Judgment

GROVER, J.: This is an appeal by special leave from a judgment of the Calcutta High Court in an Income-tax reference.

2. The assessee is a limited company incorporated under the erstwhile Gwalior State Companies Act which did not make any distinction between a private company and a public company. The paid-up capital of the company was Rs. 25,00,000/- composed of 25,000 ordinary shares of Rs. 100/- each. These 25,000 ordinary shares were held by 17 shareholders in all. It was also common ground that the shares carrying more than 50% of the total voting power were held by less than 6 persons during the accounting period. The assessment year was 1955-56 the accounting year being the one ending on March 31, 1955. The total income assessed for the aforesaid year was Rs. 9,54,658/- on which tax payable amounted to Rs. 4,05,492. The surplus available for distribution of dividend was Rs. 5,49,166/-" No dividend, however, was distributed although at the meeting held on June 8, 1955 the accounts which were approved showed a net profit of Rs. 6,81,298/-.

3. The controversy before the Income-tax Officer centered on the applicability of the provisions of S. 23A of the Income-tax Act 1922. According to the assessee that section was not applicable but the Income-tax Officer came to the conclusion that since the shares carrying more than 50% of the total voting power were held by less than 6 persons the company was not one in which the public were substantially interested. As no justifiable reason for non-distribution of the requisite percentage of the dividend had been furnished S. 23A was applicable and 100% distribution was called for. In view of the provisions of S. 23A (1) additional super tax of Rs. 1,37,291.50 paise was imposed subsequent to the completion of the assessment.

4. The assessee went up in appeal to the Appellate Assistant Commissioner but the same was dismissed. The sole point that was argued before the Appellate Tribunal was whether the assessee fulfilled the conditions stated in sub-clause (b) (iii) of the Explanation to S. 23A of the Act. This argument will be considered presently. The Tribunal, however, was not persuaded to accept the contention of the assessee. On an application being filed under S. 66 (1) the Tribunal referred the following question of law for the opinion of the High Court:

(1) "Whether on the facts and in the circumstances of the case, the assessee company is one in which the public are substantially interested within the meaning of the Explanation to Section 23A of the Income-tax Act, as it stood at the relevant time?

(2) Whether on the facts and in the circumstances of the case, the imposition of the additional super-tax under Section 23A without recourse to the provisions of Section 34 (1) was legal and valid?"

5. Section 23A of the Act confers power on the Income-tax Officer to assess companies to super tax on non-distributed income in certain cases. We are concerned, in the present appeal, only with sub-s. (9) and the Explanation thereto. That sub-section provides inter alia that nothing contained in the section shall apply to any company in which the public are substantially interested. The text of Explanation the interpretation of which is the subject-matter of dispute is as follows:

Explanation - For the purposes of this section a company shall be deemed to be a company in which the public are substantially interested-

(a) If it is a company owned by the Government or in which not less than forty per cent of the shares are held by the Government.

(b) If it is not a private company as defined in the Indian Companies Act 1913 (VII of 1913) and

(i) its shares (not being shares en. titled to a fixed rate of dividend, whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the previous year beneficially held by the public (not including a