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PETITIONER: COMMISSIONER OF INCOME-TAX, WEST BENGAL

       Vs.

RESPONDENT: EAST COAST COMMERCIAL CO.  LTD.

DATE OF JUDGMENT: 11/10/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. BHARGAVA, VISHISHTHA

CITATION:  1967 AIR  768            1967 SCR  (1) 821  CITATOR INFO :  R          1976 SC1141  (14)

ACT: Income  Tax  Act  (11 of 1922), s.  23-A--company  in  which public are not substantially interested-Test for. Taxation  of  Income (Investigation  Commission)  Act,  1947 declared ultra vires-Admissions recorded by Authority acting under Act-Admisibility in evidence.

HEADNOTE: Members  of a family held 4,015 shares, out of 4,391  shares in  the  respondent  company, which  was  a  public  limited Company.  In the course of investigation under the  Taxation of Income (Investigation Commission) Act, 1947, the heads of the various branches of the family admitted that the  shares were  purchased by them out of their joint income which  had not  been disclosed and that a majority of the  shares  were held  benami.  An offer of settlement was also made  that  a single  assessment may be made in respect of  the  "secreted income" treating them as an association of persons and  that every  member  of  the  family be  treated  as  jointly  and severally  liable  to  pay  tax on  that  income.   For  the assessment years 1950-51 and 1951-52, the Income-tax Officer commenced  proceedings under s. 23A of the  Income-tax  Act, 1922, and held that the Company was one in which the  public were not substantially interested and that its affairs  were under  the control of the members of the family.  He  passed an order under the section 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  shall  be  deeming to have  been  distributed  as dividends among the share-holders.  The order was  confirmed by  the  Appellate Assistant Commissioner.   The  Income-tax Appellate  Tribunal reversed the order.  The  Tribunal  held that  the  offers made by the members of the family  to  the Income-tax  Investigation  Commission were not  relevant  in determining whether the Company was one in which the  public were  not substantially interested, and that from  the  fact that  the members of the family held 4,015 shares, it  could not  be inferred that the shares were jointly  acquired,  or that  the members exercised control over the affairs of  the

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Company.   The  Tribunal  also observed that  there  was  no material  placed by the Department to show that the  members of  the  family actually controlled the voting or  acted  in concert  so  as  to bring the company within  s.  23A.   The Tribunal, therefore, held that the section did not apply  to the  Company since it was not established that  the  Company was   one  in  which  the  public  were  not   substantially interested, even though the members of the family held  more than  75%  of  the  shares issued  by  the  Company.   On  a reference,  the  High  Court  confirmed  the  order  of  the Tribunal  holding that even on the finding that the  members of  the family were in a position to control the affairs  of the  Company, there was no evidence of any  overact  showing that  they were acting in concert and thereby constituted  a block. In appeal to this Court, HELD : The approach to the problem by the Tribunal and  High Court was erroneous.  It was for the Tribunal to  determine, having regard to ordinary human experience whether it may be safely taken that the members of the family must have  acted together as a controlling block.  That 822 enquiry  had not been made and the case was decided  on  the application of an erroneous test. [830 C-D] (i)  In  deciding whether an order under s. 23A (as  oh  the relevant  date)  is called for, it must be  decided  in  the first instance whether there was a of persons     acting  in concert  holding a sufficient number of shares  may  control the  voting as a block.  It is sufficient, if having  regard to their relationship, their conduct, their common  interest etc. it may be inferred that they must be acting together  : evidence  of actual concerted acting is  normally  difficult -to  obtain and is not insisted upon.  It is the holding  in the  aggregate,  of a majority of the shares  issued,  by  a person  or  persons  acting in concert in  relation  to  the affairs of the company which establishes the existence of  a block,  and  if the block holds 75% of the voting  power  it shall be deemed that the company is one in which the  public are  not  substantially  interested.  TO  establish  that  a company  is  one in which the public are  not  substantially interested,,  it is not a condition that actual exercise  of control by a group must be established. [828 B, E-F; 829  F- H] (ii) The  fact  that certain provisions of the  Taxation  of Income (Investigation Commission) Act were held to be  ultra vires  did not render the Commission an unlawful  body,  and the  admissions  recorded  by the Commission  could  not  be ignored.  The report could be taken in evidence after giving an opportunity to the respondent to make its  representation against the report and to tender evidence against the  truth of the recitals contained therein. [830 B-D] Raghuvanshi Mills Ltd. v. Commissioner of Income-tax, [1961] 2  S.C.R.  978  and Commissioner of  Income-tax  v.  Jubilee Mills, [1963] Supp. 1 S. C. R. 83, followed.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 672 &  673 of 1965. Appeals from the judgment and order dated August 17, 1962 of the  Calcutta High Court in Income-tax Reference No.  32  of 1959; S.   T.  Desai R. Ganapathy Iyer and R. N. Sachthey, for the appellant (in both the appeals).

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A.   K.   Sen  and D. N. Mukherjee, for the  respondent  (in both the appeals). The Judgment of the Court was delivered by Shah, J. M/s East Coast Commerical Company Ltd.  hereinafter called ’the Company’-disclosed in its return for the assess- ment years 1950-51 and 1951-52, a consolidated net profit of Rs. 8,89,241/- for the account period April 7, 1949 to  July 16, 1950.  The Income-tax Officer computed the income of the Company  for the assessment year 1950-51 at  Rs.  7,27,824/- and  for the assessment year 1951-52 at Rs. 2,00,803/-.   It came  to  the  notice of the  Income-tax  Officer  that  the Company  was one in which the public were not  substantially interested  within the meaning of s. 23A of  the  Income-tax Act, 1922, and that the distributable profit after deducting tax  due  on  the total income was Rs.  4,32,151/-  for  the assessment   year  1950-51,  and  Rs.  1,13,579/-  for   the assessment   year   1951-52,  and  that  the   Company   had distributed Rs. 43,910/- only                             823 as  dividend.  The Income-tax Officer commenced  proceedings under  S.  23A of the Income-tax Act, 1922,  and  passed  an order  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  shall be  deemed to have been distributed as dividends  among  the shareholders.   The  order was confirmed  by  the  Appellate Assistant   Commissioner.   But  the  Income-tax   Appellate Tribunal reversed the order.  The Tribunal held that s.  23A did  not apply to the Company since it was  not  established that  the  Company  was one in which  the  public  were  not substantially interested. At  the  instance of the Commissioner of  Income-tax,  three questions  were referred to the High Court of Judicature  at Calcutta.   In  these appeals the first  question  alone  is material :               "Whether on the facts and in the circumstances               of  the  case  the Tribunal erred  in  law  in               holding  that the assessee-company was one  in               which the public are substantially  interested               within  the  meaning of S. 23A of  the  Indian               Income-tax Act ?" The High Court answered that question in the negative.   The Commissioner  of Income-tax has, with certificate  under  s. 66A(2) of the Income-tax Act, 1922, appealed to this Court. Relationship  between the members of the family jointly  re- ferred  to  as ’the Kedias’ is explained  by  the  following genealogy                    Jhabarmull Kedia                      (died in 1937) --------------------------------------------------------------- :                      :               :            : Nagarmull         Probladrai        Madangpal     Bnarashi. (Died in 1928)    (Died on 16-6-51)                Prosad ------------------------ :                      : Mahabir Prosad         Purarumal The  joint  status  between the members of  the  family  was severed  on  July  4, 1943, and the members  of  the  family formed  themselves  into a partnership and  carried  on  the family business.  Some time thereafter Benarashi Prosad  and Puranmall  retired  from  the  partnership  and  started  an independent business with an outsider in partnership.   This business  was taken over by a private company  styled  ’East Coast Commercial Company Ltd. Later the private company  was converted  into  a public limited company bearing  the  same

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name  and having a paid-up capital of Rs. 4,39,  100/divided into 4,391 shares of Rs. 100/- each. 824 Investigation  was started against the members of the  Kedia family   under   the  Taxation  of   Income   (Investigation Commission)  Act, 1947. In the course of  the  investigation the heads of the four branches of the Kedia family  admitted that  the shares in the respondent company  numbering  4,115 were  purchased by them out of their joint income which  had not  been  disclosed  and a majority of the  shares  in  the Company  was held benami.  An offer of settlement  was  then made  by  the  members  of  the  Kedia  family  before   the Investigation  Commission.  In paragraph-26 of  the  report, the Commission observed as follows               "These   figures   have   been   accepted   by               Madangopal Kedia for himself and as manager of               the  joint Hindu family consisting of  himself               and  his minor sons, Prosad Kedia for  himself               and as manager of family consisting of himself               and  his minor son as the executor  and  legal               representative    of   his    elder    brother               Prohladrai,  Puranmal Kedia, and Prosad  Kedia               for   himself   and  as  manager   of   family               consisting  of himself and his son,  and  they               have  jointly filed a settlement  application.               Though  these  persons  are  now  divided  and               separate  assessments to income-tax are  being               made  on each, they have admitted that so  far               as the secret profits in question were concer-               ned,  they  were  earned by  all  the  members               jointly and have, therefore, requested that  a               single  assessment may be made, treating  them               as  an Association of Persons and making  each               member  and  his  joint  family  jointly  -and               severally liable for the tax." It appears that 2,000 shares of the Company were standing in the name of Durgadutt Jhunjhunwalla who had declared himself to  be the sole proprietor of the business styled  ’Mohanlal Murarilal’  carried  on in the State of Hyderabad.   It  was found  in  the  course  of  the  investigation  before   the Investigation  Commission  that  the  shares  were  held  by Durgadutt Jhunjhunwalla benami for the members of the  Kedla family.   By letter dated December 18, 1951 it was  admitted by  them that Durgadutt Jhunjhunwalla was only a  "  working partner" having a tenth share and that the entire capital of the  firm- had been advanced by the Kedias jointly.  Out  of the  2,000  shares  -registered  in  the  name  of  Mohanlal Murarilal,  1,000  ,shares  were  then  transferred  to  the executor  of the estate of Prohladrai Kedia and the  balance was  taken  over by Durgadutt Jhunjhunwalla on  January  30, 1951,  when  his account was finally settled,  his  personal account  being  credited  with the  sum  of  Rs.  1,00,000/- representing  his  remuneration for services  rendered  till October  20,  1949  and  he  being  debited  with  that  sum representing  the  value of 1,000 shares made over  to  him. Therefore upto the 825 account year 1951-52 in the 1,000 shares held in the name of Durgadutt Jhunjhunwalla the members of the Kedia family  had a 9/10th share. By  September 17, 1952 the members of the Kedia  family  got all  the  shares  transferred to their own  names  from  the benamidars.   The share-holding of the various,  members  of the family thereafter was as follows 1.   Madangopal Kedia                120 shares

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2.   Benarshi Prosad Kedia           495 shares 3.   Prohladrai Kedia              1,389 shares 4.   Purnamal Kedia                  650 shares 5.   Mahabir Prosad Kedia            461 shares (Out  of 1,389 shares held in the name of Prohaldrai  Kedia, 1,000 shares were those which were transferred by  Durgadutt Jhunjhunwalla). Taking  into  account 900 shares-being 9/10th share  of  the holding  of 1,000 shares which were transferred  on  January 30,  1951 in the name of Durgadutt Jhunjhunwalla, the  total holding  of the members of the Kedia family in  the  Company therefore stood at 4,015 shares.  This holding was in excess of  seventy-five per cent of the total number of the  shares issued by the Company. The Income-tax Officer held that Madangopal Kedia and others formed an association of persons.  In his view 4,115  shares had  been purchased benami out of the income earned  jointly by  the  members  of  the family and  that  the  income  was invested  by  them as an association of  persons,  and  that there was no evidence that the income from those shares  was taken  individually by the members of the family,  who  even after  disruption of the joint family on July 4,  1943,  had continued to work together and make their investments as  an association of persons.  The Income-tax Officer further held that  since the shares were never quoted in the  market  and the  affairs  of the Company were under the control  of  the members  of the Kedia family, an order under s. 23A  of  the Income-tax Act could appropriately be made. In appeal, the Appellate Assistant Commissioner agreed  with the  Income-tax  Officer  and  held  that  the  shares  were acquired  jointly by the members of the family out of  their "joint   secreted   earnings".   The   Appellate   Assistant Commissioner  also proceeded to and lyse the minutes of  the meetings  of  the  Company showing  the  attendance  at  the meetings  of  the Company held between April  10,  1946  and December  30,  1951 and held that the members of  the  Kedia family  had  controlled the affairs of the  Company  and  on their   admissions  they  had  formed  an  association   for acquisition  of the shares of the Company, and  for  various Sup.C.I./66-8 826 other purposes, and therefore it could be inferred that  the members of the association who controlled more than  seventy five  per cent of the total shares and the voting power  had acted in concert. But  the Income-tax Appellate Tribunal held that the  offers made  by the members of the Kedia family to  the  Income-tax Investigation Commission that a single assessment be made in respect  of  their  "secreted income" treating  them  as  an association  of persons and that every member of the  family be  treated  as jointly and severally liable to pay  tax  on that  income  were not relevant in determining  whether  the Company  was one in which the public were not  substantially interested,  and that from the fact that the members of  the Kedia  family  held 4,015 shares, it could not  be  inferred that  the shares were jointly acquired, or that the  members of.  the  family exercised control over the affairs  of  the Company.  The Tribunal observed :               "....that  unless  and  until  the  department               clearly  established by proper  material  that               the  Kedias  were acting in concert  there  is               absolutely  no  case  for  holding  that   the               provisions of Section 23A become applicable to               the facts of the case as in this case we  have               held  that there is nothing to  indicate  that

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             the  separated  members of  the  Kedia  family               acted in concert we hold that no case has been               made  out by the Department for  holding  that               the  assessee-company  is  one  in  which  the               public were not substantially interested." The High Court expressed a doubt that the report made by the Income-tax Investigation Commission "may not be evidence  of anything contained therein", and proceeded to observe :               "There  is  no  doubt upon  the  facts  stated               above,  that the five Kedias who held  between               them 3,115 shares, and also had an interest in               the   1,000   shares  of   Messrs.    Mohanlal               Murarilal,  were in a position to control  the               affairs  of the Company. . . . In my  opinion,               Tribunal came to right conclusion.  It may  be               that  the  holders  of the  shares  are  in  a               position to control the Company.  The majority               of shareholders may be directors or  relatives               of  directors  or relatives  of  shareholders.               But,  that  is  not by  itself  sufficient  to               satisfy  the  test.  There must  not  only  be               evidence to show that a number of  individuals               are in a position to control the company,  but               it must be shown that they are in fact  acting               in concert and they have constituted a ’block’               so as to control the affairs of the company by               themselves.    This   requires   some    overt               act. . . . There is not a single fact to  show               that the Kedias or their nominees were in fact               acting  in concert or operating as a  ’block’.               The Tribunal was right in               827               coming  to  the conclusion that  no  materials               were  placed  before it by the  Department  to               establish the fact that the Kedias in question               acted in concert or operated as a block, so as               to  bring  the  assessee  company  within  the               provision of section 23A.  " By  s.  23A(1)  of the Income-tax Act as  it  stood  in  the relevant  years  the  Income-tax Officer  was  required,  if satisfied  that in respect of any previous year the  profits and gains distributed as dividends by any company were  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, to  make  an  order that the undistributed  portion  of  the assessable income of the company of that previous year shall be  deemed to have been distributed as dividends  among  the shareholders  as at the date of the general meeting.  But  - this power could not be exercised in respect of any  company in  which the public are substantially interested.  By  the. Explanation  to  s, 23A(1) it was enacted  that  "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 twenty-five per cent. of the  voting power have been allotted unconditionally to, or acquired un- conditionally  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." This  Court  in Raghuvanshi Mills Ltd.  v.  Commissioner  of Income-Tax(1)  examined  the scheme of S. 23A  as  it  stood before the Finance Act of 1955 and observed :               "The   word   ’public’   is   used   (in   the

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             Explanation)  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. . . .               the test is first to find out whether there is               an  individual  or 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." It  is  clear  that in deciding whether an  order  under  s. 23A(1)   is   called  for,  the  Income-tax   Officer   must determine--(1)  whether  there is an individual or  a  group which can control the voting power as (1)  [1961] 2S.C.R. 978-41 I.T,R. 613. 828 a  block.  The existence of such a block may be  established by  showing  that  the voting power  is  vested  in  persons possessing  more than fifty per cent. of the  shares  issued who  act  in concert ; and (ii) that the block  exercises  a controlling interest over the affairs of the company.   This condition is satisfied only if the voting power of the block or  group  is seventy-five per cent or more.  If  the  block holds seventy-five per cent of the voting power it shall  be deemed  that the Company is one in which the public are  not substantially interested.  On the other hand, if the members of  the public hold 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 allotted unconditionally to, or acquired unconditionally  by them,  the  Company shall be deemed to be one in  which  the public are substantially interested. It is unfortunate that the Tribunal did not record a finding whether there was a group of persons controlling the affairs of  the  Company.  In the view of the  Tribunal,  since  the acquisition of 4,015 shares of the Company was not joint and there  was no other evidence that the members of  the  Kedia family were in fact acting in concert, the Company could not be  deemed  one in which the public were  not  substantially interested.   The High Court also made a  similar  approach. They  were  of the view that even on the  finding  that  the members  of the Kedia family were in a position  to  control the  affairs  of the Company, there was no evidence  of  any overt  act  showing  that they were acting  in  concert  and thereby constituted a block. In our judgment, that approach to the problem was erroneous. The  Tribunal  had to decide in the first  instance  whether there  was  a group of persons acting in concert  holding  a sufficient number of shares which may control the voting  as a block.  But the existence of a block is not decisive.   If there be a group of persons holding control over voting, the Company  would  still be a Company in which the  public  are substantially  interested, if twenty-five per cent. or  more of  the voting power has been, allotted  unconditionally  to and  beneficially held by the public and the shares were  in the previous years subject of dealings in any stock exchange in   the  taxable  territories  or  were  in   fact   freely transferable by the holders to other members of the  public. The two enquiries are distinct.  The Tribunal in paragraph 9 of  its order observed that there was no material placed  by

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the Department to show that the Kedias in question acted  in concert  so as to bring the assessee company within s.  23A. If thereby the Tribunal meant that there was no evidence  to prove  that the members of the Kedia family "actually  acted in  concert,"  the view taken by the Tribunal  was,  in  our judgment, wrong, since to establish that a Company is one in which 829 the  public  are not substantially interested, it is  not  a condition that actual exercise of control by a group must be established.  The High Court was apparently of the view that the  members  of  the Kedia family were  in  a  position  to control  the  affairs  of  the Company,  but  there  was  no evidence of any overt act or concert between them. But in Commissioner of Income-tax, Bombay City-, v.  Jubilee Mills  Ltd. (1) this Court held that no direct  evidence  of overt act or concert between the members of the group having control over voting was necessary to prove that the  Company was   not  one  in  which  the  public  were   substantially interested.   It was observed in Raghuvanshi Mills’  case(2) that  "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." In Jubilee Mills’ case(1)  this  Court elaborated those observations and stated :               "The  test is not whether they  have  actually               acted in concert but whether the circumstances               are  such that human experience tells us  that               it  can  safely  be taken that  they  must  be               acting together.  It is not necessary to state               the  kind  of evidence that  will  prove  such               concerted acting.  Each case must  necessarily               be decided on its own facts." On  an analysis of the reasons recorded by the Tribunal  and the High Court, it is clear that the Tribunal held that  the Kedias did not form a controlling group because there was no evidence  that  they actually controlled  the  voting,  even though  they  held more than seventy-five per  cent  of  the shares issued by the Company : the High Court observed  that the  members  of the Kedia family held 4,015 shares  of  the Company and were in a position to control the affairs of the Company, but there was no evidence to show that they did  in fact  act  in  concert and controlled  the  affairs  of  the Company  as  a  block.  But, as  already  observed,  if  the members  of  the Kedia family formed a block and  held  more than  seventy-five per cent of the voting power,it  was  not necessary to prove that they actually exercised  controlling interest.  It is the holding in the aggregate of a  majority of  the  shares  issued by a person  or  persons  acting  in concert  in  relation to the affairs of  the  Company  which establishes the existence of a block.  It is sufficient,  if having  regard  to their relation etc., their  conduct,  and their  common  interest, that it may be inferred  that  they must  be  acting  together : evidence  of  actual  concerted acting is normally difficult to obtain, and is not  insisted upon. (1)  [1963] Supp. 1 S.C.R. 83-48 I.T.R. 9.     (2) [1961]  2 S.C.R. 978 830 We may observe that the High Court appears to have felt some doubt  as to the admissibility of the report of the  Income- tax investigation Commission. But the Income-tax authorities are       not  strictly bound by the rules of evidence,  and

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the mere fact that       certain provisions of the  Taxation of  Income  (Investigation Commission) Act relating  to  the inquiries to be held were declared to        be ultra  vires by this Court did not render the Commission an unlawful body ; and in any event the admissions which are recorded by  the Commission,  as  having  been made before  them,  cannot  be ignored.  The report had evidence value and could  be  taken into  account. Undoubtedly the report had to be  brought  to the       notice  of the Company, and the Company had to  be given an opportunity to make its representation against  the report and to       tender evidence against the truth of the recitals contained therein.        It is not suggested  that this opportunity was not given. It was       for         the Tribunal  to  determine,  having regard  to  ordinary  human experience  whether it may be safely taken that the  members of the         Kedia  family must have acted together  as  a controlling block. That       enquiry has not been made, and the case has been decided on the        application   of   a test which is erroneous. We are, therefore, unable     on the statement of case to answer the question referred.      We  accordingly set aside the order passed by the  High Court and direct that the Tribunal do submit a supplementary statement of the case under s. 66(4) of the Income-tax  Act, 1922, because in         our view the statement of the  case already   referred   to   is  not   sufficient   to   enable determination of the case raised thereby. The     Tribunal may  make such additions or alterations in the statement  of the case in the light of the observations made in the course of this judgment. The Tribunal will submit the supplementary statement of the case to the High Court. The High Court will then proceed to determine the question according to law. The costs     of  this hearing will be costs in the  proceedings before the High     Court. Order  of  High  Court set aside  with  direction,  to,  the Tribunal to submit supplementary statement of the case. V.P.S. 831