PUNJAB PRODUCE AND TllADING CO. LID.

c.J.T. WFSf BENGAL, CALCUTIA

July 29, 1971.

[K. S. HEGDE AND A. N. GROVER, JJ.]

Income-tax Act, 1922, •· 23A(9) Explanation (b) (ii1)-Share• of company carrying more than 50% voting power held by less than six persotU-

AOairs of company not controlled by le11 than six /HTIOM-Company whether one in which public are subst1111tially i.nttre1ted-Whether one condition or both conditions in cl. (b) (iii) of Explanation should be fulfilled-Limitation under •· 34(1) of Act whether applicable where additional

1urtax is imposed under 1. 23.A.

The assessee company was incorporated under the erstwhile Gwalior Companies Act which did not make any distinction between public and private companies. The affairs of the company were not controlled by ICIS than six persons but shares carrying more than 50% of the total votin1 power were during the relevant previous year held by less than 6 persons.

After the company's assessment for the assessment year 1955-56 had been completed the Income-tax Officer levied additional super-tax on the company under s. 23A of the Income-tax Act, 1922 holding that it wa• not a company in which the public were substantially interested within the meanin& of sub-cl. (b) (iii) of the Explanation to cl. (9) of s. 23A. Under tho Explanation a company is treated to be one in which the public are substantially interested if it is not a private company under the Indian Companies Act and the affairs of the company or the shares carrying more than 50%

;, f the total voting power are at no time durina the previous year controlled or held by less than six persons. The authorities under th• Act as well as the High Court, in reference, held against the assessee. In appeal by speicia] leave to this Court the assessee contended that the word 'or' in sub-cl. (b) (ili) aforesaid had been used disjunctively and therefore if either of the conditions mentioned therein did not exist the company must be deemed to be one in which the public were substantially interested. Reliance was placed on the decision of this Court in the case of the Star Company Ltd. in which the word 'or' used in sub-cl. (b) (ii) of the afo1esaid Explanation was held to have been used disjunctively.

It was also contended that on the facts and circumstances of the case the imposition of the additionol super-tax under s. 23A without recourse to the provisions of s. 34(1) was not valid.

. HELD: (i) The language of sub-els. (ii) and (ili) of cl. (b) is different.

The former relates to a positive state of affairs whereas the latter lays down negative conditions. The word 'or' is often used to express an alternative of terms defined or explanation of tho same thina in clilferent words. Therefore if either of the two negative conditions which are to. be found ID sub-cl. (b)'(iii) remains unfulfilled, the conditions laid down in the entire clauae cannot be said to have been satisfied. The clear Import of the word 'and' appearing there read with the negative or disqualifying con .. ditions in sub-cl. (b) (Iii) ia that the assessee was bound to satisfy apon from lb• conditions contained in tht> other sub-clau,.. that ita affairs were .at no time durina Ibo previous year controlled by less than 6 persona and ahatee carl'yillJ more than 50% of the totol votin11 JlOWCr were durina the

same period not held by less than 6 pmons. (9821'-0J ·

SUPREME COURT RLPORTS [1971] SUPP. s.c.R.

A Star Company Ltd. v. Co111mis:sioner of lncon1e-1a.'f (Central) Cah:1tta,

C. A. No. 1204/68 dt. 29·4-70. distinguished.

Indian Steel & Wire Products ltd. l'alculta v. Cv1nmis~'io11er of lncotnetax, West Be..ga/, Ca/c111ta, l.T.R. No. 204 of 1961, referred to.

(ii) An order made by the Income-ta< Officer directing payment of additional super-tax is not an order of assessment within the meaning of s. 34(3) of the Act and to such an order the period of limitation prescribed thereby does not apply. [983A-8]

M. M. Parikh, l.T.O .. Special Inveltigation Circle 'B', Al11nedabad v.

Navanagar Transport and Industries Ltd. & Anr .. 63 l.T.R. 663, followed.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1344 of 1967.

Appeal from the judgment and order dated November 24, 1966 of the Calcutta High Court in Income-tax Reference No.

D 8.6 of 1962.

V. S. Desai, N. R. Khaitan, B. P. Maheshwariand Krish11ii Sen, for the appellant.

Jagadish Swamp, Solicitor-General, S. K. Aiyer and B. D. E Sharma, for the respondent.

The Judgment of the Court was delivered by

Grover, J.-This is an appeal by special leave from a judgment of the Calcutta. High Court in an Income tax Reference.

The assessee is a limited company incorporated under the erstwhile Gwalior State Companies Act which did not make any distinction between a private company and a public company.

The paid-up capital of the compooy was Rs. 25,00,000 /- com posed of 25,000 Ordinary shares of Rs. I 00 /- each.

These 25,000 Ordinary shares were held by 17 share holders in all. It was also common ground that the shares carrying more than 50% of "1c total voting power were held by less than 6 persons duririg the accounting period.

The Msessment year was 1955-56 the accounting year being the one ending on March 31, 1955. The total income assessed for the aforesaid year was Rs. 9,54,658 /- on which tax payable amounted to Rs. 4,05,492. The surplus available for distribution of dividend was Rs. 5,49,166/-. No dividend, however, was distribute<! although at the meeting held on June 8,

PUNJAIHRODUCB & TRADING oo. Y. (l, J.T, (Grover, J.)

J 955 th~ account~ which were approved showed a net profit of Rs. 6,81,298/-.

The controversy before the Income tax Officer centered on the applicability of the provisions of s. 23A of the Income tax Act 1922. According to the assessee that section was not appli cable but the Income tax Officer came to the conclusion that since the shares carrying more than 50% of the total voting power were held by less than 6 persons the company was not one in which the public were substantially interested. As no justifiable reason for non-distribution. of the requisite percentage of the dividend had been furnished s. 23A was applicable and 100% distribution was called for. In view of the provisions of s. 23A(l) additional super ta•x of Rs. 1,37 ,291.50 paise was imposed subsequent to the completion of the assessment.

The asscssee went up in appeal to the Appellate Assistant Commissioner but the same was dismissed. The sole point that was argued before the Appellate Tribunal was whether the asses- 5ee fulfilled the conditions stated in sub-clause (b) (iii) of the Expla.nation to s. 23A of the Act. This argument will be considered presently. The Tribunal, however, was not persuaded to accept the contention of the assessee.

On an application being filed under s. 66(1) the Tribunal referred the following question of law for the opinion of the High Court :

(I) "Whether on the facts and in the circumstances of 1lhe case, the assessee company is one in which the public are substa.ntially interested within the meaning of the Explanation to Section 23A of the Income tax Act, as it stood at the relevant time ?

(2) Whether on the facts and in the circumstances of the case, the imposition of the additional super-tax under Section 23A without recourse to the provisions of Section 34(1) was legal a.nd valid ?"

Section 23A of the Act confers power on the Income tax Officer to assess companies to super tax on non-distributed income in certain cases. We are concerned, in the present appeal, only with sub-s. (9) and the Explanation thereto.

That sub-section provided inter alia that nothing contained in the section shall apply to any company in which the public arc substantially interested. The text of Explanation the interpretation of which is the subject matter of dispute is as follows :-

"Explanation.-For the purposes of this section a company shall be deemed to be a company in which the public are substantially interested.

SUPREME COURT REPORTS

[1971) SUPP. S.C.R-

(a) If it is a company owned by the Government or in which not less than forty percent of the shares ace held by the Government.

(b) If it is not a private company as defined in the Indian Companies Act 1913 (VII of 1913) and

(i) its shares (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 fifty pi:r cent of the voting power have been a.llotted unconditionally to, or acquired unconditionally by, and were

throughout the previous year. beneficially held by the public (not including a company to which the provisions of this section apply) :

Provided that in ehe case of any such company as is referred to in sub-section (4), this sub-clause shall apply as if for the words 'not less than fifty percent' the words 'not less than forty percent,' bad been substituted:

(ii) the said shares were at anv time during the provlous year the sublect of dealing In any recognised stock: exchange in India or were freely transferable by the holder to other members of the public; and

(iii) the affairs of the company or the shares cacrying more than fifty percent of the total voting power were at no time during the previous year controlled or held by less lihan six persons (persons who are related to one another as husband, wife, lineal ascendant or descendant or brother or sister, as the case may be, being treated as a single person and persons who are nomim:es of another person together with that other person being likewise treated as a single person) :

Provided hat in the case of any such company as is referred to in sub-section (4), this clause shall apply as if for the words 'more than fifty per cent' the words 'm1'rt than sixty per cent' had been substituted.

It is quite clear that clause (a) was not relevant and had no application. It was also not disputed that the assessee had fulfilled the conditions contained in sub-clause (b)(i) and (b)(ii) or

/he Explanation.

The sole question which had to be decided f>y the Tribunal and the High Court was wheliher the asscssCCJ llad fulfilled the conditions set out in sub-clause (b)(iii) of the Explanation. It wae not found that the affairs of the company were, at any time, during the previous year controlled by less than 6 persons, the number six being arrived at according to the formula

PUNJAB PRODUCE & TRADING co .•. C.J.T. (Grorer J.)

laid down in sub-clause. The sole finding on which the deci- "Sion went against the assessee was that shares carrying more than

50 'j, of the total voting power were during the previous year held by less than 6 persons. The argument which has throughout been pressed on. behalf of the assessee is that the word "or" which is to be found between the words "the affairs of the company" and

th: shares carrying more than ............ " had been used disjunctively and therefore if either one of the conditions did not exist tho assessee would be entitled to say that the conditions laid down in sub-clause (b)(iii) had been fulfilled. In other words if it was established that the affairs of the assessee were at no time, during the previous year controlled by less than 6 persons it would be a company in which the public were substantially interested even though the shares carrying more than 50 % of the total voting power had been held during the previous year by less than si~ persons. The Tribunal disposed of this contention in the followmg manner :-

"Sub-clause (iii\ is divided into two parts; the first part relates to the affairs of the company being controlled by not less 6 persons and the second part relates to holding of shares carrying more than 50% of the total voting power by not less than 6 persons. Both these parts are joined with the main pa.rt of clause (b) by the use of the conjunctive word "and" so that the proper construction of the sub-clause (iii) would be as follows :-

(1) If it is not a private company as defined in the Indian Companies Act. 1913 and the affairs of the company were at no time during the previous year controlled by less than six persons ;

(2) If it is not a priva.te company as defined in the Indian Companies Act, 1913 and the shares carrying more than 50% of the total voting power were at no time <luring the previous year held by less than 6 persons."

According to _the Tribµnal sub-cl. (iii) of cl. (b) sought to impose two distinct and separate conditions, namely, (I) control of the affairs of the company and 12) requiite percentage of the voting G power held by virtue of the holding of shares. In order that a company might be treated as one in which the public were substantially interested it had to show that not merely its affairs were controlled by not less han 6 persons but also that 50% of the total voting power had been held by not less than 6 persons. 1:he

Hieb Court looked closely into the language of the ExplanabOn 11 and had no difficulty in coming to the conclusion that the onditions laid down in all the sub-clauses of cl. (b) had to be sattslied.

SUPREME COURT REPORTii [1971rsuPP. s.c.R.

The difficulty, however, was created by the language of sub-cl.(b)

(iii) in which the word "or" appeared in more than one place.

In a previous Bench decision of the Calcutta High Court in an Income tax Reference (The Indian Steel & Wire Products Ltd.

Calcutta v.

The Commissioner of lncome-iax, West Bengal.

Calcutta) (') the same point had arisen and it had been held that the conditions prescribed in sub-cl. (b) (iii) would not be satisfied by mere compliance with one branch of it. Both branches namely t:ie control of the affairs by not less than 6 persons and the holding of shares carrying the requisite percentage of the total voting power by not less than 6 persons would have to be fulfilled.

On behalf of the assessee a good deal of reliance has been placed on a decision of this Court in The Star Company Ltd.

v. The Commissioner of Income-tax (Central) Calcutta('). In that case sub-clause (b)(ii) came up for consideration and it was held that the two parts of the explanation contained in that sub-clause were alterna.tive. In other words if one part was satisfied it was unnecessary to consider whether the second part was also satisfied. Thus the word "or" was treated as having been used disjuntively and not conjunctively. The same reasoning is sought to be invoked with reference to sub-clause (b)(iii).

It is significant that the language of sub-cla.uses (ii) and (iii) of cl. (b) is different. The former relates to a positive state of affairs whereas the latter lays down negative conditions.

The word "or" is often used to express an alternative of. terms defined or explanation of the same thing in different words.

Therefore if either of the two negative conditions which are to be found in sub-clause (b)(iii) remains unfulfilled, the conditions laid down in the entire clause crnnot be said to have been satisfied. The clear import of the opening part of cl. (b) with the word "and" appearing there read with the nega-tive or disqualifying conditions in sub-cl. (b) (iii) is that the assessee was bound to satisfy apart from the conditions contained in the oliher sub-clauses that its affairs were at no time during the previous year controlled by less than 6 persons and shates carrying more than 50% of the tota.1 voting power were during the same period not held by less than 6 persons. We are unable to find any infirmity in llhe reasoning or the conclusion of the Tribunal and the High Court so far as question No. I is concerned.

(I) Income Tax Reference No. 204of1961.

(2) C. A•. 1204 & 120S/68 dt. 29-4-70.

PUNJAB PRODUCE & TRADING co. v. c.J.T. (Grover, J.) 983

The second question stands concluded by the decision of A this Court in M. M. Parikh, I. T. 0. Special Investigation Circle "B'', Ahmedabad v. Navanagar Transport and Industries Ltd., & Another (') in which it was held that an order under s. 23A of the Act made by the Income tax Officer directing payment of additional Super tax was an order of assessment within the meaning of s. 34(3) of the Act and to such a.n order the period of B limitation prescribed thereby did not apply.

In the result this appeal fails and it is dismissed with costs.

G. C.

Appeal dismissed.

(I) 63 l.T.R. 663.