Tax-rate classification and interest appealability depend on statutory subsidiary status and denial of liability to interest.

For the First Schedule to the Finance (No. 2) Act, 1971, the classification of a domestic company may depend on the incorporated definition of a subsidiary in the Income-tax Act and its statutory setting. On that approach, a wholly owned sub-subsidiary can qualify as a subsidiary if the shareholding and control conditions are satisfied, and the parent need not itself be domestic where the assessee otherwise meets the statutory requirements. On interest under section 139 of the Income-tax Act, an appeal is maintainable where the assessee denies liability to interest itself, but not where the challenge is confined to the merits of the levy or reasonable cause.

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Issues: (i) Whether a wholly owned sub-subsidiary of a foreign company in which the public are substantially interested is covered by the expression "company in which the public are substantially interested" for the purposes of the First Schedule to the Finance (No. 2) Act, 1971. (ii) Whether an appeal lies against levy of interest under section 139 of the Income-tax Act, 1961, where the assessee disputes its liability.

Issue (i): Whether a wholly owned sub-subsidiary of a foreign company in which the public are substantially interested is covered by the expression "company in which the public are substantially interested" for the purposes of the First Schedule to the Finance (No. 2) Act, 1971.

Analysis: The rate structure in Paragraph F of the First Schedule applies to a domestic company, and the special definition in section 2(6)(a) of the Finance (No. 2) Act, 1971 incorporates section 108 of the Income-tax Act, 1961. The meaning of "subsidiary company" was examined with reference to section 4 of the Companies Act, 1956, and the incorporated definition was treated as applicable in the income-tax context, subject to the statutory setting. On that approach, a sub-subsidiary can be treated as a subsidiary if the shareholding and control conditions are satisfied. The majority also held that the parent company need not itself be a domestic company for the assessee to qualify under the Finance Act definition, provided the assessee is a domestic company and the statutory conditions are otherwise met.

Conclusion: The issue is answered in favour of the assessee. The assessee can fall within the beneficial rate category if the statutory conditions are satisfied.

Issue (ii): Whether an appeal lies against levy of interest under section 139 of the Income-tax Act, 1961, where the assessee disputes its liability.

Analysis: An appeal is maintainable where the assessee denies its liability to interest on the ground that the provision itself is not attracted. A challenge merely directed to the merits of the levy or to reasonable cause does not by itself expand the appellate scope. The maintainability depends on whether the assessee's challenge amounts to a denial of liability.

Conclusion: The issue is answered in favour of the assessee to the extent that denial of liability makes an appeal maintainable.

Final Conclusion: The reference is disposed of by accepting the assessee's core contention on the tax-rate classification issue and by recognising maintainability of appeal where liability to interest is denied.

Ratio Decidendi: For purposes of the Finance (No. 2) Act, 1971, an incorporated definition in the Income-tax Act must be read in its statutory context, and a sub-subsidiary may qualify as a subsidiary where the statutory conditions are met; an appeal against interest is maintainable when the assessee disputes the very liability to interest.

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