TaxTMI 
TaxTMI 
2006 (4) TMI 572
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....xt ground is against not treating the company as a financial company as per Section 40A(8) of the IT Act, 1961 (the Act). This ground was also a matter of adjudication in the appeals cited (supra) for asst. yr. 1984-85 and it was held that the assessee-company is a financial company and hence, disallowance under Section 40A(8) has to be deleted. The facts for the present year remaining the same, we follow the earlier order of the Tribunal and delete the disallowance of Rs. 10,25,032 made under Section 40A(8) of the Act. 5. Ground No. 4 is against disallowance of Rs. 35,24,873 being 10 per cent of the dividend income on ad hoc basis. This ground was not pressed at the time of hearing and hence the same is rejected as such. 6. Fifth ground in the appeal is against disallowance of Rs. 99,860 as prior period expenses. This ground was also not pressed at the time of hearing and hence, the same is dismissed as such. 7. The sixth ground is against not treating the company in which the publics are substantially interested as per Section 2(18) of the Act. In its return as well as by its letter dt. 15th July, 1987, assessee had claimed itself to be a company in which the public are ....
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.... the term defined without being bound by the artificial and extended definition of Section 2(18). 11. With regard to the term "person having interest", our attention was invited to the provisions of Bombay Public Trust Act, 1950. Section 2(10)(e) of the said Trust Act included a beneficiary of a public trust as a person interested in the trust. Reference was also made to Sections 41B and 50 of the said Trust Act whereby trustees incurred liabilities for breach of trust and also entitled any beneficiary to lodge complaints before the Charity Commissioner. In the instant case, it was submitted, since the public at large were beneficiaries of the trust, automatically, by virtue of the trusts' shareholding in the assessee-company, it (i.e. public) became substantially interested in the assessee-company. In this connection, decision of the Supreme Court in the case of Deoki Nandan v. Murlidhar and of the Lahore High Court in the case of Nihal Chand v. Narain Das AIR 1934 Lahore 949 were referred to. 12. Reference was then made to the decision of the Madras High Court in the case of Amrutanjan Ltd. v. CIT (1961) 41 ITR 21 (Mad), wherein, the High Court's observations while ....
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.... on p. 32 (Vol. 1 - 5th Edn.) was referred to. Several clauses of Section 2 providing for various definitions were referred to. It was pointed out that whereas certain clauses used the word "means", certain other clauses used the word "includes". Reference was made to the order of the Tribunal in the case of Life Insurance Corporation of India v. Jt. CIT Interest-tax Appeal No. 9/Bom/1996 and Ors. reported at (2002) 74 TTJ (Mumbai) 624 Ed. In the said decision it was observed by the Tribunal that when the term "means and includes" is used, the definition is meant to be exhaustive and neither extensive nor inclusive. When the term "means" is used it gives a hard-and-fast definition. In Clause (18) of Section 2, it was submitted, the term "is said to be" is used which is qualified by the phrase "if it is...." Thus, it was sought to be impressed by Mr. Srinivasulu that the phraseology used in Section 2(18) tantamounts to using the term "means". 15. The use of the definition in Section 2(18) was broadly two-fold, viz. (a) difference in tax rate and (b) for the purpose of Section 104. Keeping these purposes in mind, it was contended, enlarged meaning could not be given. It was conten....
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.... of the Act. 19. With regard to the decision in Indian Hotels Co. Ltd. (supra), it was submitted that the provisions interpreted therein were no longer on the statute book. It was further contended that whereas the Bombay High Court in that case was seized with the interpretation of Section 2(18), the assessee's case in the present appeal was to remain outside the said provision and that it be dictated only by the natural meaning of the term a "company in which public are substantially interested. 20. On a specific query from the Bench as to whether the aspect of control of the affairs of the company was of any relevance, the reply of Mr. Vyas was in the negative since Clause (iii) of Section 2(18)(b)(i) dealing with the control of the affairs of the company had been deleted after the amendment in 1983. On a specific query posed to the learned Departmental Representative as to whether he stands committed to the proposition that the words "is said to be" used in Section 2(18) have the same connotation as the term "means", his answer was in the affirmative. 21. We have duly considered the rival contentions and the material on record. We pick up the issue from where the l....
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....re the Bombay High Court. As rightly pointed out by Mr. Vyas, the High Court in that case was concerned with a statutory provision which no longer exists for the assessment year with which we are concerned. In it, the words "held by" were interpreted by the High Court, which in our opinion, is a narrower concept, than the concept "substantially interested." In this context, it is well established, as held by the Bombay High Court in the case of CIT v. Thane Electricity Supply Ltd. that what is binding on the Court in a subsequent case is not the conclusion arrived at in a previous decision, but the ratio of that decision for it is the ratio which binds as a precedent and not the conclusion. 23. In short, we are satisfied that the assessee-company before us is a company in which the public are substantially interested. Though our conclusion is mainly based on two specific arguments of the learned Counsel namely, the meaning of the term "is said to be" and the decision in Indian Hotels (supra), we are also convinced that the context in which the definition has to be read is the concessional rate of tax. In other words, since the context does not require us to travel beyond the sco....
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....ntially interested. 3. It is a cardinal principle in construction of enactments that unless the context otherwise requires, the definition of an expression contained in the Act should prevail throughout the Act. Therefore, whenever a different meaning is sought to be given to that expression occurring at different places in the Act, it is necessary to point out why the context requires different meaning to be given to the same expression occurring at different places in the Act. (Reference is invited to the decision in the case of CIT v. Dredging Corporation of India. 4. "Unless the context otherwise requires" means that the same words should have been used elsewhere is the Act in a different context. If we were to interpret those words in that context, one may ignore the definition given under Section 2(18). However, in this case, there is no such expression elsewhere in the Act so as to protect or give benefit to the company such as the assessee herein. Absence of any such clause in respect of the companies who should otherwise have been held as a "company in which the public are substantially interested", has unnecessarily affected some companies and the legislature realis....
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....jects of the company, the nature and composition of its membership and other relevant considerations. The Board is empowered to issue such direction even in respect of a past year and the direction will have effect for the assessment year or years specified therein. 5. In this case of Chamber of Commerce, Club etc., a pragmatic view would have been to treat them as companies in which public are substantially interested. But probably it was found difficult to raise such contentions, i.e. of including such companies in the definition of Section 2(18), and, thus, the legislature had to intervene. The case of the assessee-company cannot be said to be any different. The following observations of the Hon'ble Bombay High Court in the case of CIT v. Indian Hotels Co. Ltd. in my sincere view, leads to the only interpretation that the assessee-company does not fall under Section 2(18) of the Act: Now, the arguments before the Tribunal in the instant case had proceeded on the footing that 81 per cent of the shares held by the three public trusts must be treated as being held by the public. As indicated by the decisions referred to above, two questions will have to be answered.....
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....in making a suitable amendment to include such companies which should have otherwise been brought within the fold of Section 2(18) would also cushion the conclusion reached by me. 7. In the result I reject the contention of the assessee-company with regard to treatment of the assessee as a company in which public are substantially interested. 8. With regard to grounds other than the ground No. 6, I agree with the views and findings of my learned Brother. REFERENCE UNDER Section 255(4) OF THE IT ACT, 1961 23rd July, 2001 We the members of the Mumbai Bench 'C' have differed on one issue in the case of Tata Sons Ltd. v. Dy. CIT in ITA No. 8231/Bom/1991. Hence, this reference is made to the Hon'ble President of the Tribunal to nominate a Third Member to decide the point of difference. The point of difference is as follows: Whether, on the facts and in the circumstances of the case and in law, the assessee-company is a company in which the public are substantially interested as per Section 2(18) of the Act. The AM has held that the same to be a company in which the public are substantially interested whereas the JM has held it to be a company in wh....
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....ccording to him the natural and ordinary meaning of the term a "company in which public are substantially interested" cannot be destroyed; that the provisions contained in Section 2(18) are inclusive one and serve the purpose of only extending the ordinary meaning of the said term; that as far as the facts are concerned, there is no dispute that the public trusts are holding 78.71 per cent of the shares and therefore the public have an interest in the trusts by virtue of Sections 2(10), 41B and 50 of the Bombay Charity Trust Act, 1950 and consequently the public are interested in the assessee-company through the trusts; that the decision of the Bombay High Court in the case of CIT v. Indian Hotels Co. Ltd. (1982) 30 CTR (Bom) 12 : (1983) 141 FIR 343 (Bom) as relied upon by the Revenue is not an authority for any of the issues to be decided in this appeal and consequently, the assessee-company has to be treated as a "company in which the public are substantially interested". He also referred to certain decisions wherein the defined meaning has been extended keeping into consideration the term 'unless the context otherwise require'. 9. Shri P.K. Das, the learned Department....
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....s considered along with the material placed on record. Section 2(18) as it stood in the impugned year reads as under: 2. In this Act, unless the context otherwise requires,- (18) "company in which the public are substantially interested"-a company is said to be a company in which the public are substantially interested- (a) if it is a company owned by the Government or the RBI or in which not less than forty per cent of the shares are held (whether singly or taken together) by the Government or the RBI or a corporation owned by that bank; or (aa) if it is a company which is registered under Section 25 of the Companies Act, 1956 (1 of 1956); or (ab) if it is a company having no share capital and if, having regard to its objects, the nature and composition of its membership and other relevant considerations, it is declared by order of the Board to be a company in which the public are substantially interested: Provided that such company shall be deemed to be a company in which the public are substantially interested only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or aft....
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....y order of the Board to be a company in which the public are substantially interest; or (iv) a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely (A) 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) were, as on the last day of the relevant previous year, listed in a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and any rules made thereunder; (B) 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 the Government, or a corporation established by a Central, State or Provincial Act or, any company to which this clause applies or any subsidiary company of such company where such subsidiary company fulfils the conditions ....
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....ch 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. (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 holder to the other members of the public; and (iii) the affairs of the company or the shares carrying more than fifty per cent held by five or less persons. Explanation 1 : In computing the number of five or less persons aforesaid,- (i) the Government or any corporation established by a Central, State or Provincial Act or a company to which this clause applies or the subsidiary company of such company shall not be taken into account, and (ii) persons who are relatives of one another, and persons who are nominees of any person together with that other person, shall be treated as a single person. Explanation 2 : In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the gener....
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....ch took the view that under Section 187B of the Companies Act, in the case of every trust, the rights and powers including the right to vote exercisable at any meeting of the company of which shares are held by the trust, shall be exercisable by the public trustee and since, the public trustee was a nominee of the Government and the Government would represent the people, it could be said that the voting power in respect of the shares held by the trust is ultimately exercisable by the Government on behalf of the public and so, the shares were held by the public. Having accepted the alternative argument advanced before it, the Tribunal came to the conclusion that as the shares in the assessee-company were held by the three trusts, the same can be said to be held by the public and the assessee-company should be held as a company in which the, public are, substantially interested. 15. At the instance of Revenue the question referred to the Bombay High Court was: "Whether the assessee-company is a company in which the public are substantially interested as the majority of the shares are held by charitable trusts." The High Court rejected the claim on both the grounds. As regards alte....
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....ough that the shares are held by the public and in a case where there are beneficiaries of a public trust, the shares must be treated as being beneficially held by the beneficiaries through the trusts; that in such case, the voting power vests in the public but through the trustees; that the statute must be reasonably construed and a construction in consonance with justice should be adopted. The High Court observed that while it is hard to dispute the proposition that tax laws are to be interpreted reasonably and in consonance with justice, it is also well established that any equitable considerations are wholly irrelevant in interpreting tax laws. 16. Quoting Raghuvanshi Mills Ltd. v. CIT, the Bombay High Court held that the observations of the Supreme Court will thus indicate that when the definition in Section 2(18)(b) requires that the prescribed number of shares should be beneficially held by the public, it contemplates that person must hold the shares for his own benefit and no person who holds a share or shares not for his own benefit but for the benefit of another will fall within the body which is designated "public" in Section 2(18)(b)(i). One of the important consider....
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....he company. This condition is satisfied only if the voting power of the block or group is seventy-five per cent or more. If the block holds seventy-five per cent of the voting power, it shall be deemed that the company is one in which the public are not substantially interested. On the other hand, if the members of the public hold shares of 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 twenty five per cent of the voting power allotted unconditionally to, or acquired unconditionally by, them, the company shall be deemed to be one in which the public are substantially interested. Now, the arguments before the Tribunal in the instant case had proceeded on the footing that 81 per cent of the shares held by the three public trusts must be treated as being held by the public. As indicated by the decisions referred to above, two questions will have to be answered. Firstly, whether there is any group of shareholders who can be considered as a block and whose voting power is more than 50 per cent and, secondly, are 50 per cent of the shares acquired unconditionally and benefic....
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....e first name of the trustee, which would normally be the name first recorded as the holder of the shares, was the same, namely, Lady Navajbai Ratan Tata. Normally, these trustees would be expected to act in concert. Similarly, the remaining shares are held either by Tata Sons (P) Ltd. to the extent of 1,051, that person and there are 8 such groups of 6 shares each, out of which the joint holders in 4 groups are trustees in one or the other trust. Looking at the manner in which the shares are held, either way, it was held that therefore, the prescribed 50 per cent of the shares, as required by Clause (i) of Section 2(18)(b), could not be said to be held by the public. If this condition is not satisfied, then irrespective of the question as to whether the second or the third condition is satisfied or not, the company will not be one which falls within Section 2(18)(b) of the Act. 19. The expression "company in which the public are substantially interested" came up before the Supreme Court in CIT v. Amrutanjan Ltd. with reference to provisions of Section 23A of the IT Act, 1922. The Court after noticing the fact that the Act did not define explained it as : "Normally a company woul....
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....ay Public Trust Act, 1950 may be true because in a public trusts, admittedly the beneficiaries are the members of the general public and, therefore, under Section 2(10) every member of the public has to be regarded as a "person having interest" and this fact coupled with the right of every member of the public under Section 41B to file a complaint, resulting in the Charity Commissioner exercising his power to institute an enquiry with regard to the affairs of the trust and that every member of the public has the right to resort to the provisions of Section 50 that may result in the filing of an appropriate suit in an appropriate Court for redressal of justice. The above statutory provisions and fact do not establish that every member of the public has substantial interest in the assessee-company through the public trusts. It may be that the general public are the beneficiaries in a public trust and are persons interested in the public trust in view of the Supreme Court in the decision of Deoki Nandan v. Murlidhar as also the decision of the Lahore High Court in the case of Nihal Chand v. Narain Das AIR 1934 Lahore 949, but that does not mean that public are substantially interested....
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....ust even though for benefit of public in nature cannot be equated with public. It is the ratio of a decision that is material for it is the ratio that binds as a precedent and not the conclusion. 24. The term 'held by' might be as stated by the learned Counsel, a narrower concept than the concept "substantially interested". But both are associated with public and the public trusts are held to be not public in itself it gives the same result-in the first case, shares held by public and in the later case, where public is substantially interested. If the trusts are not public, both fail. It may not be out of place to mention that Clause (d) in the earlier definition 2(18)(b)(B) making holding of shares by public which was subject-matter of consideration of Bombay High Court was deleted, though by certain more companies were included under the coverage of Section 2(18) of the Act. That shows that even when public holding was one of the criteria to determine the character of the company in which public are substantially interested the shareholding by trust was not held to be public; it would all the more be logical that such shareholding by the trust will not be taken as a cr....
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....ffirmed by the Supreme Court in CIT v. Straw Board Manufacturing Co. Ltd. has reiterated the above view having followed the Supreme Court decision in the case of Getti Chettiar. On p. 84 the Punjab and Haryana High Court has quoted the above observations of the Supreme Court. The jurisdictional Bombay High Court has also in CGT v. Dr. R.B. Kamdin reiterated the above view by observing that the essential meaning or the basic idea of a term must be borne in mind while interpreting it and on pp. 481-2 observed as under: It (Supreme Court) further observed that where, within the framework of the ordinary acceptation of a word, every single requirement of the definition clause was fulfilled, it would be wrong to take the definition as destroying the 'essential meaning' of that word. With respect, I agree with the approach commended in the judgments delivered in both these cases. In view of the above discussion, it is necessary to resort independently to the natural and ordinary meaning of the term "company in which the public are substantially interested", in the present appeal. 26. The argument has no force. As aforesaid, the public at large having interest in....
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....reholder which would attract the provisions of Section 2(22)(e). The Companies Act, 1956, by Section 153 does not recognize any trust or beneficial interest of a person in any share. There also the beneficial holding was not recognized for the purposes of deemed dividend which is even an inclusive definition. 28. In CIT v. Harrisons Crossfield (India) Ltd. the Revenue contended that the Tribunal has entered a clear finding to the effect that the five persons did hold (less than six) 50 per cent of the voting power in the assessee-company, that this finding was entered on a consideration of the provisions of Section 2(18)(b)(B)(iii) of the Act and that after entering such a clear finding the Tribunal was not justified in approaching the question in a different manner with reference to the purpose and in holding that the company is one in which the public are substantially interested. The attention of the Court was drawn to the decision of the Supreme Court in Punjab Produce & Trading Co. Ltd. v. CIT (1971) 82 HP, 619 (SC). The Court answered the question referred in favour of the assessee and against the Department and held that: We could not find any assistance from the....
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....ustified in adding words thereto so as to make out some presumed object of the legislature.... If the legislature has failed to clarify its meaning by the use of the appropriate language, the benefit thereof must go to the taxpayer. It is settled law that in case of doubt that interpretation of a taxing statute, which is beneficial to the taxpayer must be adopted. 30. It is a cardinal principle in construction of enactments that, unless the context otherwise requires, the definition of an expression contained in the Act should prevail throughout the Act. Whenever a different meaning is sought to be given to that expression occurring at different places in the Act, it is necessary to point out why the context requires different meaning to be given to the same expression occurring at different places in the Act. Reference is invited to the decision in the case of CIT v. Dredging Corporation of India. "Unless the context otherwise requires" means that should have been used elsewhere in the Act in different context. If we were to interpret those words in that context, one may ignore the definition given under Section 2(18) of the Act. 31. Mr. Vyas further contended that whereas t....
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....usions in the definition and cannot drive home the proposition that by using the term "is said to be", the legislature has tried to rope in certain categories of companies which otherwise would not have been regarded as companies in which public are substantially interested. The result could have flowed if the legislature used the term 'means' instead of 'is said to be'. 32. Mr. Vyas then referred to the decision of the Supreme Court in Printers (Mysore) Ltd. v. Asstt. CTO rendered in the context of a concessional rate of tax, the decision in the case of N.K. Jain v. C.K. Shah dealing with a welfare legislation; the decision in Workmen of American Express International Banking Corporation v. Management of American Express International Banking Corporation, a three Judge Bench of the Supreme Court in The Vanguard Fire & General Insurance Co. v. Fraser & Ross several tax cases including CIT v. B.C. Srinivasa Setty Bombay High Court in Ritz Ltd. v. CIT (1995) 126 CTR (Bom) 33 : (1995) 216 LTR 138 (Bom). The discussions on the above cases compel one to look into the provisions of Section 2(18) in the relevant context. It is clear that the concessional rate of taxatio....
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....mechanically attribute to it the meaning assigned to it in definition clause and where the context does not permit or where it would lead to absurd or unintended result, the definition of an expression need not be mechanically applied. No absurdity is seen in this case in adopting the meaning given in the definition clause. The Supreme Court observed that "The opening words in Section 2 viz. 'In this Act, unless the context otherwise requires' must be examined in the light of the context, the title, the preamble and all the other enacting parts of the statute. Due weight ought to be given to the opening words. The subject matter and the context in which a particular word is used are of great importance and it is axiomatic that the object underlying the Act must always be kept in view in construing the context in which a particular word is used. So construed there is much in the context to show that the restricted meaning in the definitions should not be applied." It may be that even where the definition is exhaustive inasmuch as the word defined is said to mean a certain thing, it is possible for the word to have a somewhat different meaning in different sections of the Act....
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..... a company having for its object the promotion of commerce, art, science, religion, charity or any other useful object and which prohibits payment of dividends to its members) will be regarded as a company in which the public are substantially interested without the application of the various tests as to the composition of the ownership of the shares in, and control over the affairs of, the company. Further, in order to cover the entities which are not registered as companies but are declared to be companies for tax purposes and to companies limited by guarantee which are not registered under Section 25, the CBDT has been empowered to direct that any such entity or company shall be treated as a company in which the public are substantially interested having regard to the objects of the company, the nature and composition of its membership and other relevant considerations. 36. Notes on Clauses of the Finance Bill, 1983 may also be referred to for amended provisions which is applicable to the impugned year. It reads: Sub-clause (b) seeks to amend Clause (18) of Section 2 of the IT Act. Under the proposed amendment, a company whose shares are not listed in a rec....
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....of the Companies Act, 1956, and it fulfils the conditions specified in this regard in the IT Act. 139. The conditions which the last category of companies have to fulfil are that, either (i) the equity shares of the company should, as on the last date of the relevant year, be listed in a recognised stock exchange in India, or (ii) equity shares carrying not less than 50 per cent of the voting power should be beneficially held by: (a) the Government, or (b) a statutory corporation, or (c) any other widely held company or a wholly owned subsidiary of such company, or (d) the public (other than a director of the company or a closely held company). 140. Two other conditions laid down are that the shares of the company should be freely transferable by the holders to other members of the public and the affairs of the company or the shares carrying more than 50 per cent, of its total voting power should, at no time during the relevant previous year, be controlled or held by five or less persons. For the purposes of determining whether the affairs of a company or shares in the company are controlled or held by five or less persons, pers....