RAGHUVANSHI MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question originally referred for the opinion of the High Court on 26th September, 1952, when the reference was first made was as follows :

(2.) THIS question as originally framed has come back to this Court after a chequered career although it was once reframed by this Court. The circumstances under which the question arises may be briefly stated as follows : The Raghuvanshi Mills Ltd., who was the applicant for the reference, was originally incorporated on 28th February, 1929, as a public limited company. This company had a share capital of rupees ten lakhs divided into 10,000 shares of Rs. 100 each. In this company, there were prior to 14th November, 1941, eight directors of whom one Maganlal Parbhudas held 6,344 shares. Maganlal Parbhudas had five sons, Ravindra, Surendra, Bipinchandra, Harishchandra and Krishnakumar. On 14th November, 1941, Maganlal Parbhudas transferred, by way of gift, 5,000 shares out of his 6,344 shares to the said five sons, each getting 1,000 shares. Of the five sons, two of the elder sons, viz., Ravindra and Surendra, were directors of the mills. A few months after this transfer, there was formed a partnership between the five sons of Maganlal Parbhudas styled as M/s Ravindra Maganlal & Bros. On 3rd February, 1942, the partnership was converted into a private limited company by name Ravindra Maganlal & Co. Ltd. On the 7th of March, 1942, M/s Ravindra Maganlal & Co. Ltd. were appointed the managing agent of the Raghuvanshi Mills Ltd. Thus three of the directors of the mills, viz., Ravindra, Surendra and Bipinchandra, sons of Maganlal, came to be also directors of M/s Ravindra Maganlal & Co. Ltd., the managing agents.

(3.) ,750 shares and the balance of 551 shares were held by other members of the public. The Tribunal found as a fact that in addition to the 4,695 shares held by the directors, 3,000 shares held by the three sons of Maganlal Parbhudas, namely, Bipinchandra, Harishchandra and Krishnakumar were shares which were under the control of the said Maganlal Parbhudas as a director of the mills and, therefore, they must be counted as shares not beneficially held by the public, with the result that 7,695 shares would be held by directors or persons under the control of the directors. Therefore, the Tribunal came to the conclusion that the company could not take advantage of proviso (3) r/w the Explanation to S. 23A. 4. The reference originally made was heard on 10th March, 1953, by a Division Bench of this Court consisting of Chief Justice Chagla and the late Mr. Justice Tendolkar and the Division Bench found that the principles upon which the Tribunal felt it should act were incorrectly stated and the High Court laid down certain principles themselves. In delivering the judgment on behalf of the Division Bench, the learned Chief Justice observed that having regard to the third proviso to S. 23A r/w the Explanation thereof, there could be no doubt that the expression "public" is used therein in contradistinction to the directors and the whole object of the third proviso was that there should be voting power exercised which must be independent of the control of the directors. So far as the question of control is concerned, the learned Chief Justice observed that the legislature itself had expressed its mind 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. At that hearing it was also argued on behalf of the mills that the word "public" must not be read in any sense different from the ordinary meaning of the word. The Division Bench construed the word with reference to an English decision in Tatem Steam Navigation Co. Ltd. vs. IRC (1942) 10 ITR (Suppl) 85 . They observed that the public was, so far as the English statute was concerned, treated in contradistinction with "relatives", for certain relatives were specifically named in the statute as not being members of the public. Having regard to this construction of the words "public" and "relative", their Lordships observed that the correct principle of law was that "if there is a de facto control over a shareholder by a director of the company, then the shareholder cannot be deemed to be a member of the public as he has no independent voting right". Further, defining what they meant by "de facto control", they observed, "the mere possibility of the voting power being controlled is not enough. Anything is possible and any one's voting power may be controlled, but that is not what the law requires. The law requires a de facto control, a control which is in fact exercised, and here again we do not find that the Judicial Member has given that finding." Their Lordships held, therefore, that the statement of the case had not found whether there was de facto control in that sense and, therefore, they felt constrained to call for a supplementary statement of the case. After the supplementary statement was received the Division Bench held that Maganlal Parbhudas exercised de facto control over his three sons, Bipinchandra, Harishchandra and Krishnakumar and, therefore, the latter could not be considered to be members of the public for the purposes of s. 23A, and if that were so, then the public did not have an interest in the company of 25 per cent. shares. That order was passed on 1st September, 1955.