dedol-hf/india-case-legal-rag huggingface dataset:
cases  were  not cases of mixed motives at  all.   The  only
motive  operating in those cases in the minds of the  direc-
tors was detrimental to the interests of existing sharehold-
ers and, therefore, to the company itself. Our attention was
drawn  to Palmer's Company Law, 18th Edition, p. 183,  where
it  is  stated  that "in exercising  their  powers,  whether
general or special, directors must always bear in mind  that
they  are in a fiduciary position, and must  exercise  their
powers for the benefit of the company, and for that  alone."
Relying on the words "and for that alone," it is urged  that
the  power  to  issue shares must be  exercised  wholly  and
solely  for the benefit of the company, that there must  not
be  any  other motive whether or not that  other  motive  is
injurious to the company and that if that power is exercised
for that purpose and also for some other purpose then  irre-
spective  of the nature of that other purpose the  directors
would  be guilty of an abuse of their power.  I am not  pre-
pared to read the passage in the way urged by learned  coun-
sel  for  the plaintiffs.  None of the cases cited  on  that
point  in  Palmer's  Company Law was  concerned  with  mixed
motives at all.  In none of them was there any motive  bene-
ficial  to the company or to the existing shareholders.   In
my  view what that passage means is that the power  must  be
exercised for the benefit of the company and that as between
the directors and the company there must be no other  motive
which  may operate to the detriment of the company.  If  the
directors exercise the power for the benefit of the  company
and at the same time they have a subsidiary motive which  in
no way affects the company or its interests or the  existing
shareholders  then  the very basis of  interference  of  the
Court  is absent, for, as I have pointed out, the  Court  of
equity only intervenes in order
    425
to  prevent a breach of trust on the part of  the  directors
and to protect the cestui que trust, namely the company  and
possibly  the  existing  shareholders.  If  as  between  the
directors  and  the  company and the  existing  shareholders
there  is  no breach of trust or bad faith there can  be  no
occasion  for the exercise of the equitable jurisdiction  of
the  Court.   I find support for my views in  the  following
observations of their Lordships of the Judicial Committee in
Hirsche v. Sims(1):
    "If  the true effect of the whole evidence is, that  the
defendants  truly and reasonably believed at the  time  that
what they did was for the interest of the company, they  are
not chargeable with dolus malus or breach  of  trust  merely
because  in promoting the interest of the company they  were
also  promoting their own, or because they  afterwards  sold
shares at prices which gave them large profits."
    On the facts of this case the concurrent finding is that
the  company was in need of funds and, therefore, the  issue
of further shares was clearly necessary and is referable  to
such need.  The further motive of keeping out the  Singhania
group, who are not yet shareholders but are strangers,  does
not prejudicially affect the company or the existing  share-
holders  and  the  presence of such  further  motive  cannot
vitiate  the good motive of finding the necessary funds  for
the  company.  In my judgment it is impossible to hold  that
the issue of fresh shares was, in the circumstances, illegal
or void.
    Re  (iii):--Learned   counsel    for   the    plaintiffs
contends that both the Courts below were in error in holding
that  there has been no contravention of the  provisions  of
section 105-C of the Indian Companies Act.  That section  is
in the following terms :--
    "Where  the directors decide to increase the capital  of
the company by the issue of further shares such shares shall
be  offered  to the members in proportion  to  the  existing
shares held by each member (irrespective of class) and  such
offer  shall  be  made by notice specifying  the  number  of
shares to which the member is entitled, and limiting a  time
within which the offer, if
(1) [1894] A.C. 654, at pp. 660-661.
426
not  accepted, will be deemed to be declined; and after  the
expiration  of  such  time, or on receipt of  an  intimation
from  the  member to whom such notice is given that  he  de-
clines  to  accept  the shares offered,  the  directors  may
dispose of the same in such manner as they think most  bene-
ficial to the company."
    This  section was added to the Indian  Companies Act  in
1936.
    The  first question is whether the section  contemplates
increase  of  capital above the authorised  limit,  or  only
below the authorised limit. Learned Attorney General appear-
ing for the company urges that the words
further  shares"  must be read in conjunction  with  the
words  "decide to increase the capital of the company"  and,
so  read, must mean shares which are issued for the  purpose
of  increasing  the capital beyond the  authorised  capital.
He  contends that section 105-C has no application  to  this
case. Section 50 deals with, among other things,  alteration
of  the conditions of the Memorandum of Association  of  the
company by increasing its share capital by the issue of  new
shares. The very idea of alteration of the memorandum by the
issue  of new shares clearly indicates that it  contemplates
an increase of the share capital above the authorised  capi-
tal  with  which the company got  itself  registered.   This
increase can only be done by the company in a general  meet-
ing  as  provided in sub-section (2) of section  50.    This
increase above' the authorised limit cannot possibly be done
by  the  directors on their  own  responsibility.    Section
105-C,  however, speaks of increase of capital by the  issue
of further shares. The words used are capital and not  share
capital and further shares and not new shares.  It speaks of
increase  by  the directors.  Therefore,  the  section  only
contemplates  such  increase  of capital as  is  within  the
competence  of  the directors to decide  upon.   It  clearly
follows  from this that the section is intended to  cover  a
case where the directors decide to  increase the capital  by
issuing  further shares within the authorised limit, for  it
is  only within that limit that the directors can decide  to
issue  further shares, unless they are precluded from  doing
even that by the regulations of
    427
the company.  It is said that section 105-C becomes applica-
ble after the company in a general meeting has decided  upon
altering   its memorandum  by  increasing its share  capital
by  issuing new shares. If the company at a general  meeting
has  decided upon  the  increase  of its share  capital   by
the issue of new shares, then it is wholly inappropriate  to
talk   of  the  directors  deciding  to   increase  capital,
because   the  increase has  already  been decided  upon  by
the  company  itself.  Further, after the company has  at  a
general meeting decided to increase its share capital by the
issue  of  new  shares, the increased  capital  becomes  its
authorised  capital and then ii the directors under  section
105-C decide to increase the capital by the issue of further
shares,  then this decision is nothing more than a  decision
to raise capital  within the  newly authorised limit. Final-
ly, if section 105-C were to be held applicable to the  case
of  an increase of capital above the authorised  limit  then
such  construction will lead to anomalous results so far  as
the companies which have adopted Table A, for the section is
not  consonant with Regulation 42 of Table A which, as  will
be  shown hereafter, applies to increase of  capital  beyond
the  authorised  limit.  If the  Legislature  intended  that
section 105-C should apply to all companies in the matter of
increase  of  capital above the authorised limit,  then  the
simplest  thing  would  have been to make  Regulation  42  a
compulsory  regulation,  instead of  introducing  a  section
which  in  its terms differs from Regulation  42  and  which
therefore makes the position of companies which have adopted
Table A anomalous.  It appears to me, therefore, for reasons
stated  above,  that section 105-C becomes  applicable  only
when  the  directors decide to increase capital  within  the
authorised  limit  by the issue of further shares.  In  this
view of the matter that section is clearly applicable to the
facts of this case.
    The next question is whether the directors have, in  the
matter of issuing and offering further shares in the present
case, been guilty of any contravention of the provisions  of
this section.  Learned counsel for
54
428
the  plaintiffs contends that they have, because  they  have
not  offered the whole lot of shares to the shareholders  in
proportion  to  the  existing shares held by  them.   It  is
pointed  out  that although the directors decided  to  issue
4,596  further shares they have only offered four shares  to
every  five shares held by the shareholders which works  out
at  4,323 1/5 shares which leaves  272 4/5  shares   in  the
hands  of the directors which they have reserved power  unto
themselves  to dispose of in such manner as they think  fit.
Learned  Attorney-General appearing  for  the  company  sub-
mits:
     That section 105-C should be construed in the light  of
Regulation 42 in Table A of the Indian Companies Act, 1913;
    (b)  That  in  order to prevent absurdity  and  to  give
business  efficacy to the section, the words "as  nearly  as
circumstances admit" should be read into the section; and
    (c) That in any event the directors have not contravened
the provisions of the section even if the same be  literally
construed.
Each of these points requires serious consideration.
    As  to  the  first point it should  be  remembered  that
section 105-C was introduced in the Act only in 1936.  There
is no counterpart of it in the English Act even now.   Prior
to 1936 there was no check on the powers of the directors to
issue  blocks  of shares, within the  authorised  limit,  to
themselves  or to their nominees, unless their  powers  were
circumscribed  by the Articles of Association.  One  of  the
mischiefs  of the managing agency system which  prevails  in
this  country  was that the managing  agents,   who  usually
dominated the board of directors, could, to secure their own
position,  induce  the board to issue blocks  of  preference
shares  to the managing agents or their nominees.  To  check
this mischief section 105-C was introduced in the Indian Act
in 1936.  As regards the increase of capital beyond
429
the  authorised limit it could only be done by the  company.
The  shareholders  could, while sanctioning  such  increase,
protect  themselves  by  giving special  directions  to  the
directors as to the mode of disposal of the new shares..  In
the  model Regulations set forth in Table A of the 1882  Act
under  the heading "Increase of Capital" are  grouped  three
Regulations  26  to 98. Regulation 27 was in  the  following
terms:
    "(27) Subject to any directions to the contrary that may
be  given  by  the meeting that sanctions  the  increase  of
capital,  all new shares shall be offered to the members  in
proprtion  to  the existing shares held by  them,  and  such
offer  shall  be  made by notice specilying  the  number  of
shares to which the member is entitled, and limiting a  time
within  which the offer, if not accepted, will be deemed  to
be  declined, and after the expiration of such time,  or  on
the  receipt of an intimation from the member to  whom  such
notice  is given that he declines to accept the  shares  of-
fered, the directors may dispose of the same in such  manner
as they think most beneficial to the company."
    In Table A of our present Act under the heading "Altera-
tion of Capital" are to be found three corresponding Regula-
tions 41 to 43.  Regulation 42 is as follows:--
    "(42) Subject to any direction to the contrary that  may
be given by the resolution sanctioning the increase of share
capital,  all new shares shall, before issue, be offered  to
such  persons  as at the date of the offer are  entitled  to
receive  notices  from the company of  general  meetings  in
proportion,  as nearly as the circmustances admit,.  to  the
amount  of the existing shares to which they  are  entitled.
The  offer shall be made by notice specifying the number  of
shares offered, and limiting a time within which the  offer,
if  not accepted, will be deemed to be declined,  and  after
the expiration of that time, or on the receipt of an intima-
tion  from  the  person to whom the offer is  made  that  he
declines  to  acccpt the shares offered, the  directors  may
dispose
430
of the same in such manner as they think most beneficial  to
the  company.  The directors may likewise so dispose of  any
new  shares  which  (by reason of the ratio  which  the  new
shares  bear to shares held by persons entitled to an  offer
of new shares) cannot, in the opinion of the directors,   be
conveniently offered under this article."
    The words underlined are new and are not to be found  in
Regulation 27 of Table A of the 1882 Act. The scheme of  the
1882  Act, as of our present Act, and the language  used  in
the  two  regulations quoted above clearly indicate,  to  my
mind,  that  they deal with that kind of increase  of  share
capital  which involves an alteration of the  conditions  of
the memorandum which the company alone can do by issuing new
shares.  These Regulations do not purport to deal  with  in-
crease  of  capital which is within the  competency  of  the
directors to decide upon. In that kind of increase of  capi-
tal beyond the authorised limits these regulations give  the
directors  certain  latitude,  subject, of  course,  to  any
directions to the contrary that may be given by the  resolu-
tion of the shareholders in general meeting sanctioning such
increase.  The only difference between Regulation 27 of 1882
and Regulation 42 of our present Act is that under the  last
mentioned Regulation, in the absence of any direction to the
contrary,  the discretion of the directors has been  widened
by  the  introduction of the words underlined  above.   This
company was incorporated in 1908 under the Act of 1882.   It
did not adopt the Regulations of Table A of the 1882 Act but
article  45 of its Articles of Association proceeds more  or
less  on the lines of Regulation 27 of Table A of  the  1882
Act.  The discretion given to the directors under article 45
is,  therefore,  obviously narrower than that  left  to  the
directors under Regulation 42 of Table A of the present Act.
Then  came  section 105C in 1936.  As already  pointed  out,
that  section  deals  with increase of  capital  within  the
authorised limit which the directors can decide upon without
reference  to the shareholders in a general meeting  of  the
company. The legislature had before it both Regulation 27 of
Table
431
A  of 1882 and Regulation 42 of Table A of the Act of  1913.
It  chose to adopt the language of Regulation 27 in  prefer-
ence to that of Regulation 42.  The absence in section 105-C
of  the words I have underlined in Regulation 42 cannot  but
be  regarded as deliberate. And I can conceive of very  good
reasons  for this departure. In the case of increase  beyond
the  authorised limit, that can be done only by the  company
in  general meeting and the shareholders can  protect  them-
selves by giving directions to the contrary and,  therefore,
subject  to such directions a wider latitude may  safely  be
given  to  the  directors. But in the case  of  increase  of
capital within the authorised limit which the directors  may
do without reference to the shareholders the legislature did
not think it safe to leave an uncontrolled discretion to the
directors. The mischief sought to be remedied required  this
curtailing of the directors' discretion.  In my judgment  it
is  impossible  to construe section 105-C in  the  light  of
Regulation 42 for several reasons. Regulation 42 and section
105-C  do not cover the same field and cannot be said to  be
in  pari materia.  The omission of the underlined words  was
obviously deliberate.  The difference in the language of the
two  provisions in the same statute cannot be overlooked  as
merely accidental.  And lastly the reading of these words of
Regulation  42 in section 105-C will frustrate what  I  con-
ceive  to be the underlying reason for the  introduction  of
the  section.  In my judgment the first point urged  by  the
learned Attorney-General which found favour with the  Courts
below cannot be accepted.
The  second point urged by the learned Attorney  General
is  founded  on the supposed necessity  of  introducing  the
words  "as nearly as the circumstances admit" to  avoid  the
absurdity  which  may flow from a  literal  construction  of
section 105-C.  It must be remembered that the cardinal rule
of interpretation of statutes is to construe its  provisions
literally and grammatically giving the words their  ordinary
and  natural meaning.  It is only when such  a  construction
leads to an obvious absurdity which. the legislature  cannot
be supposed to have intended that the  Court  in
432
interpreting the section may introduce words to give  effect
to what it conceives to be the true intention of the  legis-
lature.   It is not any and every inconvenience that  justi-
fies  adoption  of this extreme rule of  construction.   The
section  literally  construed is quite inteligible  and  may
easily  be  applied to many cases where the  further  shares
issued bear a uniform and round proportion.  Merely  because
a literal construction of the section leads to  inconvenient
result  in a particular case cannot, in my opinion,  justify
the application of such a drastic rule of construction as is
urged  by  the Attorney-General.  Even in  this  case  there
would  have been no inconvenience if the  directors  decided
for the issue of 4,053 shares which could have been  offered
in the proportion of three shares to every four shares  held
by  each shareholder. It is true that ordinarily it  is  for
the  directors  to judge as to the exact amount  of  capital
needed by the company but in arriving at their decision they
cannot overlook the limitations put upon their power by  the
section with respect to the proportion in which the  further
shares  are  to  be offered by them  to.  the  shareholders.
Further, the supposed inconvenience can be easily avoided by
a  reference  to the shareholders in a  general  meeting  by
asking them to increase the share capital beyond the  autho-
rised limit to such an amount as would permit  proportionate
disposal of the further and new shares.  In my opinion there
is  not  sufficient  force in the  contention  which  should
induce the Court to depart from the ordinary and golden rule
of interpretation I have mentioned above.
    The  last  point urged by the ]earned  Attorney  General
appears  to  me to be of substance. On  a  strictly  literal
construction  of  the section the  directors  must  perforce
offer all the further shares to the shareholders in  propor-
tion to their respective holdings.  Section 105-C comes into
operation after the directors have decided to issue  further
shares.   The  section does not in terms provide  that  such
offer must be made all at once or at any particular point of
time  and I see no reason to import any such requirement  in
the section.
433
The underlying object of the section is to effect  equitable
distribution  of the further shares.   Here the shares  have
been offered in the proportion of four shares to every  five
shares.  There can be no suggestion of favouritism  in  this
offer.  Every shareholder will get his proportion if  he  so
desires.  The majority will remain the majority if every one
takes up the shares offered to him.  It is true that 272-4/5
shares remain in hand. At best although issued they have not
been offered to anyone.  I dO not agree that under clause  8
of  the directors' resolution the directors can  dispose  of
those 272-4/5 shares in any manner they please before offer-
ing them proportionately to the existing shareholders.  That
clause, on a true construction of the resolution as a whole,
covers only those shares which have been actually issued but
have  not been applied for. In point of fact  the  directors
have  not yet allotted any of these 272-4/5 shares.  If  and
when the directors allot these shares otherwise than in  due
course of law, i.e., with.out offering them to  the   share-
holders, the shareholders will then have cause for complaint
and  may  then come to Court for redress.  It is  said  that
272-4/5 shares cannot in future be offered to so many share-
holders  in a reasonable proportion.  If it cannot be  done,
these odd shares will  remain in  hand until the company  at
a  general meeting decides to increase the share capital  by
issuing  new shares and then these odd shares together  with
new  shares will be easily capable of being offered  to  the
shareholders proportionately.   These special considerations
which arise in the case of this company by reason of its own
peculiar  circumstances  cannot, in my  opinion,  affect  or
alter the meaning and effect of the section.  From all  that
I can see, up to the present time, there has been no contra-
vention of the provisions of section 105-C.  In my view  the
directors have substantially complied with the  requirements
of  the  section and the plaintiffs can have  no  grievance.
They rushed to Court prematurely.
    For  the reasons stated above, I am clearly  of  opinion
that the conclusions of the Courts below were
434
right  and no ground has been made out for interfering  with
the  same.   The result, therefore, is that this  appeal  is
dismissed with costs.
    MUKHERJEA  J.--I agree that this appeal should  be  dis-
missed and I concur substantially in the reasons which  have
been  given  by my learned brother Mr. Justice  Das  in  his
judgment.
Appear dismissed.
Agent for the Appellants: S.P. Varma.
Agent for the Respondents: Rajinder Narain.
    435
PETITIONER:
COMMISSIONER OF INCOME-TAX, BOMBAY
        Vs.
RESPONDENT:
AHMEDBHAI UMARBHAI & CO., BOMBAY.
DATE OF JUDGMENT:
04/05/1950
BENCH:
KANIA, HIRALAL J. (CJ)
BENCH:
KANIA, HIRALAL J. (CJ)
FAZAL ALI, SAIYID
SASTRI, M. PATANJALI
MAHAJAN, MEHR CHAND
DAS, SUDHI RANJAN
MUKHERJEA, B.K.
CITATION:
 1950 AIR  134            1950 SCR  335
 CITATOR INFO :
 F          1953 SC 105  (6A)
 F          1954 SC 155  (13)
 RF         1954 SC 198  (10)
R          1954 SC 470  (33)
 R          1955 SC 661  (152)
 E&D        1957 SC  49  (37,38)
 R          1959 SC 586  (7)
 R          1960 SC1162  (10)
 RF         1963 SC 577  (24)
 OPN        1967 SC1626  (10)
 RF         1972 SC 151  (4)
 F          1977 SC 560  (7)
 R          1979 SC 289  (24)
 D          1987 SC2140  (18)
ACT:
    Excess Profits Tax Act (XV of 1940), s. 5, Third  Provi-
so-Indian  Income-tax  Act (XI of 1922),  s.42  (3)--Article
manufactured   outside   British  India--Sale   in   British
India--Whether  whole  profits accrue or  arise  in  British
India--Liability to excess profits tax-Manufacturing  opera-
tions, whether "part of business "-- Apportionment of  prof-
its between place of manufacture and place of sate-permissi-
bility--Applicability of s. 42 (3).
HEADNOTE:
    Section 5 of the Excess Profits Tax Act, 1940,  provided
that  "the  Act shall apply to every business of  which  any
part  of the profits made during the  chargeable  accounting
period  was  chargeable to income-tax."  There  was  also  a
proviso  to the effect that "the Act shall not apply to  any
business, the whole of the profits of which accrued or arose
in an Indian State and that where the profits of a part of a
business  accrued  or arose in an Indian  State,  such  part
shall  for the purpose of this provision be deemed to  be  a
separate business, the whole of the profits of which accrued
or  arose  in  an Indian State, and the other  part  of  the
business shall be deemed to be a separate business."