Commissioner of Income-Tax, West
Bengal Vs. Jeewanlal Ltd. [1953] INSC 59 (8 October 1953)
DAS, SUDHI RANJAN SASTRI, M. PATANJALI (CJ)
BOSE, VIVIAN HASAN, GHULAM BHAGWATI, NATWARLAL H.
CITATION: 1953 AIR 473 1954 SCR
ACT:
Excess Profits Tax Act (XV of 1940),
s.2(11)-Director con- trolled company -Definition-Directors authorised by
another- Company holding majority of shares to vote in respect of the shares--
Company, whether director controlled.
HEADNOTE:
Ordinarily a company will be a,
"company, the directors whereof have a controlling interest therein"
for the purposes of the Excess Profits Tax Act, 1940, only if the directors
thereof hold, and are entered in the share register as holders of, a majority
of the vote-carrying shares of the company. It is not necessary that they must
have a beneficial interest in such shares, but the mere fact that one of the
directors of the company has been authorised by another company which held a
majority of shares in the former company, to vote on its behalf in respect of
the shares held by it, will not make the former company a director controlled
company.
Glasgow Expanded Metal Co. Ltd. v.
Commissioners of Inland Revenue (12 Tax Cas. 573), Commissioners of Inland
Revenue v. B. W. Noble (12 Tax Cas. 911), Inland Revenue commissioners V. ,T.
Bibby and Sons Ltd. (14 I.T.R. Suppl- 7, 29 Tax Cas. 167), Commissioner of
Income-tax v. Bipin, Silk Mills Ltd. (14 I.T.R. 344) and Commissioners of
-Inland Revenue v. Hodgkinson (Salford) Ltd. (29 Tax Cas. 395) relied on.
British American Tobacco Co. Ltd. v. Commissioners of Inland Revenue ([1943]
A.C. 335) and New Shorrock Spinning and Manufacturing Co. Ltd. v. Commissioner
of –Income tax, Bombay (18 I.T.R. 712) distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 78 of 1952.
Appeal from the Judgment and Order dated the
17th January, 1951, of the High Court of Judicature at Calcutta (Harries C.J.
and Banerjee J.) in its Special Jurisdiction (Income- tax) in Income-tax
Reference No. 50 of 1950.
C.K. Daphtary, Solicitor-General for India
(G. N. Joshi, with him) for the appellant, 26 190 N. C. Chatterjee (S. C.
Majumdar, with him) for the respondent.
1953. October 8. The Judgment of the Court
was delivered by DAS J.-This is an appeal from the judgment and order of a
Bench of the Calcutta High Court delivered on a reference made by the
Income-tax Appellate Tribunal under section 21 of the Excess Profits Tax Act,
1940, read with section 66(1) of the Indian Income-tax Act, whereby the High Court
answered in the affirmative the question of law referred to it. The question
referred was:
"Whether in the facts and circumstances
of these cases, the Income-tax Appellate Tribunal was right in holding that the
directors of the respondent company had a controlling interest in it as
contemplated by section 2 (21) of the Excess Profits Tax Act." The
controversy arose between the parties during proceedings for assessment of
excess profits tax for five chargeable accounting periods ending on the 31st December
of each of the years 1939 to 1943.
The relevant facts which are not in dispute
are these: The respondent company is a company incorporated in what was then
British India having a capital of Rs. 3,600,000 divided into 360,000 shares of
Rs. 10 each. The Aluminium Limited, a company incorporated in Canada, held
359,790 shares in the chargeable accounting periods ending on December31, 1939,
and December 31, 1940, and 359,600 shares in the chargeable accounting periods
ending on December 31, 1941, December 31, 1942, and December 31, 1943. In
exercise of the power given to it by article 105 of the articles of association
of the respondent company, the Aluminium Ltd. appointed three permanent
directors on the board of directors of the respondent company. Two of these
directors eventually retired and only one, namely, Mr. L. G. Bash continued to
be a director of the respondent company nominated by the Aluminium Ltd. Mr. L.
G. Bash and the other directors had between them during the chargeable 191
accounting periods ending on December 31, 1939, and December 31, 1940, only 210
shares and in the chargeable accounting periods ending on December 31, 1941,
December 31, 1942, and December 31, 1943, 400 shares, Mr. L. G. Bash not having
a single share during these last mentioned chargeable accounting periods. By a
resolution passed by the directors of the Aluminium Ltd., Mr. L. G. Bash was
appointed to vote and/or from time to time to appoint a special or general
proxy to vote for and on behalf of the Aluminium Ltd. in respect of the shares
held by it in the respondent company at all ordinary or extraordinary general
meetings of the shareholders of the respondent company. Article 90 of the
articles of association of the respondent company provides:- "90. Where a
company registered under the provisions of the Indian Companies Act or not is a
member of this company a person duly appointed to represent such company at a
meeting of this company in accordance with the provisions of section 80 of the
Indian Companies Act, 1913, shall not be deemed to be a proxy but shall be
entitled to vote for such company on a show of hands -and to exercise the same
power on behalf of the company which he represents as if he were an individual
member of this company including the power to appoint a proxy whether special
or general and the production at the meeting of a company of such resolution
appointing such representative duly signed by one director of such company and
by the secretary (if any) and certified by them or him as being a true copy of
the resolution shall on production at the meeting be accepted by this company
as sufficient evidence of the validity of his appointment." Mr. L. G. Bash
has at all material times been exercising the powers conferred by the above
article as the representative of the Aluminium Ltd.
The claim of the respondent company was that
it should be regarded as a company the directors whereof had a controlling
interest therein, inasmuch as Mr. L. G. Bash, one of the directors, had the I
authority to exercise the voting power of the Aluminium Ltd. and, 192 as such,
could control the affairs of the respondent company and that in computing the
standard profits the statutory percentage should be taken at 10 per cent. per
annum and not at 8 per cent per annum. This contention was rejected by the
Excess Profits Tax Officer. On appeal by the respondent company the Appellate
Assistant Commissioner of Excess Profits Tax upheld the decision of the Excess
Profits Tax Officer. The respondent company thereupon appealed to the Incometax
Appellate Tribunal "which reversed the decision of the Appellate Assistant
Commissioner observing that in view of the power of attorney that was given to
Mr. L. G. Bash by the Aluminium Ltd. there was no room for doubt that the
respondent company, which was then the appellant before the Tribunal, was a
director-controlled company. On the application of the Commissioner of
Income-tax, the Appellate Tribunal referred the question of law herein before
set out.
By its judgment dated the 11th January, 1951,
the High Court of Calcutta has answered the question in the affirmative.
The Commissioner of Excess Profits Tax, West
Bengal, has now come up on appeal to this court with a certificate under
section 66-A (2) of the Indian Income-tax Act.
In common parlance a person is said to have
"a controlling interest" in a company when such a person acquires, by
purchase or otherwise, the majority of the vote-carrying shares in that
company, for the control of the company resides in the voting powers of its
shareholders. In this sense, the directors of a company may well be regarded as
having "a controlling interest" in the company when they hold and are
entered in the share register as holders of the majority of the shares which,
under the articles of association of the company, carry the right to vote. [See
Glasgow Expanded Metal Co., Ltd. v. Commissioners of Inland Revenue (1) and
Commissioners of Inland Revenue v. B. W.
Noble(2)]. It is not, however, necessary that
in order to have "a Controlling interest" the person or persons who
hold the majority of the votecarrying shares must have a beneficial interest in
the (1) (1923) 12 Tax Cas. 573.
(2) (1926) 12 Tax Cas, 911.
193 shares held by them. These persons may
hold the shares as trustees and may even be accountable to their beneficiaries
and may be brought to book for exercising their votes in breach of trust,
nevertheless, as between them as shareholders and the company, they are the
shareholders, and as such, have "a controlling interest" in the company.
[See Inland Revenue Commissioners v. J. Bibby & Sons Ltd.(1) and
Commissioner of Income-tax v. Bipin Silk Mills Ltd. (2)].
According to the facts found in the statement
of the case the directors of the respondent company do not themselves hold the
majority of shares which, on the contrary, are registered in the name of the
Aluminium Ltd. and, therefore, according to the principles discussed above,
they cannot be said to have "a controlling interest" in the
respondent company.
Learned counsel for the respondent company,
however, contends, on the analogy of the reasonings adopted by the House of
Lords in British American Tobacco Co. Ltd. v. Commissioners of Inland
Revenue(3) that although Mr. L. G. Bash does not hold the majority of shares
and has no beneficial interest in the shares held by the Aluminium Ltd.
in the respondent company and although he may
be bound to cast the votes according to the directions of his principals, the
Aluminium Ltd., and may be answerable to the latter if he acts in breach of his
duty, nevertheless, as long as his authority is not revoked, as far as the
respondent company is concerned, tile, majority of its vote- carrying shares
are subject, directly or indirectly, to his will and ordering and, therefore,
the directors of the respondent company in fact control its affairs at general
meetings and as such have " a controlling interest " therein, no
matter by what machinery or means that result has been effected. This line of
argument found favour with the Appellate Tribunal and the High Court. We are
unable, with all respect, to accept this argument as sound, for this argument
appears to us to oversimplify the position.
Assuming, but without, expressing any final
opinion as (1) [1946] 14 I.T.R. (Suppl.) 7; [1945] I All E.R. 667; 29 Tax Cas.
167, (2) A.I.R. 1947 Bom. 45; 14 I.T.R. 344.
(3) [1943] A.C. 335; 11 I.T.R. (Suppl.) 29;
29 Tax Cas. 49, 194 to, the correctness of the decision in the last mentioned
case, we have no doubt that the analogy is inapt, for the principle of that
decision can have no application to the case before us. In the case of
directors, who hold the majority of shares as trustees they, so far as the
company is concerned, are the registered shareholders and the right to vote is
vested in them, although as between them and their beneficiaries the beneficial
interest is -vested in the latter. They are the registered holders of the
shares and the votes they cast are their own votes. That case is entirely
different from the case of directors who are only the agents of the holders of
the majority of shares. When a shareholder holding the majority of shares
authorises an agent to vote for him in respect of the shares so held by him,
the agent acquires no interest, legal or beneficial, in the shares. The title
in the shares remains vested in the shareholder. The shareholder may revoke the
authority of the agent at any time. In spite of the appointment of the agent
the shareholder may himself appear at the meeting and cast his votes
personally. Therefore, the shares being always subject to his will and
ordering, the controlling interest which the holder of the majority of shares
has never passes to the agent. Let us take the facts of the present case. Under
article 90, when Mr. L.G. Bash as agent of the Aluminium Ltd. attends a general
meeting of the respondent company he has to produce the resolution of his
principals authorising him to cast the votes of his principals. The votes he
casts are not his votes but are the votes of the Aluminium Ltd. In such a
situation, in the eye of the law, the controlling interest remains vested in
the Aluminium Ltd. and is at no time vested in Mr. L. G.
Bash. The shares in question which give the
controlling interest are neither held by Mr. L. G. Bash nor are they subject,
directly or indirectly, to his will and ordering, and, therefore, he cannot,
applying either of the tests mentioned above, be said to have a controlling
interest.
The decision of the Court of Appeal in
Commissioners of Inland Revenue v. Jamed Hodgkinson (Salford) Ltd.(1) (1)
(1949) 29 Tax Cas. 395.
195 appears to us to be apposite. It is
unfortunate that the last mentioned case was not brought to the notice of the
High Court before the judgment under appeal was delivered.
Dissent has been expressed in the judgment
under appeal from the recent decision of the Bombay High Court in New Shorrock
Spinning and Manufacturing Co. Ltd. v. Commissioner of Income-tax, Bombay(1).
The facts of that case are entirely different from the facts of the case before
us and that decision has no manner of application to the present case.
It is, therefore, unnecessary for us to
discuss or express any opinion as to whether the observations to be found in
the judgment in that case are or are not well-founded.
For reasons stated above, we accept this
appeal and hold that the answer to the question referred by the Appellate
Tribunal to the High Court should be in the negative. The respondent company
must pay the costs of the appellant in this court as well as in the High Court.
Appeal allowed. Agent for the appellant: G.
H. Rajadhyaksha. Agent for the respondent: S. C. Banerjee.
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