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1965 Supreme(Mad) 211
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE VEERASWAMI & THE HONOURABLE MR. JUSTICE VENKATADRI
East India Corporation Limited - Appellant
Versus
Commissioner of Income Tax, Madras - Respondent
Case No : No
Decided On : 19 July 1965
The shares of a public limited company are in fact freely transferable if there is a factual tendency towards free transfer of shares, subject to reasonable restrictions, by holders to other members of the public.
Headnote:
INCOME TAX ACT, 1922 - SECTION 23-A - PUBLIC LIMITED COMPANY - SHARES FREELY TRANSFERABLE - DISCRETION OF DIRECTORS TO REFUSE TRANSFER - DIRECTION UNDER SECTION 34(3) - JURISDICTION OF TRIBUNAL.
Fact of the Case:
The assessee, a public limited company, was found by the Income-tax Officer to be a company in which the public were not substantially interested and directed that a sum of Rs. 2, 43, 588 being the undistributed portion of the assessable income of the company during the previous year should be deemed to have been distributed as dividends among the shareholders. On appeal, the Appellate Assistant Commissioner reversed the order, holding that the shares of the assessee were in fact freely transferable. The Tribunal upheld the Appellate Assistant Commissioner's view on the first ground of the Income-tax Officer, but differed from him on his second ground, and held that as clause 13 of the assessee's articles did contain restrictions on the free transfer of shares, it could not be said that the assessee had established that it was a company in which the public were substantially interested. The Tribunal also gave a direction under section 34(3) to reassess the shareholders as a consequence of section 23-A proceedings.
Finding of the Court:
The court held that the Tribunal erred in holding that the shares of the assessee were not in fact freely transferable solely on the basis of clause 13 of the articles, which vested absolute discretion in the directors to accept or not to accept applications for transfer of shares. The court also held that the Tribunal had no jurisdiction to give a direction under section 34(3) to reassess the shareholders as a consequence of section 23-A proceedings, as the Tribunal's jurisdiction was confined to passing such orders as it may think fit on appeal.
Issues: 1. Whether on a proper construction of the articles of association of the company, the shares are in fact freely transferable by the holders to other members of the public so as not to become liable to an order under section 23-A? 2. Whether the direction under section 34(3) to reassess the shareholders as a consequence of section 23-A proceedings was legally given as a result of the Tribunal's finding?
Ratio Decidendi: 1. The court held that the words "are in fact freely transferable" in the Explanation to the third proviso to section 23-A mean that there should be a factual tendency towards free transfer of shares, subject to reasonable restrictions, by holders to other members of the public. The court held that the Tribunal erred in holding that only transfers prior to the end of the relevant previous year could be taken into account in determining whether the shares were in fact freely transferable. 2. The court held that the Tribunal's direction under section 34(3) was without jurisdiction, as the Tribunal's jurisdiction was confined to passing such orders as it may think fit on appeal and did not extend to giving directions beyond the scope of the appeal.
Final Decision: The court answered both questions in favour of the assessee and against the department with costs.
VEERASWAMI J.
This reference relates to the propriety of an order under section23-A of the Income-tax Act, 1922, and a direction given by the Tribunal under section 34(3) of the same Act to reassess the shareholders as a consequence of section 23-A proceedings The assessee was originally a private limited company incorporated in July, 1942, but converted into a public limited company on August 25, 1948. For the assessment year 1954-55, for which the previous year ended on December 31, 1953, the Income-tax Officer found that it was not a company in which the public were substantially interested. On that view, he directed that a sum of Rs. 2, 43, 588 being the undistributed portion of the assessable income of the company during the previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the assessee in respect thereof should be deemed to have been distributed as dividends among the shareholders of the assessee as on June 30, 1954, the date of the general meeting at which the accounts for the previous year were laid. He formed this view on two grounds
(1) Equity shares of the assessee, carrying not less than 25 per cent. of the voting power, were not beneficially held by the public at the end of the relevant previous year ; and
(2) The shares of the assessee-company were not the subject of dealings in any stock exchange and the shares were not in fact freely transferable by the holders to other members of the public
On appeal by the assessee, the Appellate Assistant Commissioner of Income-tax did not accept these grounds, and reversed his order. He thought that as one of the shareholders of the company, the Saroja Mills, is a company in which the public were substantially interested, it should be held that more than 25 per cent. of the voting power was held by that company. He further held that clause 13 of the articles of the assessee which vested in the directors discretion in the matter of transfer of shares and was but a common feature found in the articles of what are undoubtedly public limited companies in which the public are substantially interested, did not justify the Income-tax Officer's finding that transfer of shares was here severely restricted, and, therefore, the shares oft the assessee-company were not in fact freely transferable. The Appellate Assistant Commissioner opined that the general restriction found in clause 13
"was only in the nature of a ' de jure ' restriction and cannot disentitle the assessee to urge its claim that the shares were in fact freely transferable" *
. The department took the matter in appeal before the Income-tax Appellate Tribunal, Madras. It upheld the Appellate Assistant Commissioner's view on the first ground of the Income-tax Officer, but differed from him on his second ground, and held that as clause 13 of the assessee's articles did contain restrictions on the free transfer of shares, it could not be said that the assessee had established that any transfer of shares was allowed up to the end of the relevant previous year. On appeal before the Tribunal, it would appear, in the first instance, to have called for a report from the Income-tax Officer of particulars, regarding the date of transfer, transferors and transferees of shares in the assessee-company up to the end of the accounting period relevant to the assessment year 1954-55. The report submitted by the Income-tax Officer showed that on July 22, 1942, there was a transfer from Sri Karumuthu Thiagarajan Chettiar of 20 shares to Sri T. Manickavasagam Chettiar, one of his sons, and on August 2, 1948, another transfer by the former of 5 shares to Thiagarajan Chettiar and Sons (P.) Ltd., Coimbatore, and that no application for transfers was rejected by the assessee-company. Thiagarajan Chettiar and Sons (P.) Limited, Coimbatore, was stated to be a limited company whose shares were held exclusively by the members of Sri Thiagarajan Chettiar's family. During the a
