AMRUTANJAN LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under section 66 (1) of the Indian Income-tax Act, arising at the instance of the Amrutanjan Co. Ltd., a public limited company. The late Mr. Nageswara Rao was having a business in the manufacture and sale of Amrutanjan, a pain balm. The company, the Amrutanjan Ltd., was formed in September, 1936, and was duly registered under the Indian Companies Act. The business relating to the manufacture and sale of the pain balm and allied products was transferred to the company, for consideration. The authorised capital of the company was Rs. 10,00,000 being composed of 7,000 ordinary shares and 3,000 preference shares of Rs. 5,50,000 - 2,500 ordinary shares and 3,000 preference shares. It is stated that the prospectus issued at the time of the formation of the company stated that dividends exceeding 6 1\2 per cent. would not be declared, till the reserve fund of the company reached to Rs. 3,50,000. Under the articles of association, the holder of a preference share was entitled to obtain a cumulative dividend of 7 1\2 per cent. on the shares held by him. But he was not entitled to any further rights in the profits made by the company. In the meetings of the company, his position was equal to that of the holder of an ordinary share. There was no difference in the voting powers of the preference and ordinary shareholders. The company was managed by a partnership concern. It is sufficient, for the purpose of this reference, to state that, after the death of Nageswara Rao the firm of partners, who managed the business, consisted of Ramayamma, his widow, Kamakshi Amma, his daughter, Sambu Prasad, his son-in-law, and Ramachandra Rao, the brother of Ramayamma. Six persons were in the directorate of the company. Amongst them, were Sambu Prasad and Ramachandra Rao; the others were strangers. During the period, to which this reference relates, namely, 1st April, 1946, to 31st March, 1949, the share holdings did not undergo any substantial change. Of the 3,000 preference shares, not more than 382 were held by the directors; the balance was held by persons other than the directors. Of the 2,500 ordinary shares, Ramayamma held 2,185, her daughter Kamakshi Amma 250, and what was left for others, was only 65.

(2.) THE company made substantial profits during the period under reference, but not all the profits or even a fair portion thereof were distributed to shareholders. THE profits made and those distributed are shown below :

(3.) QUESTION No. 3 : The order of the Income-tax Officer in the instant case is contested principally on the ground that the company is one in which the public are substantially interested, and that, therefore, by reason of the third proviso to the section, no action could be taken under section 23A. The case for the company is that the public have more than 51 per cent. of the total number of shares in the company, and, the company not being thus in the control of any person, the provisions of the section should not be applied to it. An analysis of the shareholders shows that the principal shareholder of the company is Ramayamma, who holds about 40 per cent. of the total number of shares in the company. The directors of the company hold less than seven per cent. of the shares. Even if one were to consolidate the shares held by Ramayamma, her daughter, her son-in-law, and her brother, it would be about 47 per cent. The other persons, who undoubtedly are members of the public, would hold more than 51 per cent. But the contention of the learned counsel for the Department is that the percentage of shares should be ascertained only with regard to the ordinary shares held, and no regard should be had for the preference shares; the reason advanced is that a preference shareholder would not be interested in the declaration of the dividends, as his own right is only to get 7 1/2 per cent. whatever might be the profits earned, and that he would either be indifferent or sail with the persons in management. To appreciate the contention, it is necessary to refer to the relevant provision of section 23A, as it stood during the period covered by this reference :