Beneficial holding by the public under income-tax law depends on unconditional ownership, not mere director control.

Section 23A of the Indian Income-tax Act, 1922 turned on whether the assessee company was one in which the public were substantially interested, requiring examination of whether more than 75% of the shares were not beneficially held by the public. The Supreme Court held that "held by the public" cannot be narrowed merely because directors exercise voting power; directors remain members of the public, and the focus is on shares being beneficially held unconditionally by the public rather than under concerted control. The Court treated de facto control over certain shareholders as relevant, but remitted the matter for the High Court to decide the original question and, if necessary, obtain a supplemental statement from the Tribunal.

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Issues: (i) Whether shares held by directors are, by that reason alone, excluded from being treated as shares held by the public for purposes of the third proviso and Explanation to section 23A of the Indian Income-tax Act, 1922; (ii) Whether the shares held by the relevant shareholders were beneficially held by the public so as to take the company outside section 23A.

Issue (i): Whether shares held by directors are, by that reason alone, excluded from being treated as shares held by the public for purposes of the third proviso and Explanation to section 23A of the Indian Income-tax Act, 1922

Analysis: The statutory test turns on whether shares carrying not less than 25 per cent of the voting power are unconditionally acquired and beneficially held by the public. The word "public" is used in contrast to a controlling block of persons acting in concert, and the decisive inquiry is not the mere status of a shareholder as a director, but whether the shares are held independently and beneficially. Mere directorship, without proof of control over voting power or concerted action, does not by itself exclude a shareholder from the category of the public.

Conclusion: No. Directors are not automatically outside the public merely because they are directors.

Issue (ii): Whether the shares held by the relevant shareholders were beneficially held by the public so as to take the company outside section 23A

Analysis: Shares cannot be counted as held by the public if they are in truth controlled by a group or block exercising voting power as a unit, including through nominees or relatives who do not hold beneficially and unconditionally for themselves. On the finding recorded, the shares of the three sons were under the de facto control of their father, and the High Court's approach treating directorship itself as decisive was erroneous. The proper question remained whether, on the true test of beneficial and unconditional public holding, more than 75 per cent of the voting power was not so held.

Conclusion: The matter required reconsideration on the correct statutory test, and the existing answer could not stand.

Final Conclusion: The appeal succeeded to the extent that the High Court's reasoning was set aside and the matter was sent back for determination on the correct interpretation of section 23A, leaving the ultimate applicability of that provision open for fresh decision.

Ratio Decidendi: For the purpose of the public-interest exception under section 23A, the real test is whether the relevant shares are unconditionally and beneficially held by persons forming part of the public, and not whether the holders are directors as such; shares under the control of a single voting block are not to be counted as public holdings.

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