Vildirect: IncomeTax-caselaws-1970-VIL-89-SC-DT

1970-VIL-89-SC-DT

Equivalent Citation: [1971] 82 ITR 613 (SC), 1970 AIR 1559, 1970 (3) SCC 864

Supreme Court of India

Date: 29.04.1970

STAR COMPANY LIMITED

COMMISSIONER OF INCOME-TAX (CENTRAL) , CALCUTTA

BENCH

Order date 11/2/1969

JUDGMENT

Judgement date 29/4/1970

Judge(s) : A. N. GROVER., J. C. SHAH., V. RAMASWAMY. and K. S. HEGDE.

ORDER

The order of the court was delivered by

RAMASWAMI J.--These appeals are brought by certificate from the judgment of the Calcutta High Court dated February 17, 1964, in Income tax Reference No. 94 of 1960.

The assessment years are 1948-49 and 1949-50 and the corresponding accounting years ended on March 31, 1948, and March 31, 1949, respectively. The appellant (hereinafter called "the assessee") is a company limited by shares. In the general meetings of the shareholders for the respective accounting years no dividends were declared, although sufficient profits were available for distribution. It was urged before the Income-tax Officer that it was a company in which "the public were substantially interested" within the meaning of the third proviso to section 23A(1) of the Income-tax Act, 1922, 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 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. The Income-tax Officer, therefore, made the orders under section 23A(1) of the Income-tax Act, 1922 (hereinafter called "the Act"), on March 16, 1956, relating to the assessment years 1948-49 and 1949-50, respectively. The orders of the Income-tax Officer were confirmed on appeal by the Appellate Assistant Commissioner. Before the Appellate Tribunal the assesses contended that the Income-tax Officer was not right in taking action under section 23A(1) of the Act for the assessment years in question. The Tribunal came to the conclusion that the shares of the company carrying more than 25 per cent. of the voting power were at the end of the previous years, beneficially held by the public within the meaning of section 23A(1). The first condition of the section was therefore satisfied but the Tribunal was of the opinion that the assessee did not satisfy the second condition laid down in the Explanation to the third proviso to sub-section (1) of section 23A of the Act as it stood at the relevant time. The reasons which weighed with the Tribunal were that there was no evidence that the shares of the assessee were actually the subject of dealings in any stock exchange in the course of the relevant previous years. An official bulletin of the Calcutta Stock Exchange in which the shares were quoted was produced. But the quotations given therein did not convince the Tribunal as the shareholding of the beneficial owners remained unaltered. This indicated that there was an absence of any dealing in shares by the beneficial owners. The Tribunal also found that the assessee did not satisfy the other condition regarding the free transferability of its shares as article 13 of the articles of association of the assessee laid down that the directors may refuse to register any transfer of a share and may also "veto any transfer without assigning any reason". The Tribunal accordingly refused to give, any relief to the assessee and dismissed the appeals. At the instance of the assessee the Appellate Tribunal stated a case to the High Court on the following question of law under section 66(1) of the Act :

" Whether, on the facts and in the circumstances of the case, the Income-tax Officer was justified in passing an order under section 23A(1) of the Indian Income-tax Act on the assessee-company for the assessment years 1948-49 and 1949-50 ?"

By its judgment dated February 17, 1964, the High Court answered the question in the affirmative and against the assessee.

Section 23A(1) of the Act stood as follows before its amendment by the Finance Act, 1955 :

" Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month 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, unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, 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, and thereupon the proportionate share thereof of each shareholder 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 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 (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 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 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."

Article 13 of the articles of association of the assessee-company reads :

" 13. The directors may refuse to register any transfer of a share :--

(a) where the company has a 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 an 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."

On behalf of the appellant the argument of Mr. Chagla was that the High Court was not right in holding that article 13 was restrictive in nature but was only a procedural formality for the purpose of transferring the shares and did not affect the fundamental nature of the transferability of the shares. In support of this contention reliance was placed on a decision of the Madras High Court in East India Corporation Ltd. v. Commissioner of Income-tax in which it was held that the mere fact that an absolute discretion was vested in the board of directors to refuse to register the transfer of shares in a given case could not by itself lead to the inference that the shares were not in fact freely transferable. The opposite view-point was put forward on behalf of the respondent. Reference was made in this connection to the decision of the Calcutta High Court in Commissioner of Income-tax v. Tona Jute Co. Ltd., in which it was held that a public company whose directors had an absolute discretion to refuse to register the transfer of any share without assigning any reason was not a company the shares of which were freely transferable and section 23A(1) can be applied to such a company even if the board of directors had not objected to any transfer placed before them. We do not propose to decide at this stage as to which of the conflicting views is correct. For we are of the opinion that the statement of the case does not furnish all the material facts bearing on the question whether the shares have "in the course of the previous year been the subject of dealings in any stock exchange" within the meaning of the Explanation to section 23A(1) of the Act. The Tribunal has referred to the fact that at the hearing of the appeal the representative of the assessee pointed out "by reference to the official bulletin of the stock exchange that the shares were quoted" but "in point of fact the shareholding of the beneficial owners remained unaltered in the relevant accounting year indicating the absence of any dealing in shares by them." In those circumstances, the Tribunal held that "a mere quotation in respect of the shares in the stock exchange did not satisfy the conditions that the shares had been the subject of dealings in the stock exchange in the previous years concerned." For a satisfactory decision of this case it is necessary for us to know (1) whether the shares were quoted in the Calcutta Stock Exchange in the "cash section" or the "forward section", (2) whether the heading of the bulletin of the Calcutta Stock Exchange represents the actual transactions which have already taken place, (3) whether there was any fluctuation in the price of shares, and (4) the number of quotations in the two years of account. We, accordingly, direct the Income-tax Appellate Tribunal to furnish a supplementary statement of the case under section 66(4) of the Act on the points mentioned above. In submitting its supplementary statement the Tribunal will not travel outside the record of the case before it. These appeals will be placed for hearing after the supplementary statement is received.

S. Ray, Senior Advocate (O. P. Khaitan and B. P. Maheshwari, Advocates, with him), for the appellant.

Jagadish Swarup, Solicitor-General of India (R. N. Sachthey and B. D. Sharma, Advocates, with him), for the respondent.

[April 29, 1970 : The court delivered the following judgment.]

JUDGMENT

The judgment of the court was delivered by

SHAH J.--Explanations to section 23A(1) of the Indian Income-tax Act, 1922, before it was amended by the Finance Act, 1955 (in so far as it is material for the purpose of these appeals) provided :

" A company shall be deemed to be a company in which the public are substantially interested if shares of the company......carrying not less than 25% 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."

For a company to be deemed a company in which the public are substantially interested, two conditions must co-exist, (1) the shares of the company carrying not less than 25% of the voting power must have been allotted unconditionally to or acquired unconditionally by the public, and (2)(a) that any such shares have in the course of the previous year been the subject of dealings on any stock-exchange, or (b) that the shares are in fact freely transferable by the holders to other members of the public.

It is common ground that condition (1) is satisfied in this case in respect of condition (2), there was controversy and this court by order dated February 11, 1969, directed the Income-tax Appellate Tribunal to submit a supplementary statement of case on the following four points :

(i) whether the shares were quoted in the Calcutta Stock Exchange in the "cash section" or the "forward section" ;

(ii) whether the heading of the bulletin of the Calcutta Stock Exchange represents the actual transactions which have already taken place ;

(iii) whether there was any fluctuation in the price of the shares ; and

(iv) the number of quotations in the two years of account.

The Tribunal has submitted a statement of case (1) that the shares were quoted in the "cash section", (2) that the heading in the bulletin represents actual transactions which have taken place, (3) that there were fluctuations in the price of the shares, and (4) that transactions in share took place daily. In view of these findings it must be held that the first part of condition (2) is satisfied. Since the two parts of condition (2) are alternative, it is unnecessary to consider whether the second part of condition (2) is satisfied in this case. In the view we take, both the conditions, on the satisfaction of which a company may be deemed a company in which the public are substantially interested, are satisfied.

The appeals must, therefore, be allowed and the question submitted by the Tribunal will be answered in the negative. The Commissioner will pay the costs of the company in this court. One hearing fee.

Appeals allowed.

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