not whether they have actually acted in concert but whether circumstances are such that human experience tells that it can safely be taken that they must be acting together. On this material there can be no doubt that Subhkaran and those who supported him at this meeting formed a group which controlled the voting power as a block and this group, inter alia, included the trustees of the two trusts. When such a block held the shares it cannot be said to be, unconditionally and beneficially held by members of the public. For ascertaining the shares unconditionally and beneficially held by the public, if the shares are held by a group which controls the affairs, of the company it cannot be said that the first condition in the Explanations to section 23A(1) is fulfilled. In this view of the matter, question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be said to affect the free transferability of the shares as contemplated by the Explanation to section 23A(1) of the Act. The assessee-company could, therefore, be regarded as one in which the public were substantially interested. Article 37 did not confer any uncontrolled or unrestricted discretion upon the directors to refuse to register the transfer of shares in a given case in other words, the directors could not act arbitrarily or capriciously. The power conferred by such an article was of a fiduciary nature which had to be exercised by the directors in the best interests of the company for preventing any undesirable person becoming a member, if that was likely to be prejudicial to the interests of the company ; it was a power which had to be reasonably exercised for protecting the interests of the company. Free transferability of shares was a normal and common feature of limited companies and article 37 could not by itself be regarded as a restriction on the transfer of shares. The wording of article 40 of the articles of association of the assessee-company is slightly different but ; so far as the substance of the matter is concerned, it is in pari material. The ratio o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentary Board, Lucknow, and the next smaller amount is Rs. 10,000, donated to Vice-Chancellor, Lucknow University. As regards the claim for this deduction, the argument of Mr. Trivedi on behalf of the assessee-company is that as these amounts were actually donated by the assessee-company during the relevant previous year, they cannot be regarded as being available for distribution of profits because these sums cannot form part of the amount of dividend that can be distributed to the shareholders. His submission was that in arriving at the satisfaction which the Income-tax Officer is required to have under section 23A(1) of the Act regard must be had to the actual amount which was available for distribution of dividend. If funds are spent by the assessee-company consistently with the objects clause in the memorandum of association of the company, then such an item has not to be taken into account in deciding whether the dividend declared was reasonable in view of the commercial profits. Undoubtedly, sub-clause (xiv) of clause (b) of the memorandum of association of the assessee-company permits the assessee-company to make donations to charitable causes. So it is not possible to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declaration of dividend, should be considered from the point of view of a prudent businessman or a director of a company. In deciding this question of reasonableness or unreasonableness of the amount distributed as dividend, the question of previous losses, present losses, availability of surplus money, reasonable requirement for the future, as indicated by the Supreme Court in Commissioner of Income-tax v. Gangadhar Banerjee Co., and the nature of the contracts, as was considered by the Bombay High Court in New Star Industries Pvt. Ltd. v. Commissioner of Income-tax, have to be taken into account ; and in each case the question is whether a prudent businessman in the light of the particular facts facing him would or would not decide to declare, a dividend, and if be would, how much amount would be set apart for declaration of dividend. As the principles, in our opinion, are well settled, it is unnecessary to refer to the other cases which were cited by Mr.Trivedi on behalf of the assessee on the interpretation of section 23A(1) of the Act. Strong reliance was, however, placed by Mr. Trivedi upon the decision of the Madras High Court in Commissioner of Income-tax v. Anamalai Bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act should be passed in computing the commercial or accounting profits, regard has to be had to commercial principles or a businessman's point of view. Simply because a particular expenditure is authorised by the memorandum of association of a company it cannot be assumed that every amount so spent can be justified on commercial principles or business considerations in determining the commercial or accountable profits. Apart from giving a list of the donations no materials are brought on record by the assessee-company with a view to show that all or a major part of these donations amounting to Rs. 1 lakh and odd were guided by commercial principles or out of business considerations and if regard be had to the object with which section 23A is enacted, then the mere fact that, an amount has been spent is not by itself sufficient to exclude it in determining the amount of commercial or accountable profits, available for distribution amongst the shareholders. In the absence of a nexus, direct or indirect, between the expenditure and the business of a company such a claim for deduction cannot justifiably be made. Thus, in our opinion the Tribunal was right in disallowing the deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt that where the Income-tax Officer takes action under section 23A before the tax for the relevant period is assessed, only the estimated tax can be deducted in ascertaining the profits available for distribution ; but if the tax has already been assessed before he takes action under that section the actual tax assessed on the income of the company and not the estimated tax or the tax shown in the balance-sheet should be taken into account. In our opinion, the ratio of the Supreme Court decision on this question is very precise and there is no scope for further argument. Even when the initial order was passed by the Income-tax Officer under section 23A the tax liability of the assessee-company was already determined. If that was so, then in view of this decision, as the tax was already assessed before action was taken by the Income-tax Officer under section 23A, the actual tax assessed on the income, of the company and not the estimated tax or the tax shown in the balance-sheet should be taken into account. Thus, in our opinion, the assessee-company was justified in claiming a deduction in the sum of Rs. 2,32,873 in respect of the sum of Rs. 5,36,113. It was however, urged by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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