Case: Pilani Investment Corporation Ltd Vs. The Commissioner Of Income Tax (Central)

The Tribunal observed that both JC Mills and PPI Co. were public companies in which the public were substantially interested and therefore, it was not correct to say that the shares held by the two companies were controlled by a group of persons as distinguished from members of the public. The Tribunal further observed that the usual clause in the Memorandum and Articles of Association empowering the directors to decline to register a transfer of shares without assigning any reason did not mean any restriction on the transferability of shares by one holder to another. The Tribunal also found that there was nothing to show that the shares were not in fact freely transferable. The Tribunal consequently upheld the assessees contention that it was a public limited company in which the public was substantially interested and its shares were freely transferable. The provisions of Section 23-A of the Act were held to have been wrongly invoked. The order of the Income-tax Officer in this respect was consequently set aside. The question reproduced above was thereafter referred to the High Court. The High Court by a short order answered the question in the affirmative and in this connection relied upon an earlier decision of the Calcutta High Court in Commr. of Income-tax, West Bengal v. Tona Jute Co. Ltd., (1963) 48 ITR 902 (Cal) .5. In appeal before us, Mr. Sen on behalf of the appellant has contended that the decision of Calcutta High Court in (1963) 48 ITR 902 (Cal) (supra) has been impliedly overruled by a decision of this Court in the case of Shree Krishna Agency Ltd. v. Commr. of Income-tax (Central), Calcutta, 82 ITR 372 = (AIR 1972 SC 156 ). This contention, in our opinion, is well founded. In the case of Tona Jute Co. (supra) the Calcutta High Court had expressed the view that a public limited company whose directors had absolute discretion to refuse to register transfer of a share to any person whom it would, in their opinion, be undesirable in the interest of the company to admit to membership and were not obliged to give any reason for refusal to register was not a company the shares of which were freely transferable to other members of the public within the meaning of Section 23-A of the Act. A view contrary to that of Calcutta High Court was taken by the Madras High Court in East India Corpn. Ltd. v. Commr. of Income-tax, 61 ITR 16 = (AIR 1967 Mad 7 ) and the Bombay High Court in Raghuvanshi Mills Ltd. v. Commr. of Income-tax, (1969) 74 ITR 823 (Bom) . This Court in the case of Shree Krishna Agency Ltd. (supra) approved the view taken by the Madras and Bombay High Courts. This Court in that case dealt with Article 37 of the Articles of Association of the assessee company which was a public company and which provided that the directors might at any time in their absolute and uncontrollable discretion and without assigning any reason decline to register any proposed transfer of shares. It was held that in the absence of evidence to show that the directors had been exercising their power under Article 37 freely and had virtually eliminated the element of free transferability of the shares in the company, the mere existence of an article like Article 37 could not be said to affect the free transferability of the shares as contemplated by the explanation to Section 23-A of the Act.6. There is in the present case also no evidence to show that the directors had eliminated the element of transferability of shares. As such, we find that the decision of the High Court in answering the question against the assessee cannot be sustained.7. On an earlier date of hearing Mr. Ahuja, on behalf of the revenue, prayed for adjournment to ascertain whether there was any cogent material on the record to show that there was any group acting in concert which was in control of the assessee company. The adjournment was granted. When the hearing of the case was resumed thereafter. Mr. Ahuja on behalf of the department frankly stated that he had not been able to find any cogent material to show that there was any group acting in concert which was in control of the assessee company. He, however, prayed that the case be remanded to the authorities concerned for going into this question. As the matter relates to the assessment year 1952-53 and as Mr. Ahuja in spite of adjournment has not been able to find any cogent material to warrant the plea that a group acting in concert was in control of the assessee company, we are of the opinion that we should not accede to the prayer of Mr. Ahuja in this respect.The fact that two public limited companies were holding between themselves more than 75 per cent of the shares of the assessee company was not sufficient to attract Section 23-A of the Act.8. The case of Commr. of Income-tax v. Jubilee Mills Ltd., (1963) 48 ITR 9 (SC) referred to by Mr. Ahuja cannot be of much assistance to him. In the said case the Managing Agents of a company were partners of a firm who held between themselves more than 75 per cent of the voting power. It was held that as more than 75 per cent of voting power was held by a group, the company was not a company in which the public were substantially interested within the meaning of Section 23-A. In the present case as appears from the resume of facts, more than 75 per cent of shares of the assessee company are held not by a group of partners, but by two public companies in which public are substantially interested. There is also no material to show that any group acting in concert is in control of the assessee company. As such, the case of Jubilee Mills cannot be said to have any material bearing.

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

Explanation:
1[ds]6. There is in the present case also no evidence to show that the directors had eliminated the element of transferability of shares. As such, we find that the decision of the High Court in answering the question against the assessee cannot be sustained.The case of Commr. of Income-tax v. Jubilee Mills Ltd., (1963) 48 ITR 9 (SC) referred to by Mr. Ahuja cannot be of much assistance to him. In the said case the Managing Agents of a company were partners of a firm who held between themselves more than 75 per cent of the voting power. It was held that as more than 75 per cent of voting power was held by a group, the company was not a company in which the public were substantially interested within the meaning of Section 23-A. In the present case as appears from the resume of facts, more than 75 per cent of shares of the assessee company are held not by a group of partners, but by two public companies in which public are substantially interested. There is also no material to show that any group acting in concert is in control of the assessee company. As such, the case of Jubilee Mills cannot be said to have any materialcontention, in our opinion, is well founded. In the case of Tona Jute Co. (supra) the Calcutta High Court had expressed the view that a public limited company whose directors had absolute discretion to refuse to register transfer of a share to any person whom it would, in their opinion, be undesirable in the interest of the company to admit to membership and were not obliged to give any reason for refusal to register was not a company the shares of which were freely transferable to other members of the public within the meaning of Sectionof the Act. A view contrary to that of Calcutta High Court was taken by the Madras High Court in East India Corpn. Ltd. v. Commr. of61 ITR 16   = (AIR 1967 Mad 7  ) and the Bombay High Court in Raghuvanshi Mills Ltd. v. Commr. of(1969) 74 ITR 823 (Bom)  . This Court in the case of Shree Krishna Agency Ltd. (supra) approved the view taken by the Madras and Bombay High Courts. This Court in that case dealt with Article 37 of the Articles of Association of the assessee company which was a public company and which provided that the directors might at any time in their absolute and uncontrollable discretion and without assigning any reason decline to register any proposed transfer of shares. It was held that in the absence of evidence to show that the directors had been exercising their power under Article 37 freely and had virtually eliminated the element of free transferability of the shares in the company, the mere existence of an article like Article 37 could not be said to affect the free transferability of the shares as contemplated by the explanation to Sectionthe matter relates to the assessment yearand as Mr. Ahuja in spite of adjournment has not been able to find any cogent material to warrant the plea that a group acting in concert was in control of the assessee company, we are of the opinion that we should not accede to the prayer of Mr. Ahuja in this respect.The fact that two public limited companies were holding between themselves more than 75 per cent of the shares of the assessee company was not sufficient to attract Sectionof the Act.