RAGHUVANSHI MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question, which has been referred on this reference under section 66 (2) of the India Income -tax Act, 1922 is :

(2.) THE assessee is public limited company incorporated on the 28th of February, 1929. During the account year of the assessee company, viz., April 1, 1942 to March 31, 1943 for which the relevant assessment year was 1943 -44, the divided declared by the company in its annual general meeting was less than what was required under section 23A of the Income -tax Act, 1922. A question, therefore, arose whether the assessee -company was one to which the provisions of the said section were applicable.

(3.) ,754 shares were held by the relations of the director including three other sons of Maganlal Prabhudas, viz., Bipinchandra Maganlal, Harischandra Maganlal and Krishnakumar Maganlal and his wife, Kantabai Maganlal. Each of the three sons held 1,000 shares and the wife held 771 shares. The remaining 551 shares we held by the members of the public. During the material time, Ravindra Maganlal and Co. which was a private limited company, was to managing agents of the assessee -company. The issued and subscribed capital of this private limited company Rs. 5,000, which was equally subscribed by the five sons of Maganlal Prabhudas. The directors of the managing agency company were Ravindra Maganlal Surendra Maganlal and Bipinchandra Maganlal, the first two of him were also the directors of the assessee company. Now, under section 23A, as it stood at the material time, companies in which the public are substantially interested were excluded from the operation of the section and a company was to be demanded to be on in which the public are substantially interested were excluded from the operation of the section and a company was to be deemed to be one in which the public are substantially interest if shares carrying 25 per cent, or more of the voting power were held unconditionally and beneficial by the public and such share were during the previous year the subject of dealing in any stock exchange or were in fact freely transferable by the holders to the other members, of the public. According to the Income -tax Officer the shares held by the assessee's directors or by the relations of the directs could not be regarded as the share held by the public and since excluding these share only 551 shares qualified to be share held by the public, the pub; lie could not said to be holding share carrying voting over of at least 25 per cent. In his opinion, therefore the assessee -company could not be treated ads a company in which the public were substantially interest and consequently the provisions of section 23A were applicable to it. He according made an order under the said section against the assessee -company. The decision of the Income -tax officer was confirmed in appeal by the Appellate Assistant Commissioner, the decision taken by the department authorities as to the applicability of the provisions of section 23A to the assessee -company was affirmed but to the Income -tax Appellate Tribunal. In upholding the decision of the department authorities, one of the members of the Tribunal took the view that the shares held by the directors of the assessee -company and the shears held by the person interest in the managing agency could not be regarded as shares held by the public and since the total of those exceeded 75 per cent. off the total number of shares, the assessee -company could not be said to be one in which the public are substantially interested. According to the members of the Tribunal the shares held by the directors and the shows held by the relations of the director could not qualify as shares held by the members of the public. When the matter came to this court on a that in the case of every managing agency company the shareholders are controlled by the directors of the managed company in which the shareholders may have no relationship with the director of the managed company. The reason given by the Tribunal, therefore that the shares held by the persons interested in the managing agency had to be excluded because such persons were under the control of the directors of the managed company was not correct and what was required to be found was whether they were in facts so controlled. Similarly, merely because the shareholder was a relation of the director was not sufficient to make the shares held by the shareholders as share not held by the public. Mere relationship was not sufficient but what was further required to be found was that the shareholding of the reliance was in the fact controlled by the director. This court, therefore, though it necessary top call for a further supplementary statement from the Tribunal in the light of its judgment. The Tribunal accordingly furnished a supplementary statement recording its finding that the shares held by the three sons of Maganlal Prabhudas, who were interested in the managing agency, were under the de facto control of their father, Maganlal Prabhudas dying the material time. On receipt of this supplementary statement from their Tribunal this court accepted the said finding. Now, it may be pointed out that in submitting its statement on the question framed by this could under section 66 (2) the Tribunal had pointed out that controversy between the parties mainly related to the quality of shares held by the three sons of Maganlal Prabhudas viz., Bipinchandra Maganlal, Harishchandra Maganlal and Krishnakumar Maganlal, who were interested in the managing agency along with the other two sons, whom were also the director of the assessee -company. It had, therefore while submitting the statement of case, observed that the more appropriate question for reference was :