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PETITIONER: COMMISSIONER OF INCOME-TAX,WEST BENGAL

       Vs.

RESPONDENT: MESSRS.  JEEWANLAL LTD.

DATE OF JUDGMENT: 08/10/1953

BENCH: DAS, SUDHI RANJAN BENCH: DAS, SUDHI RANJAN SASTRI, M. PATANJALI (CJ) BOSE, VIVIAN HASAN, GHULAM BHAGWATI, NATWARLAL H.

CITATION:  1953 AIR  473            1954 SCR    0

ACT:    Excess Profits Tax Act (XV of 1940), s.2(11)-Director con-  trolled company -Definition-Directors authorised by another-  Company holding majority of shares to vote in respect of the  shares-- Company, whether director controlled.

HEADNOTE: Ordinarily  a  company will be a,  "company,  the  directors whereof  have  a  controlling  interest  therein"  for   the purposes  of the Excess Profits Tax Act, 1940, only  if  the directors  thereof  hold,  and  are  entered  in  the  share register  as  holders of, a majority  of  the  vote-carrying shares  of the company.  It is not necessary that they  must have a beneficial interest in such shares, but the mere fact that one of the directors of the company has been authorised by  another company which held a majority of shares  in  the former  company,  to vote on its behalf in  respect  of  the shares  held  by  it, will not make  the  former  company  a director controlled company. Glasgow  Expanded Metal Co. Ltd. v. Commissioners of  Inland Revenue  (12 Tax Cas. 573), Commissioners of Inland  Revenue v.   B.  W.  Noble  (12  Tax  Cas.  911),   Inland   Revenue commissioners V. ,T.  Bibby and Sons Ltd. (14 I.T.R.  Suppl- 7,  29 Tax Cas. 167), Commissioner of Income-tax  v.  Bipin, Silk Mills Ltd. (14 I.T.R. 344) and Commissioners of -Inland Revenue  v.  Hodgkinson  (Salford) Ltd. (29  Tax  Cas.  395) relied   on.    British  American  Tobacco   Co.   Ltd.   v. Commissioners  of Inland Revenue ([1943] A.C. 335)  and  New Shorrock Spinning and Manufacturing Co. Ltd. v. Commissioner of -Incometax, Bombay (18 I.T.R. 712) distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 78 of 1952. Appeal  from the Judgment and Order dated the 17th  January, 1951,  of the High Court of Judicature at Calcutta  (Harries C.J.  and Banerjee J.) in its Special Jurisdiction  (Income- tax) in Income-tax Reference No. 50 of 1950.

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C.K.  Daphtary, Solicitor-General for India (G.   N.  Joshi, with him) for the appellant, 26 190 N.   C.  Chatterjee  (S.   C. Majumdar, with  him)  for  the respondent. 1953.  October 8. The Judgment of the Court was delivered by DAS  J.-This is an appeal from the judgment and order  of  a Bench  of the Calcutta High Court delivered on  a  reference made  by the Income-tax Appellate Tribunal under section  21 of the Excess Profits Tax Act, 1940, read with section 66(1) of  the  Indian  Income-tax  Act,  whereby  the  High  Court answered in the affirmative the question of law referred  to it.  The question referred was: "Whether in the facts and circumstances of these cases,  the Income-tax Appellate Tribunal was right in holding that  the directors  of  the  respondent  company  had  a  controlling interest  in  it as contemplated by section 2  (21)  of  the Excess Profits Tax Act." The controversy arose between the parties during proceedings for  assessment  of excess profits tax for  five  chargeable accounting  periods ending on the 31st December of  each  of the years 1939 to 1943. The  relevant facts which are not in dispute are these:  The respondent  company  is a company incorporated in  what  was then British India having a capital of Rs. 3,600,000 divided into 360,000 shares of Rs. 10 each.  The Aluminium  Limited, a company incorporated in Canada, held 359,790 shares in the chargeable  accounting periods ending on  December31,  1939, and December 31, 1940, and 359,600 shares in the  chargeable accounting periods ending on December 31, 1941, December 31, 1942, and December 31, 1943.  In exercise of the power given to  it by article 105 of the articles of association of  the respondent  company,  the  Aluminium  Ltd.  appointed  three permanent  directors  on  the  board  of  directors  of  the respondent  company.   Two  of  these  directors  eventually retired and only one, namely, Mr. L. G. Bash continued to be a  director  of  the respondent  company  nominated  by  the Aluminium  Ltd.  Mr. L. G. Bash and the other directors  had between them during the chargeable 191 accounting periods ending on December 31, 1939, and December 31,  1940, only 210 shares and in the chargeable  accounting periods ending on December 31, 1941, December 31, 1942,  and December  31, 1943, 400 shares, Mr. L. G. Bash not having  a single   share  during  these  last   mentioned   chargeable accounting periods.  By a resolution passed by the directors of the Aluminium Ltd., Mr. L. G. Bash was appointed to  vote and/or  from  time to time to appoint a special  or  general proxy  to  vote for and on behalf of the Aluminium  Ltd.  in respect  of the shares held by it in the respondent  company at  all  ordinary or extraordinary general meetings  of  the shareholders  of the respondent company.  Article 90 of  the articles of association of the respondent company provides:- "90.  Where a company registered under the provisions of the Indian  Companies Act or not is a member of this  company  a person duly appointed to represent such company at a meeting of this company in accordance with the provisions of section 80 of the Indian Companies Act, 1913, shall not be deemed to be a proxy but shall be entitled to vote for such company on a show of hands -and to exercise the same power on behalf of the company which he represents as if he were an  individual member  of  this company including the power  to  appoint  a proxy  whether special or general and the production at  the meeting  of  a company of such  resolution  appointing  such

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representative  duly signed by one director of such  company and  by the secretary (if any) and certified by them or  him as  being a true copy of the resolution shall on  production at  the  meeting be accepted by this company  as  sufficient evidence of the validity of his appointment." Mr. L. G. Bash has at all material times been exercising the powers conferred by the above article as the  representative of the Aluminium Ltd. The  claim of the respondent company was that it  should  be regarded   as  a  company  the  directors  whereof   had   a controlling  interest therein, inasmuch as Mr. L.  G.  Bash, one  of the directors, had the I authority to  exercise  the voting power of the Aluminium Ltd. and,                             192 as such, could control the affairs of the respondent company and  that  in computing the standard profits  the  statutory percentage should be taken at 10 per cent. per annum and not at  8 per cent per annum.  This contention was  rejected  by the Excess Profits Tax Officer.  On appeal by the respondent company  the  Appellate  Assistant  Commissioner  of  Excess Profits  Tax upheld the decision of the Excess  Profits  Tax Officer.   The respondent company thereupon appealed to  the Incometax Appellate Tribunal "which reversed the decision of the Appellate Assistant Commissioner observing that in  view of the power of attorney that was given to Mr. L. G. Bash by the  Aluminium  Ltd. there was no room for  doubt  that  the respondent company, which was then the appellant before  the Tribunal,   was  a  director-controlled  company.   On   the application of the Commissioner of Income-tax, the Appellate Tribunal referred the question of law herein before set out. By its judgment dated the 11th January, 1951, the High Court of  Calcutta has answered the question in  the  affirmative. The Commissioner of Excess Profits Tax, West Bengal, has now come  up  on appeal to this court with a  certificate  under section 66-A (2) of the Indian Income-tax Act. In  common parlance a person is said to have "a  controlling interest"  in  a  company when such a  person  acquires,  by purchase  or  otherwise, the majority of  the  vote-carrying shares  in  that  company, for the control  of  the  company resides  in the voting powers of its shareholders.  In  this sense,  the directors of a company may well be  regarded  as having  "a  controlling interest" in the company  when  they hold and are entered in the share register as holders of the majority  of  the  shares  which,  under  the  articles   of association  of the company, carry the right to  vote.  [See Glasgow Expanded Metal Co., Ltd. v. Commissioners of  Inland Revenue  (1)  and Commissioners of Inland Revenue v.  B.  W. Noble(2)].  It is not, however, necessary that in  order  to have "a Controlling interest" the person or persons who hold the  majority  of  the  votecarrying  shares  must  have   a beneficial interest in the (1) (1923) 12 Tax Cas. 573. (2) (1926) 12 Tax Cas, 911. 193 shares  held by them.  These persons may hold the shares  as trustees and may even be accountable to their  beneficiaries and  may  be brought to book for exercising their  votes  in breach   of   trust,  nevertheless,  as  between   them   as shareholders and the company, they are the shareholders, and as such, have "a controlling interest" in the company.  [See Inland Revenue Commissioners v. J. Bibby & Sons Ltd.(1)  and Commissioner  of Income-tax v. Bipin Silk Mills  Ltd.  (2)]. According  to the facts found in the statement of  the  case the  directors of the respondent company do  not  themselves hold  the  majority of shares which, on  the  contrary,  are

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registered in the name of the Aluminium Ltd. and, therefore, according to the principles discussed above, they cannot  be said  to  have "a controlling interest"  in  the  respondent company. Learned   counsel  for  the  respondent  company,   however, contends,  on the analogy of the reasonings adopted  by  the House  of  Lords  in British American Tobacco  Co.  Ltd.  v. Commissioners  of Inland Revenue(3) that although Mr. L.  G. Bash  does  not  hold  the majority of  shares  and  has  no beneficial interest in the shares held by the Aluminium Ltd. in  the respondent company and although he may be  bound  to cast   the  votes  according  to  the  directions   of   his principals, the Aluminium Ltd., and may be answerable to the latter  if he acts in breach of his duty,  nevertheless,  as long  as  his  authority  is not  revoked,  as  far  as  the respondent company is concerned, tile, majority of its vote- carrying shares are subject, directly or indirectly, to  his will  and  ordering  and, therefore, the  directors  of  the respondent  company in fact control its affairs  at  general meetings  and  as  such  have "  a  controlling  interest  " therein,  no matter by what machinery or means  that  result has been effected.  This line of argument found favour  with the  Appellate Tribunal and the High Court.  We are  unable, with all respect, to accept this argument as sound, for this argument  appears  to  us  to  oversimplify  the   position. Assuming, but without, expressing any final opinion as (1)  [1946] 14 I.T.R. (Suppl.) 7; [1945] I All E.R. 667;  29 Tax Cas. 167, (2)  A.I.R. 1947 Bom. 45; 14 I.T.R. 344. (3)  [1943] A.C. 335; 11 I.T.R. (Suppl.) 29; 29 Tax Cas. 49, 194 to,  the correctness of the decision in the  last  mentioned case,  we have no doubt that the analogy is inapt,  for  the principle  of that decision can have no application  to  the case  before  us.  In the case of directors,  who  hold  the majority  of shares as trustees they, so far as the  company is concerned, are the registered shareholders and the  right to  vote  is vested in them, although as  between  them  and their  beneficiaries the beneficial interest is  -vested  in the  latter.  They are the registered holders of the  shares and  the votes they cast are their own votes.  That case  is entirely  different from the case of directors who are  only the agents of the holders of the majority of shares.  When a shareholder  holding  the majority of shares  authorises  an agent  to vote for him in respect of the shares so  held  by him, the agent acquires no interest, legal or beneficial, in the  shares.  The title in the shares remains vested in  the shareholder.   The shareholder may revoke the  authority  of the  agent at any time.  In spite of the appointment of  the agent the shareholder may himself appear at the meeting  and cast  his  votes personally.  Therefore,  the  shares  being always  subject  to his will and ordering,  the  controlling interest  which  the holder of the majority  of  shares  has never  passes  to the agent.  Let us take the facts  of  the present case.  Under article 90, when Mr. L.G. Bash as agent of  the  Aluminium  Ltd. attends a general  meeting  of  the respondent  company he has to produce the resolution of  his principals  authorising  him  to  cast  the  votes  of   his principals.   The votes he casts are not his votes  but  are the votes of the Aluminium Ltd.  In such a situation, in the eye  of the law, the controlling interest remains vested  in the  Aluminium  Ltd. and is at no time vested in Mr.  L.  G. Bash.   The  shares in question which give  the  controlling interest  are  neither held by Mr. L. G. Bash nor  are  they subject,  directly or indirectly, to his will and  ordering,

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and,  therefore,  he cannot, applying either  of  the  tests mentioned  above,  be said to have a  controlling  interest. The  decision  of the Court of Appeal  in  Commissioners  of Inland Revenue v. Jamed Hodgkinson (Salford) Ltd.(1) (1)  (1949) 29 Tax Cas. 395. 195 appears  to us to be apposite.  It is unfortunate  that  the last  mentioned  case was not brought to the notice  of  the High Court before the judgment under appeal was delivered. Dissent has been expressed in the judgment under appeal from the recent decision of the Bombay High Court in New Shorrock Spinning  and  Manufacturing Co.  Ltd.  v.  Commissioner  of Income-tax, Bombay(1).  The facts of that case are  entirely different  from  the facts of the case before  us  and  that decision  has no manner of application to the present  case. It  is, therefore, unnecessary for us to discuss or  express any  opinion as to whether the observations to be  found  in the judgment in that case are or are not well-founded. For  reasons  stated above, we accept this appeal  and  hold that  the answer to the question referred by  the  Appellate Tribunal  to the High Court should be in the negative.   The respondent  company must pay the costs of the  appellant  in this court as well as in the High Court. Appeal   allowed.    Agent   for  the   appellant:   G.   H. Rajadhyaksha.  Agent for the respondent: S. C. Banerjee.