Judgment - Chagla, C.J.

1. The question that arises on this reference is whether the assessee company is entitled to the benefit of the third proviso to Section 23A, Income-tax Act, which provides that Sub-section (1) of Section 23A shall not apply to any company in which the public are substantially interested.

2. The assessee company has a subscribed capital of Rs. 10,00,000 divided into 10,000 shares of Rs. 100 each, and during the relevant accounting period, which is the assessment year 1943-44, the company had eight directors who held between them 4695 shares. One of the directors was one Maganlal Prabhudas who held 1344 shares and his two sons Ravindra Maganlal and Surendra Maganlal were also directors who held each 1168 and 1100 shares. 4754 shares were held by various relations of the directors and 1,000 shares each were held by three other sons of Maganlal, viz. Bipinchandra, Harishchandra and Krishnakumar, and the balance of 551 shares were held by members of the public unconnected with the directors of the .assessee company. There is an Explanation to the third proviso to Section 23A, and to the extent that it is material it reads as follows :

"A company shall be deemed to be a company in which the public are substantially interested if shares of the company carrying not less than 25 per cent, of the voting power have been allotted unconditionally to or acquired unconditionally by, and are at the end of tne previous year beneficially held by the public."

The question that the Tribunal had to consider was whether 25 per cent, of the shares of the assessee company were held by the public within the meaning of this Explanation, and in order to decide that question the only material issue that arose before the Tribunal was whether the 3,000 shares held by Eipinehandra, Harishchandra and Krishnakumar could be considered to be shares held by the public.

3. In order to decide this question we have to consider what is the proper meaning to be given to the expression "held by the public" used in the Explanation. There can be 110 doubt that the expression "public" is used in contradistinction to the directors and the whole object of the third proviso is that there must be voting power exercised which must be independent of the control of the directors, and the Legislature has taken the view that the public would be deemed to be substantially interested in the company if 25 per cent, of the shares are held by members of the public. Therefore, what is emphasised in the proviso is that the public should not only be interested, but should be substantially interested and the interest of the public would only arise if the public can exercise an independent control over the affairs of the company. But if members of the public who are shareholders are under the control of the directors and if their voting power is controlled by the directors and if the votes cast by them arc not their own votes but in substance the votes of the directors, then for the purpose of this proviso the shares in effect are not held by the public at all but are held by the directors.

It is from this point of view that one must approach the correct meaning to be given to the expression "public". Mr. PalkhivaJa says that we must give to the expression "public" its ordinary natural meaning. In our opinion that contention is entirely untenable. If that were the correct interpretation, then a director is as much a member of the public as anyone else, but it is conceded by Mr. Palkhivala that in considering who the public is the directors must be excluded. Now, why are the directors excluded? They are excluded because being in control and management of the company they are interested in the company and they would take a point of view which would be a partisan view. But the Legislature wanted a point of view which was an independent point of view and therefore it would not be correct to interpret the expression "public" in its larger and wider sense or connotation.

4. Th

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