TMI Blog1973 (3) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the company. According to regulation 60 of Table "A" every member has one vote for every share held by him, no distinction being kept between preference and equity shares. The accounting year of the company is the calendar year. During the year 1959, out of the 12,000 equity shares 6,834 were held as under : " 1. V. Gopal Naidu 161 Shares Director 2. G. Purushotham (son of No. 1) 861 " " 3. G. Krishnan (son of No. 1) 186 " " 4. G. N. Sam (son of No. 1) 161 " " 5. G. R. Rudrappan (step-brother of G. Krishnan) 2,015 " " 6. G. Venkataraman (Brother of No. 5) 653 " " 7. P. Balasubramaniam (son of No. 2) 159 " " 8. Vijayakumar (son of No. 3) 659 " " 9. Mani (unmarried daughter of No. 2) 100 " " 10. Travancore Forward Bank Ltd. 1,328 " " 11. Mrs. Kamalam Purushotham (wife of No. 2) 200 " " 12. A. Amirtha (married daughter of No. 2) 101 " " 13. P. Neelaveni (married daughter of No. 2) 100 " " 14. S. V. Raman 150 " " ---------- Total ... 6,834 ---------- The shares held by Travancore Forward Bank Ltd. are the shares pledged by G.Krishnan. In the register of members of the company, the name of this bank appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4,70,000 represented the accumulated profits in the hands of the company. The Income-tax Officer rejected the contention that there was no loan or advance by the company to the individual shareholders and that the said Rudrappan helped himself with the funds of the company and that misappropriation or embezzlement should not be considered as payment by way of a loan. In that view he held Rs. 3,21,173 as dividend under section 2(6A)(e) of the Act in the hands of the assessee. In the appeal preferred by the assessee originally, the Appellate Assistant Commissioner confined his consideration to the question whether the sum of Rs. 4,50,000 represented a loan or advance by the company to the assessee. He held that Rudrappan had criminally misappropriated the funds of the company, that the other partners of the managing agency firm were not aware of the acts of Rudrappan, that there was no entry in the books of the company to show that any loan had been given to the assessee and that, therefore, there was no payment by the company to a director or a shareholder as required under section 2(6A)(e). In that view he did not consider it necessary to decide the other issue. The department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23A. Explanations 1 to section 23 A defines the expression " company in which the public are substantially interested ". We are not concerned with clause (a) of that Explanation. Clause (b) prescribes four conditions. Unless all these four conditions are satisfied, the company shall not be deemed to be a company in which the public are substantially interested. The four conditions are : 1. The company should not be a private company as defined in the Companies Act 1956. 2. Its shares, other than 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 previous year beneficially held by the public. This fifty per cent. which shall be regarded as held by the public is reduced to 40 per cent. in the case of Indian companies whose business consists wholly in the manufacture or processing of goods. 3. The shares of the class mentioned in condition (2) were either subject matter of dealings in the previous year in any recognised stock exchange in India or freely transferabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntially interested." The Supreme Court further held : " The test is first to find out whether there is an individual or a group which controls the voting power as a block. If there be such a block, the shares held by it cannot be said to be 'unconditionally' and 'beneficially' held by members of the public." These principles were again affirmed in Commissioner of Income-tax v. East Coast Commercial Co. Ltd. and the Supreme Court further observed : " It is clear that in deciding whether an order under section 23A(1) is called for, the Income-tax Officer must determine (i) whether there is an individual or a group which can control the voting power as a block. The existence of such a block may be established by showing that the voting power is vested in persons possessing more than fifty per cent. of the shares issued who act in concert ; and (ii) that the block exercises a controlling interest over the affairs of the 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 subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has already been said that the security can be a legal mortgage only if the mortgagee is entered on the register, and that this can only be done if there is an outright transfer to him. Hence, a legal mortgage involves a registered transfer which, for the protection of the borrower, should be coupled with a written agreement setting out the terms and containing an undertaking by the lender to retransfer when the borrower redeems by repaying the principal, interest and costs." When once the share is registered in the name of the mortgagee, it is the mortgagee who can exercise the vote. The mortgagor or the pledger had no right either to vote or control or direct the voting by the mortgagee. Even in cases where the name of the pledger of the share continued to be the holder of the pledged shares in the books of the company, the pledger is bound to vote according to the directions of the pledgee bank. This position is also supported from the following passage in the Hand Book on Formation, Management and Winding up of Joint Stock Companies by Sir Francis Gore-Browne (29th edition) at page 425 : " Where an agreement, for the sale of shares has been made, or where, shares are mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in detail in which the company may be forced on commercial expediency to dispose of raw materials. From that fact alone it should not be said that they are dealers or doing business in selling those raw materials. In this case, the finding of the Tribunal and the Appellate Assistant Commissioner is that Rs. 17 lakhs worth of cotton sold represented only the cotton that was not required for the business of the company and it was sold after getting the express permission of the Textile Commissioner. We are, therefore, of opinion that the company's business is manufacture and sale of yarn and that, therefore, it comes within the proviso to Explanation I(bi). If that is so, even if these 1,328 shares, held by the Travancore Forward Bank Ltd. are to be treated as not held by the public, the second condition is satisfied. The Appellate Assistant Commissioner and the Tribunal have found that the equity shares of the company were the subject-matter of dealings in the Madras Stock Exchange and the company had not at any time in the year 1959 refused registration of the transfer of any shares. But the learned counsel for the revenue, relying on one of the articles of association of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a person whom they consider undesirable. The decision, is it is submitted, incorrect, and was dissented from by the Madras High Court in East India Corporation Ltd. v. Commissioner of Income-tax. (A similar point was raised before the Bombay High Court in some writ petitions and the department agreed to regard shares as freely transferable in such cases). Shares must be treated as freely transferable if any agreement or the articles of the company do not restrict the shareholder's right to transfer the shares, and the right to transfer the shares cannot be said to be restricted merely because the directors of the company have discretion to refuse to register transfer of shares in favour of a person whom they consider undesirable. The articles of public companies must always contain a provision conferring such discretion and it cannot be said that in such cases the public companies restrict the right to transfer their shares. Such restriction is really an attribute of a private company and not of a public company as is made clear in section 3(1)(iii) of the Copanies Act, 1956. It may, also be pointed out that no, instance has been brought to the notice of any of the authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the directors of the company and that since the number of directors in this case is less than six this condition is not satisfied. We are unable to accept this contention. Unless it is shown that though the number of directors is less than six, they have a direct or indirect control over more than 50 per cent. of the voting power, the company could not be said to a controlled company. In fact, according to section 252 of the Indian Companies Act, the minimum number of directors prescribed for a public limited company is only three. If the argument of the learned counsel for the revenue is to be accepted, then in all cases of public limited companies where the number of directors is less than six, the company will automatically have to be held as one in which the public are not substantially interested. In Commissioner of Inome-tax v. Jubilee Mills Ltd., the Supreme Court observed : " The control of the affairs of the company is ordinarily in the hands of the directors of the company but there may be cases in which the managing agents, by reason of their superior holding of shares, may be able to appoint the directors and generally to control the views of the directors. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were holding only 5,506 equity shares and the remaining 6,494 equity shares belong to the members of the public. In regard to preference shares, it has been found by the Tribunal that only 210 shares belonged to the controlling group and as such the remaining 7,790 preference shares belong to the public. Taking both the categories of shares together, out of the 20,000 shares, 14,284 shares are held by the public who are persons other than those forming the controlling group. Thus, the controlling group holds only very much less than 50 per cent. of the total voting power. We, therefore, hold that the fourth condition is also satisfied. All the conditions have been cumulatively satisfied, the company is one in which the public are substantially interested within the meaning of section 23A of the Indian Income-tax Act, 1922. The second question is covered by our judgment in Govindarajulu Naidu v. Commissioner of Income-tax. In that case, the assessee family held 3,300 partly paid up shares in a private limited company. Towards the first and second call money amounting to Rs. 1,65,000 the company debited the account of the assessee and the call monies have been treated as havin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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