Raghuvanshi Mills, Ltd. Vs.
Commissioner of Income-Tax, Bombay  INSC 274 (7 December 1960)
07/12/1960 HIDAYATULLAH, M.
CITATION: 1961 AIR 743 1961 SCR (2) 978
CITATOR INFO :
F 1961 SC1154 (6,8) R 1967 SC 768 (13) RF
1976 SC1141 (3,13)
Income Tax--Majority shares of the assessee
company held by Directors and their relations, if can be treated as held by the
Public--Test--Indian Income-tax Act, 1922 (11 of 1922), S. 23A, Third Proviso,
Explanation (before amendment by the Finance Act, 1955).
One Maganlal Parbhudas who was a Director of
the assessee company held 6,344 shares out of a total of 10,000 shares of the
company and he made a gift of 1000 shares to each of his five sons. During the accounting
period the company had eight Directors including the said Maganlal Parbhudas
and two of his sons and they held 4695 shares as between themselves. Out of the
balance of the shares 4754 shares were held by the relatives of some of the
Directors. Three sons of Maganlal Parbhudas were Directors of the Managing
Company. The Income-tax Officer applied s. 23A of the Income-tax Act as it
stood prior to its amendment by the Finance Act, 1955 to the company holding
that this was not a company in which the public were substantially interested.
The order of the Income Tax Officer was
confirmed on appeal both by the Assistant Commissioner and the Tribunal. The
High Court remitted the case to the Tribunal for a statement whether the
Directors were exercising de facto control over any of the other shareholders.
The Tribunal thereupon gave the finding that the Directors, particularly the
three sons of Maganlal Parbhudas who formed the Directors of the Managing
Company were under the de facto control of their father. The High Court agreed
with the finding of the tribunal and held that on the facts and circumstances
of the case the shares held by the three sons of Maganlal Parbhudas could not
be considered to be shares held by the members of the public within the meaning
of the Explanation to the third proviso to S. 23A of the Income Tax Act. On
appeal by the assessee company, Held, that in the Explanation the word
"public" is used in contradistinction to one or more persons who act
in unison and among whom the voting power constitutes a block. If such a block
exists and possesses more than seventy five per cent of the voting power, then
the company cannot be said to be one in which the public are substantially
Sardar Baldev Singh v. Commissioner of Income-tax,
Delhi and Ajmer,  1 S.C.R. 482, considered.
The test is first to find out whether there
is an individual or a group which controls the voting power as a block. If
there is such a block the shares held by it cannot be said to be held 979
"unconditionally" or "beneficially" by the public. Only
those shares which are "unconditionally" and "beneficially"
held by the public uncontrolled by the controlling group can be treated as
shares held by the public under the Explanation. The group may be composed of
Directors or their nominees or relations in different combinations, but none
can be said to belong to that c group, be he a Director or a relative unless he
does not hold the shares unconditionally and beneficially for himself. It is
only such a person who can fall properly outside the word "public".
The view that Directors merely by reason of
their being Directors stand outside the "public" is erroneous.
Commissioner of Income-tax v. H. Bjordal,
 A. C. 309, followed.
Mere relationship is of no consequence unless
it is proved that the voting power of one relative is controlled by another
Tatem Steam Navigation Co. v. Commissioner of
Inland Revenue, (1941) 24 T.C. 56, followed.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 30 of 1957.
Appeal by special leave from the judgment and
order dated September 1, 1955, of the Bombay High Court in Income-tax Reference
No. 37 of 1952.
N. A. Palkhivala and I. N. Shroff, for the
K. N. Rajagopala Ayyangar and D. Gupta, for
1960. December 7. The Judgment of the Court
was delivered by HIDAYATULLAH, J.-The Raghuvanshi Mills Ltd., Bombay (a public
limited Company), has filed this appeal by special leave against the judgment
and orders of the High Court of Bombay dated March 10, 1953, and September 1,
1955. By the first order, the Bombay High Court directed the Income-tax
Tribunal to submit a supplementary statement in the case in the light of its
judgment, giving the parties liberty to lead further evidence, if any. By the
second order, the High Court re-framed the question, and answered it against
The assessee Company's issued and subscribed
capital was, at the material time, Rs. 10,00,000 divided into 10,000 shares of
Rs. 100 each. Prior to 980 November 14, 1941, one Maganlal Parbhudas, who was a
Director of the Company, held 6,344 shares. On November 14, 1941, he made a
gift of 1,000 shares to each of his five sons, Ravindra, Surendra,
Bipinchandra, Hareshchandra and Krishnakumar. We are concerned with the account
year of the Company, April 1, 1942, to March 31, 1943, the assessment year
being 1943-44. In that year, the dividend which was declared at the Annual
General Meeting held on December 17, 1943, was less than what was required
under s. 23A of the Indian Income-tax Act. The question, therefore, arose
whether the Company could be said to be one to which s. 23A(1) of the Act was
applicable, regard being had to the third proviso and the Explanation under it.
During the accounting period, the Company had
eight Directors, whose names along with the shares respectively held by them
are given below:
Shares (1) Shri Maganlal Parbhudas 1,344 (2)
Ravindra Maganlal 1,168 (3) Surendra Maganlal... 1,100 (4) Amritlal Chunilal
(jointly with Babulal Chunilal)... 833 (5) Babulal Chunilal.... 100 (6)
Bhagwandas Harakchand.... 50 (7) Haridas Purshottam.. 50 (8) Sir Chunilal B.
Mehta (jointly with Lady Tapibai Chunilal) 50 ----------Total 4,695
----------------Out of the balance of the shares, 4,754 shares were held by the
relatives of some of the above-named Directors, as stated below:
Shares (1) Shrimati Kantabai Maganlal (wife
of a Director) 771 (2) Shri Bipinchandra Maganlal 1,000 (3) Shri Hareshchandra
Maganlal (son of a Director) 1,000 (4) Shri Krishnakumar Maganlal (do) 1,000
981 (5) Shrimati Dhanlaxmi Mohanlal (6) Srimati Prabhavati Nanalal Harilal (5
and 6 daughters of a Director) 50 (7) Shri Hirjibhai Purshottam and Haridas
Purshottam (brothers of a Director) 25 (8) Shri Dhanjibhai Purshottam and Haridas
Purshottam (brothers of a Director) 25 (9) Shri Chimanlal Vithaldas (cousin of
a Director) 833 -----------Total 4,754 --------------The remaining 551 shares
were held by the members of the public, who were not connected with the
Directors of the Company in any way.
Before March, 1942, Messrs. Ravindra Maganlal
and Bros. were the Managing Agents of the Company. Maganlal Parbhudas was the
sole proprietor of that firm. On March 7, 1942, the Company appointed Ravindra
Maganlal & Co. Ltd. as the Managing Agents for. a period of 20 years. The
Managing Company had a total issued and subscribed capital of Rs. 5,000 and the
five sons of Maganlal Parbhudas who have been named before had subscribed that
capital equally. During the account year, Maganlal Parbhudas and two of his
sons, Ravindra Maganlal and Surendra Maganlal, were three of the Directors of
the Company. Ravindra, Surendra and Bipinchandra were Directors of the Managing
On these facts, the Income-tax Officer
applied s. 23A (as it stood prior to its amendment by the Finance Act, 1955) to
the Company, holding that this was not a Company in which the public were
substantially interested. The order of the Income-tax Officer was confirmed on
appeal, both by the Appellate Assistant Commissioner and the Tribunal. The
Tribunal also refused to state a case under s. 66(1) of the Incometax Act, but
the High Court of Bombay acting under s. 66(2) called for a statement of the
case on the question:
"Whether on the facts and circumstances
of the 124 982 case the provisions of s. 23A of the Indian Income-tax Act (XI
of 1922) are applicable to the petitioners?" In stating the cases the
Tribunal pointed out that probably the question ought to have been:
"Whether on the facts and circumstances
of the case 1,000 shares each held by Bipinchandra, Haresh chandra and
Krishnakumar in the capital of the assessee Company are held by members of the
public within the meaning of the Explanation to the third proviso to s.
23A?" The members of the Tribunal in deciding the appeal before them, gave
slightly different reasons. According to the Accountant Member, the shares held
by persons interested in the Managing Company were under the control of the
Directors of the appellant Company, and those persons could not be considered
to be members of the public. The Judicial Member held that the Directors were
controlling the shareholders of the Company, that their relatives were mere
nominees, whose voting power was controlled by the Directors, and that the
public could not, therefore, be said to be substantially interested, as
required by the Explanation to the third proviso to the section.
When the High Court heard the case, the
learned Judges addressed themselves to the question, what was the proper
meaning of the expression "held by the public" in the Explanation.
They came to the conclusion that the object of the third proviso and the
Explanation was that the voting power to be exercised by the public should be
independent of the control of the Directors, and that the word "Public"
was used in contradistinction to the Directors. They apparently thought that a
holding by a Director could not be described, in any event, as a holding by the
public. The High Court came to the tentative opinion that both the tests stated
by the Accountant Member and the Judicial Member were incorrect, and held that
what the law required was de facto control, 4 c a control which is, in fact,
exercised," and that no finding appeared to have been given on that point
by the Tribunal. The case was accordingly remitted to 983 the Tribunal for
submission of a fresh statement of the case whether the Directors were
exercising de facto control. over any of the other shareholders, who belonged
to the second category mentioned by us above. The Tribunal thereupon restated
the case, and after examining further evidence, gave the finding that the
Directors, particularly the three sons of Maganlal Parbhudas who formed the
Directors of the Managing Company were under the de facto control of their
father. At no stage in the case did the Tribunal alter the finding reached by
the Department that the shares of the Company were not, in fact, freely
transferable by the holders to members of the public.
The High Court then reheard the case, and
came to the conclusion that there was evidence on which the Tribunal could hold
that Maganlal Parbhudas exercised de facto control over his three sons. In view
of this finding, the High Court held that the order made by the Tribunal was
correct, and answered the question in the negative, reframing it as follows:
"Whether on the facts and circumstances
of the case the shares held by Bipinchandra, Harishchandra and Krishnakumar can
be considered to be shares held by members of the public within the meaning of
the explanation to the third proviso to Section 23A?" The High Court
refused to grant a certificate; but the Company has obtained special leave from
this Court, and has filed this appeal.
It is first contended that the test that the
shares held by the Directors of a company are not shares in which the public
are substantially interested is incorrect. According to learned counsel, all
the authorities, the Tribunal and the High Court have proceeded on this wrong
assumption, and have failed to apply the proper test laid down by the Explanation
to the third proviso. It may be pointed out that there is no dispute that 551
shares, were, in fact, held by the public. The total shares of the Company
being 10,000, the Company can only avoid the application of s.
23A, if the public hold shares carrying not
less than 25 per cent. of the voting power, that is to say, 2,500 shares.
The Directors between them hold 4,695 shares.
These 984 have been held by the High Court to be shares, which cannot be said
to be beneficially held by the public. Even so, if the rest of the shares can
be said to be held by the public, then the minimum 25 per cent. would still be
reached. It was in this context that the shares of the sons of Maganlal,
Bipinchandra, Harishchandra and Krishnakumar, were considered. If those shares
can be said to fall outside the category of shares beneficially held by the
public, then those shares along with the shares held by the Directors reduced
the number of shares held by the remaining shareholders to less than 25 per
cent. It was on this view that the case was remitted to the Tribunal by the
High Court to obtain a further statement whether Maganlal Parbhudas was de
facto controlling these three shareholders.
Two questions, therefore, arise in this
appeal. The first is whether the shares held by the Directors must always be
regarded as not held by the public. The second is what is the meaning of the
"a company shall be deemed to be a
company in which the public are substantially interested, if its shares
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." In this connection,
we may point out that a ruling of the Privy Council appears to take a different
view from that taken by the High Court, in regard to an Uganda Ordinance in
pari materia with the proviso and the Explanation. We shall refer to that case
as also to a case of the House of Lords, where also a different conclusion in
law from that of the High Court has been reached.
Section 23A (as it stood prior to its
amendment in 1955), omitting the portions not material, read as follows:
"23A. Power to assess individual members
of certain companies.-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 985
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 supertax
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 carrying not less than
twentyfive 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...... and if any such shares have in the course
of such previous year been the subject of dealings in any stock exchange or are
in fact freely transferable by the holders to other members of the
public." It is clear from the third proviso that the sub-section 986 does
not apply to a company in which the public are substantially interested. The
Explanation lays down, among the tests, the minimum interest which can be
called substantial' by saying that shares of the company carrying not less than
25 per cent. of the voting power must be allotted unconditionally to, or
acquired unconditionally by, the public and they must be beneficially held by
The essence of the Explanation lies not in
the percentage which only shows the limit of the minimum holding by the public,
but lies in the words "unconditionally" and "beneficially".
These words underline the fact that no person who holds a share or shares not
for his own benefit but for the benefit of another and who does not exercise
freely his voting power, can be said to belong to that body, which is designated
'public'. The word 'Public' is used in contradistinction to one or more persons
who act in unison and among whom the voting power constitutes a block. If such
a block exists and possesses more than seventy-five per cent. of the voting
power, then the company cannot be said to be one in which the public are
In Sardar Baldev Singh v. The Commissioner of
Income-tax, Delhi and Ajmer (1), this Court took the following view:
"The section thus applies to a company
in which at least 75 per cent. of the voting power lies in the hands of persons
other than the public, which can only mean, a group of persons allied together
in the same interest. The company would thus have to be one which is controlled
by a group.
The group can do what it likes with the
affairs of the company, of course, within the bounds of the Companies Act.
It lies solely in its hands to decide whether
a dividend shall be declared or not." judged from the test we have
indicated, it is clear that such a group may be formed by the Directors of a
company acting in concert, or by some Directors acting in concert with others
or even by some , shareholder or shareholders, none of whom may be a Director.
Such a group which may, for convenience, be (1)  1 S.C.R. 482.
987 designated a block, must hold a
controlling interest, and if the voting power of the block is 75 per cent. or
more, then obviously it can do anything at a meeting, whether general or
When a company starts, the promoters may
subscribe a portion of its capital and release the other unconditionally to the
public. This is a case of unconditional allotment of shares to the public. The
public may also unconditionally acquire a portion of the shares which were
previously held by the group which promoted the company. If at the end of the
previous year 25 per cent. or more of the voting power is so held by the
public, the company can take the benefit of the third proviso. But if more than
75 per cent. of shares have again passed into the hands of a group which acts
as a block, the third proviso ceases to apply.
In deciding if there is such a controlling
interest, there is no formula applicable to all cases. Relationship and
position as Director are not by themselves decisive. If relatives act, not
freely, but with others, they cannot be said to belong to that body, which is
described as 'public' in the Explanation. But it would be otherwise if they
were free. Similarly, if Directors or some of them do not act as a body or in
concert with others, the fact that they are Directors is of no significance.
The case of Tatem Steam Navigation Co., Ltd. v. Commissioners of Inland Revenue
(2) illustrates the first proposition. There, the assessing Commissioners had
made directions under s. 21 of the Finance Act, 1922, against which the Company
appealed on the ground that it was a Company in which the public were
substantially interested, inasmuch as shares of the Company carrving not less
than 25 percent. of the voting power had been allotted unconditionally to or acquired
unconditionally by, and were, at the end of the relevant periods, beneficially
held by the public and the decision of the Special Commissioners that 16,000
shares given by Lord Glanely to his niece were not allotted to or acquired by
the public and that the Company was, therefore, not (1) (1941) 24 T.C. 57.
988 a Company in which the public were
"substantially interested" was erroneous. It was held by Lawrence,
J., that merely because she was a niece of Lord Glanely did not make her cease
to be a member of the public. The Court of Appeal agreed with Lawrence, J. No
doubt, there were other provisions which laid down the kind of relationship
which would lead to the inference that the holder was controlled by another,
and a niece was not such a relative. The Act we are considering did not lay
down the kind of relationship which would show such a control, and the same
principle will apply. Mere relationship thus is not of consequence, unless
control of the voting power held by such a relative, by another relative, is
The other test adopted in the case by the
Bombay High Court that Directors stand outside the 'public' is also not
decisive. In Commissioner of Income-tax v. H. Bjordal (1), the Judicial
Committee dealt with s. 21(1) of the Income Tax Ordinance No. 8 of 1940
(Uganda), as amended by s. 5 of the Income Tax (Amendment) Ordinance, 1943.
That provision of law is completely in pari materia with s. 23A. Two brothers,
H. Bjordal and S. Bjordal, held 73.96 and 25.09 per cent. of the voting power.
Five others held 04 per cent. of the voting power. The shares held by S.
Bjordal were purchased for full value by him from his brother.
There was no suggestion that he was a nominee
of the respondent or that he was acting in concert with his brother. Both
brothers were Directors of the Company. It was held by the Judicial Committee
that shareholders in a company who are members of the 'public' do not cease to
be so, because they become Directors. In the Uganda Ordinance also, like our
Act, there was no guidance as to the meaning of the word 'public', as there was
in the English statute considered in Tatem's case (2).
It is significant that in Jubliee Mills Ltd.
v. Commissioner of Income-tax (3), Chagla, C. J., and S. T. Desai, J., speaking
of the judgment under appeal and (1)  A.C. 309. (2)  24 T.C. 57.
(3)  34 I.T.R. 30, 41.
989 taking into consideration the Privy
Council case, observed:
"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." In our judgment, the test is first to find out whether
there is an individual or a group which controls the voting power as a block.
If there be such a block, the shares held by it cannot be said to be "unconditionally"
and "beneficially" held by members of the public. In the category of
shares held by the public, only those shares can be counted which are
unconditionally and beneficially held by the public, or, in other words, which
are uncontrolled by the group, which controls the affairs. The group itself may
be composed of Directors or their nominees or relations in different
combinations, but none can be said to be.long to that group, be he a director
or a relative unless he does not hold the shares unconditionally and
beneficially for himself. It is only such a person, who can fall properly
outside the word 'public'.
Judged from this point of view, the judgment
and orders of the High Court cannot be upheld. Directors cannot, by reason of
being Directors, be said not to be members of the public. To that extent, the
judgment is erroneous. There is a finding by the Tribunal in the supplementary
statement of the case that the shares held by Bipinchandra, Harishchandra and
Krishnakumar were under the control of their father, Maganlal Parbhudas. Their
holding was 3,000 and with Maganlal's holding of 1,344 shares, makes up a total
of 4,344 shares. Though the question as framed by the High Court appears to
have been correctly answered in the negative, it does not dispose of the
matter. The, question to be determined still is whether more than per cent. of
the shares are not beneficially held by the public. We accordingly set aside
the judgment and orders of the High Court, and direct the High Court to decide
the question originally framed by it, viz.:
"Whether on the facts and circumstances
of the 125 990 case the provisions of s. 23A of the Indian Income-tax Act, XI
of 1922, are applicable to the petitioners?" The High Court may call for a
supplemental statement of the case from the Tribunal, if it finds it neces
The appeal is allowed. The respondents shall
bear the costs of this appeal. The costs in the High Court shall abide the