Amendment of Articles of Association of a Company.

Satyanarayana Rao, J.-The following question was referred to us by the Appellate Tribunal under section 66(1) of the Indian Income-tax Act:

“Whether on the facts and in the circumstances of the case the amendment of the Article 12 of the Articles of Association of the company can be said to be a transaction with the main purpose of avoidance or reduction of the liability to excess profits tax within the meaning of section 10-A of the Excess Profits Tax Act?”

The assessee in this case is a company incorporated under the Indian Companies Act and carries on business at Coimbatore. During the accounting year from 1st July, 1941, to 30th June, 1942, the company was assessed to excess profits tax and the resolution of the company amending section 12 of the Articles of Association was set aside by the Excess Profits Tax Officer under section 10-A of the Excess Profits Tax Act. This decision, however, was reversed by the Appellate Tribunal who disagreed with the conclusion of the Excess Profits Tax Officer. Hence this reference.

The Central Board of Revenue fixed the standard profits for the assessment years 1938-39 and 1939-40 at Rs. 1,20,000 to which an interest of Rs. 40,201 was added thus making a total of Rs. 1,60,201. The proportionate standard profits for one year was taken as Rs. 80,100. In the accounting year from 1st September, 1939, to 30th June, 1940, the company was assessed as a non-director-controlled company. During the second accounting period beginning from 1st July, 1940, and ending with 30th June, 1941, the company altered its Article 12 the result of which was to make the compary a director-controlled company. Article 12 of the Articles of Association of the company before the amendment was in these terms:

“On a show of hands each member present shall have one vote. On a poll, the first ten shares carried each one vote and every five shares over the first ten shares carried one vote.”

The amendment which was passed on 2nd April, 1941, reads as follows:

“On a show of hands every member shall have one vote for each share held by him.”

After the amendment more than 50 per cent, of the voting power vested in the hands of the directors as a result of which it became a director-controlled company. Notwithstanding this alteration for some reason the company was assessed to excess profits tax during the accounting year beginning with 1st July, 1940, and ending with 30th June, 1941, on the footing that it was a director-controlled company. During that year there was also an increase of the capital of the company amounting to Rs. 2,87,333. In the thirds year of account the Excess Profits Tax Officer treated the resolution of the company amending the articles as within the mischief of section 10-A of the Excess Profits Tax Act and therefore assessed the company as a non-director-controlled company. During this period there was a further increase of the capital of the company and the total increase for the two years was Rs. 7,06,533 so that taking the standard profits as fixed by the Central Board at Rs. 80,100 by reason of the increase of the capital during the accounting period the standard profits was increased by adding Rs. 56,523 representing eight per cent, of the increased capital of Rs. 7,06,533. If it was treated as a director-controlled company the percentage would have been ten per cent, in which case the standard profits would further increase reducing the excess profits by over Rs. 15,000 and the tax by about Rs. 10,000. Thd difference, therefore, of a company being a director-controlled company or a non-director-controlled company is in the calculation of the standard profits. If the company is a director-controlled company ten per cent, of the increase of the capital would be treated as an addition to the standard profits while in the case of a non-director-controlled company it will be only eight per cent. The result of increase in the standard profits is obviously to decrease the excess profits available fo