9911796707
TMI Blog1964 (4) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... reference fully paid-up shares. This company was managed by a firm which, after the death of Nageswara Rao Panthulu, consisted of Ramayamma, widow of Nageswara Rao, Kamakshamma, his daughter, Ramayamma's brother, Ramachandra Rao, and Kamakshamma's husband, Sambu Prasad. Between April 1, 1946, to March 31, 1949, Ramayamma, widow of Nageswara Rao, was holding 2,185 ordinary shares and her daughter, Kamakshamma, was holding 250 ordinary shares. Out of the preference shares only 385 were held by the directors including Ramayamma and Kamakshamma. Under the articles of association of the company, both preference and ordinary shareholders were entitled to vote at the meeting of the company--each shareholder being entitled to exercise one vote for each share. In the course of assessment proceedings of the respondent company, the Income-tax Officer found that for the three years ending March 31, 1947, March 31, 1948, and March 31, 1949, the company had declared each year a total dividend of Rs. 38,750 at the rate of 7 1/2 per cent. on the preference shares and 6 1/2 per cent. on the ordinary shares--which was considerably less than sixty per cent. of the amount available for distribution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent. of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super-tax payable by the company in respect thereof he shall,....make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid,... Provided further that this sub-section shall not apply to any company in which the public are substantially interested or to a subsidiary company 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. 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 (no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Act, however, did not define the expression " company in which the public are substantially interested ". Normally a company would be deemed to be one in which the public are substantially interested, where more than half the voting power is vested in the public. Where the controlling interest, i.e., a minimum of fifty-one per cent. of the voting rights is held by a single individual or a group of individuals acting in concert, the company would be regarded as one in which the public are not substantially interested. But the legislature by the Explanation has raised a conclusive presumption in those cases where shares of the company carrying not less than twenty-five per cent. of the voting power are held by persons other than the controlling group. For the purpose of computing twenty-five per cent. of the power, however, rights of holders of shares entitled to a fixed dividend have to be excluded. It is now settled law that the distinction between the controlling group and the public is not along the fine which distinguishes directors from the remaining members of the company. If a director does not belong to the controlling group, he will be regarded as a member of the publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an the controlling group, the shares yielding a fixed rate of dividend have to be ignored. But for the purpose of ascertaining the voting power, voting rights attached to all the shares must be taken into account. No investigation has been made by the income-tax department whether there is any group of persons controlling the working of the company. It is true that Ramayamma was holding 87.40 per cent. of the ordinary shares issued by the company, and there is obviously no person who could hold twenty-five per cent. or more of the ordinary shares. In the present case, as already observed, the preference shareholders were entitled to vote at the meeting and the articles of association of the company made no distinction between the preference and the ordinary shareholders in the matter of exercise of voting rights. The total voting power was 5,500--one vote for each share, ordinary and preference alike--and twenty-five per cent. of that voting power is 1,375, but to invite the presumption under the Explanation this power must be exercisable only by the ordinary shareholders, and not by shareholders entitled to a fixed rate of dividend. The presumption under the Explanation could ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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