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SUPREME COURT OF INDIA
J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.
Commissioner of Income-tax, West Bengal (In both the appeals), Appellant
Versus
East Coast Commercial Co. Ltd. (In both the appeals ), Respondent.
Civil Appeals Nos. 672 and 673 of 1965, D/-11-10-1966.
Advocates appeared
Mr. S. T. Desai, Senior Aclvocate, (M/s. R. Ganapathy Iyer and R. N. Sachthey Advocates, with him), for Appellant (in both the appeals) ; Mr. A. K. Sen, Senior Advocate, Mr. D. N. Mukherjee, Advocate, with him), for Respondent (in both the appeals).
INCOME TAX - S. 23-A - Company in which public are substantially interested - Controlling group - Existence of block - Evidence of actual concerted acting not necessary - Admissions before Investigation Commission - Evidentiary value.
Fact of the Case:
The assessee company was one in which the public were not substantially interested. The members of the Kedia family held 4015 shares of the Company and were in a position to control the affairs of the Company. The Income-tax Officer held that the Kedias formed an association of persons and that the shares were acquired jointly by the members of the family out of their "joint secreted earnings". The Appellate Assistant Commissioner agreed with the Income-tax Officer. However, the Income-tax Appellate Tribunal held that the offers made by the members of the Kedia family to the Income-tax Investigation Commission that a single assessment be made in respect of their "secreted income" treating them as an association of persons and that every member of the family be treated as jointly and severally liable to pay tax, on that income were not relevant in determining whether the Company was one in which the public were not substantially interested.
Finding of the Court:
The Tribunal held that the Kedias did not form a controlling group because there was no evidence that they actually controlled the voting, even though they held more than seventy-five per cent of the shares issued by the Company. The High Court observed that the members of the Kedia family held 4015 shares of the Company and were in a position to control the affairs of the Company, but there was no evidence to show that they did in fact act in concert and controlled the affairs of the Company as a block. However, the Court held that if the members of the Kedia family formed a block and held more than seventy-five per cent of the voting power, it was not necessary to prove that they actually exercised controlling interest.
Issues: Whether the assessee company was one in which the public were substantially interested.
Ratio Decidendi: The existence of a block is not decisive. If there be a group of persons holding control over voting, the Company would still be a Company in which the public are substantially interested, if twenty-five per cent or more of the voting power has been allotted unconditionally to and beneficially held by the public and the shares were in the previous years subject of dealings in any stock exchange in the taxable territories or were in fact freely transferable by the holders to other members of the public. The two enquiries are distinct. The Tribunal in paragraph 9 of its order observed that there was no material placed by the Department to show that the Kedias in question acted in concert- so as to bring the assessee company within S. 28-A. If thereby the Tribunal meant that "there was no evidence to prove that the members of the Kedia family actually acted in concert," the view taken by the Tribunal was, in our judgment, wrong, since to establish that a Company is one in which the public are not substantially interested, it is not a condition that actual exercise of control by a group must be established.
Final Decision: The Court set aside the order passed by the High Court and directed that the Tribunal do submit a supplementary statement of the case under S. 66 (4) of the Income-tax Act, 1922.
Judgment
SHAH, J. : M/s. East Coast Commercia1 Company Ltd., - hereinafter called the Company-disclosed in its return for the assessment years 1950-51 and 1951, a consolidated net profit of Rs. 8,89,241 for the account period April 7, 1949 to July 16, 1950. The Income-Tax Officer computed the income of the Company for the assessment year 1950-51 at Rs. 7,27,824 and for the assessment year 1951-52 at Rs. 2,00,803. It came to the notice of the Income-tax Officer that the Company was one in which the public were not substantially interested within the meaning of S. 23-A of the Income-tax Act, 1922, and that the distributable profit after deducting tax due on the total income was Rs. 4,32,151 for the assessment year 1950-51, and Rs. 1,13,579 for the assessment year 1951-52 and that the Company had distributed Rs. 43,910 only as dividend. The Income-tax Officer commenced proceedings under S. 23-A of the Income-tax Act, 1922 and passed an order that the undistributed portion of the assessable income of the Company as computed for income-tax purposes and reduced by the amount of income-tax and super-tax shall be deemed to have been distributed as dividends among the shareholders. The order was confirmed by the Appellate Assistant Commissioner. But the Income-tax Appellate Tribunal reversed the order. The Tribunal held that S 23-A did not apply to the Company since it was not established that the Company was one in which the public were not substantially interested.
2. At the instance of the Commissioner of Income-tax, three questions were referred to the High Court of Judicature at Calcutta. In these appeals the first question alone is material :
" Whether on the facts and in the circumstances of the case the Tribunal erred in law in holding that the assessee-company was one in which the public are substantially interested within the meaning of S. 23-A of the Indian Income-tax Act?" The High Court answered that question in the negative. The Commissioner of Income-tax has, with certificate granted under S.66-A (2) of the Income-tax Act, 1922, appealed to this Court.
3. Relationship between the members of the family jointly referred to as the Kedias is explained by the following genealogy :
The joint status between the members of the family was severed on July 4, 1943, and the members of the family formed themselves into a partnership and carried on the family business. Some time thereafter Benarashi Prosad and Puranmal retired from the partnership and started an independent business with an outsider in partnership. This business was taken over by a private company styled East Coast Commercial Company Ltd . Later the private company was converted into a public limited company bearing the same name and having a paid-up capital of Rs. 4, 39,100 divided into 4391 shares of Rs. 100 each.
4. Investigation was started against the members of the Kedia family under the Taxation on Income (Investigation Commission) Act, 1947. In the course of the investigation the heads of the four branches of the Kedia family admitted that the shares in the respondent company numbering 4,115 were purchased by them out of their joint income which had not been disclosed and a majority of the shares in the Company was held benami. An offer of settlement was then made by the members of the Kedia family before the Investigation Commission. In paragraph 26 of the report, the Commission observed as follows :
"These figures have been accepted by Madangopal Kedia for himself and as a manager of the joint Hindu family consisting of himself and his minor sons, Benarashi Prosad Kedia for himself and as manager of the joint family consisting of himself and his minor son and also as the executor and legal representative of his deceased elder brother Prohladrai, Puranmal Kedia, and Mahabir Prosad Kedia for himself and as manager of the joint family Consisting of himself and his son, and they have jointly filed a settlement application. Though these persons are now divided and
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