Scope and the method of applying the provisions of Section 2(18) to foreign concerns. - Income Tax - 377/CBDT

INSTRUCTION NO. 377/CBDT Dated: February 3, 1972 Section(s) Referred: 2(17) ,2(18) Statute: Income - Tax Act, 1961 The Board wish to clarify certain doubts entertained about the scope and the method of applying the provisions of Section 2(18) of the Income-tax Act to foreign concerns, which are assessable as 'companies' in terms of the provisions of Section 2(17) of the Income-tax Act, 1961. 2. At the outset, it has to be emphasised that the term 'company' used in the Income-tax Act, as defined in Section 2(17), is wider than the corresponding term in the Indian Companies Act, 1956. As a result, foreign associations, which may not be companies under the companies Act may still be 'companies' under the Income-tax Act, where such association fall within the per view of Section 2(17)(ii). 3. The provisions of Section 2(18) of the Income-tax Act, 1961 are applicable as much to Indian Companies as to foreign associations which are 'companies' in terms of Section 2(17). So, even such foreign associations would have to be treated as companies in which the public are substantially interested; but this can be done only when they satisfy all tests prescribed u/s. 2(18)(b). 4. There are three tests prescribed u/s 2(18)(b), according to the first of which a foreign association assessable as a 'company must establish that its equity shares, carrying not less than 50% of the voting power, were allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by 'the public'. For this purpose, the expression 'the public' would include the public in India as well as outside. 5. The second test to be fulfilled by foreign association, assessable as 'companies' is that their shares should have been the subject of dealing in any recognised stock exchange in India at any time during the relevant previous year or were freely transferable by the holder to other members of the public. It will be noticed that the second test envisages two sets of situations. Few foreign associations are likely to have their shares dealt in any stock exchange in India. As such, for most of them, the second test will imply the free transferability of their shares. 6. The third text prescribed is that the affairs of the company, or the shares carrying more than 50% of its total voting power, were at no time during the relevant previous year controlled or held by 5 or less 'persons' 'the term person' being as clarified by Explanation 1 to Section 2(18). 7. Before treating the foreign associations assessed as Companies, as Companies in which the public are substantially interested, the Income-tax, Officers must satisfy themselves that each of three tests has been fulfilled by the concern. It should not be difficult to obtain the relevant particulars from the concerned company, for, it will stand to lose by with-holding them. In case the foreign association as such is not assessable in India but only its subsidiary is, it will be the latter who will be denied the benefits of Section 108(b), if it is not proved that the parent company satisfied the tests laid down in Section 2(18)(b). 8. There may be certain cases where the number of shareholders is very large or the controlling interests changed hands during the relevant previous year. In such cases, it could be difficult for the Income-tax Officers to give a prompt decision. For enabling him to expedite matters, the foreign association may be asked, to file certificates from established chartered accountants testifying to the fact that it does fulfill each of the three conditions laid down under Section 2(18)(b) of the Income-tax Act, 1961. However, even these certificates should be subject to test checks. 9. The above instructions will apply to all such foreign associations which have been/are recognised as such under the term of Section 2(17) of the Income-tax Act and for assessment years to which such recognition relate.