Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1962 Supreme(SC) 295

SUPREME COURT OF INDIA.
J. L. KAPUR, A. K. SARKAR and M. HIDAYATULLAH JJ.
COMMISSIONER OF INCOME-TAX, BOMBAY CITY I V. JUBILEE MILLS LTD.
Date of decision:17/9/1962.
Civil Appeal No. 599 of 1961.
Appeal from the judgment and order of the Bombay High Court dated March 13, 1958, in I.T.R. No. 40 of 1957 reported as Jubilee Mills Ltd.
Versus
Commissioner of Income-tax [1958]34 I.T.R. 30.
Advocate appeared
R. Ganapathy Iyer and R. N. Sachthey for the appellant.
A. V. Viswanatha Sastri, Senior Advocate, with I. N. Shroff for the respondent.

A company in which the managing agents, either by themselves or with those who act in concert with them, hold shares above the 75% limit is not a company in which the public are substantially interested for the purposes of section 23A of the Income-tax Act.

Headnote:
INCOME TAX - Section 23A - Applicability - Company in which public are substantially interested - Explanation - Interpretation - Controlling interest - Group holding shares - Managing agents - Whether a group - Test.
Fact of the Case:

The assessee company, Jubilee Mills Ltd., was a limited liability company with a paid-up capital of Rs. 15,25,000. The company was managed by a firm called Mangaldas Mehta & Co., which consisted of fourteen partners, seven of whom were directors of the assessee company. The members of the managing agents who were also directors held between them 35.469 ordinary shares and 880 first preference shares. The remaining seven members of the managing agents, who were not directors of the assessee company, held respectively 41,659 and 370 shares of the two categories. Seventy-five shares were held by Girdhardas & Co. Ltd. to which company section 23A was applicable. Some of the members of the managing agency firm held on behalf of their minor children or on behalf of their joint families 9,899 ordinary shares and 937 first preference shares.
Finding of the Court:

The High Court held that the assessee company was a company in which the public were substantially interested and that section 23A was not applicable. The Supreme Court reversed the decision of the High Court and held that the assessee company was not a company in which the public were substantially interested and that section 23A was applicable.
Issues: Whether the assessee company was a company in which the public were substantially interested for the purposes of section 23A of the Income-tax Act?
Ratio Decidendi: The Supreme Court held that the assessee company was not a company in which the public were substantially interested because the managing agents, either by themselves or with those who act in concert with them, held shares above the 75% limit and could be regarded as constituting a group which cannot be counted as "public". The court held that when the managing agents, either by themselves or with those who act in concert with them, hold shares above the 75% limit they can be regarded as constituting a group which cannot be counted as "public". In such a case the holding of the managing agents, if above 75%, may furnish proof that the company is one in which the public are not substantially interested.
Final Decision: The appeal was allowed. The answer of the High Court was set aside and the question was answered in the negative. The respondent was ordered to pay the costs here and in the High Court.

JUDGMENT:

HIDAYATULLAH . J.-This is an appeal on a certificate of fitness granted by the High Court of Bombay against the judgment of the High Court dated March 13, 1958, on a reference made by the Income-tax Appellate Tribunal. The Commissioner of Income-tax, Bombay City I, is the appellant and the Jubilee Mills Ltd., Bombay, the respondent. The only question raised in this appeal is the application of section 23A of the Income-tax Act to the assessee company.

The assessee company is a limited liability company with a paid-up capital of Rs. 15,25,000. Its paid up capital is made up as under:

I lakh ordinary shares of Rs. 10 each Rs. 10,00,000

5,000 cumulative preference shares of

Rs. 25- paid-up. Rs. 1,25,000

4,000 second preference shares of

Rs. 100 each fully paid-up. Rs. 4,00,000

The second preference shares do not entitle the holders to vote. Thus shares of the assessee company carrying votes are 1,05,000. This was the position on June 30, 1947. We are concerned with the assessment year 1948-49 corresponding to the previous year ended on June 30, 1947. In that year, the company was assessed on a total income of Rs. 7,47,639. The Income-tax Officer calculated the tax at Rs. 3,27,091 and the balance available for distribution was Rs. 4,20,548. In that year, the company ought, if section 23A was applicable, to have distributed 60% of the above amount. The company, however, declared dividends which in the aggregate amounted to Rs. 24,750. The Income-tax Officer, with the previous approval of the Inspecting Assistant Commissioner, applied the provisions of section 23A of the Income-tax Act and held that the company was deemed to have declared dividend of Rs. 3,97,788.

The assessee company was being managed by a firm called Mangaldas Mehta & Co. That firm consisted of fourteen partners of whom seven were the directors of the assessee company. The members of the managing agents who were also directors held between them 35.469 ordinary shares and 880 first preference shares. The remaining seven members of the managing agents, who were not directors of the assessee company, held respectively 41,659 and 370 shares of the two categories. Seventy-five shares were held by Girdhardas & Co. Ltd. to which company admittedly section 23A was applicable. Some of the members of the managing agency firm held on behalf of their minor children or on behalf of their joint families 9,899 ordinary shares and 937 first preference shares. The following is a detailed break-up of the share-holdings:

Untitled Document

CATEGORY A :

_____________________________________________________________________________

Shares held by directions who are partners in the firm of managing agents

Holding of ordinary shares

Share in the partnership firm of managing agents firm

Holding of the Ist preference shares

_____________________________________________________________________________

Shri Homi Mehta

8/128

Nil

Sheth Mathurdas Mangaldas Parekh

6,466

14/128

273

" Madanmohan Mangaldas

11,052

14/128

273

" Madhusudan Chamanlal Parekh

3,616

7/128

" Mahendra Chamanlal Parekh

3,616

7/128

" Surendra Mangaldas Parekh

7,053

14/128

274

" Indrajit Chamanlal Parekh

3,616

7/128

_____________

35,469

880

_____________________________________________________________________________

Untitled Document

CATEGORY B

____________________________________________________________________

Shares held by directors who are partners in the firm of managing agents

Holding of ordinary shares

Share in the partnership firm of managing agents firm

Holding of the Ist preference shares

____________________________________________________________________

Shri Harshavadan Mangaldas

11,053

14/128

274

Mrs. Savitagavri chamanlal Parekh

3,750

7/128

Shri Virendra

Chamanlal

Parekh

a minor by his mother and guardian Mrs. Savitagav

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