l Appeal c No 380 of 1957
Appeal from the judgment and order dated March 8 1956 of the Bombay High Court in Income tax Reference No 4 of 1956
N A Palkhivala section N Andley Rameshwar Nath J B Dadachanji and P L Vohra for the appellant
A N Kripal and D Gupta for the respondent
December 7
The Judgment of the Court was delivered by HIDAYATULLAH J
This appeal on a certificate by the High Court has been filed by Shree Changdeo Sugar Mills Ltd to which section 23A of the Income tax Act prior to its amendment by the Finance Act 1955 was applied in respect of the assessment year 1948 49
The question which was referred to the High Court was whether at the relevant time the assessee Company could be deemed to be a Company in which the public were substantially interested
This question was answered in the negative by the High Court
During the assessment year the Company had not distributed dividends to the extent of 60 per cent
of its profits and an order under section 23A1 of the Indian Income tax Act was passed by the Income tax Officer
The Company appealed to the Appellate Assistant Commissioner who dismissed the appeal
It next appealed to the Tribunal but was unsuccessful
The Tribunal however referred the above question which as already stated was answered in the negative by the High Court
The issued subscribed and paid up capital of the assessee Company consisted of 60000 shares which were distributed as follows 992 1 11 Directors of the Company 41500 shares
2 The Managing Agency Firm 2300 shares
3 Mysore Merchants Ltd 11880 shares
4 Others  4320 shares
60000 shares
The question arose in determining whether the public were substantially interested in the Company that is to say held 25 per cent
of the voting power
The Bombay High Court in determining this point followed its decision in Raghuvanshi Mills V Commissioner of Income tax 1 and held that no holding by the Directors of a company could be regarded as one in which the public were substantially interested
We have heard Civil Appeal No 30 of 1957 from the decision of the Bombay High Court in the Raghuvanshi Mills case 1 in which judgment has been pronounced today and have held that that is not the correct test to apply
We have remanded the said appeal after setting out the correct test to apply
What we have said there applies equally here
There is yet another question which arose in this appeal but not in the appeal of the Raghuvanshi Mills
As we have already stated Mysore Merchants Ltd held 11880 shares of the assessee Company
If these shares could be said to be held by the public along with 4320 shares the public would be holding 25 per cent of the voting power whether or not the Directors of the Company held the rest of the shares
It was
 therefore necessary for the High Court to consider whether the shares held by Mysore Merchants Ltd could be said to be held by the public
The High Court held against the assessee Company that they could not be counted as part of the holding by the public and in our judgment the High Court has reached the correct conclusion
The matter has to be judged under the third proviso to section 23A1 which read as follows Provided further that this sub section shall not apply to any company in which the public are 1 993 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 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 have been allotted unconditionally to or acquired unconditio nally by and are at the end of the previous year beneficially held by the public not including a company to which the provisions of this sub section apply and if any such shares have in the course of such previous year been the subject of dealings in any stock exchange in British India or are in fact freely transferable by the holders to other members of the public
 In applying the proviso and the Explanation we have to give effect to the words not including a company to which the provisions of this sub section apply and have to determine whether Mysore Merchants Ltd is a Company to which the provisions of section 23A can be said to be applicable
Learned counsel for the assessee Company contends that in deciding this we have to be satisfied on three points which he summarises as follows aThe public should not be substantially interested in that Company bIt must have assessable profits for the relevant assessment year and cIt must not have distributed 60 per cent of its net assessable profits
He contends that unless these three conditions are fulfiled section 23A will not apply to Mysore Merchants Ltd and that the shares held by it will be deemed to be held by the public
He points out that Mysore Merchants Ltd had no assessable income in the corresponding assessment year and had suffered a loss that conditions b and c did not therefore apply and 994 that section 23A is not applicable to that Company
In our opinion the paramount condition is that even in that Company the public should be beneficially interested in 25 per cent
of the voting power and it was admitted before us that it was not a public Company at all but a private Company and that therefore the public were not interested in that Company
The shares held by Mysore Merchants Ltd cannot at all be counted as a holding in which the public are beneficially interested in view of the exclusion contained in the Explanation
This point will not therefore be open for the determination of the High Court when the question is reconsidered by the High Court in the light of our observations in The Raghuvanshi MillsLtd
vs Commissioner of Income tax Bombay 1 decided today
Learned counsel for the assessee Company also contended that in view of cl 14 of the Part B States Taxation Concessions Order 1950 the provisions of section 23A could not be applied to Mysore Merchants Ltd That clause reads as follows  14
Requiring distribution of dividends by private companies
The provisions of section 23A of the Act shall not be applied in respect of the profits and gains of any previous year ending before the appointed day unless the State law contained a provision corresponding thereto
 This Concession would be open to Mysore Merchants Ltd if it satisfied the terms of Cl
That however cannot detract from the application of section 23A to determine whether the shares hold by it can be described as those in which the public are beneficially interested in another company
The Explanation requires that the shares held by a company should be considered as held by the public only if section 23A does not apply to it
The Concessions Order does not seek to negative this test it only confers a benefit on a company to which cl
14 applies
Mysore Merchants Ltd may be able to avail of that concession and still fall within 1  995 section 23A for other purposes
This contention has no force
The appeal is allowed and the case is remitted to s the High Court for deciding the question in the light of the observations in our decision in the Raghuvanshi Mills case 1
As the case is remanded the costs of this appeal shall be paid by the respondent but the costs in the High Court will abide the result
Appeal allowed


Summary:
During the assessment year the company had not distributed dividends to the extent of 60 of its profits and an order under section 23A1 of the Act was passed by the Income tax Officer
The question referred by the Tribunal to the High Court was whether at the relevant time the assessee company could be deemed to be a company in which the public were substantially interested ie held 25 of the voting power was answered in the negative
Held that the test that no holding by the Directors of a company could be regarded as one in which the public were substantially interested was not the correct test to apply
The test as laid down in Raghuvanshi Mills vs Commissioner of Income tax   would apply to this Case
Held further that the paramount condition in applying the proviso and the explanation of section 23A1 was that the public should be beneficially interested in 25 of the voting power
 The explanation to section 23A required that shares held by the company should be considered as held by the public only if section 23A did not apply to it
The concession order in cl
14 of the Part B States Taxation Concession Order 1950 did not seek to negative that test it only conferred a benefit on a company 991 to which cl
14 applied and the company could avail that concession and still might fall within section 23A for other purposes
The Raghuvanshi Mills Ltd vs Commissioner of Income tax SI  Bombay   applied