Judgment Case ID: 187

Judgment:
Appeal No. 78 of 1952. Appeal from the Judgment and Order dated the 17th January	 1951	 of the High Court of Judicature at Calcutta (Harries C.J. and Banerjee J.) in its Special Jurisdiction (Income tax) in Income tax Reference No. 50 of 1950. C.K. Daphtary	 Solicitor General for India (G. N. Joshi	 with him) for the appellant	 26 190 N. C. Chatterjee (section C. Majumdar	 with him) for the respondent. October 8. The Judgment of the Court was delivered by DAS J. This is an appeal from the judgment and order of a Bench of the Calcutta High Court delivered on a reference made by the Income tax Appellate Tribunal under section 21 of the Excess Profits Tax Act	 1940	 read with section 66(1) of the Indian Income tax Act	 whereby the High Court answered in the affirmative the question of law referred to it. The question referred was: "Whether in the facts and circumstances of these cases	 the Income tax Appellate Tribunal was right in holding that the directors of the respondent company had a controlling interest in it as contemplated by section 2 (21) of the Excess Profits Tax Act." The controversy arose between the parties during proceedings for assessment of excess profits tax for five chargeable accounting periods ending on the 31st December of each of the years 1939 to 1943. The relevant facts which are not in dispute are these: The respondent company is a company incorporated in what was then British India having a capital of Rs. 3	600	000 divided into 360	000 shares of Rs. 10 each. The Aluminium Limited	 a company incorporated in Canada	 held 359	790 shares in the chargeable accounting periods ending on December31	 1939	 and December 31	 1940	 and 359	600 shares in the chargeable accounting periods ending on December 31	 1941	 December 31	 1942	 and December 31	 1943. In exercise of the power given to it by article 105 of the articles of association of the respondent company	 the Aluminium Ltd. appointed three permanent directors on the board of directors of the respondent company. Two of these directors eventually retired and only one	 namely	 Mr. L. G. Bash continued to be a director of the respondent company nominated by the Aluminium Ltd. Mr. L. G. Bash and the other directors had between them during the chargeable 191 accounting periods ending on December 31	 1939	 and December 31	 1940	 only 210 shares and in the chargeable accounting periods ending on December 31	 1941	 December 31	 1942	 and December 31	 1943	 400 shares	 Mr. L. G. Bash not having a single share during these last mentioned chargeable accounting periods. By a resolution passed by the directors of the Aluminium Ltd.	 Mr. L. G. Bash was appointed to vote and/or from time to time to appoint a special or general proxy to vote for and on behalf of the Aluminium Ltd. in respect of the shares held by it in the respondent company at all ordinary or extraordinary general meetings of the shareholders of the respondent company. Article 90 of the articles of association of the respondent company provides: "90. Where a company registered under the provisions of the Indian Companies Act or not is a member of this company a person duly appointed to represent such company at a meeting of this company in accordance with the provisions of section 80 of the Indian Companies Act	 1913	 shall not be deemed to be a proxy but shall be entitled to vote for such company on a show of hands and to exercise the same power on behalf of the company which he represents as if he were an individual member of this company including the power to appoint a proxy whether special or general and the production at the meeting of a company of such resolution appointing such representative duly signed by one director of such company and by the secretary (if any) and certified by them or him as being a true copy of the resolution shall on production at the meeting be accepted by this company as sufficient evidence of the validity of his appointment." Mr. L. G. Bash has at all material times been exercising the powers conferred by the above article as the representative of the Aluminium Ltd. The claim of the respondent company was that it should be regarded as a company the directors whereof had a controlling interest therein	 inasmuch as Mr. L. G. Bash	 one of the directors	 had the I authority to exercise the voting power of the Aluminium Ltd. and	 192 as such	 could control the affairs of the respondent company and that in computing the standard profits the statutory percentage should be taken at 10 per cent. per annum and not at 8 per cent per annum. This contention was rejected by the Excess Profits Tax Officer. On appeal by the respondent company the Appellate Assistant Commissioner of Excess Profits Tax upheld the decision of the Excess Profits Tax Officer. The respondent company thereupon appealed to the Incometax Appellate Tribunal "which reversed the decision of the Appellate Assistant Commissioner observing that in view of the power of attorney that was given to Mr. L. G. Bash by the Aluminium Ltd. there was no room for doubt that the respondent company	 which was then the appellant before the Tribunal	 was a director controlled company. On the application of the Commissioner of Income tax	 the Appellate Tribunal referred the question of law herein before set out. By its judgment dated the 11th January	 1951	 the High Court of Calcutta has answered the question in the affirmative. The Commissioner of Excess Profits Tax	 West Bengal	 has now come up on appeal to this court with a certificate under section 66 A (2) of the Indian Income tax Act. In common parlance a person is said to have "a controlling interest" in a company when such a person acquires	 by purchase or otherwise	 the majority of the vote carrying shares in that company	 for the control of the company resides in the voting powers of its shareholders. In this sense	 the directors of a company may well be regarded as having "a controlling interest" in the company when they hold and are entered in the share register as holders of the majority of the shares which	 under the articles of association of the company	 carry the right to vote. [See Glasgow Expanded Metal Co.	 Ltd. vs Commissioners of Inland Revenue (1) and Commissioners of Inland Revenue vs B. W. Noble(2)]. It is not	 however	 necessary that in order to have "a Controlling interest" the person or persons who hold the majority of the votecarrying shares must have a beneficial interest in the (1) (2) 193 shares held by them. These persons may hold the shares as trustees and may even be accountable to their beneficiaries and may be brought to book for exercising their votes in breach of trust	 nevertheless	 as between them as shareholders and the company	 they are the shareholders	 and as such	 have "a controlling interest" in the company. [See Inland Revenue Commissioners vs J. Bibby & Sons Ltd.(1) and Commissioner of Income tax vs Bipin Silk Mills Ltd. (2)]. According to the facts found in the statement of the case the directors of the respondent company do not themselves hold the majority of shares which	 on the contrary	 are registered in the name of the Aluminium Ltd. and	 therefore	 according to the principles discussed above	 they cannot be said to have "a controlling interest" in the respondent company. Learned counsel for the respondent company	 however	 contends	 on the analogy of the reasonings adopted by the House of Lords in British American Tobacco Co. Ltd. vs Commissioners of Inland Revenue(3) that although Mr. L. G. Bash does not hold the majority of shares and has no beneficial interest in the shares held by the Aluminium Ltd. in the respondent company and although he may be bound to cast the votes according to the directions of his principals	 the Aluminium Ltd.	 and may be answerable to the latter if he acts in breach of his duty	 nevertheless	 as long as his authority is not revoked	 as far as the respondent company is concerned	 tile	 majority of its vote carrying shares are subject	 directly or indirectly	 to his will and ordering and	 therefore	 the directors of the respondent company in fact control its affairs at general meetings and as such have " a controlling interest " therein	 no matter by what machinery or means that result has been effected. This line of argument found favour with the Appellate Tribunal and the High Court. We are unable	 with all respect	 to accept this argument as sound	 for this argument appears to us to oversimplify the position. Assuming	 but without	 expressing any final opinion as (1) [1946] 14 I.T.R. (Suppl.) 7; [1945] I All E.R. 667; 	 (2) ; (3) ; 11 I.T.R. (Suppl.) 29; 	 194 to	 the correctness of the decision in the last mentioned case	 we have no doubt that the analogy is inapt	 for the principle of that decision can have no application to the case before us. In the case of directors	 who hold the majority of shares as trustees they	 so far as the company is concerned	 are the registered shareholders and the right to vote is vested in them	 although as between them and their beneficiaries the beneficial interest is vested in the latter. They are the registered holders of the shares and the votes they cast are their own votes. That case is entirely different from the case of directors who are only the agents of the holders of the majority of shares. When a shareholder holding the majority of shares authorises an agent to vote for him in respect of the shares so held by him	 the agent acquires no interest	 legal or beneficial	 in the shares. The title in the shares remains vested in the shareholder. The shareholder may revoke the authority of the agent at any time. In spite of the appointment of the agent the shareholder may himself appear at the meeting and cast his votes personally. Therefore	 the shares being always subject to his will and ordering	 the controlling interest which the holder of the majority of shares has never passes to the agent. Let us take the facts of the present case. Under article 90	 when Mr. L.G. Bash as agent of the Aluminium Ltd. attends a general meeting of the respondent company he has to produce the resolution of his principals authorising him to cast the votes of his principals. The votes he casts are not his votes but are the votes of the Aluminium Ltd. In such a situation	 in the eye of the law	 the controlling interest remains vested in the Aluminium Ltd. and is at no time vested in Mr. L. G. Bash. The shares in question which give the controlling interest are neither held by Mr. L. G. Bash nor are they subject	 directly or indirectly	 to his will and ordering	 and	 therefore	 he cannot	 applying either of the tests mentioned above	 be said to have a controlling interest. The decision of the Court of Appeal in Commissioners of Inland Revenue vs Jamed Hodgkinson (Salford) Ltd.(1) (1) 195 appears to us to be apposite. It is unfortunate that the last mentioned case was not brought to the notice of the High Court before the judgment under appeal was delivered. Dissent has been expressed in the judgment under appeal from the recent decision of the Bombay High Court in New Shorrock Spinning and Manufacturing Co. Ltd. vs Commissioner of Income tax	 Bombay(1). The facts of that case are entirely different from the facts of the case before us and that decision has no manner of application to the present case. It is	 therefore	 unnecessary for us to discuss or express any opinion as to whether the observations to be found in the judgment in that case are or are not well founded. For reasons stated above	 we accept this appeal and hold that the answer to the question referred by the Appellate Tribunal to the High Court should be in the negative. The respondent company must pay the costs of the appellant in this court as well as in the High Court. Appeal allowed.

Summary:
Ordinarily a company will be a	 "company	 the directors whereof have a controlling interest therein" for the purposes of the Excess Profits Tax Act	 1940	 only if the directors thereof hold	 and are entered in the share register as holders of	 a majority of the vote carrying shares of the company. It is not necessary that they must have a beneficial interest in such shares	 but the mere fact that one of the directors of the company has been authorised by another company which held a majority of shares in the former company	 to vote on its behalf in respect of the shares held by it	 will not make the former company a director controlled company. Glasgow Expanded Metal Co. Ltd. vs Commissioners of Inland Revenue 	 Commissioners of Inland Revenue vs B. W. Noble 	 Inland Revenue commissioners V. 	T. Bibby and Sons Ltd. (14 I.T.R. Suppl 7	 	 Commissioner of Income tax vs Bipin	 Silk Mills Ltd. and Commissioners of Inland Revenue vs Hodgkinson (Salford) Ltd. relied on. British American Tobacco Co. Ltd. vs Commissioners of Inland Revenue ([1943] A.C. 335) and New Shorrock Spinning and Manufacturing Co. Ltd. vs Commissioner of Incometax	 Bombay distinguished.