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

1. The Raghuvanshi Mills Ltd., Bombay (a public limited company), has filed this appeal by special leave against the judgment and orders of the 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.        2. The assessee Companys issued and subscribed capital was, at the material time, Rs. 10,00,000/- divided into 10,000 share of Rs. 100/- each prior to November 14, 1941, one Maganla Parbhudas, who was a Director of the Company, held 6,344 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 S. 23A of the Indian Income-tax Act. The question, therefore, arose whether the Company would be said to be one to which S. 23A (1) of the Act was applicable, regard being had to the third proviso and the Explanation under it.        (2a)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 ... ... 1,344        (2) "Ravindra Maganlal ... ... 1,168        (3) "Surendra Maganlal ... ... 1,100        (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 4,695        3. Out of the balance of the shares, 4,754 shares were held by the relatives of some of the above-named Directors, as stated below:        Shares        (1) Shri Kantabai Maganlal (wife of a Director) ... ... ... ... 771        (2) Shri Bipinchandra Maganlal ... 1,000        (3) Shri Hareshchandra Maganlal (son of a Director) ... ... ... ... 1,000        (4) Shri Krishnakumar Maganlal (do) ... 1,000        (5) Shrimati Dhanlaxmi Mohanlal ... ... 50        (6) Shrimati Prabhavati Nanalal Harilal (5 and 6 daughters of a Director) 50        (7) Shri Hirjhibai 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 4,754        4. 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.        5. 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 and Co. Ltd. as the Managing Agent for a period of 20 years. The Managing Company had a total issued and subscribed capital of Rs. 5,000/- 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.        6. On these facts, the Income-tax Officer applied S. 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 S. 66(1) of the Income-tax Act, but the High Court of Bombay acting under S. 66(2) called for a statement of the case on the question :"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 ?"In stating the case, the Tribunal pointed out that probably the question ought to have been :"Whether on the facts and circumstances of the case 1,000 shares each held by Bipinchandra, Hareshchandra 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 S. 23A?"7. 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.        8. 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 Account Member and the Judicial Member were incorrect, and held that what the law required was de facto control, "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 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.        9. 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 defacto 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 S. 23A?"The High Court refused to grant a certificate; but the Company has obtained special leave from this Court, and has filed this appeal.

Reasoning: 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: