1. Dispute regarding whether a company is director-controlled under Section 2(21) of the Excess Profits Tax Act, 1940, where a director acts as a voting agent for the majority shareholder. (Para 1 , 2 , 3 , 4 )
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1953 Supreme(SC) 91
SUPREME COURT OF INDIA
M. Patanjali Sastri, CJI., S. R. Das, Vivian Bose, Ghulam Hasan, N. H. Bhagwati, JJ.
Commissioner of Income-tax, West Bengal – Appellant
Versus
Messrs. Jeewanlal Ltd., Calcutta – Respondent
Civil Appeal No. 78 of 1952
Decided On : 08-10-1953
Advocates appeared
Shri C. K. Daphtary Solicitor-General for India (Shri G. N. Joshi, Advocate, with him) instructed by Shri G. H. Rajadhyaksha, Agent for appellant; Shri N. C. Chaterjee, Senior Advocate, (Shri S. C. Majumdar, Advocate with him), instructed by Shri S. C. Banerjee Agent, for Respondents.
Shri C. K. Daphtary Solicitor-General for India (Shri G. N. Joshi, Advocate, with him) instructed by Shri G. H. Rajadhyaksha, Agent for appellant; Shri N. C. Chaterjee, Senior Advocate, (Shri S. C. Majumdar, Advocate with him), instructed by Shri S. C. Banerjee Agent, for Respondents.
Important Points
A director acting as an agent authorized to vote the shares of a majority shareholder does not possess a "controlling interest" in the company, as the legal title and ultimate control remain vested in the registered shareholder.
Subject
Tax Law - Excess Profits Tax
Act Referred
Headnote
(A) Excess Profits Tax Act, 1940 - Section 2(21) - Income-tax Act - Section 66(1) - Controlling interest - Definition and scope - A person is said to have a "controlling interest" in a company when such a person acquires the majority of the vote-carrying shares, as control resides in the voting powers of shareholders. Directors may be regarded as having a controlling interest when they are entered in the share register as holders of the majority of shares which carry the right to vote. (Para 6)
(B) Controlling interest - Beneficial interest - It is not necessary for the persons holding the majority of vote-carrying shares to have a beneficial interest in those shares. Persons holding shares as trustees, even if accountable to beneficiaries, are the shareholders as between themselves and the company and thus possess a controlling interest. (Para 6)
(C) Agent vs. Shareholder - An agent authorized to vote on behalf of a majority shareholder acquires no legal or beneficial interest in the shares. The title remains vested in the shareholder, who may revoke the agent's authority at any time or vote personally. Consequently, the controlling interest never passes from the shareholder to the agent. (Para 7)
Facts of the case:
A company's majority shares were held by a foreign corporation. The foreign corporation, exercising its powers under the Articles of Association, appointed a director to the board. This director was further authorized by a resolution of the foreign corporation to vote on its behalf at general meetings. The company contended that because a director had the authority to exercise the voting power of the majority shareholder, the directors had a controlling interest in the company, which would entitle the company to a higher statutory percentage in computing standard profits.
Findings of Court:
The directors did not hold the majority of shares in their own names; the shares were registered to the foreign corporation. The director acting as a representative was merely an agent of the shareholder. The votes cast by the agent were the votes of the registered shareholder, and the controlling interest remained vested in the shareholder.
Issues: Whether a director who is authorized to exercise the voting power of a majority shareholder can be deemed to have a "controlling interest" in the company under Section 2(21) of the Excess Profits Tax Act.
Ratio Decidendi: The court distinguished between directors holding shares as trustees and directors acting as agents. Trustees are registered holders and the right to vote is vested in them. In contrast, an agent acquires no interest in the shares, and the shares remain subject to the shareholder's will and ordering. Therefore, a director acting as an agent for a majority shareholder does not possess a controlling interest.
Result: Appeal allowed.
(B) Controlling interest - Beneficial interest - It is not necessary for the persons holding the majority of vote-carrying shares to have a beneficial interest in those shares. Persons holding shares as trustees, even if accountable to beneficiaries, are the shareholders as between themselves and the company and thus possess a controlling interest. (Para 6)
(C) Agent vs. Shareholder - An agent authorized to vote on behalf of a majority shareholder acquires no legal or beneficial interest in the shares. The title remains vested in the shareholder, who may revoke the agent's authority at any time or vote personally. Consequently, the controlling interest never passes from the shareholder to the agent. (Para 7)
Facts of the case:
A company's majority shares were held by a foreign corporation. The foreign corporation, exercising its powers under the Articles of Association, appointed a director to the board. This director was further authorized by a resolution of the foreign corporation to vote on its behalf at general meetings. The company contended that because a director had the authority to exercise the voting power of the majority shareholder, the directors had a controlling interest in the company, which would entitle the company to a higher statutory percentage in computing standard profits.
Findings of Court:
The directors did not hold the majority of shares in their own names; the shares were registered to the foreign corporation. The director acting as a representative was merely an agent of the shareholder. The votes cast by the agent were the votes of the registered shareholder, and the controlling interest remained vested in the shareholder.
Issues: Whether a director who is authorized to exercise the voting power of a majority shareholder can be deemed to have a "controlling interest" in the company under Section 2(21) of the Excess Profits Tax Act.
Ratio Decidendi: The court distinguished between directors holding shares as trustees and directors acting as agents. Trustees are registered holders and the right to vote is vested in them. In contrast, an agent acquires no interest in the shares, and the shares remain subject to the shareholder's will and ordering. Therefore, a director acting as an agent for a majority shareholder does not possess a controlling interest.
Result: Appeal allowed.
Legal Category Hierarchy
Table of Contents
2. Whether a director exercising voting power as an agent for the majority shareholder constitutes a controlling interest in the company. (Para 5 , 7 )
3. Controlling interest requires holding the majority of vote-carrying shares; an agent exercising voting rights on behalf of a shareholder does not acquire such interest. (Para 6 , 7 )
4. Controlling interest remains with the registered shareholder and does not pass to an agent appointed to exercise voting rights on their behalf. (Para 7 )
5. Appeal allowed; the directors were held not to have a controlling interest in the company. (Para 9 )
6. What constitutes a controlling interest in a company?
A person has a controlling interest when they acquire the majority of vote-carrying shares. This applies even if the shares are held as trustees without beneficial interest, as the registered holders possess the voting power. (Para 6 )
7. Does a director acting as an agent for a majority shareholder possess a controlling interest?
No. An agent acquires no legal or beneficial interest in the shares. Since the shareholder can revoke the agent's authority or vote personally, the controlling interest remains vested in the shareholder. (Para 7 )
8. How does the legal position of a trustee shareholder differ from that of a voting agent?
Trustee shareholders are registered holders of shares and cast their own votes, thus possessing a controlling interest. In contrast, voting agents cast the votes of their principals and hold no interest in the shares. (Para 7 )
Judgement
S. R. 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 S. 21, Excess Profits Tax Act, 1940 read with S. 66(1), 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 S. 2(21), Excess Profits Tax Act."
2. The controversy arose between the parties during proceedings for assessment of Excess Profits Tax for five chargeable accounting periods ending on 31st December of each of the years 1939 to 1943.
3. 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.36,00,000 divided into 360,000 shares of Rs. 10 each. The Aluminum Limited, a company incorporated in Canada, held 359,790 shares in the chargeable accounting periods ending on 31-12-1939 and 31-12-1940 and 359,600 shares in the chargeable accounting periods ending on 31-12-1941, 31-12-1942 and 31-12-1943. In exercise of the power given to it by Article 105 of the Article 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 other directors had between them during the chargeable accounting periods ending on 31-12-1939 and 31-12-1940 only 210 shares and in the chargeable accounting periods ending on 31-12-1941, 31-12-1942 and 31-12-1943 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 oral nary 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 an pointed to represent such company at a meeting of this company in accordance with the Provisions of S. 80, Companies Act 1913, shall not be deemed to he 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 in pointing 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."
4. 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.
5. 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 authority to exercise the voting power of the Aluminium Ltd. and, 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 reje
