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PETITIONER: SHREE CHANGDEO SUGAR MILLS, LTD.

       Vs.

RESPONDENT: THE 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 1154            1961 SCR  (2) 990

ACT: Income-tax--Undistributed  income--Company in  which  Public are   substantially  interested--Powers  to   assess   Super Tax--Test--Part B States (Taxation Concession) Order,  1950, cl. 14--Indian Income-tax Act, 1922 (11 of 1922), S. 23A(1).

HEADNOTE: During the assessment year, the company had not  distributed dividends  to the extent of 60% of its profits and an  order under  S.  23A(1) of the Act was passed  by  the  Income-tax Officer.  The question referred by the Tribunal to the  High Court was whether at the relevant time the assessee  company could  be  deemed to be a company in which the  public  were substantially  interested,  i.e.,  held 25%  of  the  voting power, was answered in the negative. Held,  that the test that no holding by the Directors  of  a company  could be regarded as one in which the  public  were substantially interested was not the correct test to  apply. The  test as laid down in Raghuvanshi Mills v.  Commissioner of  Income-tax,  [1961] 2 S.C.R. 978, would  apply  to  this Case. Held, further, that the paramount condition in applying  the proviso and the explanation of S. 23A(1) was that the public should  be  beneficially  interested in 25%  of  the  voting power., The explanation to S. 23A required that shares  held by  the company should be considered as held by the  public, only if S. 23A did not apply to it.  The concession order in cl.  14 of the; Part B States (Taxation  Concession)  Order, 1950, did not seek to negative that test, it only  conferred a benefit on a company, 991 to  which cl. 14 applied, and the company could  avail  that concession,  and  still might fall within s. 23A  for  other purposes. The  Raghuvanshi Mills Ltd. v. Commissioner  of  Income-tax, SI’ Bombay, [1961] 2 S.C.R. 978, applied.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION: Civil Appeal c, No.  380  of

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1957. Appeal  from the judgment and order dated March 8, 1956,  of the Bombay High Court in Income-tax Reference No. 4 of 1956. N.   A. Palkhivala, S. N. Andley, Rameshwar Nath, J.   B. Dadachanji and P. L. Vohra, for the appellant. A. N. Kripal and D. Gupta, for the respondent. 1960.   December 7. The Judgment of the Court was  delivered by HIDAYATULLAH,  J.-This appeal, on a certificate by the  High Court,  has been filed by Shree Changdeo Sugar Mills,  Ltd., to  which  s.  23A  of the  Income-tax  Act  (prior  to  its amendment  by the Finance Act, 1955) was applied in  respect of  the  assessment year, 1948-49.  The question  which  was referred to the High Court was whether at the relevant  time the  assessee  Company could be deemed-to be a  Company,  in which  the  public  were  substantially  interested.    This question was answered in the negative by the High Court. During the assessment year, the Company had not  distributed dividends to the extent of 60 per cent. of its profits,  and an  order under s. 23A(1) of the Indian Income-tax  Act  was passed  by the Income-tax Officer.  The Company appealed  to the  Appellate  Assistant Commissioner,  who  dismissed  the appeal.    It  next  appealed  to  the  Tribunal,  but   was unsuccessful.   The  Tribunal, however, referred  the  above question  which,  as  already stated, was  answered  in  the negative by the High Court. The  issued, subscribed and paid-up capital of the  assessee Company  consisted of 60,000 shares, which were  distributed as follows: 992 (1) 11 Directors of the Company     41,500 shares. (2) The Managing Agency Firm             2,300 shares. (3) Mysore Merchants Ltd.          11,880 shares. (4) Others.....                          4,320 shares.                                    --------------------                                          60,000 shares.                                      ------------------ The  question arose in determining whether the  public  were substantially  interested  in the Company, that is  to  say, held  25  per cent. of the voting power.   The  Bombay  High Court  in  determining this point followed its  decision  in Raghuvanshi  Mills V.  Commissioner of Income-tax  (1),  and held that no holding by the Directors of a company could  be regarded  as  one  in which the  public  were  substantially interested.  We have heard Civil Appeal No. 30 of 1957  from the  decision  of the Bombay High Court in  the  Raghuvanshi Mills case (1), in which judgment has been pronounced today, and  have held that that is not the correct test  to  apply. We  have  remanded the said appeal, after  setting  out  the correct  test  to apply.  What we have  said  there  applies equally here. There  is yet another question, which arose in  this  appeal but not in the appeal of the Raghuvanshi Mills.  As we  have already stated, Mysore Merchants Ltd., held 11,880 shares of the  assessee Company.  If these shares could be said to  be held by the public along with 4,320 shares, the public would be  holding 25 per cent of the voting power, whether or  not the  Directors of the Company held the rest of  the  shares. It was., therefore, necessary for the High Court to consider whether the shares held by Mysore Merchants ’Ltd., could  be said to be held by the public.  The High Court held  against the assessee Company that they could not be counted as  part of the holding by the public, and, in our judgment, the High Court has reached the correct conclusion. The  matter has to be judged under the third proviso  to  s.

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23A(1), which read as follows: "Provided  further that this sub-section shall not apply  to any company in which the public are (1)  [1953] 24 I.T.R. 338. 993 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  unconditio- nally  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  British India  or are in fact freely transferable by the holders  to other members of the public." In applying the proviso and the Explanation, we have to give effect  to the words "not including a company to  which  the provisions of this sub-section apply", and have to determine whether  Mysore Merchants Ltd., is a Company, to  which  the provisions of s. 23A can be said to be applicable.   Learned counsel  for the assessee Company contends that in  deciding this,  we  have to be satisfied on three  points,  which  he summarises as follows: (a)The  public should not be substantially  interested  in that Company; (b)It  must  have  assessable  profits  for  the  relevant assessment year; and (c)It  must  not have distributed 60 per cent of  its  net assessable profits. He contends that unless these three conditions are fulfiled, s. 23A will not apply to Mysore Merchants Ltd., and that the shares  held by it will be deemed to be held by the  public. He points out that Mysore Merchants Ltd., had no  assessable income in the corresponding assessment year and had suffered a  loss,  that conditions (b) and (c)  did  not,  therefore, apply, and 994 that  s.  23A  is not applicable to that  Company.   In  our opinion,  the  paramount  condition is that  even  in   that Company  the public should be beneficially interested in  25 per cent. of the voting power, and it was admitted before us that  it  was  not a public Company at  all  but  a  private Company, and that, therefore, the public were not interested in that Company.  The shares held by Mysore Merchants  Ltd., cannot  at all be counted as a holding in which  the  public are  beneficially  interested,  in  view  of  the  exclusion contained   in  the  Explanation.   This  point  will   not, therefore, be open for the determination of the High  Court, when  the question is reconsidered by the High Court in  the light  of our observations in The Raghuvanshi Mills.Ltd.  v. Commissioner of Income-tax, Bombay (1), decided today. Learned counsel for the assessee Company also contended that in   view  of  cl.  14  of  the  Part  B  States   (Taxation Concessions) Order, 1950, the provisions of s. 23A could not be  applied to Mysore Merchants Ltd.  That clause  reads  as follows: "  14.   Requiring  distribution  of  dividends  by  private

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companies.- The  provisions  of  section 23A of the  Act  shall  not  be applied in respect of the profits and gains of any  previous year  ending before the appointed day unless the  State  law contained a provision corresponding thereto." This  Concession would be open to Mysore Merchants Ltd.,  if it  satisfied  the terms of Cl. 14.  That,  however,  cannot detract from the application of s. 23A to determine  whether the shares hold by it can be described as those in which the public are beneficially interested in another company.   The Explanation  requires  that  the shares held  by  a  company should  be considered as held by the public, only if s.  23A does  not apply to it.  The Concessions Order does not  seek to  negative  this  test; it only confers  a  benefit  on  a company,  to which cl. 14 applies.  Mysore  Merchants  Ltd., may  be  able to avail of that concession,  and  still  fall within (1)  [1961] 2 S.C.R. 978. 995 s.   23A for other purposes.  This contention has no force. The  appeal  is allowed, and the case is remitted to  s  the High  Court  for deciding the question in the light  of  the observations  in our decision in the Raghuvanshi Mills  case (1).   As  the case is remanded, the costs  of  this  appeal shall  be paid by the respondent, but the costs in the  High Court will abide the result.                                          Appeal allowed.