Appeal No 30 of 1957
Appeal by special leave from the judgment and order dated September 1 1955 of the Bombay High Court in Income tax Reference No 37 of 1952
N A Palkhivala and I N Shroff for the appellant
K N Rajagopala Ayyangar and D Gupta for the respondent
December 7
The Judgment of the Court was delivered by HIDAYATULLAH J
The Raghuvanshi Mills Ltd Bombay a public limited Company has filed this appeal by special leave against the judgment and orders ofthe High Court of Bombay dated March 10 1953 and September 1 1955
By the first order the Bombay High Court directed the Income tax Tribunal to submit a supplementary statement in the case in the light of its judgment giving the parties liberty to lead further evidence if any
By the second order the High Court re framed the question and answered it against the assessee
The assessee Company s issued and subscribed capital was at the material time Rs 1000000 divided into 10000 shares of Rs 100 each
Prior to 980 November 14 1941 one Maganlal Parbhudas who was a Director of the Company held 6344 shares
On November 14 1941 he made a gift of 1000 shares to each of his five sons Ravindra Surendra Bipinchandra Hareshchandra and Krishnakumar
We are concerned with the account year of the Company April 1 1942 to March 31 1943 the assessment year being 1943 44
In that year the dividend which was declared at the Annual General Meeting held on December 17 1943 was less than what was required under section 23A of the Indian Income tax Act
The question therefore arose whether the Company could be said to be one to which section 23A1 of the Act was applicable regard being had to the third proviso and the Explanation under it
During the accounting period the Company had eight Directors whose names along with the shares respectively held by them are given below Shares 1 Shri Maganlal Parbhudas 1344 2 Ravindra Maganlal 1168 3 Surendra Maganlal 1100 4 Amritlal Chunilal jointly with Babulal Chunilal 833 5 Babulal Chunilal 100 6 Bhagwandas Harakchand 50 7 Haridas Purshottam 50 8 Sir Chunilal B Mehta jointly with Lady Tapibai Chunilal 50 Total 4695 Out of the balance of the shares 4754 shares were held by the relatives of some of the above named Directors as stated below Shares 1 Shrimati Kantabai Maganlal wife of a Director 771 2 Shri Bipinchandra Maganlal 1000 3 Shri Hareshchandra Maganlal son of a Director 1000 4 Shri Krishnakumar Maganlal do 1000 981 5 Shrimati Dhanlaxmi Mohanlal 6 Srimati Prabhavati Nanalal Harilal 5 and 6 daughters of a Director 50 7 Shri Hirjibhai Purshottam and Haridas Purshottam brothers of a Director 25 8 Shri Dhanjibhai Purshottam and Haridas Purshottam brothers of a Director 25 9 Shri Chimanlal Vithaldas cousin of a Director 833 Total 4754 The remaining 551 shares were held by the members of the public who were not connected with the Directors of the Company in any way
Before March 1942 Messrs Ravindra Maganlal and Bros were the Managing Agents of the Company
Maganlal Parbhudas was the sole proprietor of that firm
On March 7 1942 the Company appointed Ravindra Maganlal  Co Ltd as the Managing Agents for
a period of 20 years
The Managing Company had a total issued and subscribed capital of Rs 5000 and the five sons of Maganlal Parbhudas who have been named before had subscribed that capital equally
During the account year Maganlal Parbhudas and two of his sons Ravindra Maganlal and Surendra Maganlal were three of the Directors of the Company
Ravindra Surendra and Bipinchandra were Directors of the Managing Company
On these facts the Income tax Officer applied section 23A as it stood prior to its amendment by the Finance Act 1955 to the Company holding that this was not a Company in which the public were substantially interested
The order of the Income tax Officer was confirmed on appeal both by the Appellate Assistant Commissioner and the Tribunal
The Tribunal also refused to state a case under section 661 of the Incometax Act but the High Court of Bombay acting under section 662 called for a statement of the case on the question Whether on the facts and circumstances of the 124 982 case the provisions of section 23A of the Indian Income tax Act XI of 1922 are applicable to the petitioners In stating the cases the Tribunal pointed out that probably the question ought to have been Whether on the facts and circumstances of the case 1000 shares each held by Bipinchandra Haresh chandra and Krishnakumar in the capital of the assessee Company are held by members of the public within the meaning of the Explanation to the third proviso to section 23A The members of the Tribunal in deciding the appeal before them gave slightly different reasons
According to the Accountant Member the shares held by persons interested in the Managing Company were under the control of the Directors of the appellant Company and those persons could not be considered to be members of the public
The Judicial Member held that the Directors were controlling the shareholders of the Company that their relatives were mere nominees whose voting power was controlled by the Directors and that the public could not therefore be said to be substantially interested as required by the Explanation to the third proviso to the section
When the High Court heard the case the learned Judges addressed themselves to the question what was the proper meaning of the expression held by the public in the Explanation
They came to the conclusion that the object of the third proviso and the Explanation was that the voting power to be exercised by the public should be independent of the control of the Directors and that the word Public was used in contradistinction to the Directors
They apparently thought that a holding by a Director could not be described in any event as a holding by the public
The High Court came to the tentative opinion that both the tests stated by the Accountant Member and the Judicial Member were incorrect and held that what the law required was de facto control 4 c a control which is in fact exercised and that no finding appeared to have been given on that point by the Tribunal
The case was accordingly remitted to 983 the Tribunal for submission of a fresh statement of the case whether the Directors were exercising de facto control
over any of the other shareholders who belonged to the second category mentioned by us above
The Tribunal thereupon re stated the case and after examining further evidence gave the finding that the Directors particularly the three sons of Maganlal Parbhudas who formed the Directors of the Managing Company were under the de facto control of their father
At no stage in the case did the Tribunal alter the finding reached by the Department that the shares of the Company were not in fact freely transferable by the holders to members of the public
The High Court then reheard the case and came to the conclusion that there was evidence on which the Tribunal could hold that Maganlal Parbhudas exercised de facto control over his three sons
In view of this finding the High Court held that the order made by the Tribunal was correct and answered the question in the negative re framing it as follows Whether on the facts and circumstances of the case the shares held by Bipinchandra Harishchandra and Krishnakumar can be considered to be shares held by members of the public within the meaning of the explanation to the third proviso to Section 23A The High Court refused to grant a certificate but the Company has obtained special leave from this Court and has filed this appeal
It is first contended that the test that the shares held by the Directors of a company are not shares in which the public are substantially interested is incorrect
According to learned counsel all the authorities the Tribunal and the High Court have proceeded on this wrong assumption and have failed to apply the proper test laid down by the Explanation to the third proviso
It may be pointed out that there is no dispute that 551 shares were in fact held by the public
The total shares of the Company being 10000 the Company can only avoid the application of section 23A if the public hold shares carrying not less than 25 per cent
of the voting power that is to say 2500 shares
The Directors between them hold 4695 shares
These 984 have been held by the High Court to be shares which cannot be said to be beneficially held by the public
Even so if the rest of the shares can be said to be held by the public then the minimum 25 per cent
would still be reached
It was in this context that the shares of the sons of Maganlal Bipinchandra Harishchandra and Krishnakumar were considered
If those shares can be said to fall outside the category of shares beneficially held by the public then those shares along with the shares held by the Directors reduced the number of shares held by the remaining shareholders to less than 25 per cent
It was on this view that the case was remitted to the Tribunal by the High Court to obtain a further statement whether Maganlal Parbhudas was de facto controlling these three shareholders
Two questions therefore arise in this appeal
The first is whether the shares held by the Directors must always be regarded as not held by the public
The second is what is the meaning of the provision a company shall be deemed to be a company in which the public are substantially interested if its shares carrying not less than twenty five per cent
of the voting power have been allotted unconditionally to or acquired unconditionally by and are at the end of the previous year beneficially held by the public
 In this connection we may point out that a ruling of the Privy Council appears to take a different view from that taken by the High Court in regard to an Uganda Ordinance in pari materia with the proviso and the Explanation
We shall refer to that case as also to a case of the House of Lords where also a different conclusion in law from that of the High Court has been reached
Section 23A as it stood prior to its amendment in 1955 omitting the portions not material read as follows 23A Power to assess individual members of certain companies
Where the Income tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that 985 previous year are laid before the company in general meeting are 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 he shall unless he is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made the payment of a divi dend or a larger dividend than that declared would be unreasonable make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income tax purposes and reduced by the amount of income tax and super tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income       
Provided further that this sub section shall not apply to any company in which the public are 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 carrying not less than twentyfive per cent
of the voting power have been allotted unconditionally to or acquired unconditionally 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
 It is clear from the third proviso that the sub section 986 does not apply to a company in which the public are substantially interested
The Explanation lays down among the tests the minimum interest which can be called substantial  by saying that shares of the company carrying not less than 25 per cent
of the voting power must be allotted unconditionally to or acquired unconditionally by the public and they must be beneficially held by the public
The essence of the Explanation lies not in the percentage which only shows the limit of the minimum holding by the public but lies in the words unconditionally and beneficially
These words underline the fact that no person who holds a share or shares not for his own benefit but for the benefit of another and who does not exercise freely his voting power can be said to belong to that body which is designated public 
The word Public  is used 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
In Sardar Baldev Singh vs The Commissioner of Income tax Delhi and Ajmer 1 this Court took the following view The section thus applies to a company in which at least 75 per cent
of the voting power lies in the hands of persons other than the public which can only mean a group of persons allied together in the same interest
The company would thus have to be one which is controlled by a group
The group can do what it likes with the affairs of the company of course within the bounds of the Companies Act
It lies solely in its hands to decide whether a dividend shall be declared or not
 judged from the test we have indicated it is clear that such a group may be formed by the Directors of a company acting in concert or by some Directors acting in concert with others or even by some  shareholder or shareholders none of whom may be a Director
Such a group which may for convenience be 1  987 designated a block must hold a controlling interest and if the voting power of the block is 75 per cent
or more then obviously it can do anything at a meeting whether general or special
When a company starts the promoters may subscribe a portion of its capital and release the other unconditionally to the public
This is a case of unconditional allotment of shares to the public
The public may also unconditionally acquire a portion of the shares which were previously held by the group which promoted the company
If at the end of the previous year 25 per cent
or more of the voting power is so held by the public the company can take the benefit of the third proviso
But if more than 75 per cent
of shares have again passed into the hands of a group which acts as a block the third proviso ceases to apply
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
But it would be otherwise if they were free
Similarly if Directors or some of them do not act as a body or in concert with others the fact that they are Di rectors is of no significance
The case of Tatem Steam Navigation Co Ltd vs Commissioners of Inland Revenue 2 illustrates the first proposition
There the assessing Commissioners had made directions under section 21 of the Finance Act 1922 against which the Company appealed on the ground that it was a Company in which the public were substantially interested inasmuch as shares of the Company carrving not less than 25 percent
of the voting power had been allotted unconditionally to or acquired unconditionally by and were at the end of the relevant periods beneficially held by the public and the decision of the Special Commissioners that 16000 shares given by Lord Glanely to his niece were not allotted to or acquired by the public and that the Company was therefore not 1 988 a Company in which the public were substantially interested was erroneous
It was held by Lawrence J that merely because she was a niece of Lord Glanely did not make her cease to be a member of the public
The Court of Appeal agreed with Lawrence J No doubt there were other provisions which laid down the kind of relationship which would lead to the inference that the holder was controlled by another and a niece was not such a relative
The Act we are considering did not lay down the kind of relationship which would show such a control and the same principle will apply
Mere relationship thus is not of consequence unless control of the voting power held by such a relative by another relative is proved
The other test adopted in the case by the Bombay High Court that Directors stand outside the public  is also not decisive
In Commissioner of Income tax vs H Bjordal 1 the Judicial Committee dealt with section 211 of the Income Tax Ordinance No 8 of 1940 Uganda as amended by section 5 of the Income Tax Amendment Ordinance 1943
That provision of law is completely in pari materia with section 23A
Two brothers H Bjordal and section Bjordal held 7396 and 2509 per cent
of the voting power
Five others held 04 per cent
of the voting power
The shares held by section Bjordal were purchased for full value by him from his brother
There was no suggestion that he was a nominee of the respondent or that he was acting in concert with his brother
Both brothers were Directors of the Company
It was held by the Judicial Committee that shareholders in a company who are members of the public  do not cease to be so because they become Directors
In the Uganda Ordinance also like our Act there was no guidance as to the meaning of the word public  as there was in the English statute considered in Tatem s case 2
It is significant that in Jubliee Mills Ltd vs Commissioner of Income tax 3 Chagla C J and section T Desai J speaking of the judgment under appeal and 1 2 3  41
989 taking into consideration the Privy Council case observed It may be that our view is erroneous and it may be and very probably it is that the view taken by the Privy Council is the right one
 In our judgment the test is first to find out whether there is an individual or a 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
In the category of shares held by the public only those shares can be counted which are unconditionally and beneficially held by the public or in other words which are uncontrolled by the group which controls the affairs
The group itself may be composed of Directors or their nominees or relations in different combinations but none can be said to belong to that group be he a director or a relative unless he does not hold the shares unconditionally and beneficially for himself
It is only such a person who can fall properly outside the word public 
Judged from this point of view the judgment and orders of the High Court cannot be upheld
Directors cannot by reason of being Directors be said not to be members of the public
To that extent the judgment is erroneous
There is a finding by the Tribunal in the supplementary statement of the case that the shares held by Bipinchandra Harishchandra and Krishnakumar were under the control of their father Maganlal Parbhudas
Their holding was 3000 and with Maganlal s holding of 1344 shares makes up a total of 4344 shares
Though the question as framed by the High Court appears to have been correctly answered in the negative it does not dispose of the matter
The question to be determined still is whether more than per cent
of the shares are not beneficially held by the public
We accordingly set aside the judgment and orders of the High Court and direct the High Court to decide the question originally framed by it viz Whether on the facts and circumstances of the 125 990 case the provisions of section 23A of the Indian Income tax Act XI of 1922 are applicable to the petitioners The High Court may call for a supplemental statement of the case from the Tribunal if it finds it neces sary
The appeal is allowed
The respondents shall bear the costs of this appeal
The costs in the High Court shall abide the result
Appeal allowed


Summary:
One Maganlal Parbhudas who was a Director of the assessee company held 6344 shares out of a total of 10000 shares of the company and he made a gift of 1000 shares to each of his five sons
During the accounting period the company had eight Directors including the said Maganlal Parbhudas and two of his sons and they held 4695 shares as between themselves
Out of the balance of the shares 4754 shares were held by the relatives of some of the Directors
Three sons of Maganlal Parbhudas were Directors of the Managing Company
The Income tax Officer applied section 23A of the Income tax Act as it stood prior to its amendment by the Finance Act 1955 to the company holding that this was not a company in which the public were substantially interested
The order of the Income Tax Officer was confirmed on appeal both by the Assistant Commissioner and the Tribunal
The High Court remitted the case to the Tribunal for a statement whether the Directors were exercising de facto control over any of the other shareholders
The Tribunal thereupon gave the finding that the Directors particularly the three sons of Maganlal Parbhudas who formed the Directors of the Managing Company were under the de facto control of their father
The High Court agreed with the finding of the tribunal and held that on the facts and circumstances of the case the shares held by the three sons of Maganlal Parbhudas could not be considered to be shares held by the members of the public within the meaning of the Explanation to the third proviso to section 23A of the Income Tax Act
On appeal by the assessee company Held that in the Explanation the word public is used 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
Sardar Baldev Singh vs Commissioner of Income tax Delhi and Ajmer   considered
The test is first to find out whether there is an individual or a group which controls the voting power as a block
If there is such a block the shares held by it cannot be said to be held 979 unconditionally or beneficially by the public
Only those shares which are unconditionally and beneficially held by the public uncontrolled by the controlling group can be treated as shares held by the public under the Explanation
The group may be composed of Directors or their nominees or relations in different combinations but none can be said to belong to that c group be he a Director or a relative unless he does not hold the shares unconditionally and beneficially for himself
It is only such a person who can fall properly outside the word public
The view that Directors merely by reason of their being Directors stand outside the public is erroneous
Commissioner of Income tax vs H Bjordal  followed
Mere relationship is of no consequence unless it is proved that the voting power of one relative is controlled by another relative
Tatem Steam Navigation Co vs Commissioner of Inland Reve nue  followed