1962 (9) TMI 47 - SC - Income Tax

Supreme Court Overturns Decision on Company's Public Interest Status; Managing Agents Controlled Majority of Shares.

The SC allowed the appeal, overturning the HC's decision regarding the assessee company's status under section 23A. The SC held that the company was not ... Whether the Income tax Officer was competent to pass an order under section 23A(1) of the Act after having allowed a rebate of one anna per rupee in the assessment under proviso (a) to paragraph (B) of part I of the Second Schedule of the Finance Act, 1948? If the answer to question No. 1 is in the affirmative whether, on the facts and in the circumstances of the case, the assessee company is a company in which the public are substantially interested for the purposes of section 23A of the Act? Whether the loss of ₹ 12,75,000 incurred by the company, Prior to its reconstruction in 1930, could be taken in to consideration for purposes of the applicability of section 23A(1) of the Act?' Held that:- Appeal allowed. The exclusion of 'public' in the manner indicated generally from more than 75% of the shares and the concentration of such a holding in a single person or a group acting in concert is what attracts 23A. Thus the High Court was not right in answering the second question in the affirmative. The appeal is allowed. Issues Involved:1. Competence of the Income-tax Officer to pass an order under section 23A(1) after allowing a rebate.2. Determination of whether the assessee company is a company in which the public are substantially interested for the purposes of section 23A.3. Consideration of past losses for the applicability of section 23A(1).Detailed Analysis:Issue 1: Competence of the Income-tax Officer to Pass an Order Under Section 23A(1) After Allowing a RebateThe High Court initially answered this question in the affirmative, favoring the Commissioner of Income-tax. The High Court held that the Income-tax Officer was competent to pass an order under section 23A(1) even after allowing a rebate of one anna per rupee in the assessment. The assessee company did not appeal this decision, and it was conceded by the company's counsel that the High Court was correct in its judgment. Therefore, this issue was resolved in favor of the Commissioner of Income-tax.Issue 2: Determination of Whether the Assessee Company is a Company in Which the Public are Substantially Interested for the Purposes of Section 23AThe core issue revolved around the interpretation of the term 'public' as defined in the Explanation to section 23A. The Tribunal initially held that the group of fourteen individuals forming the managing agency firm could not be counted as members of the public. The High Court reversed this decision, following its earlier ruling in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax, which held that directors, qua directors, must be contrasted with the public. The High Court found that the directors did not hold enough shares to attract section 23A, thus answering the second question in favor of the assessee company.However, the Supreme Court disagreed with the High Court's interpretation. The Supreme Court emphasized that the term 'public' excludes any individual or group that controls the company's affairs to the exclusion of others. The Court noted that the managing agents, by holding more than 75% of the shares, effectively controlled the company. The Court stated that the managing agents and their associates, who held shares on behalf of minor children or joint families, acted in concert and thus could not be considered as part of the public. Consequently, the Supreme Court concluded that the assessee company was not a company in which the public were substantially interested, reversing the High Court's decision.Issue 3: Consideration of Past Losses for the Applicability of Section 23A(1)The High Court did not find it necessary to answer this question due to its affirmative answer to the second question. However, the Supreme Court noted that the third question was contingent upon the first question. Since the first question was resolved in favor of the Commissioner of Income-tax, the need to address the third question was rendered moot by the Supreme Court.ConclusionThe Supreme Court allowed the appeal, setting aside the High Court's affirmative answer to the second question and answering it in the negative. The Court held that the assessee company was not a company in which the public are substantially interested for the purposes of section 23A. The respondent was ordered to pay the costs in both the Supreme Court and the High Court.