JUDGMENT [ENTITY], J.
1. The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated April 20, 1981, in respect of the assessment year 1973-74 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that provisions of [SECTION] are not attracted ?"
2. The brief facts of the case are that the assessee had not declared any dividends within a period of 12 months immediately following the expiry of the previous year relevant to the assessment year 1973-74. The Income-tax Officer has issued a show-cause notice to the assessee as to why the provisions of [SECTION] of the [ACT] be not applied and why additional tax should not be levied on the assessee's income. The contention of the assessee was that the provisions of [SECTION] are not applicable in view of the fact that the majority of the shares were held by Messrs. National Engineering Industries Limited, which is a company in which the public are substantially interested. The details of the shareholders of the company were as under :
Sl. No. Name of the shareholders No. of shares held
Messrs. National Engg. Industries Ltd., Calcutta 44,995
2. Messrs. Rajasthan Industries Ltd., Jaipur 5,000
3. Shri [ENTITY] (nominee of N. E. I. Limited)
4. Shri [ENTITY]
5. Shri [ENTITY]
6. Shri [ENTITY]
7. Shri [ENTITY]
Total 50,000."
3. The Income-tax Officer took the view that before deciding the point as to whether the provisions of [SECTION] of the Act are applicable or not it has to be seen as to whether the company was saved either under [SECTION] or [SECTION] of the [ACT]. It has been observed that in accordance with the provisions of [SECTION], a company can be said to be a company in which the public are substantially interested when it satisfies all the conditions laid down under [SECTION]. All these conditions have to be fulfilled cumulatively before a company can be treated as a company in which the public are substantially interested. According to the Income-tax Officer, the first condition of [SECTION] is that shares in the company carrying not less than fifty per cent. of the voting power have been allotted unconditionally to, or acquired unconditionaly by, and were throughout the relevant previous year beneficially held by the persons mentioned in Clauses (a), (b), (c) and (d). In the case of the assessee-com-pany more than 50 per cent. of the voting power were continuously held by the two companies mentioned above. It was held that if the shares are held by a group or block then it cannot be said that it is a company in which the public is substantially interested. The words "unconditionally" and "beneficially" were interpreted to mean that the voting power of the holders of the shares should be free and not within the control of some other shareholders or other persons, and the registered shareholder should not be a nominee of other. It can also be examined as to whether any individual or a group, acting in concert controls or control the affairs of the company to the exclusion of others and if on the basis of the evidence, it is found that the shareholders are acting in a group, the shares were not freely transferable. Reliance was placed on the decisions of the apex court in [PRECEDENT] and [PRECEDENT]. The Income-tax Officer came to the conclusion that the shares were not held "unconditionally" and "beneficially" and the shares in fact were not freely transferable and the shareholders of the assessee-company are acting in concert as a group. The fact that since the inception, the assessee-company has not declared any dividend in spite of the fact that profits are being made each year was also taken into consideration. The person of normal business prudence would not make and continue investments if he is not assured of any return and on that basis the Income-tax Officer came to the conclusion that the shareholders are acting in concert as a group to subserve larger interests of somebody from outside who is exercising actual control. The provisions of Clause 46 of the articles of association were also taken into consideration where the directors of the company were empowered to decline to register any transfer of shares without assigning any reason for such refusal. According to Clause 56, the directors may compel that member to transfer all shares standing in his name to the nominee of the director at the value to be fixed by the auditors of the company if the member is guilty of acting in derogation of the interest of the company. Earlier 45,000 shares were held by N. E. I. Ltd., and its nominees 2,500 shares by Messrs. Rajasthan Industries Ltd., and 2,500 shares were held by Birla Gwalior Pvt. Ltd. till March 31, 1971. From April 1, 1971, 45,000 shares, were held by Messrs. N. E. I. Ltd. and its nominees and 5,000 shares by Messrs. Rajasthan Industries Ltd. Birla Gwalior Pvt. Ltd. is also a company of the Birla group and its name has been included in the report of the Industrial Licensing Policy Enquiry Committee. Thus, the Income-tax Officer came to the conclusion that from the very beginning the shares have been held by one group and shares have never been transferred to any member of public and that the shares are not freely transferable. The additional tax was accordingly levied.
4. Before the Commissioner of Income-tax (Appeals), the matter was examined and it was observed that there is a clear distinction between the shareholding by individuals and Hindu undivided family and shareholding by limited companies. Since, in the present case, the shareholding of the public company is not held by individuals but by two limited companies who are legal entities and these shareholdings are being shown in the balance-sheet of these companies which are audited. It cannot be, therefore, said that the shareholding of the appellant-company is not "beneficially" and "unconditionally" held by the two companies shareholders. The Commissioner of Income-tax (Appeals) also came to the conclusion that the restriction placed under [SECTION] is of a negative type and under [SECTION] and [SECTION], it completely forecloses the rights of any shareholder by forcing him to transfer his shares at a particular price and this would certainly amount to substantial restriction of the rights of the members to transfer their shares and, therefore, it was held that the shares were not freely transferable.
5. With regard to the last condition, it was observed that the shareholders of the company were completely controlled by the Birla group and since no dividend was declared during the last about 9 years it can be said that a group which is controlled by the shareholding companies was acting in concert and controlling the affairs of the company.
6. In the second appeal before the Income-tax Appellate Tribunal, it was observed that in the case of Produce and Share Brokers Ltd., Jaipur and Messrs. Rajasthan Industries Ltd., Jaipur, the matter was decided by the Tribunal on January 31, 1979, in favour of the assessee on the point that the provisions of [SECTION] are not attracted and the said order has not been challenged and has become final. The matter was examined on the merits also and it was held that the conditions of [SECTION] are duly fulfilled and therefore, the appeal was allowed.
7. We have heard the arguments of both learned counsel. It has been submitted by Shri [ENTITY], on behalf of the Department, that simply because 'the Department has failed to file the reference in any particular year it may be for any reason then the order of the Income-tax Officer cannot be said to be binding as each year is a separate proceeding. We have considered this point. Under the [ACT], though the principles of res judicata are not applicable and the assessee as well as the Department is free to challenge the order in a different year, judicial propriety requires consistency. Without going much into the point since the matter is being examined on the merits we need not adjudicate or decide the issue on this ground alone. The provisions of [SECTION] are as under :
"shares in 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 fifty per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by-
(a) the Government, or
(b) a corporation established by a Central, State or Provincial Act, or
(c) any company to which this clause applies or any subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year."
8. The company in which the public are substantially interested is a company where shares in the company carrying not less than 50 per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by and were throughout the relevant previous year beneficially held by any company to which this clause applies.
9. In the present case, shares of more than 50 per cent. of the voting power have been allotted unconditionally to or acquired unconditionally by a company in which the public are substantially interested. The finding which has been given by the Tribunal in this regard is on the basis of the evidence on the record that the condition is satisfied. Regarding the second condition whether during the previous year the shares were freely transferable or not, the power of the directors not to transfer the shares was held of a general nature and it was observed that there is no evidence of the directors having acted in a manner refusing to transfer at any point of time any share, as no instance was found for refusal to transfer the shares and on the other hand, the assessee has submitted that there had been many transfers of shares in spite of this clause and, therefore, the Tribunal came to the conclusion that the affairs of the company or the shares carrying more than 50 per cent. of its voting power were at no time during the relevant previous year controlled or held by five or less persons. It was observed that it is common ground that more than 50 per cent. of the shares of the assessee-company were held by other public limited companies and the assessee-company must be treated as company in which the public are substantially interested. Regarding the allegation that the assessee-company acted in concert with other companies of the Birla group, it was observed that no material on record has been placed to come to that conclusion.
10. The finding which lias been recorded by the Tribunal is basically of the facts and it has not been pointed out as to how they are perverse. No evidence has been pointed out which has not been considered by the Tribunal nor has any question been framed regarding the perversity of any finding of fact.
11. In [PRECEDENT], question with regard to the interpretation of [SECTION] of the articles of association of the assessee which provided "the directors may at any time in their absolute and uncontrolled discretion and without assigning any reason decline to register any proposed transfer of shares was considered by the apex court to find as to whether the assessee-company could be regarded as one in which the public were substantially interested within the meaning of the Explanation to [SECTION] of the [ACT]. It was held that in the absence of evidence to show that the directors had been exercising their power under [SECTION] freely and virtually eliminated the element of free transferability of the shares as provided in the articles of the company and in the absence of restriction in any other articles of the company interfering with the free transfer of shares by one shareholder to another, the mere existence of an article like [SECTION] would not affect the free transferability of the shares within the meaning of the Explanation to [SECTION] of the [ACT]. The assessee-company was, therefore, regarded as one in which the public were substantially interested, It was held that [SECTION] did not confer any uncontrolled or unrestricted discretion upon the directors to refuse to register the transfer of shares in a given case ; in other words, the directors could not act arbitrarily or capriciously. The power conferred by such an article was of a fiduciary nature, which had to be exercised by the directors in the best interests of the company for preventing any undesirable person becoming a member, if that was likely to be prejudicial to the interests of the company ; it was a power which had to be reasonably exercised for protecting the interests of the company. Free transferability of shares was a normal and common feature of limited companies and [SECTION] could not by itself be regarded as a restriction on the transfer of shares.
12. On the basis of the various findings which have been given by the Tribunal and on the plain reading of the provisions of [SECTION] of the Act, we are of the opinion that all the conditions are duly fulfilled and the provisions of [SECTION] are not attracted.
13. The Income-tax Appellate Tribunal was justified in coming to the conclusion that the provisions of [SECTION] are not attracted.
14. The reference is accordingly answered in favour of the assessee and against the Revenue. No orders as to costs.