Case: Commissioner of Income Tax, Bombay City I Vs. Jubilee Mills Limited

2. The assessee company is a limited liability company with a paid up capital of Rs. 15, 25, 000. Its paid up capital is made up as under :1 lakh ordinary shares of Rs. 10 each Rs. 10, 00, 0005, 000 cumulative preference shares of Rs. 25paid up Rs. 1, 25, 0004, 000 second preference shares of Rs. 100 eachfully paid up Rs. 4, 00, 0003. The second preference shares do not entitle the holders to vote. Thus shares of the assessee company carrying votes are 1, 05, 000. This was the position on June 30, 1947. We are concerned with the assessment yearcorresponding to the previous year ended on June 30, 1947. In that year, the company was assessed on a total income of Rs. 7, 47, 639. TheOfficer calculated the tax at Rs. 4, 20, 548. In that year, the company ought, if section 23A was applicable, to have distributed 60% of the above amount. The company, however, declared dividends which is the aggregate amounted to Rs. 24, 750. TheOfficer, with the previous approval of section 23A, of theAct and held that the company was deemed to have declared dividend of Rs. 3, 97, 788.4. The assessee company was being managed by a firm called Mangaldas Mehta & Co. That firm consisted of fourteen partners of whom seven were the directors of the assessee company. The members of the managing agents who were also directors held between them 35, 469 ordinary shares and 880 first preference shares. The remaining seven members of the managing agents, who were not directors of the assessee company, held respectively 41, 659 and 370 shares of the two categories.shares were held by Girdhardas & Co. Ltd., to which company admittedly section 23A was applicable. Some of the members of the managing of the managing agency firm held on behalf of their minor children or on behalf of their families 9, 899 ordinary shares and 937 first preference shares. The following is a detailedof the share holdings :CATEGORY A5. Shares held by directors Holding of Share in the Holding ofwho are partners in the ordinary partnership the 1stfirm of managing agents shares firm of managing preference sharesagents firm1. Shri Homi Mehta 50 8/128 Nil2.Sheth Mathurdas MangaldasParekh 6, 466 14/128 2733. " Madan MohanMangaldas 11, 052 14/128 2734. " MadhusudanChamanlal Parekh 3, 616 7/128 205. " Mahendra ChamanlalParekh 3, 616 7/128 206. " Surendra MangaldasParekh 7, 053 14/128 2747. " Indrajit ChamanlalParekh 3, 616 7/128 2035, 469 880CATEGORY BShares held by partners of Holding of Share in thethe managing agents firm ordinary partnership Holding ofexcluding the holding of shares firm of 1stwho are also managing rence sharesparties as shown above agents firm shares1.Shri Harshavadan Mangaldas 11, 053 14/128 2742.Mrs.Savitagavri ChamanlalParekh 3, 750 7/128 163.Shri Virendra a minor by hisChamanlal mother andParekh guardianMrs.SavitagavriChamanlal Parekh 6, 328 7/128 204.Shri ManmohanChamanlalParekh do. 4, 462 7/128 205.ShriParekh do. 4, 962 7/128 206.Shri NutanChamanlal Parekh do 4, 962 7/128 207.Shri Hussein Essa 6, 142 8/128 Nil41, 659 370CATEGORY CShares represented by the Holding of Holding of the 1stdirectors ordinary shares preference shares1.Sheth Madhusudan ChamanlalParekh (No. 4, in A above)as karta of the joint familyestate of Sheth ChamanlalGirdhardas Parekh 3, 899 9372.Sheth Mathuradas MangaldasParekh (No.2 in A above)as guardian and father ofminor, Ben PurnimaMathuradas.3. do do Ben Veena 1, 0004. do do Ben Sunita 1, 0005. do do Jagatkumar 1, 000Mathuradas6.Sheth Surendra MangladasParekh (No.6 in A above)as guardian and father ofminor, Darshan SurendraParekh 1, 0007. do. as guardian andfather of minorBen BabiParekh 1, 0009, 899 9376. It appears that in the past the assessee company incurred heavy losses and it had to reconstruct its capital in 1930 because it had a debit balance of Rs. 12, 75, 000 in the profit and loss account which had to be paid out of capital. This was done by reducing the face value of the ordinary shares from Rs. 100 to Rs. 10 each, and of the preference shares from Rs. 100 to Rs. 25, each after obtaining the approval of the High Court. It is the reconstituted capital which has been shown by us in an earlier part of this judgment. It also appears that theOfficer granted to the assessee company a rebate of one anna under proviso (a) to paragraph (b) of part I of the second schedule of the finance Act. 1948. This rebate was granted to those companies to which the provisions of section 23A were not applicable. Subsequently, theOfficer, as stated already, applied section 23A to the company and it was contended that he was incompetent to do so as he must be deemed to have impliedly held already that section 23A was not applicable. Section 23A before its amendment in 1955, in so far as it is material, read as followsPower to assess individual members of certaintax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent. of the assessable income of the company of that previous year, as reduced by the amount of income tax and super tax payable by the company in respect thereof he shall, unless she is satisfied that having regard to losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income tax purposes and reduced by the amount of income tax and super tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income....Provided further that thisshall not apply to any company in which the public are substantially interested or to a subsidiary company in which the public are substantially interested or to a subsidiary company of such a company if the whole of the share capital of such subsidiary company is held by the parent company or by the nominees thereof.Explanation.For the purpose of thiscompany shall be deemed to the a company in which the public are substantially interested if shares of 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 twenty five per cent, of the voting power have been allotted unconditionally to, or acquired unconditionally by, and are at the end of the previous year beneficially held by the public (not including a company to which the provisioned of thisapply), and if any such shares have in the course of such precious year been the subject of dealings in any stock exchange in the taxable territories or are in fact freely transferable by the holders to other members of the public.We are really concerned with the application of the Explanation to the facts of this case. The Explanation, in so far as it is relevant to our purpose, says that a company shares of the company carrying not less than 25 per cent of the voting power have been allotted unconditionally to, or acquired unconditionally the public and are held beneficially by the public.8. The Income tax Officer held that this was not a company in which the public were substantially interested and that the grant of the bate earlier by him did not estop him from applying section 23A to this company. His order was upheld by the Appellate Assistant Commissioner and the Tribunal on both the points. The assessee company then applied for decision by the High CourtWhether, on the facts and in the circumstances of the case, the Income tax Officer was competent to pass an order under section 23A(1) of the Act after having allowed a rebate of one anna per rupee in the assessment under proviso (a) to paragraph (B) of part I of the Second Schedule of the Finance Act, 1948 ?(2) If the answer to question No. 1 is in the affirmative whether, on the facts and in the circumstances of the case, the assessee company is a company in which the public are substantially interested for the purposes of section 23A of the Act ?(3) Whether the loss of Rs. 12, 75, 000 incurred by the company, Prior to its reconstruction in 1930, could be taken in to consideration for purposes of the applicability of section 23A(1) of the ActThe High Court, by the judgment under appeal, answered the first two questions in the affirmative and in view of the answer to question No. 2 it considered it unnecessary to answer the third. The Commissioner of Income tax obtained a certificate of fitness and filed the present appeal.

Reasoning: 10. The answer to the first question is in favour of the Commissioner of Income tax. The other side has not appealed and Mr. Viswanatha Sastri for the assessee company concede before us that the High court was right. The third question depends on the answer to the first question but as it has not been answered by the High Court we do not consider it necessary to answer it here for the first. Applying the above test, owe have to see whether there is such a group in this company. It is obvious from what we have said that category "A" which consisted of the directors could not be regarded as outside "public" merely by reason that they were directors. But there is, however an intimate connection between category "A" and category "B" inasmuch as both are members of the managing agency firm. In other words, there is evidence of yet another group, namely, the group of shareholders who constitute the managing agency firm.15. We agree with the High Court that managing agents act under the control and direction of the directors. The managing agents are also appointed by the company. The control of the affairs of a company is ordinarily in the hands of the directors of the company but there may be cases in which the managing agents, by reason of their superior holding of shares may be able to appoint the directors and generally to control the views of the directors. Where the managing agents hold an interest which is small and is thus not capable of exercising an overriding power, other evidence may be required to show that they, in conjunction with others, are running the affairs of the company to the exclusion of the public. Where, however, the managing agents admittedly hold 51% or more of the shares, it is obvious that the controlling interest belongs to the managing agents, either by themselves or with those who act in concert with them, hold shares above the 75% limit they can be regarded as constituting a group which cannot be counted as "public". In such a case the holding of the managing agents, if above 75% may furnish proof that the company is one in which the public are not substantially interested. It was contended before us that even among the managing agents some may take an independent view. Normally, managing agencies are not informed by parties except for the purpose of mutual gain and the commonness of the interest lends a cohesion to the body which enables it to act in its own interest. When such a body holds shares carrying more than 75% of the voting power the company itself is run mainly as the managing agents desire it to be run. such a managing agency could easily choose its own directors and the directors would not be independent persons but mere nominees of the managing agents. In such a case the inference is irresistible that we have a group, which, as a group can run the company at its will and which not only controls the voting at the meeting of the shareholders but, by selecting its own directors, gets the directors to act according to its own desires. No member of such a managing agency firm can be regarded as belonging to "the public" and when this happens the company comes within the reach of section 23A.Applying the above test to the present case, it is clear that the managing agents between them hold 77, 128 out of 1, 00, 000 ordinary shares, well above the limit. They have in addition 1, 250 first preference shares out of 5, 000 which also carry voting power. To this must be added 75 shares held by Girdhardas & Co. Ltd. to which section 23A is admittedly applicable. This brings the total holding to 78, 453. 75% of the total shares bearing votes is 78, 750. This shows that the holding of the managing agents is short by 298 shares for the application of the explanation to section 23A. But when we turn to category "C" we find that 6, 000 shares were held by the members of the managing agency on behalf of minor children and the voting power arising from these shares was in their own hands as guardians. There is no doubt that in the present case shares carrying more than 75% of the voting power are held by this court in Raghuvanshi Mills case and by us here. The reason is this : Shares carrying more than 75% of the voting power are held by the partners of the managing agency firm or persons under its control. Now it seems to us that it is to the interest of the partners of this firm to exercise their voting power in one way, namely, the way that brings to them the largest profit out of the company. It is true that the managing agents are the servants of the company in a manner of speaking and not its masters and also that the object of a firm of managing agents is to carry out certain administrative duties concerning the company under the control of the directors of the company. That, however, is irrelevant and in any case is far from the truth in the present case. Here the partners of the managing agency practically own the company.16. At the hearing a point was raised that it has to be proved as a fact that the persons constituting the group, which owns shares carrying more thanper cent. of the voting power, were acting in unison. The test is not whether they have actually acted in acted in concert but whether the circumstances are such that human experience tells us that it can safely be taken that they must be acting together. It is not necessary to state the kind of evidence that will prove such concerted actings. Each case must necessarily be decided on its own facts. The exclusion of "public" in the manner indicated generally from more than 75% of the shares and the concentration of such a holding in a single person or a group acting in concert is what attracts 23A.In our opinion, the High Court was not right in answering the second question in the affirmative.