1. The only question arises on this reference is whether the assessee company was a director-controlled company or not a director-controlled company. The total number of shares of the company was 15,600 and the period with which we are concerned is the period from the 1st of October, 1944, to the 5th of June, 1945. During this period the total number of Shares held by the directors was 7,471. Therefore, during this period they controlled not a majority but a minority of the total votes which could be exercised as a result of the holding of shares. On these facts the Tribunal came to the conclusion that the assessee company was not a director-controlled company. It was urged before the Tribunal, as it has been urged before us by Sir Jamshedji Kanga, that two of the directors and shareholders Mafatlal Gagalbhai and Bhagubhai Mafatlal died on the 19th of July, 1944, and the 30th of September, 1944, and during the material period the shares which these two persons held were not transferred to any other shareholder, and therefore, according to Sir Jamshedji, in order to determine whether the directors had a controlling interest in the company or not, we must exclude 1,332 shares held by Mafatlal Gagalbhai and 5,604 shares held by Bhagubhai Mafatlal. If these shares were excluded, then undoubtedly the directors would have the majority of votes and, therefore, the assessee company would be a director-controlled company.
2. In order to appreciate this contention we have to consider what is the true connotation of the expression used in the Excess Profits Tax Act with which we are concerned. In order that the company should be director-controlled, the directors must have the controlling interest in the company, and the question is, what exactly does the expression 'controlling interest' mean. It is well settled that the interest which the directors must have need not be a beneficial interest in the shares of the company. Directors may be put on the register of a company as trustee; even so the votes which they would command and which they could exercise will have to be considered in determining who had the controlling interest in the company. But the difficult that arises is, how is the voting strength which the directors have to be ascertaine The control which this expression contemplates is a voting control, such a control as would enable the directors at a general meeting of shareholders to get any resolution carried which would affect the administration or the management of the company. Two views have been pressed before us. The view that has been pressed before us by Sir Jamshedji is that you must determine the voting strength and the voting control by the effective votes which the directors control and which would ultimately determine the decision at a general meeting. The other view that has been pressed before us by the Attorney-General is that you have got to consider the voting strength from the shares which represent votes held by the directors. If you find that the directors held a number of shares which gives them a majority of votes, then they have a controlling interest in the company. It is irrelevant to consider whether the shares held by others represent the effective votes or not and also whether the votes are exercisable under certain eventualities that may happen or due to certain adventitious circumstances. If you find that the directors do not control a majority of votes by reason of the fact that they do not hold a sufficient number of shares which represent the majority of votes, then the directors do not have a controlling interest in the company. Whether the majority which is against them exercise all their votes, whether all those are exercisable or not, whether they choose to come at the general meeting or not, are all irrelevant circumstances. What we have got to consider is not the effective votes held by the persons other that the directors; what we have to consider is the actual number of shares held by the directors which represent votes; and it is only from that aspect that we have to determine whether the directors controlled the company or not.
3. It seems to me, and I frankly confess that the position is not free from doubt or difficulty, that on the whole the view put forward before us by the Attorney-General is the correct view. It is the shares in a company that represent votes and it is from the strength of the holding of the shares that the voting strength has got to be determined. If the directors controlled a majority of such votes, then no further question arises. If they do not control a majority of such votes, then also no further question should arise because it would be impossible to investigate into what the position would be with regard to shareholders who the majority of votes as to whether they choose to exercise all their votes or not. In this particular case, which we are considering, the total number of the company is 15,600. Each share represent one vote, and therefore the total number of votes are 15,600. At the material date the directors could only control 7,741 votes because they held 7,471 shares. That was not the majority of the voted. Is it permissible to us to inquire as to whether the votes held by the shareholder other than directors were effective or not during the material perio Could we ask ourselves the question as to whether those votes were exercisable or no If we were allowed to ask ourselves that question, it is difficulty to lay down any limit to such an inquiry. In this particular case Sir Jamshedji relies on the fact that Mafatlal Gagalbhai and Bhagubhai Mafatlal are dead and under no circumstances can they exercise the votes which are represented by the shares that stand in their names. But is that logical limit to our inquir Why is it not open to us to proceed further and inquire with regard to other shareholder whether they are in position to exercise their votes or no A shareholder may be out of the country during the material period and not being in a position to be present at the meeting and exercise the vote. A shareholder may be detained or in other ways physically prevented from exercising his vote. Are all these purely adventitious circumstances to be taken into consideration in determining the voting strength of the director In my opinion - and I shall presently deal with the authorities - in order to decide whether the directors have a controlling interest in the company or not, all that we are entitled to look at is the register of the shareholder and the articles of the company only in order as to how many votes the shares carry with them. On looking at the register of shareholders, if we find that the directors hold shares which give them a majority of votes which votes they could exercise at any general meeting and thereby carry any resolution which they desire to carry, than the directors have a controlling interest. If, on the other hand, by looking at the register of shareholders we find that the directors have only a minority of votes and by reason of that they could not carry any resolution that they wish to carry, then they have not a controlling interest. At all material times the directors must control and command a sufficient strength of votes to be able to override any opposition that may be presented to them at a general meeting of shareholders. Whether in fact they can do so or not is not a consideration which can weigh with the Court in deciding whether they have a controlling interest or not.
4. Turning to the authorities, the first decision which has been strongly relied upon by Sir Jamshedji is the one reported in Inland Revenue Commissioners v. Bibby & Sons Ltd. That is the case which laid down that the controlling interest meant controlling voting power and not beneficial interest. There are certain observation of Lord Russell of Killowen and Lord Simonds on which Sir Jamshedji has relied. Lord Russell at page 9 say : 'When the section speaks of directors having interest in a company, what it is immediately concerned with in using the words 'controlling interest' is not the extent to which the individuals are beneficially interested in the profits of the company as a going concern or in the surplus assets in a winding-up, but the extent to which they have vested in them the power of controlling by the votes the decision which will bind the company in the shape of resolutions passed by the shareholders in general meeting.' Therefore, what emphasised by the learned Law Lord is the power of controlling by votes the decision of the company. But the learned Law Lord dies not refer at all to the distinction which Sir Jamshedji seeks to make that the votes be effective votes, and votes which are not effective must be excluded from the consideration whether the directors controlled the votes or not. Then turning to Lord Simonds, the observation relied on are at page 15, and Lord Simonds asks himself the question, 'What constitutes a controlling interest in a compan ?' and this is the answer that he gives : 'It is power by the exercise of voting rights to carry a resolution at a general meeting of a company. Can the directors of the respondent company by the exercise of their voting rights carry such a resolutio Yes; for they are the registered holders of more than half the ordinary shares of the company. Therefore they have a controlling interest in the company.' Therefore, what the learned Law Lord is emphasising is the fact that the directors in the case which he has considering were the registered were the registered holders of more than half the ordinary shares of the company. Here again, the emphasis is on the votes on the shares which represent the votes, and if the directors have a majority of such votes then they have controlling interest. Reference was also made to another decision of the House of Lords reported in British American Tobacco Co. v. Inland Revenue commissioners and reliance was placed on the observations of the Lord Chancellor (Viscount Simon) at page 31 :
'I find it impossible to adopt the view that a person who (by having the requisite voting power in a company subject to his will and ordering) can make the ultimate decision as to where and how the business of the company shall be carried on, and who thus has in fact control of the company's affairs, is a person of whom it can be said that he has not in this connection got a controlling interest in the company.'
5. It is perfectly true that if the directors can influence the ultimate decision of the company, they have a controlling interest. But according to the decision the ultimate control must be brought by directors having a majority of votes on the register and not by any extraneous circumstances which may result in the majority against them being reduced to a majority against them being reduced to a minority.
6. Some earlier English cases were also referred to at the Bar. One is the case reported in Glasgow Expanded Metal Co. Ltd. v. Commissioner of Inland Revenue, and Lord President (Clyde) expressed his opinion that the only interpretation which can be given to the expression 'controlling interest' was by reference to the power which the number of shares held by the directors gave them to control the disposal of the company's assets and the administration of its affairs at a general meeting of the company. Here again, the approach is clear. The test to be applied is the number of shares which the directors hold and it is only by reason of that holding that the directors must be in a position to control the affairs of the company. The other case in reported in the same volume, Commissioner of Inland Revenue v. B. W. Noble Ltd., and the judgment of Mr. Justice Rowlatt is to be found at page 926, and Mr. Justice Rowlatt observed that the phrase 'controlling interest' had a certain well known meaning and according to the learned Judge it meant the man whose shareholding in the company was such that he was the shareholder who was more powerful than all the other shareholder put together in general meeting. Here again, the power of the shareholder was to be judged, not by any other circumstances, not by any other consideration, but by his holding of shares. In this particular case Mr. Justice Rowlatt held that the vote which the chairman had as a casting vote under the article of association must be considered in deciding whether the directors had controlling interest or not. Sir Jamshedji says that Mr. Justice Rowlatt actually considered what happened at the meeting because he had considered the possibility of casting vote being given by the chairman. That, in my opinion is not correct reading of this judgment. The casting vote was to be exercised pursuant to the article of association. The vote existed by reason of the articles and that vote had to be considered as being vested in the chairman, who could exercise it in the event of there being a tie.
7. Sir Jamshedji has strongly relied on two very recent decisions of the English Court. One is commissioners of Inland Revenue v. James Hodgkinson (Salford) Ltd. and the other is Commissioners of Inland Revenue v. Monnick Ltd. In the first case the question that Mr Justice Croom-Johnson was considering was whether a shareholder of that particular company could by a power-of-attorney transfer his share to the directors of the company, and all that Mr. Justice Croom-Johnson held was that such a transfer was not valid and therefore the director was not entitled to exercise the votes of the shareholder and therefore those voted could not be considered in determining whether the company was a director-controlled company or not. Under the articles of association, votes could be transferred by valid proxies, and Mr. Justice Croom-Johnson has referred to these articles and has come to the conclusion that as votes were not transferred by proxies but by a power-of-attorney, the votes could not be exercised as laid down by the articles of association. Sir Jamshedji says that the very fact that Mr. Justice Croom-Johnson considered the question of votes being transferred by proxies leads one to the conclusion that in the opinion of the learned Judge the only material fact was not the holding if shares by the directors on the register of shareholders. According to Sir Jamshedji, even though a director may not hold certain shares on the register of shareholders, still he could exercise the votes represented by those shares if the shareholders had validly transferred those votes to the directors by proxies, and if those votes had been transferred, in the eye of the law the directors on whose favour the proxies were executed must be deemed to have control over those votes. Now, one must always read a decision as deciding what actually decides. Mr. Justice Croom-Johnson was not called upon, with respect, to decide what the position had been if the shareholder had executed a valid proxy. The only narrow question that arose for his determination was whether the power-of-attorney executed by the shareholder validly transferred the voting right to the director, and that question he decided as I have already indicated. In the other case the two directors had 500 shares each out 2,000 shares and there was a provision in the articles by which the directors could appoint one of the directors to be the chairman of the company, in which case he would have a casting vote. If no such appointment was made, the chairmen had to be elected at the general meeting, and the question was whether the directors could be considered to have a controlling interest inasmuch as they were in a position to nominate one of the directors as chairmen, who would then have a casting vote and would thereby have a majority of voted. The special commissioners held that they ought to have regard only to the facts as they existed at the general meetings of the company, and that the casting vote at those meetings was exercisable by the person who was in fact chosen as the chairmen, and who was not a director, and that therefore the company was not a director-controlled company during the relevant period Therefore, under the articles, this particular vote was exercisable by the chairman of the meeting, and the question had to be considered as to who had the right to exercise this vote, and on the facts of that particular case the Special Commissioners came to the conclusion to the conclusion that that vote was exercised by a person other than a directors because it was a person elected at the meeting as chairmen who could exercise that vote. I do not think that this case in any way militates against the principle of law enunciated in the earlier decisions to which I have referred. In this particular vote was not represented by a share, but was the result of a certain office held at the meeting. But the emphasis still is on the vote and not on whether the vote can be exercised or not.
8. In my opinion, therefore, the tribunal was right when it came to the conclusion that looking to the fact that the directors held 7,471 shares during the relevant period out of 15,600 shares, they did not have a controlling interest in the company and therefore during the material period the company was not a director-controlled company. I would therefore answer question (1) in the negative.
9. With regard to a question (2), whether in the circumstances of the case the commission due to the managing agents was a debt due by the company or borrowed money for the purpose of rules 2 and 2A of Scheduled II to the Excess Profits Tax Act, the case is wholly covered by a decision which we gave recently and which is reported in Seksaria Biswan Sugar Factory, Ltd. v. Commissioner of Income-tax, Bombay. In the light of that decision, the answer to question (2) is that it was a debt due.
10. Assessee must pay the costs of the reference.
11. I agree
12. Reference answered accordingly.