(1.) COMPANY Petition No. 93 of 1984 has been filed by two erstwhile directors of the Investment Trust of India Ltd. The other COMPANY petition No. 101 of 1984 has also been filed by another director of the same company. Both the petitions have been filed under section 633 (2) of the Companies act, 1956, for directions regarding notice under rule 23c of the Companies (Court) Rules, 1959. Both the petitions may be disposed of together by a common order. The averments contained in both the applications are generally that these petitioners were the directors of the Investment Trust of India Ltd. , a company having its registered office at Kothari Buildings, 117, Nungambakkam, madras-600 034, from June 9, 1980, to July 4, 1983 ; from June 9, 1980 to august 26, 1982 and from June 2, 1977 to June 23, 1982, respectively. The aforesaid company was incorporated in the year 1946 with the sole object of carrying on the business of the investment trust by investing in shares, stocks, debentures and other types of securities. The memorandum of association will clearly bring out the aforesaid object and, accordingly, the shares and other securities were bought for investment and were kept for long-term and sold only rarely. In the year 1975, the objects clause of the memorandum of the company was enlarged, empowering the company to undertake certain other activities like hire purchase, leasing, industrial financing, etc. However, even after such amendment, the basic character of the company as an investment company continued unchanged, and the company continued to acquire shares as a result of which, the earnings from investments rose from 0. 91 lakhs in 1976 to 2. 42 lakhs in 1979. Further, this company has also been classified by the Central Government as an investment and trust company in the Central Government publication Directory of Joint Stock companies issued in 1980. While so, the respondent, the Registrar of Companies, by letter dated January 6, 1982, raised a query whether the company's investment in shares of other companies are within the limits of section 372 of the Companies Act. For the same, a detailed reply was sent on January 29, 1982, stating that the company is an investment company and that the provisions regarding the ceiling prescribed under section 372 of the Companies Act are not applicable to it. It was further submitted that after being satisfied by this explanation there was no further query by the respondent, nor was any action taken by the respondent against the company or its directors. Again, by letter dated September 26, 1984, addressed to the directors of the company, the respondent stated, that from the balance-sheets of the company as on December 31, 1979, December 31, 1980, December 31, 1981, and December 31, 1982, and from the paid-up capital reflected in the balance-sheets, it was noticed that the investments made by the company were in excess of the limits specified in the first proviso to section 372 (2) of the Companies Act, 1956 The respondent, Registrar of Companies filed counters raising the following contentions. At the outset, the petition under section 633 (2) of the Act filed by the petitioners is not maintainable, since as per the aforesaid section, every officer claiming relief under section 633 (2) has to file a separate petition and establish to the satisfaction of the court, that he has acted honestly and reasonably. Further, the claim of the petitioner-company as an investment company is not maintainable in law. After diversification of its business in 1975, the company's income from investments is meagre and ranks III or IV place as per the details given in the counter. Inasmuch as the company is changed to a financial company and the income from the financial business is the major income of the company, the company is not an investment company. Again, regarding the term " Principal business " though there is no definition under the Act as commonly understood, principal business means the prime business carried on by the company at the relevant point of time and the major source of income, etc. Applying these principles and also as revealed by the company's own. account that the income from investment business forms only a negligible part in the total turnover of the company, the company ceased to be an investment company. Clauses 7, 8, 8a and 8b of the memorandum of association referred to by the petitioners are in the nature of incidental objects with wide clauses covering many business. However, since the company is not engaged in the business of financing the financial enterprises in India as seen from its balance-sheet, there is no question of applying section 372 (14) for exemption. It is incorrect to state that the petitioners have acted honestly and reasonably. As there are no convincing reasons for the grant of such relief, the powers under section 633 (2) of the Act cannot be exercised by the court. In the circumstances, the respondent would pray for the dismissal of the aforesaid company petitions. The following points arise for consideration in these petitions : (1) Whether the petitioner company continues to be an investment company and could claim that the first proviso to section 372 (2) of the Act will not be applicable to it " (2) Whether the petitioner company can invoke exemption under section 372 (14) of the Act " (3) Whether the petitioners have acted honestly and reasonably and are entitled to any relief under section 633 of the Act " It is an admitted fact that the company in question was originally started as an investment company and was investing in shares, debentures and securities. But, in the year 1975, the said activities of the company have been extended to other fields such as hire-purchase, leasing, etc. , and, accordingly, the memorandum of association was also amended. It is not in dispute that pursuant to such amendment, the company extended its activities to the financial lines. Now, the dispute leading to the filing of the present petitions arose from a letter communicated by the Registrar of companies dated January 6, 1982, in respect of the accounts filed for the year 1979, seeking a query whether the company's investment in shares of other companies was within the limits of section 372 of the Companies Act. The company has sent a reply on January 29, 1982, thereto stating that the company being an investment company, the provisions of section 372 (2) and (4) of the companies Act, are not applicable to it. However, it seems that there was no further communication between the parties till September 26, 1984, when the respondent sent a show-cause notice to the petitioners and the other directors, and the company, stating that it is reflected from the balance-sheets of the company as on December 31, 1979, December 31, 1980, December 31, 1981, and december 31, 1982, and from the subsidiary capital (originally stated in the show-cause notice as paid-up capital which is admitted by the respondent in the counter-affidavit as mistake) the investments made by the company in the other companies, were in excess of limits specified in the first proviso to section 372 (2) of the Companies Act, 1956, and that those investments were made without following the procedures mentioned in section 372 (4 ). Consequently, the respondent directed the petitioners to show cause why penal proceedings should not be initiated against the company for such violations. The petitioner-company seems to have sent a detailed reply on October 29, 1984, followed by a further reply dated January 12, 1985, stating that the show-cause notice issued by the respondent is not sustainable on several grounds as stated in the reply letters. Notwithstanding the sending of such replies, the petitioners would apprehend that the respondent may initiate criminal proceedings and so they have approached this court, praying that this court should exercise its powers under section 633 (2) of the Companies Act, and relieve the petitioners from any liability resulting from the contravention of the proviso to section 372 (2) and section 372 (4) of the Companies Act as set out in the respondent's show-cause notice dated September 26, 1984. Learned senior counsel, Mr. Govindswaminathan, appearing for the petitioners, submitted that the show-cause notice dated September 26, 1984, issued by the respondent is not sustainable on several grounds. He stated that the company in question is an investment company primarily with the object to carry on business of investment in shares, debentures and securities and that the shares were purchased and kept for long time. He added that the memorandum of association will also clearly prove that the object of the company is to make investment in shares, etc. , and also basically, the company is an investment company. It was further submitted that it was no doubt in the year 1975, the activities of the company were enlarged to other fields such as hire-purchase, etc. , as shown in the memorandum of association, but that notwithstanding such change of enlarging such activities, the investment in shares figured as prime business and hence the character of the business, i. e. , investment on shares, was unchanged, and that, therefore, the company still continues to be an investment company. In support of this contention, learned senior counsel would rely on the Central Government publication entitled directory of Joint Stock Companies issued in 1980 and also the classification issued by the Ministry of Law and Justice and COMPANY Affairs, stating that the words in section 372 " whose principal business is the acquisition of shares " would imply that the company concerned is expected to hold the shares acquired by it for a reasonable time. Further, on the earlier occasion when the respondent raised such a query by his letter dated January 6, 1982, for which the petitioner-company has given a detailed reply dated January 29, 1982, the respondent was satisfied with the explanations and did not raise any further query, and that being so, the respondent cannot take up the issue again. It was submitted that as there is no change of circumstances warranting such revival of the proceedings, the company still continues to be an investment company and that the restrictions prescribed in the proviso to section 372 (2) will not apply to the petitioner company in view of the provisions of section 372 (13 ). In reply to this argument, Mr. V. Srinivasamoorthy, learned counsel appearing for the respondent, would submit that it is incorrect to state that the company continues to be an investment company. He submitted that even though the company originally carried on the business of investment in shares, debentures and securities, it has, however, in the year 1975, changed its activities to those of hire-purchase, leasing, real estate, etc. , and that from a perusal of the balance-sheets submitted by the company at the relevant point of time it will undoubtedly reveal that financial activities other than investments have become the prime business. He, therefore, contended that the company had lost its character of an investment company. In support of the contention, learned counsel for the respondent would rely upon the following figures : Sources of major income of the company from 1979 to 1982 1 2 1979 1980 1981 1982 1. Finance charges 29, 52, 273 57, 22, 260 77, 31, 504 91, 89, 036
(2.) SERVICE charges 4, 40, 610 7, 01, 352 8, 54, 400 58, 62, 935
(3.) INTEREST on fixed deposits with banks 2, 01, 817 2, 31, 047 2, 91, 599 3, 54, 776