TaxTMI 
TaxTMI 
1960 (12) TMI 7
X X X X Extracts X X X X
X X X X Extracts X X X X
....rendra, Bipinchandra, Hareschandra and Krishnakumar. We are concerned with the account year of the company, April 1, 1942, to March 31, 1943, the assessment year being 1943-44. In that year, the dividend which was declared at the annual general meeting held on December 17, 1943, was less than what was requir ed under section 23A of the Indian Income-tax Act. The question, therefore, arose whether the company could be said to be one to which section 23A(1) of the Act was applicable, regard being had to the third proviso and the Explanation under it. During the accounting period, the company had eight directors, whose names along with the shares respectively held by them are given below : Shares (1) Shri Maganlal Parbhudas ... 1,344 (2) Shri Ravindra Maganlal ... 1,168 (3) Shri Surendra Maganlal ... 1,100 (4) Shri Amritlal Chunilal (jointly with Babulal Chunilal) ... 833 (5) Shri Babulal Chunilal ... 100 (6) Shri Bhagwandas Harakchand ... 50 (7) Shri Haridas Purshottam ... 50 (8) Shri Sir Chunilal B. Mehta (jointly with Lady Tapibai Chunilal) ... 50 ------------------- Total 4,695 ------------------- Out of the balance of the shares, 4,754 shares were ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... shares each held by Bipinchandra, Hareshchandra and Krishnakumar in the capital of the assessee company are held by members of the public within the meaning of the Explanation to the third proviso to section 23A ?" The Members of the Tribunal in deciding the appeal before them gave slightly different reasons. According to the Accountant Member the shares held by persons interested in the managing company were under the control of the directors of the appellant company and those persons could not be considered to be members of the public. The Judicial Member held that the directors were controlling the shareholders of the company, that their relatives were mere nominees, whose voting power was controlled by the directors, and that the public could not, therefore, be said to be substantially interested as required by the Explanation to the third proviso to the section. When the High Court heard the case, the learned judges addressed themselves to the question, what was the proper meaning of the expression "held by the public" in the Explanation. They came to the conclusion that the object of the third proviso and the Explanation was that the voting power to be exercised by the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hird proviso. It may be pointed out that there is no dispute that 551 shares were, in fact, held by the public. The total shares of the company being 10,000, the company can only avoid the application of section 23A, if the public hold shares carrying not less than 25 per cent. of the voting power, that is to say, 2,500 shares. The directors between them hold 4,695 shares. These have been held by the High Court to be shares which cannot be said to be beneficially held by the public. Even so, if the rest of the shares can be said to be held by the public, then the minimum 25 per cent. would still be reached. It was in this context that the shares of the sons of Maganlal, Bipinchandra, Harishchandra and Krishnakumar were considered. If those shares can be said to fall outside the category of shares beneficially held by the public, then those shares along with the shares held by the directors reduced the number of shares held by the remaining shareholders to less than 25 per cent. It was on this view that the case was remitted to the Tribunal by the High Court to obtain a further statement whether Maganlal Parbhudas was de facto controlling these three shareholders. Two questions, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r that the sub-section shall not apply to any company in which the public are substantially interested or to a subsidiary company of such a company if the whole of the share capital of such subsidiary company is held by the parent company or by the nominees thereof. Explanation.--For the purpose of this sub-section,--a company shall be deemed to be a company in which the public are substantially interested if shares of the company ... carrying not less than twenty-five per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and are at the end of the previous year beneficially held by, the public ... and if any such shares have in the course of such previous year been the subject of dealings in any stock exchange ... or are in fact freely transferable by the holders to other members of the public." It is clear from the third proviso that the sub-section does not apply to a company in which the public are substantially interested. The Explanation lays down, among the tests, the minimum interest which can be called " substantial " by saying that shares of the company carrying not less than 25 per cent. of the voting power must be allott....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... can take the benefit of the third proviso. But if more than 75 per cent. of the shares have again passed into the hands of a group which acts as a block, the third proviso ceases to apply. In deciding if there is such a controlling interest, there is no formula applicable to all cases. Relationship and position as director are not by themselves decisive. If relatives act, not freely, but with others, they cannot be said to belong to that body, which is described as " public " in the Explanation. But it would be otherwise if they were free. Similarly, if directors or some of them do not act as a body or in concert with others, the fact that they are directors is of no significance. The case of Tatem Steam Navigation Co. Ltd. v. Commissioners of Inland Revenue illustrates the first proposition. There, the assessing Commissioners had made directions under section 21 of the Finance Act, 1922, against which the company appealed on the ground that it was a company in which the public were substantially interested, inasmuch as shares of the company carrying not less than 25 per cent. of the voting power had been allotted unconditionally to, or acquired unconditionally by, and were, at ....