TaxTMI 
TaxTMI 
TaxTMI 
1988 (3) TMI 133
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....he relevant previous year by a company in which the public are substantially interested or its subsidiary, or the public other than the director or a company which is not a company in which the public are substantially interested. (ii) The second condition is that those shares should be freely transferable by the holder to the other members of the public. (iii) The third condition is that the affairs of the company or the shares carrying more than 60 per cent of the total voting power were at no time during the previous year controlled or held by 5 or less persons. These conditions are cumulative. That is in order to consider the company as a company in which the public are substantially interested, all the 3 conditions should be satisfied. 3. Now we will show how the shares were held. For the first four years, the shares were held as follows : S. Narayanan 5 C. Rambhupal Reddy 1,000 T. V. S. Charities 895 Sundaram Industries ....
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....sted. There is one company here in the list of shareholders which answers to the description of being a Corporation established by a Central, State or Provincial Act. That is United India Insurance Corporation. So, 5,000 shares held by them can be treated as shares allotted and acquired unconditionally by members of the public. But this is not enough. The assessee must show that at least 40 per cent of the shareholding, i.e. at least 7,800 shares are held either by the public or by companies in which the public are substantially interested. It would be seen than in this list, there are three companies other than the Public Sector Undertaking noted above. These three companies are (1) Sundaram Industries, (2) Southern Roadways Limited, and (3) Sundaram Private Limited. Sundaram Private Limited, being a Private Limited Company cannot be considered for this purpose. That leaves with Sundaram Industries Limited and Southern Roadways Ltd. Sundaram Industries Ltd. is a public limited company. It was initially a private limited company under section 43A. So also, its subsidiary Southern Roadways Ltd. These two companies having been deemed as public limited companies, we have to enquire wh....
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....tantially interested would come under this category and should be regarded as part of the public. For this purpose, he had relied on the decision of the Kerala High Court in case of CIT v. Aspinwall & Co. Ltd. [1975] 98 ITR 291. He also pointed out that this decision of Kerala High Court has been followed by the Bombay High Court in the case of CIT v. Baroda Investment Co. Ltd. [1979] 119 ITR 14. According to Shri Swamynathan, from this it follows that since M/s. Sundaram Charities is neither a private company nor a director, it has to be considered as part of the public. He further submitted that there was a direct authority to hold that public charitable trusts like Sundaram Charities fall within the category of the public. He cited the decision of the Calcutta High Court in the case of Union Co. Ltd. v. CIT [1983] 139 ITR 143. In that case, the High Court has held that the public trust would be considered as has to fall in the category of public. 9. There is no gainsaying that the category coming under the expression 'public' is very wide and normally charitable trusts could be considered as falling under this category. However, it is not enough that a substantial shareholding ....
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.... category 'public' were found to one of the block or who exercise the votes as per the biddings of the block, he cannot be considered as part of the public. In fact, in this case, the controversy is mainly whether they are holding shares for their own benefit or someone else. 10. Naturally, a question would be asked how to determine whether the shareholder is a part of a block or not. This question is also answered by the Supreme Court. The test is not whether they have acted in concert but whether the circumstances are such that human experience tells us that it can safely be takes that they must be acting together. Therefore, we have to look into the circumstances in which the charitable trust was holding the shares and whether by such a holding it could be considered as forming a block in voting. It is in the application of this test that a divergence has emerged. The department had applied this test and had held that Sundaram Charities being connected with the industrial house to which the assessee belongs would naturally form a block. Of course, the orders of the Commissioner (Appeals) have not exactly used these wordings but this in substance is their finding. This finding i....
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....e affairs of the company. In fact, before the tax authorities no evidence on this matter, it appears to us, has been led at all. We have said that to enjoy the protection of section 2(18)(b)(i) it is necessary to prove not only that the shares have been unconditionally allotted to or acquired by the public. but also they are held beneficially by the public. In the absence of requisite evidence it is not possible for us to come to any conclusion one way or the other." 12. While the Calcutta High Court has held that the facts were insufficient to come to a finding, the Bombay High Court considered the question somewhat differently. The shareholding is the case of the assessee-company therein were 6,000 shares out of which 4,895 shares were held by the three charitable trusts. The Bombay High Court observed as follows on these facts : "The shares are also not acquired by the beneficiaries. The shares are acquired by the trustees for the trustees for the beneficiaries. The conclusion appears to us to be inescapable that 81 per cent of shares which are held by the trustees for the beneficiaries under the public trusts cannot be said to be shares held by the public. Even so far as the ....
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....est laid down that the circumstances should be such the human experience would act in concert should be kept in mind. This test was kept in the background in the Bombay case but not in the Calcutta High Court case. 13. We have to apply this test to the facts of the case before us. We have already mentioned that T. V. S. Charities and Sundaram Charities are Societies registered under the Societies Registration Act. They are not trustee in the sense that they hold property on account of a confidence reposed on them. On the other hand, they hold properties, i.e., the shares in the company on their own end not on behalf of anyone else. It should not be forgotten that a society registered under the Societies Registration Act, is for certain purposes and incorporated body. By section 5 of the Societies Registration Act, the properties belonging to the society are vested in the governing body of the society. In all proceedings, civil and criminal, the properties may be described as the property of the governing body of such society. In this connection, the decision of the Andhra Pradesh High Court in the case of Pamulapati Buchi Naidu College Committee v. Government of Andhra Pradesh AIR....
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....ng all the trappings of incorporation given by the statute to such society. Reliance had been placed by Sri Swaminathan. The principle laid down in that case in the case of N. V. Shanmugham & Co. v. CIT [1971] 81 ITR 310 (SC) has no application in the case of a registered body having its own separate identity. Shanmugham & Company dealt with the case of company receivers doing business on behalf of certain partners of a partnership firm. The fetishes capacity of their business was the basis on which the ratio laid down in that decision was founded. Sri Swaminathan had also relied on an English case in Butt v. Kelson [1952] All. ER 167. In that case, certain executors appointed under a will of a deceased were holding certain properties of the estate of the deceased. One of the legatees wanted to see the books of a company, the share of which were held by the executor. The court of appeal held that the legatee was not entitled to call on the defendants, i.e. the executors to use their powers as directors as though they held those powers on trust for the plaintiff. The rights of the beneficiaries were that they will be treated as though they were registered shareholders in respect of ....
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....ich says the beneficiary can compel the executor to vote according to him and the Madras High Court's decision cited are mutually incompatible. It only underlines the principle that if the person in whose name the shares stand as the properties in his own rights, he need not be at dictate of the beneficiary. That really supports the department on this point. 16. In our opinion, therefore, we have to find out who are the persons representing the limited companies and the charitable societies in the Annual General Meetings of the assessee-company and how would their voting take place. Will they not in concert as to constitute a block ? We need not look into any direct evidence that they have actually consorted to act as a block. What we have to see is whether the circumstances are such that human experience tells us that it can safely be taken that they must be acting together. With this end in view, we have aim attempted to find out who are the directors of the companies and who are the members of the Managing Committee of the society. On going through the materials placed before us, we find that the promoters of Southern Roadways were T. S. Rajam and his brothers Srinivasan, Santh....
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....antially interested. 18. We are also not impressed by the submission made based on section 187 of the Companies Act. The submission had been considered fully by the Bombay High Court in the case of Indian Hotels Co. Ltd. and for the reasons stated in that decision, we are unable to accept Shri Swaminathan's submissions. 19. The second condition which has also to be satisfied is that the shares are freely transferable. It is an admitted position that there are certain provisions in the assessee's company's memorandum of association which does not allow free transfer of share. This is contained in clause (10) which is reproduced below : "(10)(a) Except as hereinafter provided, no shares in the company shall be transferred unless and until the rights of pre-emption hereinafter conferred shall have been exhausted. (b) Every member or other person referred to in the Transmission Article o Table A, who intends to transfer shares (hereinafter called 'the vendor') shall give notice in writing to the Board of his intention. That notice shall constitute the Board, his agent for the sale of the said shares in one or more lots at the discretion of the Board to members of the company in the....
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....er by transfer of the said shares purchased by him. (e) In the event of the whole of the said shares not being sold under sub-clause (d) the vendor may, at any time, within three calendar months after the expiration of the said twenty-eight days, transfer the charges not so sold at any price to any person of whom in the other shareholders of the company shall, in their absolute discretion, have approved in writing. (f) The provisions of sub-clauses (a) to (d) above shall not only to the following transfers, namely : (i) a transfer by a member who is a body corporate to the body corporate which is an associate of the transferor company. The word 'Associate' shall include any holding company of the transferor, any subsidiary company of the transferor or other company approved by the Board of directors; (ii) a transfer by a shareholder who is holding the shares as trustee for any other company or body to another body holding as trustee for the same beneficiary or to the said beneficiary. (g) The Board may, in its absolute discretion, annul the operation of the provisions of clauses (a) to (f) of this article either temporarily or permanently, and generally or in respect of a spec....
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....ear terms affect the free transferability of shares we still have to consider whether the shares of the assessee-company are capable of being transferred freely. It is in this connection that we have got to consider the importance of article 5(h) which is reported below : '(h) The Board, may in its absolute discretion annul the operations of the provisions of clauses (b), (c), (d), (e), (f) and (g) of this article, either temporarily or permanently and either generally or in respect of a specific class or number of shares and on such annulment the provisions of the said clause shall become inoperative and of no effect.' We find that the Board has got absolute discretion to annul the operation of all the clauses namely clauses (b) to (g) either temporarily or permanently. The Board could straightway or in other words in absolute discretion accept any transfer without going to the formalities as provided in clauses (b) to (g). That being so, it is clear that no restrictions would be operative. Accordingly, the power of transfer is freely exercisable by the Board, meaning thereby that the shares are capable of being transferred freely. In the free power of transferability exercisabl....
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....upreme Court in the case of Shree Krishna Agency Ltd. v. CIT [1971] 82 ITR 372 in a passage which occurs at page 375. Therein the Supreme court had stated that the directors have been given discretion to decline to register in proposed transfer but that did not mean the shares ceased to be transferable. The said article does not confer any uncontrolled discretion to refuse to register the transfer. The directors cannot act arbitrarily or capriciously. Supreme Court then pointed out that the powers conferred by such an article is of a fiduciary nature which has to be exercised by the directors in the best interest of the company. In the case before us, there is already an existing right, not of the directors as in the case of Shree Krishna Agency Ltd. but of the other existing members. The other existing members have the right of pre-emption. This right will exist at any time, any member wants to transfer the shares. Therefore, it would not be correct to consider these two types of restrictions on the same plane. Whereas, the right of pre-emption is a condition precedent, the right of a director to refuse to register a transfer would be more like a condition subsequent. It is well s....
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....bsp; 7,400 Shares Southern Roadways 4,000 Shares T. V. S. Charities 895 Shares Rambhupal Reddy 1,000 Shares It will be seen from the above, totalled up more than 60 per cent of the shares of the company and, therefore, condition No. 3 is also not satisfied. Thus, none of the conditions are satisfied and the assessee cannot be considered as a public limited company. 23. We have disposed of the main ground common in all these appeals. There are certain other points which also require disposal. We take up the assessment year 1975-76 first. In this case, the Income-tax Officer had completed the assessment originally treating the assessee as a company in which public are substantially interested. Thereafter, the assessment has been reopened undersection 147(a). The Commissioner (Appeals) had upheld the validity of the reopening of the assessment. Sri Swaminathan submitted that there has been no default on the part of the assessee and all the materials required have ....
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....nd has been taken whether the medical reimbursement, conveyance allowance etc., should not be treated as perquisites for the purpose of section 40A (5), The assessee had paid certain remuneration to the Executive Director. There is nothing in the assessment order as of which section was invoked but, he had disallowed Rs. 8,948. The assessee had taken a ground before the Commissioner (Appeals) stating that section 40(c) should apply and only the excess over Rs. 72,000 should be disallowed. The Commissioner following the Kerala High Court decision had held that 40(c) r/w the first proviso to section 40A (5) would apply and the overall ceiling of Rs. 72,000 will be applied. He further held that the payments like electricity and water charges, house rent allowance etc. should be taken as perquisites. It is against this later part of the decision that the assessee has come on appeal. Since the department has not contested the Commissioner's finding that 40(c) r/w the first proviso to section 40A (5) would apply, we cannot go into this question. We must proceed on the basis that 40(c) would apply, In section 40(c), there is no question of classifying the remuneration into perquisites and....