2000 (11) TMI 38 - HC - Income Tax

Summary

Issues Involved:

1. Whether the status of the assessee-company should be treated as a public limited company.
2. Whether the status of the assessee-company should be taken as a public limited company notwithstanding the provisions of section 2(18) of the Income-tax Act, 1961.

Detailed Analysis:

1. Status of the Assessee-Company as a Public Limited Company:

The primary issue is whether the assessee-company should be considered a public limited company for the assessment years 1978-79 to 1980-81. Initially, the Assessing Officer had assessed the company as a public limited company because more than 25% of its shares were held by one or more body corporate, invoking section 43A of the Companies Act. However, the Commissioner of Income-tax, exercising powers under section 263 of the Income-tax Act, reclassified the company as a private limited company due to restrictions on the transfer of shares in its articles of association. The Tribunal reversed this decision, relying on the Supreme Court judgment in Shree Krishna Agency Ltd. v. CIT and the provisions of section 43A of the Companies Act, which deemed the company a public limited company.

2. Applicability of Section 2(18) of the Income-tax Act:

Section 2(18) of the Income-tax Act defines a "company in which the public are substantially interested." For the assessee-company to qualify, it must meet specific conditions, including the free transferability of shares. The court examined the articles of association, which imposed restrictions on share transfers, requiring board approval and giving existing shareholders pre-emptive rights. These restrictions indicated that the shares were not freely transferable, a key characteristic of a public limited company.

Relevant Provisions and Analysis:

- Section 2(18) of the Income-tax Act: Defines a "company in which the public are substantially interested," emphasizing the free transferability of shares.
- Section 43A of the Companies Act: Deems certain private companies as public limited companies if 25% of their share capital is held by bodies corporate. However, the court noted that even under section 43A, the company retained characteristics of a private limited company, such as restrictions on share transfers.

Judgment and Conclusion:

The court concluded that the restrictions in the articles of association on the transfer of shares prevented the company from being classified as a public limited company or a "company in which the public are substantially interested." The court emphasized that free transferability of shares is an essential element for such classification. Consequently, the court answered both questions in favor of the Revenue and against the assessee, determining that the assessee-company was neither a public limited company nor a company in which the public are substantially interested.

Disposition:

The references were disposed of with no order as to costs, and both questions were answered in the negative, favoring the Revenue.