TaxTMI 
TaxTMI 
1962 (9) TMI 47
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....sition on June 30, 1947. We are concerned with the assessment year 1948-49 corresponding to the previous year ended on June 30, 1947. In that year, the company was assessed on a total income of Rs. 7,47,639. The Income-tax Officer calculated the tax at Rs. 4,20,548. In that year, the company ought, if section 23A was applicable, to have distributed 60% of the above amount. The company, however, declared dividends which is the aggregate amounted to Rs. 24,750. The Income-tax Officer, with the previous approval of the Inspecting Assistant Commissioner, applied the provisions of section 23A, of the Income-tax Act and held that the company was deemed to have declared dividend of Rs. 3,97,788. The assessee company was being managed by a firm called Mangaldas Mehta & Co. That firm consisted of fourteen partners of whom seven were the directors of the assessee company. The members of the managing agents who were also directors held between them 35,469 ordinary shares and 880 first preference shares. The remaining seven members of the managing agents, who were not directors of the assessee company, held respectively 41,659 and 370 shares of the two categories. Seventy-five shares were held....
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.... reconstruct its capital in 1930 because it had a debit balance of Rs. 12,75,000 in the profit and loss account which had to be paid out of capital. This was done by reducing the face value of the ordinary shares from Rs. 100 to Rs. 10 each, and of the preference shares from Rs. 100 to Rs. 25, each after obtaining the approval of the High Court. It is the reconstituted capital which has been shown by us in an earlier part of this judgment. It also appears that the Income-tax Officer granted to the assessee company a rebate of one anna under proviso (a) to paragraph (b) of part I of the second schedule of the finance Act. 1948. This rebate was granted to those companies to which the provisions of section 23A were not applicable. Subsequently, the Income-tax Officer, as stated already, applied section 23A to the company and it was contended that he was incompetent to do so as he must be deemed to have impliedly held already that section 23A was not applicable. Section 23A before its amendment in 1955, in so far as it is material, read as follows : "23A. Power to assess individual members of certain companies. (1) Where the Income-tax Officer is satisfied that in respect of any previo....
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.... case. The Explanation, in so far as it is relevant to our purpose, says that a company shares of the company carrying in which the public are substantially interested if the shares of the company carrying not less than 25 per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, the public and are held beneficially by the public. The Income tax Officer held that this was not a company in which the public were substantially interested and that the grant of the rebate earlier by him did note stop him from applying section 23A to this company. His order was upheld by the Appellate Assistant Commissioner and the Tribunal on both the points. The assessee company then applied for decision by the High Court : "(1) Whether, on the facts and in the circumstances of the case, 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? (2) If the answer to question No. 1 is in the affirmative whether, on the facts and in the circumstances of the case, the assesse....
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....gents act under the direction of the directors and unless the directors were themselves controlling the voting power above the limit stated by the Explanation, the company must be regarded as one in which the public were substantially interested. Applying the same test to the present case, the High Court found that the directors between them held only the shares which we have shown in tabular form under category "A". Since the number of these shares was not up to the mark to attract section 23A, the High Court answered the second question in favour of the assessee company. The request of the department that a supplemental statement of the case be asked from the Tribunal as to whether any person belong in g to categories "B" and "C" was so much within the control of the directors as not to hold the shares unconditionally or beneficially for himself was rejected by the High Court observing that this would give a second chance to the department to lead further evidence. Following the decision of the House of Lords in Thomas Fattorini (Lancashire) Ltd. v. Inland Revenue Commissioners [1942] A.C. 643 ; [1943] 11 I.T.R.(suppl) 50 they refused to take action under section 66(4). The High ....
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....ted out that what one has to find out is whether there is an individual who, or a group acting in concert which, controls or control the affairs of the company to the exclusion of others by reason of his or their voting power. Such person or group of persons do not answer the description "public". There is nothing inherent in the office of directors which would lead one to think that the directors must act in unison. They are persons in whom the shareholder have reposed confidence and on whom they have conferred powers which, under the scheme of the companies Acts, have to be exercised for the benefit of the shareholders. The directors are, in a manner of speaking, trustees of these powers. It is the duty is the directors to exercise these powers to the best of their independent judgment. There is therefore, nothing in the nature of things or at all that requires the directors to act in unison. This court pointed out in Raghuvanshi Mills case [1955] 28 I.T.R. 25 that such a group may be composed of directors or their nominees or relations in different combinations or may be composed of persons none of whom is a director provided such a group forms a block which holds the controllin....
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.... therefore, the managing agents, either by themselves or with those who act in concert with them, hold shares above the 75% limit they can be regarded as constituting a group which cannot be counted as "public". In such a case the holding of the managing agents, if above 75% may furnish proof that the company is one in which the public are not substantially interested. It was contended before us that even among the managing agents some may take an independent view. Normally, managing agencies are not informed by parties except for the purpose of mutual gain and the commonness of the interest lends a cohesion to the body which enables it to act in its own interest. When such a body holds shares carrying more than 75% of the voting power the company itself is run mainly as the managing agents desire it to be run. such a managing agency could easily choose its own directors and the directors would not be independent persons but mere nominees of the managing agents. In such a case the inference is irresistible that we have a group, which, as a group can run the company at its will and which not only controls the voting at the meeting of the shareholders but, by selecting its own direct....