TMI Blog1964 (2) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... sted within the meaning of third proviso to section 23A(1) read with the Explanation thereto and, therefore, the provisions of sub-section (1) of section 23A were not attracted. The Income-tax Officer came to the conclusion, firstly, that 75 per cent. of the shares and the voting power of the company were held by persons who could not be regarded as belonging to the public and, secondly, under the articles of association of the company the shares were not freely transferable. So concluding, he made the order under section 23A(1) of the Act. His order was affirmed in appeal by the Appellate Assistant Commissioner. In the appeal before the Tribunal the same points were urged in support of the assessee's contention. The Appellate Tribunal upon consideration of the materials before it found that, in the relevant accounting period, the total share capital of the applicant-company consisted of 10,400 shares of which the real and beneficial shareholders were as follows: 1.Mugneeram Bangur Co. ... 125 2.Ramcoomar Bangur ... 1,950 3.Naraindas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had, in fact, been dealings in the shares in the course of the relevant previous years. The Tribunal also found that the assessee did not satisfy the other alternative condition regarding the free transferability of its shares as article 13 of the articles of association of the company Jays down that the directors may refuse to register any transfer of a share and also veto any transfer without assigning any reason . As the second condition of the Explanation to the third proviso was not fulfilled, the Tribunal refused to give any relief to the assessee. Article 13 of articles of association of the company runs as follows: The directors may refuse to register any transfer of a share: (a)Where the company has lien on the share. (b)Where it is not proved to their satisfaction that the proposed transferee is a responsible person, (c)Shares may at any time be transferred by a member to any other member or a non-member by the instrument of transfer in accordance with the procedure provided in clauses 14, 15, 16, 17 and 18 of the articles of association. (d)The directors may also veto any transfer without assigning any reason. Mr. Meyer Las contended bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany 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. The Explanation runs as follows: For the purpose of this sub-section,- a company shall be deemed to be a company in which the public are substantially interested if the shares of the company (not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in profits) 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 (not including a company to which the provisions of this sub-section apply), and if any such shares have in the course of such previous year been 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 scope of this Explanation has been dealt with by their Lordships of the Supreme Court in the case of Raghuvanshi Mills Ltd. v. Commissioner of Income-tax [1961] 41 ITR 613 ; [1961]2 SCR 970, the relevant portions whereo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power) have been (i) allotted unconditionally to or (ii) acquired unconditionally by and are (iii) at the end of the previous year beneficially held by the public (not including a company to which the provisions of section 23A(1) apply); and (2)Any such shares have, in the course of such previous year been the subject of dealings in any stock exchange in the taxable territories or are in fact freely transferable to the members of the public. On a perusal of the Supreme Court decision in Raghuvanshi Mills' case (supra), it appears that their Lordships have decided as to what are the ingredients which should be considered with regard to the first part of the Explanation and this decision does not point to the question whether both the conditions should be fulfilled in order to obtain an exemption from the operation of section 23A(1). This section contains a penal provision and, as such, the initial burden is on the Income-tax Officer to show that his order is in compliance with the terms of the section. Since his order, which was ultimately confirmed by the Tribunal, shows that the initial burden was discharged by him, the onus of proving that a company is one where both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbers of the public. As regards the second condition the Tribunal has found that it was not satisfied. The reasons are that (1) there is no evidence of dealings in any stock exchange and the production of the stock exchange bulletin in which the shares were quoted was not by itself sufficient. (2) The shareholdings of the beneficial owners remained unaltered in the two years of account and there were no dealings thereon in these years. (3) The restrictive clause regarding transferability of shares in the memorandum of association does not show that the alternative ingredient in the second condition was fulfilled. In giving the above reasons the Tribunal has observed that the shares of the assessee-company are the properly of the Bangur group and if there had been any fictitious or colourable transactions in respect thereof in the past and on that basis quotations were made in the official bulletin of the Calcutta Stock Exchange, that does not satisfy the requirement of law. Mr. Meyer has criticised this part of the order on the ground that the Tribunal has committed an error by stating that the shares of the assessee-company are the property of the Bangur group inasmuch as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The quotations in the stock exchange bulletin are undoubtedly prima facie evidence as to dealings in shares in a stock exchange, but since the Tribunal considered on facts stated in the foregoing paragraph that no value should be attached to the quotations in the stock exchange bulletin as to actual dealings in shares, its decision based on facts in this regard cannot be interfered with. There is also a finding of fact to the effect that if the assessee wanted to avail of the benefit conferred by the third proviso and the Explanation aforesaid, in so far as the second condition therein was concerned, it was its imperative duty to adduce further evidence in addition to the stock exchange bulletin to prove conclusively the ingredients of the second condition of the Explanation. It appears from the paper book that although an opportunity was given to the assessee to produce satisfactory evidence in this regard, it was at no point of time availed of. Accordingly, we are of opinion that as the assessee has failed to discharge the onus to prove that it is entitled to the exemption from the operation of section 23A(1), no benefit arising out of the third proviso and the Explanation c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the position, we are of opinion that the Tribunal was correct, when it finds that so long as the directors possess the right to refuse to register any transfer without any reason or to veto any transfer, it follows that the shares of the company are not freely transferable, within the meaning of the third proviso and the alternative ingredient of the second condition in the Explanation of section 23A(1) of the Act. In the above premises, we find that the Tribunal was justified in finding that as the assessee could not prove the second condition of the said Explanation, it cannot be said to be a company in which the members of the public are substantially interested. Accordingly, the order under section 23A(1) of the Act passed by the Income-tax Officer on the assessee-company is not liable to attack. Our conclusion may be summarised as follows: (1)The Explanation of the third proviso to section 23A(1) envisages two conditions under which an assessee can claim exemption from the penal provisions of section 23A(1) and the burden of proving these conditions is on the assessee. (2)The conditions in the said Explanation are conjunctive and, there fore, the proof of one o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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