The shares held by the Directors of a company cannot, by reason of being Directors, be said not to be members of the public. To that extent, the judgment is erroneous.

Headnote:
INCOME TAX - S. 23A - Company in which public are substantially interested - Meaning of - Shares held by Directors - Whether can be said to be held by public - Test - Shares held by relatives of Directors - Whether can be said to be held by public - Test - Shares held by Managing Agents - Whether can be said to be held by public - Test.
Fact of the Case:

The assessee company, Raghuvanshi Mills Ltd., Bombay, had issued and subscribed capital of Rs. 10,00,000/- divided into 10,000 shares of Rs. 100/- each. Prior to November 14, 1941, one Maganla Parbhudas, who was a Director of the Company, held 6,344 shares. On November 14, 1941, he made a gift of 1000 shares to each of his five sons, Ravindra, Surendra, Bipinchandra, Hareshchandra and Krishnakumar. The question arose whether the Company would be said to be one to which S. 23A (1) of the Indian Income-tax Act was applicable, regard being had to the third proviso and the Explanation under it.
Finding of the Court:

The Court held that the test is first to find out whether there is an individual or a group which controls the voting power as a block. If there be such a block, the shares held by it cannot be said to be "unconditionally" and "beneficially" held by members of the public. In the category of shares held by the public, only those shares can be counted which are unconditionally and beneficially held by the public, or, in other words, which are uncontrolled by the group, which controls the affairs. The group itself may be composed of Directors or their nominees or relations in different combinations, but none can be said to belong to that group be he a director or a relative unless he does not hold the shares unconditionally and beneficially for himself. It is only such a person, who can fall properly outside the word "public".
Issues: 1. Whether the shares held by the Directors of a company are not shares in which the public are substantially interested? 2. What is the meaning of the provision: "a company shall be deemed to be a company in which the public are substantially interested, if its shares 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".
Ratio Decidendi: 1. The Court held that the shares held by the Directors of a company cannot, by reason of being Directors, be said not to be members of the public. To that extent, the judgment is erroneous. 2. The Court held that the test is first to find out whether there is an individual or a group which controls the voting power as a block. If there be such a block, the shares held by it cannot be said to be "unconditionally" and "beneficially" held by members of the public. In the category of shares held by the public, only those shares can be counted which are unconditionally and beneficially held by the public, or, in other words, which are uncontrolled by the group, which controls the affairs. The group itself may be composed of Directors or their nominees or relations in different combinations, but none can be said to belong to that group be he a director or a relative unless he does not hold the shares unconditionally and beneficially for himself. It is only such a person, who can fall properly outside the word "public".
Final Decision: The Court set aside the judgment and orders of the High Court, and directed the High Court to decide the question originally framed by it, viz: "Whether on the facts and circumstances of the case the provisions of S. 23A of the Indian Income-tax Act, XI of 1922, are applicable to the petitioners?". The High Court may call for a supplemental statement of the case from the Tribunal, if it finds it necessary.

Judgment

HIDAYATULLAH, J. : The Raghuvanshi Mills Ltd., Bombay (a public limited company), has filed this appeal by special leave against the judgment and orders of the High Court of Bombay dated March 10, 1953, and September 1, 1955. By the first order, the Bombay High Court directed the Income-tax Tribunal to submit a supplementary statement in the case in the light of its judgment, giving the parties liberty to lead further evidence, if any. By the second order, the High Court re-framed the question, and answered it against the assessee.

2. The assessee Company s issued & subscribed capital was, at the material time, Rs. 10,00,000/- divided into 10,000 share of Rs. 100/- each prior to November 14, 1941, one Maganla Parbhudas, who was a Director of the Company, held 6,344 shares. On November 14, 1941, he made a gift of 1000 shares to each of his five sons, Ravindra, Surendra, Bipinchandra, Hareshchandra and Krishnakumar. We are concerned with the account year of the Company, April 1, 1942, to March 31, 1943, the assessment year being 1943-44. In that year, the dividend which was declared at the Annual General Meeting held on December 17, 1943, was less than what was required under S. 23A of the Indian Income-tax Act. The question, therefore, arose whether the Company would be said to be one to which S. 23A (1) of the Act was applicable, regard being had to the third proviso and the Explanation under it.

(2a) During the accounting period, the Company had eight Directors, whose names along with the shares respectively held by them are given below :

(1) Shri Maganlal Parbhudas ... ... 1,344

(2) " Ravindra Maganlal ... ... 1,168

(3) " Surendra Maganlal ... ... 1,100

(4) " Amritlal Chunilal (Jointly with Babulal Chunilal) ... 833

(5) " Babulal Chunilal ... ... 100

(6) " Bhagwandas Harakchand ... ... 50

(7) " Haridas Purshottam ... ... 50

(8) " Sir Chunilal B. Mehta (Jointly with Lady Tapibai Chunilal) 50

________

Total 4,695

________

3. Out of the balance of the shares, 4,754 shares were held by the relatives of some of the above-named Directors, as stated below :

(1) Shri Kantabai Maganlal (wife of a Director) ... ... ... ... 771

(2) Shri Bipinchandra Maganlal ... 1,000

(3) Shri Hareshchandra Maganlal (son of a Director) ... ... ... ... 1,000

(4) Shri Krishnakumar Maganlal (do) ... 1,000

(5) Shrimati Dhanlaxmi Mohanlal ... ... 50

(6) Shrimati Prabhavati Nanalal Harilal (5 and 6 daughters of a Director) 50

(7) Shri Hirjhibai Purshottam and Haridas Purshottam (brothers of a Director) ... ... ... ... 25

(8) Shri Dhanjibhai Purshottam and Haridas Purshottam (brothers of a Director) ... ... ... ... 25

(9) Shri Chimanlal Vithaldas (cousin of a Director) ... ... ... ... 833

_________

Total 4,754

_________

4. The remaining 551 shares were held by the members of the public, who were not connected with the Directors of the Company in any way.

5. Before March, 1942, Messrs. Ravindra Maganlal & Bros. were the Managing Agents of the Company. Maganlal Parbhudas was the sole proprietor of that firm. On March 7, 1942, the Company appointed Ravindra Maganlal & Co. Ltd. as the Managing Agent for a period of 20 years. The Managing Company had a total issued and subscribed capital of Rs. 5,000/- and the five sons of Maganlal Parbhudas who have been named before had subscribed that capital equally. During the account year, Maganlal Parbhudas and two of his sons, Ravindra Maganlal and Surendra Maganlal, were three of the Directors of the Company. Ravindra, Surendra and Bipinchandra were Directors of the Managing Company.

6. On these facts, the Income-tax Officer applied S. 23A (as it stood prior to its amendment by the Finance Act, 1955) to the Company, holding that this was not a Company in which the public were substantially interested. The order of the Income-tax Officer was confirmed on appeal, both by the Appellate Assistant Commissioner and the Tribunal. The Tribunal also refused to state a case under S. 66(1) of the Income-tax Ac

Click Here to Read the rest of this document

1960 Supreme(SC) 336

The shares held by the Directors of a company cannot, by reason of being Directors, be said not to be members of the public. To that extent, the judgment is erroneous.

Cases Referred (1)