http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 9  

PETITIONER: RAGHUVANSHI MILLS, LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BOMBAY

DATE OF JUDGMENT: 07/12/1960

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. KAPUR, J.L. SHAH, J.C.

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)

ACT: 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).

HEADNOTE: 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 9  

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 interested. Sardar Baldev Singh v. Commissioner of Income-tax, Delhi and Ajmer, [1961] 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, [1955] 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 relative. Tatem  Steam Navigation Co. v. Commissioner of Inland  Reve- nue, (1941) 24 T.C. 56, followed.

JUDGMENT: 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 appellant. K.   N.   Rajagopala   Ayyangar  and  D.  Gupta,   for   the respondent. 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. 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 9  

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 Company. On these facts, the Income-tax Officer applied s. 23A (as it stood  prior to its amendment by the Finance Act,  1955)  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 9  

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  re- stated 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 9  

High  Court  held that the order made by  the  Tribunal  was correct,  and  answered the question in  the  negative,  re- framing 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 provision: "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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 9  

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  divi- dend  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  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 public. 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 substantially  interested. 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.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 9  

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)  [1961] 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 special. 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 Di- rectors  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 proved. 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),

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 9  

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) [1955] A.C. 309.       (2) [1941] 24 T.C. 57. (3)  [1958] 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 9  

case from the Tribunal, if it finds it neces  sary. The appeal is allowed.  The respondents shall bear the costs of this appeal.  The costs in the High Court shall abide the result.                                           Appeal allowed.