Case: Commissioner Of Income-Tax, Madras Vs. The Amrutanjan Ltd., Madras

1. One Nageswara Rao Panthulu set up a business of manufacturing a "pain-balm" which was marked in the trade-name of "Amrutanjan". In September 1936 the respondent company was floated as a public limited company under the Indian Companies Act, 1913, to acquire and carry on the business of manufacture and sale of "Amrutanjan." The authorised capital of the company was 7,000 ordinary shares and 3,000 preference shares of Rs. 100/- each, and the issued and paid-up capital was 2,500 ordinary and 3,000 preference shares. The preference shareholders were under the Articles of Association entitled to a fixed dividend of 71/2 per cent on the face value of the shares, with no right in the balance of the profits. The respondent company took over the business conducted by Nageswara Rao Panthulu for Rs. 5,50,000/- paid in the form of 2,500 ordinary and 3,000 preference fully paid-up shares. This company was managed by a firm which after the death of Nageswara Rao Panthulu consisted of Ramayamma widow of Nageswara Rao, Kamakshamma his daughter. Ramayammas brother Ramchandra Rao and Kamakshammas brother Ramachandra Rao and Kamakshammas husband Sambu Prasad. Between April 1, 1946 to March 31, 1949 Ramayamma widow of Nageswara Rao was holding 2,185 ordinary shares and her daughter Kamakshamma was holding 250 ordinary shares. Out of the preference shares only 385 were held by the directors including Ramayamma and Kamakshamma.2. Under the Articles of Association of the company, both preference and ordinary shareholders were entitled to vote at the meeting of the company - each shareholder being entitled to exercise on vote for each share. In the course of assessment proceedings of the respondent company, the Income-tax Officer found that for the three years ending March 31, 1947, March, 31, 1948 and March 31, 1949 the company had declared each year a total dividend of Rs. 38,750/- at the rate of 71/2 per cent on the preference shares and 61/2 per cent on the ordinary shares - which was considerably less than sixty per cent of the amount available for distribution as computed under S. 23-A of the Income-tax Act, as it stood at the material time. The Income-tax Officer served a notice, after obtaining the approval of the Inspecting Assistant Commissioner of Income-tax, requiring the respondent company to show cause why an order under S. 23-A of the Income-tax Act, 1922, should not be passed against the company, and after considering the objections raised by the company ordered on March 31, 1953, that the undistributed portion of the assessable income of the company as computed for income-tax and super-tax payable by the company in respect thereof, shall be deemed to have been distributed as dividend amongst the shareholders as at the date of the respective general meetings. This order was confirmed in appeal by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal.3. Several contentions were raised before the Revenue authorities and the Tribunal challenging the competence of the Income-tax Officer to pass an order under S. 23-A including the contention that the said provision was unconstitutional or ultra vires. These have been negatived by the Tribunal and also by the High Court and it is unnecessary to refer to those contentions in these appeals as they do not survive for determination.

Reasoning: 6. It is now settled law that the distinction between the controlling group and the public is not along the line which distinguishes directors from the remaining members of the company. If a director does not belong to the controlling group, he will be regarded as a member of the public for the purposes of the third proviso and the Explanation to S. 23-A even though such director was directly entrusted with the management of the affairs of the company.No investigation has been made by the Income-tax Department whether there is any group of person controlling the working of the company. It is true that Ramayamma was holding 87.40 per cent of the ordinary shares issued by the company, and there is obviously no person who could hold twenty-five per cent or more of the ordinary shares. In the present case, as already observed, the preference shareholders were entitled to vote at the meeting and the Articles of Association of the Company made no distinction between the preference and the ordinary shareholders in the matter of exercise of voting rights. The total voting power was 5,500-one vote for each share, ordinary and preference alike and twenty-five per cent of that voting power is 1,375, but to invite the presumption under the Explanation this power must be exercisable only by the ordinary shareholders, and not by shareholders entitled to a fixed rate of dividend. The presumption under the Explanation could arise only, if twenty-five per cent of the voting power was held by persons entitled to ordinary shares outside the controlling group.Prima facie such an interpretation is not warranted if regard be had to the terms of the Explanation. But even that argument is of no value, for twenty-five per cent of the voting power attached to the ordinary shares is not exercisable by the public. This, therefore, is a case in which shares not entitled to a fixed dividend carrying not less than twenty-five per cent of the voting power are not shown to have been allotted unconditionally to, or acquired unconditionally by or beneficially held by the public. The Explanation, therefore, has no operation.The order of the High Court must therefore be confirmed, but on different grounds. The interpretation of the Explanation by the High Court, for reasons already set out was incorrect, the explanation had no application, because no presumption on the facts found could arise thereunder. The Revenue authorities have not made any investigation on the question whether there existed any controlling interest in a group of persons, so as to bring the case within the thirdan analysis of the provisions of the third proviso to S.and its Explanation, the following positionWhere there is no individual member or a group of members acting in concert holingper cent or more of the voting power, which controls the working of a company, it is from its very nature a company in which there is no controlling member or group, and therefore, the public are substantially interested;2. Where a shareholder holds or a group of shareholder acting in concert holdper cent or more of the voting power, the question is one of fact to be determined in each case, whether it is a company in which the public are substantially interested, having regard to the purpose for which the holding ofper cent or more is utilised;3. Where not less thanper cent of the voting power is allotted unconditionally to, or is acquired unconditionally by or is beneficially held by the public, it shall be presumed that the company is one in which the public are substantially interested. But in considering whether shares carrying not less thanper cent of the voting right are held by the public, shares entitled to a fixed rate of dividend have to bereason of the rule which excludes from the computation of voting power holder of shares entitled to a fixed rate of dividend is that Sectionis directed primarily against the accumulation of undistributed dividends to avoid payment ofax. But shareholders who are entitled to a fixed rate of dividend are not directly interested in such accumulation it matters little to them whether the dividend is immediately distributed to the ordinary shareholders or is accumulated, and therefore in assessing whether the twenty five per cent of the shares are vested in persons other than the controlling group, the shares yielding a fixed rate of dividend have to be ignored. But for the purpose of ascertaining the voting power, voting rights attached to all the shares must be taken into account.