TMI Blog1969 (6) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... uper-tax payable by the company in respect thereof was, therefore, Rs. 13,22,988. The company had declared Rs. 7,00,000 to be distributed as dividend. Since the said amount was less than 60 per cent. of Rs. 13,22,988, which was the balance of the assessable income of the company after deduction therefrom of the income-tax and super-tax payable by it in respect thereof, the Income-tax Officer was of the opinion that the provisions of section 23A of the Income-tax Act, as it stood at the material time, were attracted. He, therefore, issued a notice to the assessee-company requiring it to show cause why an order under section 23A should not be made against it. The assessee contended that it was excluded from the operation of section 23A(1) by reason of the third proviso to that sub-section read with the Explanation thereto. It was contended that the assessee-company was a company in which the public were substantially interested and was also a subsidiary of a company in which the public were substantially interested and consequently was excluded from the operation of section 23A(1). The claim of the assessee was not accepted by the Income-tax Officer and an order under section 23A was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the Income-tax Officer can consider whether having regard to the loss incurred by the company in earlier years or to the smallness of the profit the payment of a dividend or a larger dividend than that declared would be unreasonable, the assessee must distribute by way of dividend the whole of its commercial profit ? " The Tribunal agreed to make a reference on the first and the second questions on the ground that they were questions of law arising out of its order. It was, however, of the opinion that the third question did not arise out of its order and, therefore, was not required to be referred to this court. It accordingly drew up a statement of the case and referred the first two questions to this court. When the reference came before this court, a notice of motion was taken out on behalf of the assessee requesting that a supplementary statement of the case be called for from the Tribunal requiring it to state the third question which the assessee had asked in its application before the Tribunal on the ground that the said question properly arose on the Tribunal's order and was wrongly refused by it. The said notice of motion was allowed by this court and the Tribunal wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said claim, in our opinion, cannot be seriously pressed inasmuch as what the said provision requires is that the whole of its capital and not substantially or practically the whole of its capital must be held by the parent company. In order to substantiate its claim for exemption under the first part of the third proviso read with the Explanation, what the assessee has to satisfy is that it is a company in which the public are substantially interested within the meaning of the Explanation. Now, the requirements of the Explanation are : (1) that the shares of the company carrying not less than 25 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 (2) such shares have been, in the course of the previous year, the subject of dealings in any stock exchange in the taxable territories or are in fact freely transferable by the holders to other members of the public. The factual position so far as the assessee-company is concerned is that out of the total of 30,000 ordinary shares of the company, 29,893 shares are held by the Premier Construction Company in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other words, which are uncontrolled by the group which controls the affairs of the company. According to the test laid down by the Supreme Court, in order that a company may be one in which the public are substantially interested, shares carrying not less than 25 per cent. of the voting power must be possessed by the members of the public and must be free from the control of any person or persons constituting a block controlling the affairs of the company. Concentration of the voting power beyond 75 per cent. in the hands of a single individual shareholder or a group of shareholders acting in concert excludes such shareholder or group of shareholders from the concept of the word " public " as used in the Explanation. According to the Tribunal, since 95.5% of the shares were held by the Premier Construction Company, voting power in excess of 75 per cent. was held by it as a single shareholder and consequently the shares held by the Premier Construction Company could not be considered as unconditionally or beneficially held by the " public " within the meaning of the Explanation. Since the rest of the shares held by the public were far less than the required minimum of 25 per cent., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Supreme Court stated that the words " unconditionally and beneficially " occurring in the Expanation underlined the fact that no person who holds a share or shares not for his own benefit but for the benefit of another and who does not exercise freely his voting power could be said to belong to that body which is designated public " According to Mr. Palkhivala, if this concept of the word " public is borne in mind, a company in which the public are substantially interested would undoubtedly fall within the ambit of the word " public " and its holdings, irrespective of its extent, would constitute the holding by the public. Now, the object of section 23A(1) is undoubtedly to prevent avoidance of super-tax by the shareholders of a company by resorting to the expedient of not distributing its dividend or profits. The sub-section accordingly has required every company to declare as dividend at least sixty per cent. of its assessable income as reduced by the amount of income-tax and super-tax payable thereon and has compelled obedience to the requirement by providing that, if a company fails to do so, certain consequences which are of a penal nature would ensue. By the third ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidual or a group of individuals manipulating the dividend policy of the company for his or their own benefit in view of the Explanation. It would be seen from the terms of the Explanation that what are deemed to be companies in which the public are substantially, interested are not necessarily companies in which the public have a controlling interest but in which the public have some interest, which is not nominal. The minimum limit of public interest which would qualify it to be a company in which the public are substantially interested is only that of voting power of 25 per cent. A company in which the public are only interested to the extent of 25 per cent. could easily be a company which is controlled or dominated by an individual or a, group of individuals and the dividend policy of the company could be capable of being manupulated by the individual or the group for their own benefit. Even then under the third proviso read with the Explanation such companies are excluded from the operation of the provisions of section 23A(1). It would not, therefore, be advisable in proceeding to interpret the Explanation to approach it in the light of a supposed intendment as is suggested by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the shares which are held unconditionally and beneficially by the public ? The words in parenthesis following the word "public" exclude from its ambit companies to which the provisions of section 23A(1) apply so that in computing the shares held by the public those held by companies to which the provisions of the sub-section apply will have to be left out. The words in parenthesis are words of exclusion and state what is excluded so that the inquiry as to which shares are held by the "public" unconditionally and beneficially will have to be made only with reference to the shares held by shareholders other than companies to which the provisions of the sub-section apply. They have not the effect of positively including within the ambit of the expression " public " any shareholder or category of shareholders without further inquiry. Mr. Palkhivala says that they must be taken to have such effect, when the reason for the exclusion of the companies to which the sub-section applies is considered. In other words, Mr.Palkhivala's argument is that, although the words by themselves have not the effect which lie contends for, such an effect can be gathered on the basis of a supposed intendm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld beneficially by the public within the meaning of the Explanation to section 23A(1) of the Indian Income-tax Act, 1922, one has first to see whether there is an individual or a group holding the controlling interest, which group acting in concert can direct the affairs of the company at its will. The controlling interest is effective only if the group owns 51 per cent. of the total shares, but the company still will be a company in which the public can be said to be substantially interested because to cease to be so the shareholding of the group must be more than 75 per cent. " Again in Commissioner of Income-tax v. East Coast Commercial Co. Ltd. the Supreme Court observed : In deciding whether a distribution order is called for under section 23A(1) of the Indian Income-tax Act, 1922, the Income-tax Officer must determine: (i) whether there is an individual member who, or a group of members which, can control the voting power of the company 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 50 per cent. of the shares issued who act in concert ; and (ii) that the block exercises a controlling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or in the interpretation put on them by the Supreme Court which would warrant a different consideration in the case of individual shareholders and in the cases where the shareholders are companies in which the public are substantially interested. Mr. Palkhivala has argued that, although no clear words may be found in the Explanation as it was worded at the material time making a distinction between the shares held by a company in which the public are substantially interested and the shares held by the other members of the public, that such was the intention of the legislature would be apparent from the subsequent amendments made in the Act of 1922 and the corresponding provisions of the new Act, of 1961 which replaced the old Act. He has accordingly invited our attention to the amendments made in 1955 and 1957 to the Act of 1922 and the corresponding provisions contained in the Act of 1961 and the amendments made in the new Act in 1965. Now, we do not think that, having regard to the nature, scope and extent of the amendments, they can be pressed into service for the purpose of interpreting the provision as it stood before the amendment. By these amendments several additions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to prevent a real or supposed anomaly. " In our opinion, therefore, the Tribunal was right in the view that it took that the, assessee-company is not on in which the public are substantially interested and, therefore, not entitled to exemption from the operation of the provisions of section 23A(1). In that view of the matter, the first two questions must be decided against the assessee. Coming now to the third question, the same, in our opinion, must be answered in favour of the assessee. It may be that, on merits, the assessee might not have been able to claim that an order against it under section 23A was not justified as, having regard to the smallness of the profits, a dividend higher than what was declared by the assessee was unreasonable. But in the order of the Tribunal the merits of the claim have not been considered and it has disallowed the claim on the ground that before the assessee could raise the claim it had to satisfy the condition, viz., that it should have distributed the whole of the commercial profits available to it. That view of the Tribunal is clearly wrong and the question as framed, therefore, has got to be answered in favour of the assessee. We ..... X X X X Extracts X X X X X X X X Extracts X X X X
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