Trustees' Shares Not Publicly Held, Deductions Disallowed, Tax Liability Upheld

The court held that the shares held by the trustees of two trusts were not beneficially held by the public as they acted in concert with a controlling group. However, the shares of the assessee-company were deemed freely transferable despite director discretion. The deduction claim for charity and donations was disallowed due to lack of evidence of commercial principles guiding the donations, but the deduction for further tax liability was upheld as the tax was already assessed. Each party was ordered to bear its respective costs.

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Issues Involved:
1. Whether the shares held by the trustees of the two trusts can be said to be held beneficially by members of the public.
2. Whether the shares of the assessee-company are freely transferable within the scope of section 23A, Explanation.
3. Whether the assessee's claims for deduction of Rs. 1,02,223 for charity and donations and further tax liability of Rs. 2,32,873 are valid.

Detailed Analysis:

Issue 1: Beneficial Holding of Shares by Members of the Public
The first issue pertains to whether the shares held by the trustees of the two trusts can be considered as beneficially held by members of the public. The court examined the history and structure of the assessee-company, including the creation of two irrevocable trusts by Subhkaran and Kesardeo for the benefit of their wives and children. The trustees of these trusts held significant shares in the assessee-company.

The court referred to the Supreme Court's decisions in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Jubilee Mills Ltd., which emphasize that shares must be unconditionally and beneficially held by the public to be considered as such. The court concluded that the trustees were acting in concert with Subhkaran, forming a controlling group, and thus, the shares could not be considered as beneficially held by the public. Therefore, the answer to the first question was in the negative.

Issue 2: Free Transferability of Shares
The second issue addressed whether the shares of the assessee-company were freely transferable. Article 40 of the assessee-company's articles of association allowed the directors to refuse the registration of share transfers at their discretion. The court referred to the Supreme Court's decision in Shree Krishna Agency Ltd. v. Commissioner of Income-tax, which held that the mere existence of such an article does not affect the free transferability of shares unless it is shown that the directors exercised their power arbitrarily.

The court found no evidence that the directors of the assessee-company exercised their power under Article 40 to virtually eliminate the element of free transferability. Therefore, the shares were deemed freely transferable, and the answer to the second question was in the affirmative.

Issue 3: Validity of Deductions for Charity, Donations, and Tax Liability
The third issue involved the validity of the assessee's claims for deductions of Rs. 1,02,223 for charity and donations and Rs. 2,32,873 for further tax liability.

1. Charity and Donations:
The court examined whether the amounts spent on charity and donations could be excluded from the commercial profits available for distribution. The court referred to the Supreme Court's decision in Commissioner of Income-tax v. Gangadhar Banerjee & Co. Private Ltd., which emphasized that commercial or accounting profits should be calculated on commercial principles. The court found that the assessee-company did not provide sufficient evidence to show that the donations were guided by commercial principles. Therefore, the Tribunal was right in disallowing the deduction for charity and donations.

2. Further Tax Liability:
Regarding the deduction of Rs. 2,32,873 for further tax liability, the court referred to the Supreme Court's decision in Gangadhar Banerjee's case, which held that the actual tax assessed should be deducted in arriving at the commercial or distributable profits. Since the tax liability was already determined before the Income-tax Officer took action under section 23A, the deduction was valid. Therefore, the assessee-company was justified in claiming this deduction.

Conclusion:
- The shares held by the trustees of the two trusts cannot be considered as beneficially held by members of the public.
- The shares of the assessee-company are freely transferable within the scope of section 23A, Explanation.
- The claim for deduction of Rs. 1,02,223 for charity and donations was not valid, but the deduction of further tax liability of Rs. 2,32,873 was valid.

Each party will bear its respective costs of the reference.

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