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PETITIONER: PILANI INVESTMENT CORPORATION LTD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME TAX (CENTRAL)

DATE OF JUDGMENT09/01/1973

BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ REDDY, P. JAGANMOHAN

CITATION:  1973 AIR 1030            1973 SCR  (3) 206  1973 SCC  (3) 571

ACT: Income-tax Act (11 of 1922), s. 23A and Explanation-Memoran- dum  and  Articles of Association  empowering  directors  to refuse to register transfer of shares without assigning  any reason-If element of free transfer eliminated.

HEADNOTE: This  Court,  in  Shree  Krishna Agency Ltd.  v.  C.  I.  T. (Central)  Calcutta, (1971) 82 I.T.R. 372, had held that  in the absence of evidence to show that the directors had  been exercising their power to. decline to register any  transfer of  shares  freely  and had thus  virtually  eliminated  the element  of  free  transferability  of  the  shares  in  the ,company,  the mere existence of a power in  the  Memorandum and Articles of Association giving such as discretion  could not be said to affect the free transferability of the shares as contemplated by the Explanation to s. 23A, of the Income- tax Act, 1972. [20GD-E] In  the  present case, more than 75% of the  shares  of  the assessee company were held not by a group or partners but by two public companies in which the Tribunal found, the public were  substantially  interested : there was no  material  to show that any group acting in concert was in control of  the assessee  company, and.. though the Memorandum and  Articles of Association gave a discretion to the      directors    to decline  to  register  a transfer of shares  there  was  not evidence  to  show. that the directors  had  eliminated  the element of transferability of shares. Shree  Krishna  Agency Ltd. v. Commissioner  of  Income-tax, (Central) ,Calcutta, [1971] 82 I.T.R. 372, followed. Commissioner  of  Income-tax, West Bengal v. Tona  Jate  Co. Ltd., [1963] 48 I.T.R. 902, overruled. East  India Corporation Ltd. v. Commissioner of  Income-tax, [1966] I.T.R. 16 and Raghuvanshi Mills Ltd. v.  Commissioner of Income-tax, [1969] 74 I.T.R. 823, approved. Commissioner of Income-tax v. Jubilee Mills Ltd., [1963]  48 I.T.R. 9, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 2177 & 2178

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of 1969. Appeals  by  certificate from the judgment and  order  dated February  24, 1969 of the Calcutta High Court in  Income-tax Reference Nos. 210 and 211 of 1964. B.   Sen, Leila Seth, U. K. Khaitan and B. P. Maheshwari for the- appellant. B.   B.  Ahuja,  S.  P. Nayar and R. N.  Sachthey,  for  the respondent. 207 The Judgment of the Courts was delivered by KHANNA,  J.  These two appeals on certificate  are  directed against  the  judgment  of Calcutta High  Court  whereby  it answered  the following question in the affirmative  and  in favour of the revenue : "Whether  in  the facts and circumstances of the  case,  the provisions of section 23A were rightly invoked." The matter relates to assessment years 1952-53 and  1953-54. It  would,  however,  be convenient to  set  out  the  facts relating to the year 1952-53 because the decision in  regard to  the  assessment  for that year  would  also  govern  the assessment  for the following year.  The assessee  appellant is a limited company.  Proceedings under section 23A of  the Indian Income Tax Act, 1922 (hereinafter referred to as  the Act)  were started against the appellant company as  it  had not  declared any dividend during the year.  The Income  Tax Officer  found that the income of the assessee  company  had been  determined in regular assessment to be  Rs.  22,65,227 and  despite  that it had not declared  any  dividend.   The Income  Tax  Officer observed that there were only  two  big shareholders  of  the assessee company,  namely,  Jiyajeerao Cotton   Mills  Ltd.,  Birlanagar   (Gwalior)   (hereinafter referred  to as JC Mills) and Punjab Produce and  Investment Co. Ltd. (hereinafter referred to as PPI Co.). JC Mills,  in the opinion of the Income Tax Officer, could not be regarded as a member of the public as it was being represented on the Board  of  Directors  through  its  General  Manager  D.  P. Mandalia.   PPI Co. was found to be a company to  which  the provisions of section 23A of the Act were applicable.  These two companies between themselves held 3,21,594 shares out of the  total shareholding of 3,70,000 shares.  As  the  shares held  by  the  public,  in the opinion  of  the  Income  Tax Officer,  came  to  less  than 25  per  cent  of  the  total shareholding,  the assessee company was held to fall  within the  purview  of  section 23A of the Act.   The  Income  Tax Officer  also referred to article 33 of the  Memorandum  and Articles of Association of that assessee company,  according to  which the directors could without assigning  any  reason decline to register a transfer to a transferee of whom  they did  not  approve.   This fact was held  to  be  a  definite restriction  on  the  transfer of shares.   It  was  further observed  that the shares of the assessee company  were  not quoted  in stock exchange.  After deducting Rs. 8,40,524  on account  of tax payable on Rs. 22,65,227 the balance of  Rs. 14,23,703 was deemed by the Income Tax Officer to have  been distributed amongst the shareholders. On  appeal before the Appellate Assistant  Commissioner,  it was  urged on behalf of the assessee company that  JC  Mills and  PPI  Co.  were  companies  in  which  the  public   was substantially interested and, as such, the share-holding  of these public companies 208 should be considered to be shares held by the members of the public.   The’ Appellate Assistant Commissioner did  not  go into  the question as to whether or not the above  mentioned two   companies   were  such  in  which   the   public   was

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substantially  interested.  He observed that groups  of  the two  companies were controlling the affairs of the  assessee company and as such, the, shares he-Id by them could not  be considered  to be shares held by the members of the  public. The appeal filed by the, assessee was accordingly dismissed. The  matter  was  then taken up by the  assessee  in  appeal before  the  Income Tax Appellate Tribunal.   It  was  urged before  the  Tribunal  that JC Mills was  a  public  limited company  to which the provisions of section 23A of  the  Act were  not applicable.  It was also pointed out that the  PPI Co. was a company to which the provisions of section 23A did not  apply.   A  copy of the order  of  Appellate  Assistant Commissioner  made in appeal filed by PPI Co.  was  produced before  the Tribunal.  The Appellate Assistant  Commissioner had by that order set aside the order of Income Tax  Officer and  had held that section 23A of the Act did not  apply  to PPI Co. The Tribunal observed that both JC Mills and PPI Co. were public companies in which the public were substantially interested  and, therefore, it was not correct to  say  that the  shares held by the two companies were controlled  by  a group  of  persons  as distinguished  from  members  of  the public.  The Tribunal further observed that the usual clause in the Memorandum and Articles of Association expowering the directors  to  decline  to register  a  transfer  of  shares without assigning any reason did not mean any restriction on the transferability of shares by one holder to another.  The Tribunal also found that there was nothing to show that  the shares  were not in fact freely transferable,  The  Tribunal consequently upheld the assessee’s contention that it was  a public limited company in which the public was substantially interested  and  its share were  freely  transferable.   The provisions of section 23A of the Act were held to have  been wrongly  invoked.   The order of the Income Tax  Officer  in this  respect  was  consequently set  aside.   The  question reproduced above was thereafter referred to the  High-Court. The High Court by a short order answered the question in the affirmative  and in this connection relied upon  an  earlier decision  of  the  Calcutta High Court  in  Commissioner  of Income-tax, West Bengal v. Tona Jute Co. Ltd. (1). In appeal before us, Mr. Sen on behalf of the appellant  has contended  that  the,  decision of Calcutta  High  Court  in Commissioner  of  Income-tax, West Bengal v. Tona  Jute  Co. Ltd.  (supra) has been impliedly overruled by a decision of this Court in the 209 case of Shree Krishna Agency Ltd. v. Commissioner of Income- tax (Central), Calcutta(1).  This contention in our  opinion is  well founded.  In the case of Tona Jute Co. (supra)  the Calcutta  High  Court had expressed the view that  a  public limited  company whose directors had absolute discretion  to refuse to register transfer of a share to any person whom it would, in their opinion, be, undesirable in the interest  of the  company to admit to membership and were not obliged  to give  any reason for refusal to register, was not a  company the  shares of which were freely transable to other  members of the public within the meaning of section 23A of the  Act. A view contrary to that of Calcutta High Court was taken  by the  Madras  High Court in East India  Corporation  Ltd.  v. Commissioner of Income-tax (2 ) and the Bombay High Court in Raghuvanshi  Mills  Ltd. v. Commissioner  of  Income-tax(3). This Court in the case of Shree Krishna Agency Ltd.  (supra) approved  the  view  taken by the  Madras  and  Bombay  High Courts.   This Court in that case dealt with article  37  of the  Articles of Association of the assessee  company  which was  a public company and which provided that the  directors

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might  at  any  time in their  absolute  and  uncontrollable discretion  and  without  assigning any  reason  decline  to register any proposed transfer of shares.  It was held  that in  the absence of evidence to show that the  directors  had been exercising their power under article 37 freely and  had virtually eliminated the element of free transferability  of the shares in the company, the mere existence of an  article like  article  37  could  not be said  to  affect  the  free transferability  of  the  shares  as  contemplated  by   the explanation to section 23A of the Act. There  is in the present case also no evidence to show  that the directors had eliminated the element of  transferability of shares.  As such, we find that the decision of the,  High Court in answering the question against the assessee  cannot be sustained. On  an earlier date of hearing Mr. Ahuja, on behalf  of  the revenue,  prayed for adjournment to ascertain whether  there was any cogent material on the record to show that there was any  group  acting in concert which was in  control  of  the assessee  company.  The adjournment was granted.   When  the hearing  of  the case was resumed thereafter, Mr.  Ahuja  on behalf of the department frankly stated that he had not been able to find any cogent material to show that there was  any group acting in concert which was in control of the assessee company.   He, however, prayed that the case be remanded  to the authorities concerned for going into. this-question.  As the matter relates to the assessment year 195253 and as  Mr. Ahuja in spite of adjournment has not been able to find  any cogent material to warrant the plea that a group acting (1) [1971] 82 I.T.R. 372.   (2) [1966] 61 I.T.R. 16, (3)  [1969] 74 I.T.R. 823. 210 in concert was in control of the assesee company, we are  of the  opinion that we should not accede to the prayer of  Mr. Ahuja  in  this respect.  The fact that two  public  limited companies  were holding between themselves more than 75  per cent  of  the  shares  of  the  assessee  company  was   not sufficient to attract section 23A of the Act. The case of Commissioner of Income-tax v. Jubilee Mills Ltd. (1) referred to by Mr. Ahuja cannot be of much assistance to him.  In the said case the Managing Agents of a company were partners of a firm who held between themselves more than  75 per  cent  of, the voting power.  It was held that  as  more than  75 per cent of voting power was held by a  group,  the company  was  not  a  company  in  which  the  public   were substantially interested within (the meaning of section 23A. In  the  present case as appears from the resume  of  facts, more than 75 per cent of shares of the assessee company  are held not by a group of partners, but by two public companies in which public are substantially interested.  ’This is also no  material to show that any group acting in concert is  in control  of  the  assessee company.  As such,  the  case  of Jubilee Mills cannot be said to have any material bearing. We accordingly accept the appeals, set aside the judgment of the  High Court and discharge the answer given by it to  the question referred to it.  We answer the said question in the negative  and  in  favour of the  assessee.   The  assessee- appellant shall also be entitled to the costs of this  Court and in the High Court.  One set of hearing fee. V.P.S.                                               Appeals allowed. (1) [1963] 48 I.T.R. 9. 211

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