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TMI Blog1960 (4) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... ill the reserve fund of the company reached to ₹ 3,50,000. Under the articles of association, the holder of a preference share was entitled to obtain a cumulative dividend of 7 1/2 per cent on the shares held by him. But he was not entitled to any further rights in the profits made by the company. In the meetings of the company, his position was equal to that of the holder of an ordinary share. There was no difference in the voting powers of the preference and ordinary shareholders. The company was managed by a partnership concern. It is sufficient, for the purpose of this reference, to state that, after the death of Nageswara Rao the firm of partners, who managed the business, consisted of Ramayamma, his widow, Kamakshi Amma, his daughter, Sambu Prasad, his son-in-law, and Ramachandra Rao, the brother of Ramayamma. Six persons were in the directorate of the company. Amongst them, were Sambu Prasad and Ramachandra Rao; the others were strangers. During the period, to which this reference relates, namely, 1st April, 1946, to 31st March, 1949, the share holdings did not undergo any substantial change. Of the 3,000 preference shares, not more than 382 were held by the directors; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Public Companies (Limitation of Dividends) Act 1949, which limited the declaration of dividends to six per cent. 3. The Income Tax Officer overruled the contentions of the company, and passed an order under section 23A deeming the undistributed profits as having been distributed amongst the shareholders. This was affirmed by the Appellate Assistant Commissioner on appeal, and by the Appellate Tribunal on further appeal. The following questions were, thereupon, referred for the decision of this court under section 66(1) : (1) Whether section 23A of the Indian Income Tax Act is intra vires ? (2) Whether the serving of the orders on April 1, 1953, for the assessment years 1947-48 and 1948-49, makes them ? and (3) Whether the provisions of section 23A were correctly applied for the three relevant years ? 4. Question No. 1 : The constitutional validity of section 23A and the contention that it offends against articles 14, 19(1)(f) and 31 of the Constitution, came up for consideration before a Bench of this court (one of us being a member of that Bench) in Sponsor v. Income Tax Officer, Madras. That contention was negatived. That is authority by which we are bound. In view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son for imposing any such time limit for initiation of proceedings under section 23A, when the statute provides no such limit. This was the view of the Bombay High Court in Kasturchand Ltd. v. Commissioner of Income Tax. This view was accepted in Spencers case to which we have made reference. Recently, we had occasion to consider in W. P. No. 886 of 1957, whether the time limit prescribed under section 34 would apply to the assessment proceedings, consequently upon the order under section 23A. We held that the period of four years prescribed in section 34 would apply in a case of assessment, consequent upon an order under section 23A. That does not mean that, for the proceedings under section 23A, the provisions of section 34 would apply; the former being merely a procedural matter, there would be limitation; we, therefore answer question No. 2 the negative and against the assessee. 7. Question No. 3 : The order of the Income Tax Officer in the instant case is contested principally on the ground that the company is one in which the public are substantially interested, and that, therefore, by reason of the third proviso to the section, no action could be taken under section 23A. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose shall be included in the total income of such shareholder for the purpose of assessing his total income : ... Provided further that this sub-section shall not apply to any company in which the public areas substantially interested... Explanation. - For the purpose of this sub-section... a company shall be deemed to be a company in which the public are substantially interested if shares of the company (not being shares entitled to a fixed rate of divided, whether with or without a further right to participate in profits) carrying not less that twenty five per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and are at the end of the previous year beneficial 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If that test were to be applied, Ramayamma would have 89 per cent of the ordinary shares. This would make her a person in control of the company, and the rest of the shareholders who can be said to be members of the public, would not be entitled to 25 per cent of the ordinary shares. 12. Prima facie, the terms of the explanation cannot be construed as limiting the operation of the third proviso only to those companies, which come under the explanation. The use of the word "deemed" creates a fiction. A company, which cannot in reality be styled as one in which the public are substantially interested, is deemed to be such by the explanation. I can only be an addition to the category coming under the third proviso, and not definition of the same. In this connection, it would be useful to refer to the object, with which the section was enacted. That it is permissible to have regard to the evil which a statute intended to suppress in understanding its scope, is a settled rule of construction. In Thomson v. Lord Clanmorris Lord Lindley, M. R., said : ... in construing any other statutory enactment, regard must be had not only to the words used, but to the history of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individuals; the companies were not liable, at any rate, to the extent to which the individuals were made liable. This led to an individual adopting the device of transferring his assets to a company, very often a one man company. The income of the individual would then be depending on the amount of dividend declared and distributed to him depending on the amount of dividend declared and distributed to him by the company. There was no obligation on the company to declare dividends. The individual could regulate the declaration of dividends, so as to be within the limits which would enable him to avoid super-tax. The undistributed profits could be accumulated. Devices were adopted to convert the accumulated income with the company as capital, and thus avoid for ever super-tax. The same mischief was possible even in a case, where the company was not a one man company, but one in which an individual or a small group was in a position to control it. By virtue of such control, the declaration of dividends could be manipulated. Evasion of super-tax became thus possible in what could conveniently be called "controlled companies". Such a manipulation would not be possible in a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meet. The basic assumption that underlies section 23A is the identity of the interests of the shareholders and the control company. That assumption is founded on reality. The shareholder created a veil of a corporate personality as legally distinct from his juristic personality. That was legal. The Legislature countered that with a legal fiction. That was also legal. If both are forgotten the taxpayer and the taxgatherer proceed on the realities of the situation. The profits are taxed. 17. In the case of controlled companies, an order under section 23A could be avoided only by satisfying the Income Tax Officer that, having regard to the loss incurred by the company in earlier years or to the smallness of the profits made, payment of dividend than that declared would be unreasonable, or by showing that the case came within provisos 1 and 2. Those considerations would also apply to public limited companies which are controlled. Mr. T. V. Viswanatha Aiyar, appearing for the assessee, contended that, even if in the instant case the company is deemed to be a controlled one, he would be entitled to show to the Income Tax Officer that there was a justification for the non-declaration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st in the company, when they held the majority of shares which, on the articles of association of the company, carried the right to vote at the meetings. In Raghuvanshi Mills Ltd. v. Commissioner of Income Tax the Bombay High Court held that the expression "public", in the explanation to section 23A of the Indian Income Tax Act was used in contra-distinction to the directors, and that it could not be given its ordinary natural meaning. It was held that if members of the public, who were shareholders, were under the control of the directors, and if their voting power was controlled by the directors, the votes cast by them being not their own votes but in substance the votes of the directors, then, for the purpose of the third proviso, the shares in effect could not be held to have been held by the public at all, but held by the directors. The learned judges were of the view that the expression "public" in the section was used in contra-distinction to the directors, as the object of the third proviso was that there must be voting power exercised, which must be independent of the control of the directors. They, therefore, held that the question would depend upon th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered in Jubilee Mills Ltd. v. Commissioner of Income Tax. The learned judges of the Bombay High Court adhered to their own view in Raghuvanshi Mills Ltd. v. Commissioner of Income Tax in preference to the one adopted by the Privy Council. We, however, prefer to follow the decision of the Privy Council. 22. On that conclusion, it would follow that, before section 23A can be applied to a public limited company, it has to be seen whether any person is in a position to control the company, be he a director or member. There may be cases in which, though the shares are distributed, a person will have a factual control over them. Such a case would depend on the existence of facts which establish a de facto control. But, where no such factual combination or control is proved, what determines control is the existence of 51 per cent or more of voting power in an individual. If that is found, the company would be a controlled company. If in such a company the public have got 25 per cent of the voting power, the company would be deemed to be one which the public have a substantial interest, by virtue of the explanation. The provisions of the section will not apply to that case either. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the matter of voting rights. Therefore, the voting power should be ascertained with respect to both preference and ordinary shares held. Ramayamma has got only about 40 per cent of the total number of shares. She cannot, therefore, be held to be in a position to control the company. Even combining the shares held by Ramayamma, her daughter, her brother and son-in-law, the total percentage is only about 47 per cent. Therefore, even if it were to be held that the third proviso of the section is governed by the explanation thereto in its entirety, the position is that the public are having more than 25 per cent of the voting power and, therefore, the company is one in which the public would be substantially interested. 26. The result of the conclusion is that the Income Tax Officer has no authority to take proceedings under section 23A. In view of this conclusion, it is unnecessary to deal with the other points raised on behalf of the company, namely, those relating to the applicability of the Public Companies (Limitation of Dividends) Ordinance, 1948, and the third Public Companies (Limitation of Dividends) Act, 1949. We answer the third question in the negative, and in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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