Commissioner of Income-Tax, Madras Vs.
The Amrutanjan Ltd., Madras [1964] INSC 138 (28 April 1964)
28/04/1964 SHAH, J.C.
SHAH, J.C.
SUBBARAO, K.
SIKRI, S.M.
CITATION: 1964 AIR 1804 1964 SCR (8) 9
ACT:
Income Tax-Object and scope of s.
23-A-"Company in which the public are substantially
interested"--Meaning of-Indian Income Tax Act, 1922 (11 of 1922), s. 23-A.
HEADNOTE:
The Income-tax Officer found that the
respondent company had, declared during the three years ending March 31, 1947,
March 31. -1948 (1) [1964] 1 S.C.R. 553.
10 and March 31, 1949, dividends which were
considerably less than 60% of the amount available for distribution as computed
under s. 23-A of the Income-tax Act, 1922. He served a notice on respondent
company to show cause why an order under s. 23-A be not passed against it.
After hearing the respondent the Income-tax Officer passed an order that the
undistributed portion of the assessable income of the respondent 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 dividend among the share-holders. The order of the Income-tax
Officer was upheld by the Appellate Assistant Commissioner and the Income-tax
Appellate Tribunal.
A reference was made to High Court and the
relevant question referred was whether the provisions of s. 23-A were correctly
applied for the three relevant years. The High Court held that respondent
company was one in which the public were substantially interested and,
therefore, the Income-tax Officer had no jurisdiction to pass the order under
s. 23-A for any of the three years. The appellant came to this Court with
certificate of fitness from the High Court. Dismissing the appeal.
HELD:-The respondent company was one in which
the public were substantially interested and therefore, the Income-tax Officer
had no jurisdiction to pass an order under s. 23-A.
The Indian Income-tax Act, 1922 does 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 51% of
the voting right 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.
The distinction between the controlling group
and public is not along the line which distinguishes directors from the
remaining members of the company. If a director does not belong to a
controlling group, he will be regarded as a member of the public for purposes
of the third proviso and explanation to s. 23-A, even though such 'director was
directly entrusted with the management of the affairs of the company.
Section 23-A was enacted with the object of
preventing avoidance of super-tax by share-holders controlling the affairs of a
company in which the public are not substantially interested, by the expedient
of not distributing dividends out of the profits. For many years, the rates of
super-tax applicable to companies were much lower than the higher rates
applicable to other assessees. That gave inducement to Persons controlling
companies to avoid the higher incidence of super-tax by transferring to limited
companies the businesses. The profits of business could be accumulated till
they were 'distributed in the form of capital and in 'the meanwhile
accumulations of undistributed profits remained available to them for the
purposes of their other businesses. Section 23-A was enacted with a view to
full attempts made by persons holding cotnrolling 11 interests in companies to
avoid payment of super-tax applicable to no corporate assessees by refusing to
agree to distribution of profits. Under s. 23-A an Income-tax Officer was
authorised to make an order by which .a fictional or notional income which was
not in fact received by the ,share-holders, was deemed to be distributed and was
liable to tax as it had arisen or accrued to them. However, no such order could
be passed in respect of a company in which the public were substantially
interested and to a subsidiary company of such a company if the whole of the
share capital of such subsidiary company was held by the parent company or by
the nominee thereof
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 521-523 of 1963.
Appeals from the judgment dated April 5, 1960
of the Madras High Court in Case referred No. 80 of 1955.
C. K. Daphtary, Attorney-General, K. N.
Rajagopal Sastri and R. N. Sachthey, for the appellant (in all the appeals).
S. Narayanaswamy and R. Gopalakrishnan, for
the respondent (in all the appeals).
April 28, 1964. The Judgment of the Court was
delivered by SHAH, J.-One Nageswara Rao Panthulu set up a business of
manufacturing a "pain-balm" which was marketed. in the trade-name of
"Amrutanjan". In September 1936 the respondent company was floated as
a public limited company under the Indian Companies Act, 1913, to acquire and
carry on the business of manufacture and sale of "Amrutanjan".
The authorised capital of the company was
7,000 ordinary shares and 3,000 preference shares of Rs. 100/each, and the
issued and paid-up capital was 2,500 ordinary and 3,000 preference shares. The
preference shareholders were under the Articles of Association entitled to a
fixed dividend of 71 per cent on the face value of the shares, with no right in
the balance of the profits. The respondent company took over the business
conducted by Nageswara Rao Panthulu for Rs. 5,50,0001paid in the form of 2,500
ordinary and 3,000 preference fully paid-up shares. This company was managed by
a firm which after the death of 12 Nageswara Rao Panthulu consisted of
Ramayamma, widow of Nageswara Rao, Kamakashamma, his daughter, Ramayamma's
brother Ramchandra Rao and Kamaksham ma'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 Kamakhamma 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 71/2 per cent on the preference
shares and 61 per cent on the ordinary shares-which was considerably less than
sixty per cent of the amount available for distribution as computed under s.
23-A of the Income-tax Act. as it stood at the material time. The Income-tax
Officer served a notice, after obtaining the approval of the Inspecting
Assistant Commissioner of Incometax, reauiring the respondent company to show
cause why an order under s. 23-A of the Income-tax Act, 1922, should not be
passed against the company and after considering the objections raised by the
company ordered on March 31, 1953, that the undistributed portion of the
assessable income of the company 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 dividend amongst
the shareholders as at the date of the respective general meetings. This order
was confirmed in appeal by the Appellate Assistant Commissioner and the
Income-tax Appellate Tribunal.
Several contentions were raised before the
Revenue authorities and the Tribunal challenging the competence of the
income-tax officer to pass an order under s. 23-A including the contention that
the said provision was unconstitutional or ultra vires. These have been negative
by the Tribunal and also by the High Court and it is unnecessary to refer to
those contentions in these appeals as they do not survive for determination.
To a reference made under s. 66(1) of the
Indian Income tax Act, the Tribunal referred three questions to the High ,Court
of Judicature at Madras. The third question, which alone is material in these
apeals, reads as follows:
"Whether the provisions of s. 23-A were
correctly applied for the three relevant years?" The High Court held that
the respondent company was one in which the public were substantially
interested, and therefore the Income-tax Officer had no jurisdiction to pass
the order under s. 23,-A of the Income-tax Act for any of the three years and
on that footing answered the question in the negative. Against the order passed
by the High Court, with certificate of fitness the Commissioner of Income-tax has
appealed to this Court.
Section 23-A of the Indian Income-tax Act,
1922 before it was amended by the Finance Act, 1955, stood as follows:
"(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,. . 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 14 shall be deemed to have
been distributed as dividends amongst the shareholders as at the date of the
general meeting aforesaid Provided further 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 it 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)
..............
The section was enacted with the object of
preventing avoidance of super-tax by shareholders controlling the affairs of a
company in which the public are not substantially interested, by the expedient
of not distributing dividend out of the profits. Under the annual Finance Acts
for many years the rates of super-tax applicable to companies were much lower
than the higher rates applicable to other assessees. That gave an inducement to
persons controlling companies to avoid the higher incidence of super-tax by
transferring to limited companies their businesses. Thereby the sow of earning
was secured, the profits of the business could be accumulated till they were
distributed in the form of capital, and in the meanwhile accumulations of
undistributed profits remained available to them for purposes of their other
businesses. With a view to foil attempts made by persons holding controlling
interests in companies to avoid payment of super-tax applicable to no corporate
assessees by refusing to agree to distribution of profits, s. 23-A was enacted
by the Legislature. The Income tax Officer was thereby authorised, if satisfied
when less than sixty per cent of the assessable income of the company, subject
to reductions permitted thereby, was not distributed, to pass an order under
which the income was deemed to be distributed among the shareholders entitled
thereto. By the order so made a fictional or notional income which was not in
fact received by the shareholders was deemed to be distributed, and in the
hands of the shareholders such deemed income was liable to tax as if it had
arisen or accrued to them. But by the express provision contained in s. 23-A,
as it stood at the material time, no order could be passed in respect of any
company in which the public were substantially interested and to a subsidiary
company of such a company if the whole of the share capital of such subsidiary
company was held by the parent company, or by the nominees thereof. 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 right 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 voting 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 line which
distinguishes directors from the remaining members of the 16 company. If a
director does not belong to the controlling group, he will be regarded as a
member of the public for the purposes of the third proviso and the Explanation
to s. 23-A even though such director was directly entrusted with the management
of the affairs of the company.
The Commissioner contends that the
Explanation to sub-s. (1) of s. 23-A is in reality a clause which defines what
a company, in which the public are substantially interested, is. In terms,
however, the Explanation raises a presumption and does not purport to define a
company in which the, public are substantially interested. On an analysis of
the provisions of the third proviso to s. 23-A and its explanation, the
following position emerges:
(1) Where there is no individual member or a
group of members acting in concert holding fifty-one per cent or more of the
voting power, which controls the working of a company, it is from its very
nature a company in which there is no controlling member or group and therefore
the public are substantially interested;
(2) Where a shareholder holds or a group of
shareholders acting in concert hold fifty-one per cent or more of the voting
power, the question is one of fact to be determined in each case, whether it is
a company in which the public are substantially interested, having regard to
the purpose for which the holding of fifty-one per cent or more is utilised;
(3) Where not less than twenty-five per cent
of the voting power is allotted unconditionally to, or is acquired
unconditionally by or is beneficially held by the public, it shall be presumed
that the company is one in which the public are substantially interested. But
in considering whether shares carrying not less than twenty-five per cent of
the voting right are held by the public, shares entitled to a fixed rate of
dividend have to be excluded.
17 The reason of the rule which excludes from
the computation of voting power holders of shares entitled to a fixed rate of
dividend is that s. 23-A is directed primarily against the accumulation of
undistributed dividends to avoid payment of non-corporate rates of super-tax.
But shareholders who are entitled to a fixed rate of dividend are not directly
interested in such accumulation: it matters little to them whether the dividend
is immediately distributed to the ordinary shareholders or is accumulated, and
therefore in assessing whether the twenty-five per cent of the shares are
vested in persons other than 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 arise
only, if twenty-five percent of the voting power was held by persons entitled
to ordinary shares outside the controlling group.
It was suggested that the expression
"twenty-five per cent of the voting power" would mean not twenty-five
per cent of the total voting power, but power exercisable in respect of shares
other than shares entitled to a fixed rate of dividend. Prima facie, such an
interpretation is not warranted if regard be had to the terms of the
Explanation. 51 S. C-2 18 But even that argument is of no value, for
twenty-five per cent of the voting power attached to the ordinary shares is not
exercisable by the public. This, therefore, is a case in which shares not
entitled to a fixed dividend carrying not less than twenty-five per cent of the
voting power are not shown to have been allotted unconditionally to, or
acquired unconditionally by or beneficially held by the public. The
Explanation, therefore, has no operation.
Whether in view of the third proviso the
company may be regarded as one in which the public are substantially
interested, is a question to which no attention was paid by the Tribunal.
Whether in fact there exists such a controlling interest in the hands of one
shareholder or a group of shareholders as would render the company one in which
the public are not substantially interested is a question which therefore
cannot be decided by this Court.
The order of the High Court must therefore be
continued, but on different grounds. The interpretation of the Explanation by
the High Court, for reasons already set out, was incorrect. The Explanation had
no application, because no presumption on the facts found could arise there under.
The Revenue authorities have not made any investigation on the question whether
there existed any controlling interest in a group of persons. so as to bring
the case within the third proviso.
The appeals must be dismissed with costs. One
hearing fee.
Appeals dismissed.
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