Commissioner of Income-Tax, Bombay Vs.
Jubilee Mills Ltd., Bombay  INSC 287 (5 December 1967)
Income Tax--Individual members of companies,
assessment of--Public substantially interested, meaning of--Group controlling
more than 15% voting power--Managing Agents forming such a group--Indian
Income-tax Act, 1922(11 of 1922), s. 23A.
Section 23A of the income-tax Act, 1922,
empowered the Income-tax Officer to assess individual members of a company in
respect of undistributed assessable income of the company in certain
circumstances. The proviso to this section made s. 23A inapplicable to a
company in which the public was substantially interested. The explanation to
the proviso laid down that a company shall be deemed to be one in which the
public was 84 substantially interested if the shares of the company carrying
not less than 25% of the voting power had been allotted unconditionally to or
acquired by the public and were held beneficially by the public. It was found
that though the directors 'of the company's qua directors did not hold more
than 75% of the shares, the shares held by such directors as were partners in
the firm of the Managing Agents of the company together with the shares held by
other partners of the Managing Agents and the shares held by the members of the
Managing Agency on behalf of minor children exceeded 75% of the voting power.
Held, that the company was not one in, which
the public was substantially interested and s. 23A was applicable to it.
No person could be said to belong to the
"public" unless he held the shares unconditionally and beneficially
for himself. The words "unconditionally" and "beneficially"
indicated that the voting power arising from the holding of those shires should
be free and not within the control of some shareholder and the holder should
not be a nominee of another. Directors, qua directors, were not without the
pale of the public as there was nothing that required them to act in unison.
What had to be seen was whether there was any individual or a group holding the
controlling interest which group acting in concert could direct the affairs of
the company at its will. The partners of the Managing, Agency constituted a
group holding more than 75% of the voting power in the company and they could
not be counted as public as they must be taken to act in their own interest in
Commissioner of Income-tax v. H. Bjordal,
 28 I. T. R. 25, referred to.
Shri Changdeo Sugar Mills Ltd. v.
Commissioner of Income- tax, Bombay,  41 1. T. R. 667 and Raghuvanshi
Mills Ltd. v. Commissioner of Income-tax  41 1. T. R. 613, relied on.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 599 of 1961.
Appeal from the judgment and order dated
March 13, 1958, of the Bombay High Court in I.T. R. No. 40 of 1957.
R. Ganapathy Iyer and R. N. Sachthey, for the
A. V. Viswanatha Sastri and I. N. Shroff, for
1962. September 17. The judgment of the Court
was delivered by 85 HIDAYATULLAH, J.This is an appeal on a certificate of
fitness granted by the High Court of Bombay against the judgment of the High
Court dated March 13, 1958, on a reference, made by the Income Tax Appellate
Tribunal. The Commissioner of Income Tax, Bombay City I, is the appellant and
the jubilee Mills Ltd., Bombay, the respondent. The only question raised in
this appeal is the application of s.23A of the Income-tax Act to the assessee
The assessee company is a limited liability
company with a paid-up capital of Rs. 15,25,000/-. Its paid up capital is made
up as under:-- I Lakh Ordinary Shares of Rs. 10 each Rs. 10,00,000 5,000
Cumulative Preference Shares of Rs. 25 paid-up. Rs. 1,25,000 4,000 Second
Preference Shares of Rs. 100 each fully paid-up. Rs. 4,00,000 The Second
Preference Shares do not entitle the holders to vote. Thus shares of the
assessee company carrying votes are 1,05,000. This was the position on June 30,
1947. We are concerned with the assessment year 1948-49 corresponding to the
previous year ended on June 30, 1947. In that year, the company was assessed on
a total income of Rs.
7,47,639/-. The Income Tax Officer calculated
the tax at Rs. 3,27,091, and t`e balance available for distribution was
Rs.4,20,548. In that year, the company ought, if s. 23A was applicable, to have
distributed 60% of the above amount.
The company, however, declared dividends
which in the aggregate amounted to Rs. 24,750. The Income Tax Officer, with the
previous approval of the Inspecting Assistant Commissioner applied the
provisions of s. 23 A of the Income Tax Act and held that the company was
deemed to have declared dividend of Rs. 3,97,788/-.
The assessee company was being managed by a
firm called Mangaldas Mehta & Co. That firm 86 consisted of 14 partners of
whom seven were the directors of the assessee company. The members of the
Managing Agents who were also directors held between them 35,469 ordinary
shares and 880 First Preference Shares. The remaining seven members of the
Managing Agents, who were not directors of the assessee company, held
respectively 41,659 and 370 shares of the two categories. 75 shares were held
by Girdhardas & Co. Ltd. to which company admittedly s. 23 A was
applicable. Some of the members of the Managing Agency firm held on behalf of
their minor children or on behalf of their joint families 9,899 Ordinary Shares
and 937 First Preference Shares. The following is a detailed break-up of the
share holdings:- Category 'A' ;
Share in Shares held by Directors Holding the
part- Holding who are partners in the of nership of the firm of Managing Agents
ordinary of firm 1st Pre- shares of Mg. ference Agents' Shares firm
1. ,, Shri Homi Mehta 50 8/128 Nil
2. ,, Sheth Mathuradas Man- galdas Parekh
6,466 14/128 273
3. ,, Madanmohan Mangaldas 11,052 14/128 273
4. ,, Madhusudan Chamanlal Parekh 3,616 7/128
5. ,, Mahendra Chamanlal Parekh 3,616 7/128
6. ,, Surendra Man- galdas Parekh 7,053
7. ,, Indrajit Chamanlal Parekh 3,616 7/128
20 -------- ------- 35,469 880 87 Category'B':
Share in Shares; held by the partners Holding the part- Holding of the Managing
Agents of Ordi- nership of the firm excluding the holding nary firm of 1st
of the Directors who are shares Mg. Shares.
also partners as shown Agents' above. firm
1. Shri Harshavadan Mangaldas 11,053 14/128
2. Mrs.Savitagavri Chamanlal Parekh 3,750
3. Shri Viren- a minor by dra Chaman- his
mother lal Parekh and guardian Mrs.Savitaga- vri Chaman- lal Parekh. 6,328
4. Shri Man- mohan Chamanlal Parekh -do-
4,462 7/128 20
5. Shri Kamalnayan Chamanlal Parekh -do-
4,962 7/128 20
6. Shri Nutan Chamanlal Parekh -do- 4,962
7. Shri Hussein Essa 6,142 8/128 Nil ------
----- 41,659 370 88 Category 'C':
Shares represented by the Holding of Pref. Shares Directors ordinary Holding of
Shares the 1st.
1. Sheth Madhusudan Chamanlal Parekh (No. 4
in 'A' above) as Karta of the joint Family estate of Sheth Chamanlal Girdhardas
Parekh 3,899 937
2. Sheth Mathuradas Mangaldas Parekh (No. 2
in 'A' above) as guardian and father of minor, Ben Purnima Mathuradas 1,000
3. -do- -do- Ben Veena 1,000
4. -do- -do- Ben Sunita 1,000
5. -do- -do- jagatkumar Mathuradas 1,000
6. Sheth Surendra Mangaldas Parekh (No. 6 in
'A' above) As guardian and father of minor Darshan Surendra Parekh 1,000
7. -do- as guardian and father of minor Ben
Babi Surendra Parekh 1,000 ------- ------ 9,899 937 It appears that in the past
the assessee company incurred heavy losses and it had to reconstruct its
capital in 1930 because it had a debit balance of Rs. 12,75,OOO in the Profit
and Loss Account which had to be paid out of capital.
This was done by reducing the face value of
the Ordinary Shares from Rs. 100 to Rs. 10 each and of the Preference Shares
from Rs. 100 to Rs. 25 each, after obtaining the approval of the High 89 Court'
It is the reconstituted capital which has been shown by us in an earlier part
of this judgment. It also appears that Income-Tax Officer granted to the
assessee company a rebate of one anna under proviso (a) to paragraph (B) of
part (1) of the, Second Schedule of the Finance Act, 1948.
This rebate was granted to those companies to
which the provisions of s. 23 A were not applicable. Subsequently, the Income
Tax Officer, as stated already,, applied s. 23 A to this company and it was
contended that he was incompetent to do so as he must be; deemed to have
impliedly held already that s. 23 A was not applicable. Section 23 A before its
amendment in 1955, in? so far as it is material read as follows:- "23A.
Power to assess individual members of certain companies.- (1) 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 dividen d 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 pur- poses 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 90 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:
x x x x x x x x Provided further that this
subsection 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." We are really concerned with the
application of the Explanation to the facts of this case. The Explanation, is
so far as it is relevant to our purpose, says that a company shall be deemed to
be a company in which the public are substantially interested if the 91 shares
of the company carrying not less than 25% of the voting power have been
allotted unconditionally, to or acquired unconditionally by the public and are:
held beneficially by the public.
The Income-tax Officer held that this was not
a company in which the public were substantially interested and that the grant
of the rebate earlier by him did not estop him from applying s. 23A to this
company. His order was upheld by the Appellate Assistant Commissioner and the
Tribunal on both the points. The assessee company then applied for a reference
and the Tribunal referred the following questions for decision by the High
Court:-- "(1) Whether, on the facts and in the circums- tances of the
case, the Income-tax Officer was competent to pass an order under Section 23A(1)
of the Act after having allowed a rebate of one anna per rupee in the
assessment under the proviso (a) to paragraph (B) of Part I of the Second
Schedule of the Finance Act, 1948? (2) If the answer to question No. 1 is in
the affirmative whether on the facts and in the circumstances of the case, the
assessee com- pany is a company in which the public are substantially
interested for the purposes of Section 23A of the Act? (3) Whether the loss of
Rs. 12,75,000 incurred by the company prior to its reconstruction in 1930,
could be taken into consideration for purposes of the applicability of Section
23A (1) of the Act?" The High Court, by the judgment under appeal answered
the first two questions in the affirmative and in view of the answer to Question
No. 2 it considered it unnecessary to answer the third. The Commissioner of
Income Tax obtained a certificate of fitness and filed the present appeal.
92 The answer to the first question is in
favour of the Commissioner of Income Tax. The other side has not appealed and
Mr. Vishwanath Sastri for the assessee company conceded before us that the High
Court was right. The third question depends on the answer to the first question
but as it has not been answered by the High Court we do not consider it
necessary to answer it here for the first time. We shall now address ourselves
to the second question.
The Tribunal in dealing with the question
whether the public could be said to hold 25% or more of the voting power in the
assessee company took into consideration a decision of the Privy Council in
Commissioner of Income Tax v. H.
Bjordal,(1) and held that though directors,
qua directors, do not cease to be members of the public, the holding of the
group of 14 individuals who collectively formed the Managing Agency firm of
Mangaldas Mehta & Co. could not be counted as held by the members of the
public in this case for purposes of the Explanation. The Tribunal was further
of the opinion that this group of persons had a 'juristic personality' and it
should be taken into account as a group in determining where the Controlling
power vested according to the test laid down by the Privy Council in the said
The High Court reversed the decision of the
Tribunal following its earlier decision reported in Raghuvan8hi Mills Ltd. v.
Commissioner of Income-Tax(2). In that case the High Court had held that
directors, qua directors must be contrasted with the public and if the
directors held more than 75% of the voting power then alone the company could
be said to be one in which the public were not substantially interested. The
High Court's view was that the Managing Agents act under the direction of the
directors and unless the directors were themselves controlling the voting power
above the limit stated by the Explanation, the company must be regarded as one
in which (1)  28 I. T. R. 25.
(2)  24 I. T. R. 338.
93 the public were substantially interested.
Applying the same test to the present case, the High Court found that the
directors between them held only the shares which we have shown in tabular
form: under category 'A'. 'Since the number of these shares was not up to the
mark to, attract s.
23A, the High Court answered the second
question in favour of the assessee company. The request of the Department that
a supplemental statement of the case be asked from the Tribunal as to whether
any person belonging to categories 'B' and 'C' was so much within the control
of the directors as not to hold the shares unconditionally or beneficially for
himself was rejected by the High Court observing that this would give a second
chance to the Department to lead further evidence. Following the decision of
the House of Lords in Thomas Fattorini (Lancashire) Ltd. v. Inland Revenue
Commissioner. (1) they refused to take action under s. 66 (4). The High Court
took notice of the fact that the Privy Council in Bjordal's case (supra) had
indicated a test to determine what is meant by "public" which was
different from that indicated by them in Raghutanshi case (supra).
They, however, held that after 1950 the
decisions of the Privy Council had only a persuasive authority and the decision
of the High Court was binding in the absence of' a decision by this Court. They
therefore, applied their own' decision in Raghuvanshi Mill's case and decided
this case Accordingly.
It may be pointed out that the High Court did
'appreciate the point of view expressed by tile Privy Council in the
above-mentioned case. They observed as follows:- "It may be that our view
is erroneous; and it may be-and very probably it is -that the view taken by the
Privy Council is the right one.
But, as we have said, so long as the judgment
of the Bombay High Court stands,it was the duty both of he Department and of
the Tribunal to give effect to that decision." (1)  A. C. 643, 94
Section 23A is not applicable to a company in which the public are
substantially interested. What is "substantial" interest of the
public is stated in the Explanation. That interest represented in terms of the
share-holding must not be less than 25% of the total number of the shares, but
no person can be said to belong to the "public" unless he holds the
shares unconditionally and beneficially for himself.
What is meant by (unconditionally" and
"beneficially" was explained by this Court in an appeal against the
decision of the High Court of Bombay in the Raghuvanshi Mills' case.
The decision of this Court is reported in
 41 I.T.R., 613. This Court pointed out that by the words
"unconditionally" and "beneficially" is indicated that the
voting power arising from the holding of those shares should be free and not
within the control of some other shareholder and the registered holder should
not be a nominee of another. It was pointed out again by this Court in Shri
Changdeo , Sugar Mills Ltd. v. commissioner of Income Tax Bombay, (1) that by
"unconditional" and. "beneficial" holding is meant that the
share,, are held by the holders for their own benefit only and without any
control of another.
This Court approved the decision of the Privy
Council in Bjordal's case that directors, qua directors, are not without the
pale of the public. This Court pointed out that what one has to find out is
whether there is an individual who, or a group acting in concert which,
controls or control the affairs of the company to the exclusion of others by
reason of his or their voting power. Such person or group of persons do not
answer the description "public." There is nothing inherent in the
office of directors which would lead one to think that the directors must act
in unison. They are persons in whom the shareholder,% have reposed confidence
and on whom they have conferred powers which under the scheme' of the Companies
Act, have to be exercised for the benefit (1)  41 1. T. R. 667.
95 of the shareholders. The directors are, in
a manner of speaking, trustees of these powers. It is the duty of the directors
to exercise these powers to the best of their independent judgment. There is
therefore, .-nothing in the nature of things or at all that requires the
directors to act in unison. This Court pointed out in the Raghuvanshi
Mills'case (1) that such a group may be composed of directors or their nominees
or relations in different combinations or may be composed of persons none of
whom is a director provided such a group forms a block which holds the
controlling interest in its hands.
It would, therefore, follow from what we have
stated that we have 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 (lie company at its will.
The controlling interest, of course, is
effective only if the group owns 51 of the total shares. But the company will
still lie a company in which the public can be said to be substantially interested
because lo cease to be so the holding of the group must be more than 75 %. In
the group, any person be he a director or a nondirector, a relative of a
director, a promoter of the company or a, stranger, may be included but only if
belonging to a group or as holding the shares as a nominee of someone else
belonging to the group. We have indicated again the true test which was not
applied in the judgment of the Bombay High Court in the Raghuvansi Mills'
case(-) and applying which we reversed that decision.
Applying the above test, we have to see
whether there is such a group in this company. It is obvious from what we have
said that category 'A' which consisted of the directors could not be regarded
as outside "public" merely by reason that they were directors. But
there is, however, an intimate connection between category 'A' and category 'B'
in as much as both are members of the Managing Agency (1)  41 I. T R.
613. (2)  24 I. T. R. 338.
96 firm. In other words, there is evidence of
yet another group, namely, the group of shareholders who constitute the
Managing Agency firm.
We agree with the High Court that Managing
Agents act under the control and direction of the directors. The Managing
Agents are also appointed by the company. The control of the affairs of a
company is ordinarily in the hand of the directors of the company but there may
be cases in which the Managing Agents, by reason of their superior holding of
shares, may be able to appoint the directors and generally to control the views
of the directors. Where the 'Managing Agents hold an interest which is small
and is thus not capable of exercising an overriding power, other evidence may
be required to show that they, in conjunction with others, are running the
affairs of the company to the exclusion of the public. Where, however, the
Managing Agents admittedly hold 51 % or more of the shares, it is obvious that
the controlling interest belongs to the Managing Agents.' When, therefore, the
Managing Agents, either by themselves or with those who act in concert with
them, hold shares above the 75% limit they can be regarded as constituting a
group which cannot be counted as " public". In such a case the
holding of the Managing Agents, if above 75%, may furnish proof that the
company is one in which the public are not substantially interested. It was
contended before us that even among the Managing Agents some may take an
independent view. Normally Managing Agencies are not formed by parties except
for the purpose of mutual gain and the commonness of the interest lends a
cohesion. to the body which enables it to act in its own interest. When such a
body holds shares carrying more than 75% of the voting power the company itself
is run mainly as the Managing Agents desire it to be run. Such a Managing
Agency could easily choose its own directors and the directors would not be
independent persons but mere nominees of the 97 Managing Agents. In such a case
the inference is irresistible that we have a group, which as a group, can run
the company at its will and which not only controls the voting at the meeting
of the shareholders but, by selecting its own directors, gets the directors to
act according to its own desires. No member of such a Managing Agency firm can
be regarded as belonging to "the public" and when this happens the
company comes within the reach of s. 23A.
Applying the above test to the present case,
it is clear that the Managing Agents, between them hold 77,128 out of 1,00,000
ordinary shares, well above the limit. They have in addition 1,250 First
Preference Shares out of 5,000 which also carry voting power. To this must be
added 75 shares held by Girdhardas & Co. Ltd. to which s. 23A is admittedly
applicable. This brings the total holding to 78,453. 75% of the total shares
bearing votes is 78,750. This shows that the holding of the Managing Agents is
short by 298 shares for the application of the Explanation to s. 23A. But when
we turn to category "C" we find that 6,000 shares were held by the
members of the Managing Agency on behalf of minor children and the voting power
arising from these shares was in their own hands as guardians. There is no
doubt that in the present case shares carrying more than 75% of the voting
power are held by persons who form a group in the sense indicated by this Court
in Raghuvanshi Mills case and by us here. The reason is this: Shares carrying
more than 75% of the voting power are held by the partners of the managing
agency or persons under its control. Now it seems to us that it is to the
interest of the partners of this firm to exercise their voting power in one
way, namely the way that brings to them the largest profit out of the company.
It is true that the managing agents are the servants of the company in a manner
of speaking and not its masters and also that the object of a firm of managing
agents is to carry out certain administrative 98 duties concerning the company
under the control of the directors of the company. That however is irrelevant
and in any case is far from the truth in the present case. Here the partners of
the managing agency practically own the company.
At the hearing a point was raised that it has
to be proved as a fact that the persons constituting the oil which owns shares
carrying more than seventyfive percent of the voting power, were acting in
unison. The test is not whether they have actually acted in concert but whether
the circumstances are such that human experience tells us that it can safely be
taken that they must be acting together. It is not necessary to state the kind
of evidence that will prove such concerted actings. Each case must necessarily
be decided on its own facts. The exclusion of "public" in the manner
indicated generally from more than 75% of the shares and the concentration of
such a holding in a single person or a group acting in concert is what attracts
s. 23 (A).
In our opinion the High Court was not right
in answering the second question in the affirmative. The appeal is allowed.
The answer of the High Court is sit aside and
the question is answered in the negative. The respondent shall pay the costs
here and in the High Court.