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TMI Blog1960 (12) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... iginally framed by it, viz. "Whether on the facts and circumstances of the case the provisions of section 23A of the Indian Income-tax Act (XI of 1922) are applicable to the petitioners ? - Appeal allowed. Case remanded. - - - - - Dated:- 7-12-1960 - Judge(s) : J. L. KAPUR., M. HIDAYATULLAH., J. C. SHAH JUDGMENT The judgment of the court was delivered by HIDAYATULLAH, J.--The Raghuvanshi Mills Ltd., Bombay (a public limited company), has filed this appeal by special leave against the judgment and orders of the High Court of Bombay dated March 10, 1953, and September 1, 1955. By the first order, the Bombay High Court directed the Income-tax Tribunal to submit a supplementary statement of the case in the light of its judgment, giving the parties liberty to lead further evidence, if any. By the second order, the High Court re-framed the question and answered it against the assessee. The assessee company's issued and subscribed capital was, at the material time, Rs. 10,00,000 divided into 10,000 shares of Rs. 100 each. Prior to November 14, 1941, one Maganlal Parbhudas, who was a director of the company, held 6,344 shares. On November 14, 1941, he made a gift of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a period of 20 years, The managing company had a total issued and subscribed capital of Rs. 5,000 and the five sons of Maganlal Parbhudas who have been named before had subscribed that capital equally. During the account year, Maganlal Parbhudas and two of his sons, Ravindra Maganlal and Surendra Maganlal, were three of the directors of the company. Ravindra, Surendra and Bipinchandra were directors of the managing company. On these facts, the Income-tax Officer applied section 23A (as it stood prior to its amendment by the Finance Act, 1955) to the company holding that this was not a company in which the public were substantially interested. The order of the Income-tax Officer was confirmed on appeal both by the Appellate Assistant Commissioner and the Tribunal. The Tribunal also refused to state a case under section 66(1) of the Income-tax Act, but the High Court of Bombay acting under section 66(2) called for a statement of the case on the question : "Whether on the facts and circumstances of the case the provisions of section 23A of the Indian Income-tax Act (XI of 1922) are applicable to the petitioners ?" In stating the case the Tribunal pointed out that probably th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case did the Tribunal alter the finding reached by the Department that the shares of the company were not, in fact, freely transferable by the holders to members of the public. The High Court then re-heard the case and came to the conclusion that there was evidence on which the Tribunal could hold that Maganlal Parbhudas exercised de facto control over his three sons. In view of this finding the High Court held that the order made by the Tribunal was correct and answered the question in the negative, reframing it as follows : "Whether on the facts and circumstances of the case the shares held by Bipinchandra, Harischandra and Krishnakumar can be considered to be shares held by members of the public within the meaning of the Explanation to the third proviso to section 23A ?" The High Court refused to grant a certificate ; but the company has obtained special leave from this court and has filed this appeal. It is first contended that the test that the shares held by the directors of a company are not shares in which the public are substantially interested is incorrect. According to learned counsel, all the authorities, the Tribunal and the High Court, have proceeded on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent. of the assessable income of the company of that previous year, as reduced by the a mount of income-tax and super-tax payable by the company in respect thereof he shall, unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit-made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an the public, which can only mean, a group of persons allied together in the same interest. The company would thus have to be one which is controlled by a group. The group can do what it likes with the affairs of the company, of course, within the bounds of the Companies Act. It lies solely in its hands to decide whether a dividend shall be declared or not." Judged from the test we have indicated, it is clear that 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. Such a group which may, for convenience, be designated a block, must hold a controlling interest and if the voting power of the block is 75 per cent. or more, then obviously it can do anything at a meeting, whether general or special. When a company starts, the promoters may subscribe a portion of its capital and release the other unconditionally to the public. This is a case of unconditional allotment of shares to the public. The public may also unconditionally acquire a portion of the shares which were previously held by the group which promoted the company. If at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot decisive. In Commissioner of Income-tax v. H. Bjordal the Judicial Committee dealt with section 21(1) of the Income Tax Ordinance, No. 8 of 1940 (Uganda), as amended by section 5 of the Income Tax (Amendment) Ordinance, 1943. That provision of law is completely in pari materia with section 23A. Two brothers, H. Bjordal and S. Bjordal held 73.96 and 25.09 per cent. of the voting power. Five others held 0.04 per cent. of the voting power. The shares held by S. Bjordal were purchased for full value by him from his brother. There was no suggestion that he was a nominee of the respondent or that he was acting in concert with his brother. Both brothers were directors of the company. It was held by the Judicial Committee that shareholders in a company who are members of the " public " do not cease to be so, because they become directors. In the Uganda Ordinance also, like our Act, there was no guidance as to the meaning of the word " public ", as there was in the English statute considered in Tatem's case. It is significant that in Jubilee Mills Ltd. v. Commissioner of Income-tax Chagla, C.J., and S. T. Desai, J., speaking of the judgment under appeal and taking into consideration t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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