Case: Raghuvanshi Mills, Ltd Vs. Commissioner Of Income-Tax, Bombay

the hands of a group which acts as a block, the third proviso ceases to apply. 15. 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 Directors is of no significance. The case of Tatem Steam Navigation Co. Ltd. v. Commissioners of Inland Revenue, 1941-24 Tax Cas 57 illustrates the first proposition. There, the assessing Commissioners had made direction under S. 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 carrying not less than 25 per cent. 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 16,000 shares given by Lord Glanely to his niece were not allotted to or acquired by the public and that the Company was, therefore, not 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 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. 16. The other test adopted in the case by the Bombay High Court that Directors stand out side the public is also not decisive. In Commissioner of Income-tax v. H. Bjordal, 1955 AC 309, the Judicial Committee dealt with S. 21(1) of the Income Tax Ordinance No. 8 of 1940 (Uganda), as amended by S. 5 of the Income Tax (Amendment) Ordinance, 1943. That provision of law is completely in pari materia with S. 23A. Two brothers, H. Bjordal and S. Bjordal, held 73.96 and 25.09 per cent of the voting power. The shares held by S. Bjordal were purchased for full value by him from his brother. There was no suggestion that the 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 Tatems case, 1941-24 Tax Cas 57. It is significant that in Jubilee Mills Ltd. v. Commissioner of Income-tax, 1958-34 ITR 30 at p. 41: (AIR 1959 Bom 51 at p. 53) Chagal, C .J. , and S. T. Desai, J., speaking of the judgment under appeal and 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." 17. 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. 18. 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 3,000 and with Maganlals holding of 1,344 shares, make up a total of 4,344 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 75 percent 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 case the provisions of S. 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 necessary.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]It is clear from the third proviso that the sub-section 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 fat 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 interested17. 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 public18. 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 3,000 and with Maganlals holding of 1,344 shares, make up a total of 4,344 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 75 percent 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: