TaxTMI 
TaxTMI 
2000 (11) TMI 38
X X X X Extracts X X X X
X X X X Extracts X X X X
....on that notwithstanding the provisions of section 2(18) of the Income-tax Act, 1961, the status of the assessee-company should be taken as a public limited company ?" The short question which has arisen in all these references is whether the assessee-company should be treated as a public limited company or in other words a "company in which the public are substantially interested" for the assessment years 1978-79 to 1980-81. For the said assessment years different references have been made and the said references, as stated hereinabove, are being disposed of together by this common judgment. The facts and circumstances in which the above questions have arisen are as under : The assessee-company was initially a private limited company within the meaning of the provisions of the Companies Act, 1956, and was being assessed as such. During the relevant assessment year's, initially, the Assessing Officer had assessed the assessee as a public limited company because more than 25 per cent. shares of the company were held by one or more body corporate. In the circumstances, the Assessing Officer, looking to the provisions of section 43A of the Companies Act, considered the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee-company had retained the basic characteristic of a private limited company because, as per its articles of associations there was a restriction on the transfer of shares of the assessee-company. According to Shri Qureshi, the Commissioner of Income-tax was right when he observed that the assessee-company had put a restriction on the transfer of its shares by virtue of the clauses incorporated in its articles of association and, therefore, the assessee-company had retained the basic characteristic of a private limited company. He has referred to the relevant sections of the Act and the Companies Act and has submitted that the assessee-company was not a "company in which the public are substantially interested". He has relied upon the following judgments to substantiate his submissions. Shree Krishna Agency Ltd. v. CIT [1971] 82 ITR 372 (SC) ; CIT v. Lucas T. V. S. Ltd. [1995] 214 ITR 700 (Mad) and CIT v. East West Import and Export P. Ltd. [1989] 176 ITR 155 (SC). On the other hand, the learned advocate, Shri Kaji, has tried to justify the order passed by the Tribunal by submitting that the assessee-company had become a public limited company as more than 25 per cent. of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder ; (B) (i) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by (a) the Government, or (b) a corporation established by a Central, State or Provincial Act, or (c) any company to which this clause applies or any subsidiary company of such company where such subsidiary company fulfils the conditions laid down in clause (b) of section 108 (hereafter in this clause referred to as the subsidiary company), or (d) the public (not being a director, or a company to which this clause does not apply) ; (ii) the said shares were, during the relevant previous year, freely transferable by the bolder to the other members of the public ; and (iii) the affairs of the company, or the shares carrying more than fifty per cent. of its total voting power were at no time, dur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ertinent to note that for all the assessment years in question or for part thereof, there was a restriction, according to the articles of association of the company, with regard to transfer of shares of the assessee-company. The relevant provisions of the articles of associations which pertain to transfer of shares are as under : "4. The company being a private company, the fallowing provisions shall have effect, viz., (i) The right of transfer of shares of the company shall be restricted as hereinafter provided. (ii) The number of members of the company (exclusive of persons who are in the employment of the company) is not to exceed fifty, but where two or more persons hold one or more shares in the company jointly, they shall, for the purposes of this article, be treated as a single member. (iii) Any invitation to the public to subscribe for any shares of the company is hereby prohibited. 34. No transfer of shares shall be registered unless a proper instrument of transfer duly stamped together with corresponding certificate of title of share or allotment letter thereof has been delivered to the company. The instrument of transfer of any share will be executed bo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the board may at any time give notice requiring any such person to elect either to be registered himself as a member or to transfer the share and if the notice is not complied with within ninety days the board may thereafter withhold payment of all dividends, bonuses or other moneys payable in respect of the share until the requirements of the notice have been complied with. 43. Except where transfer is made pursuant to articles 36, 37 and 39 herein, no shares in the company shall be transferred unless and until the rights of pre-emption hereinafter conferred shall have been exhausted. 44. Every member or other person referred to in article 41 of these articles of association who intends to transfer shares (hereinafter called 'the proposing transferor') in which he is directly or indirectly concerned or interested shall give notice in writing to the hoard of his intention specifying details of shares to be sold and the proposed sale price. Such notice shall constitute the board his agent for the sale of the said shares, in one or more lots, at the discretion of the hoard to members of the company at a price to be agreed upon by the proposing transferor and the board, or in ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fore we have to look at the provisions of clause (B). All the conditions specified in clause (B) are required to be fulfilled so as to enable the assessee-company to be considered as a "company in which the public substantially interested" or a public limited company as described by the Tribunal in its order. Condition (ii) specified in clause (B) is with regard to free transferability of the shares. The said sub-clause provides that during the relevant previous year, shares of the company should be freely transferable by the holder to the other members of the public. Thus, we have to examine whether it was open to the shareholders of the assessee-company to transfer the shares to any person of the public at the relevant time. If there was a restriction on transfer, it could be said that the shares of the company were not freely transferable during the relevant previous year. Now, let us look at the provisions pertaining to transfer of shares in the articles of association of the assessee-company. According to clause 36 of the articles of association, the board of directors may in their absolute discretion refuse to register any transfer of shares in favour of a person who is no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e public. This is an essential element which is required to constitute a company in which the public are substantially interested. The clauses incorporated in the articles of association of the assessee-company clearly distinguish its case from the case decided by the Supreme Court in Shree Krishna Agency Ltd. v. CIT [1971 ] 82 ITR 372. The company with which the court was concerned, did not incorporate the restrictions which have been referred to hereinabove. Normally, in the articles of association of all companies, a provision is incorporated whereby the board of directors has a right to keep an unwanted element away from becoming a shareholder of the company. Normally it is presumed that the board of directors would act in the interest of the company and would not permit an unwanted element to become a shareholder of the company. Refusing to transfer the shares, which is in favour of an unwanted element, is understandable but in normal circumstances, the board of directors would invariably permit a shareholder to transfer shares to another member of the public in a public limited company. That is not the case here. In the instant case, there is a clear provision in the artic....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the shares but it also restricts even transmission of the shares. According to the said clauses, it would not be open to a shareholder to bequeath his shares to someone of his choice. The aforesaid conditions incorporated in the articles of association clearly restrict free transferability of the shares to other members of the public. In view of the said provisions one cannot say that the assessee-company was a company in which public are substantially interested. The submission of the learned advocate, Shri Kaji, that as per the provisions of section 43A of the Companies Act the assessee-company had become a public limited company is not of much substance for the reason that section 43A of the Companies Act deals with a situation when certain private companies are to be treated as public limited companies. For the definition of the word "company" one has to look at section 3(1) of the Companies Act. Clause (iii) of section 3(1) defines "private company" as under : "(iii) 'private company' means a company which, by its articles, (a) restricts the right to transfer its shares, if any ; (b) limits the number of its members to fifty not including (i) persons who are in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pany had resolved to make necessary changes in the articles of association to remove the restriction on transferability of its shares. It is an admitted fact that the shares of the assessee-company were not freely transferable during the entire period in question. The Supreme Court has held in the case of CIT v. East West Import arid Export P. Ltd. [1989] 176 ITR 155 that the shares should be freely transferable for the entire previous year. In view of the fact that the shares of the assessee-company were not freely transferable during the entire previous years in question, it cannot be said that the shares were freely transferable during the relevant year in question. In the course of arguments, it has been submitted on behalf of the advocate appearing for the assessee that neither the Tribunal nor the Commissioner of Income-tax has referred to all the provisions incorporated in the articles of association of the assessee-company relating to transferability of its shares. In the circumstances, it has been submitted by him that this court should not look at the clauses which pertain to restriction on transfer of shares by the members of the company. We do not agree with the said....