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 CJ and Banerjee J in its Special Jurisdiction Income tax in Income tax Reference No 50 of 1950
CK Daphtary Solicitor General for India G N Joshi with him for the appellant 26 190 N C Chatterjee section C Majumdar with him for the respondent
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 661 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 3600000 divided into 360000 shares of Rs 10 each
The Aluminium Limited a company incorporated in Canada held 359790 shares in the chargeable accounting periods ending on December31 1939 and December 31 1940 and 359600 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 andor 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 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 vs Commissioners of Inland Revenue 1 and Commissioners of Inland Revenue vs B W Noble2
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 2 193 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 vs J Bibby  Sons Ltd1 and Commissioner of Income tax vs 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 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 vs Commissioners of Inland Revenue3 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 ITR Suppl 7 1945 I All ER 667  2  3  11 ITR Suppl 29  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 LG 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 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 vs Jamed Hodgkinson Salford Ltd1 1 195 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 vs Commissioner of Income tax Bombay1
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


Summary:
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 vs Commissioners of Inland Revenue  Commissioners of Inland Revenue vs B W Noble  Inland Revenue commissioners V T Bibby and Sons Ltd 14 ITR Suppl 7  Commissioner of Income tax vs Bipin Silk Mills Ltd and Commissioners of Inland Revenue vs Hodgkinson Salford Ltd relied on
British American Tobacco Co Ltd vs Commissioners of Inland Revenue 1943 AC 335 and New Shorrock Spinning and Manufacturing Co Ltd vs Commissioner of Incometax Bombay distinguished