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Commissioner of Income-tax, New Delhi Vs. East West Import and Export Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberI. T. Reference No. 22 of 1965
Judge
Reported in[1975]100ITR458(Bom)
ActsIncome Tax Act, 1922 - Sections 23A(1)
AppellantCommissioner of Income-tax, New Delhi
RespondentEast West Import and Export Pvt. Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateS.P. Mehta, Adv.
Excerpt:
.....power not freely transferable by holders to other members of public for large part of previous year - shares freely transferable at end of previous year - held, assessee company is a company in which public were substantially interested. - - it was not disputed at any stage of the assessment proceedings that the first criterion was clearly satisfied in the case of this company. the taxing authorities as well as the tribunal proceeded on the basis that equity shares of the assessee-company carrying not less than 25% of the voting power were held by the public and it is only with regard to the second criterion mentioned above that there was a dispute between the assessee-company on the one hand and the revenue on the other and even there the dispute pertained to the alternative..........in fact, freely transferable by holders to other members of the public for a large part of the previous year even though they were freely transferable as at the end of the previous year ?' 2. the assessee is messrs. east west import & export private ltd., now known as asian distributors ltd. the assessment year in question is 1951-52, the corresponding previous year being the one ended on 31 of march 1951, and the question that arises is whether the provisions of section 23a (1) were applicable to the company. initially the company was incorporated as a private limited company at jaipur on december 24, 1942, and at the material time it was known as 'm/s. rajputana investment co. ltd.' the assessment for the year 1951-52 was completed on a total income of rs. 6,87,881, the tax payable.....
Judgment:

Tulzapurkar, J.

1. The following question has been referred to us for our opinion under section 66 (1) of the Indian Income-tax Act, 1922, at the instance of the Commissioner of Income-tax, New Delhi :

'Whether, on the facts and in the circumstances of the case, the assessee-company could not be held to be a company in which the public were substantially interested within the meaning of the Explanation to section 23A (1) by reason of the fact that the shares of the company carrying not less than twenty five per cent. of its voting power were not, in fact, freely transferable by holders to other members of the public for a large part of the previous year even though they were freely transferable as at the end of the previous year ?'

2. The assessee is Messrs. East West Import & Export Private Ltd., now known as Asian Distributors Ltd. The assessment year in question is 1951-52, the corresponding previous year being the one ended on 31 of March 1951, and the question that arises is whether the provisions of section 23A (1) were applicable to the company. Initially the company was incorporated as a private limited company at Jaipur on December 24, 1942, and at the material time it was known as 'M/s. Rajputana Investment Co. Ltd.' The assessment for the year 1951-52 was completed on a total income of Rs. 6,87,881, the tax payable thereon amounted to Rs. 1,28,886 and the distributable surplus was Rs. 5,59,015. No dividend was declared on the ordinary shares of the company, while dividend amounting to Rs. 6,000 was declared in respect of the preference shares.

3. The question that really arises for consideration is whether the company was one in which the public were substantially interested having regard to the criteria laid down in the Explanation to section 23A (1) as it stood at the relevant time. The Explanation at the material time ran as follows :

'For the purposes of this sub-section, a company shall be deemed to be a company in which the public are substantially interest if shares of the company (not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in profits) carrying not less than twenty-five per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and are at the end of the previous year beneficially held by the public (not including a company to which the provisions of this sub-section apply), and if any such shares have in the course of such previous year been the subject of dealing in any stock exchange in the taxable territories or are in fact freely transferable by the holders to other members of the public.'

4. It is clear that only two criteria were laid down by this Explanation and they were that : (1) the shares of the company carrying not less than 25 per cent. of the voting power should have been allotted unconditionally to or acquired unconditionally by and beneficially held, at the end of the previous year, by the public; and (2) such shares should have been the subject of dealing in any stock exchange in the taxable territories in the course of the previous year or should have in fact been freely transferable by the holders to the other members of the public. It was not disputed at any stage of the assessment proceedings that the first criterion was clearly satisfied in the case of this company. The taxing authorities as well as the Tribunal proceeded on the basis that equity shares of the assessee-company carrying not less than 25% of the voting power were held by the public and it is only with regard to the second criterion mentioned above that there was a dispute between the assessee-company on the one hand and the revenue on the other and even there the dispute pertained to the alternative part of the second criterion, viz., whether such shares were in fact freely transferable by the holders to the other members of the public during such previous year or not, and the question arose in these circumstances. As stated earlier, the assessee-company was a private limited company and by article 4, 81 and 82 of the articles of association of the company there was limitation placed on the transfer of the shares of the assessee-company from the holders thereof to any other members of the public. These article were deleted at an extraordinary general meeting of the assessee-company held on 26th March 1951, an by deletion of these articles the limitation or restriction on transfer of the shares was removed as also limit on the number of shareholders. The previous year, a question arose as to whether the latter part of the second criterion indicated in the Explanation was satisfied by the assessee-company or not. The Income-tax Officer took the view that the assessee-company did not satisfied the particular requirement inasmuch as, according to him, that criterion would have been satisfied if the shares were transferable in the course of such previous year, meaning thereby 'throughout the previous year', and since the attribute of free transferability was got attached to the shares of the assessee-company only for a period of 4 or 5 days prior to the end of the previous year, the criterion could not be said to have been satisfied by the assessee-company. The Income-tax Officer also considered the practical aspect of the matter and came to the conclusion that though the attribute of free transferability was attached to the shares of the assessee-company during the last 4 or 5 days prior to the expiry of the previous year, and transfer of shares of the assessee-company would be preceded by negotiation to be carried on between the transferor and transferee and as such the free transfer could not have been effected within 4 or 5 days before the end of the previous year. In fact, he emphasized the aspect that the expression 'in the course of' indicated that the attribute of free transferability of shares should be present in the course of the whole of the previous year or throughout the previous year and, in that view of the matter, he held that provisions of section 23A (1) were attracted to the case of the assessee-company for the assessment year 1951-52. The Appellate Assistant Commissioner, to whom the assessee-company, appealed, confirmed the view of the Income-tax Officer and dismissed the appeal. When the matter was carried to the Tribunal by the assessee-company, a two-fold contention was raised before the Tribunal. In the first place, it was urged that the phrase 'in the course of such previous year' was not applicable to the latter part of the criterion indicated in the Explanation, but was applicable to the latter part of the criterion indicated in the Explanation, but was applicable only to the first part of the criterion, viz., that such shares should have been the subject of dealings in any stock exchange in the taxable territories. Secondly, it was argued that even if that phrase was applicable to the latter part of the criterion, the same could not be equated with the words 'throughout the year', but must be interpreted to mean that the shares must have attribute of free transferability at any time during the course of the previous year. The Tribunal accepted both the contentions that were urged on behalf of the assessee-company and came to the conclusion that the assessee-company was a company in which the public were substantially interested and that, therefore, section 23A was not attracted. At the instance of the Commissioner of Income-tax, New Delhi, the question of law mentioned above has been referred to us for our determination.

5. The two parts of the second criterion mentioned in the Explanation ran as follows :

'For the purpose of this sub-section, a company shall be deemed to be a company in which the public are substantially interested....... if any such shares have in the course of such previous year been the subject of dealing in any stock exchange in the taxable territories or are in fact freely transferable by the holder to other members of the public.'

6. Obviously, the expression 'any such shares' has a reference to the type of equity shares of the company carrying no less than 25% of the voting power as indicated in the first criterion mentioned in the Explanation and the two parts of the criterion in question are disjunctive in their operation, that is to say, either such shares should have been, in the course of any such previous year, the subject of any dealings in any stock exchange in the taxable territories or should have been in fact freely transferable by the holders to the other members of the public. Now, as a matter of plain language and grammatical construction, it seems to us very clear that the phrase 'in the course of such previous year' occurring in the first part of the criterion would apply only to that criterion which is indicated in that part and that phrase would not be applicable to the other aspect of the criterion, viz., the attribute of free transferability mentioned in the second part. In other words, the limitation of period indicated by the expression 'in the course of such previous year' is applicable only to the aspect that the shares should have been the subject of dealings in any stock exchange in the taxable territories and those words would be inapplicable to the other part of the criterion, viz., the attribute of free transferability, and, in our view, the Tribunal was right in so construing the relevant provisions contained in the Explanation. However, even if the phrase 'in the course of such previous year' occurring in the first part of the second criterion indicated in the Explanation is regarded as being applicable to the other part of the criterion dealing with the attribute of free transferability, it is not possible to accept the contention of Mr. Joshi appearing on behalf of the revenue that the phrase should be construed as meaning the attribute of free transferability of shares should have been present throughout the previous year in question. The phrase 'in the course of such previous year' clearly indicates that the attribute of free transferability should have been possessed by the shares of the assessee-company at any time during the previous year. In this case it was not disputed before us that by reason of deletion of articles 4, 81 and 82 from the articles of association of the assessee-company under a resolution passed by the assessee-company at the extraordinary general meeting held on 26th March 1951, the attribute of free transferability was acquired by the shares of the assessee-company towards the end of the previous year, viz., for a period of 4 or 5 days before the expiry of the previous year. But such acquisition of the attribute of free transferability, in our view clearly satisfied the requirement of the second criterion mentioned in the Explanation. It is not possible to equate the expression 'in the course of' with the expression 'throughout', nor is it possible to accept the contention that the expression should be taken to mean that at least for a substantial part of the previous year the attribute of free transferability should have been possessed by the shares of the assessee-company. If that was the intention of the legislature, nothing would have prevented the legislature from employing appropriate language. Having regard to the language used it seems to us clear that the intention was that the provisions of section 23A would not be applicable to a company if the attribute of the transferability is possessed by the shares of the company at any time during the previous year.

7. That the above interpretation which we are placing on the expression 'in the course of such previous year' is correct would further become clear from the manner in which the relevant provisions of the Explanation, have been amended in 1957. While amending the relevant Explanation, the legislature has, whenever it wanted, used expression like, 'throughout the previous year', 'at any time during the previous year', and the amendments so effected clearly indicate that the phrase 'in the course of such previous year' was intended to mean 'at any time during such previous year'.

8. The other contention that was urged before the Tribunal on behalf of the department was that the shares should have in fact been transferred in the previous year or in the subsequent year and it was only then that the criterion could be said to have been satisfied by the assessee-company. That contention was negatived by the Tribunal and having regard to the language occurring in the relevant part of the Explanation, it seems to us clear that the Tribunal was right in the view which it took, viz., that all the Explanation required was that the shares should be freely transferable and the absence of any actual transfer either in the previous year or in the subsequent year did not, by any means, deprive the shares of their quality of transferability.

9. In view of our conclusion which we have reached on the interpretation of the relevant expression occurring in the Explanation to section 23A (1), we do not think it necessary to consider the position arising under the third proviso to section 23A of the Act.

10. In our view, therefore, the Tribunal was right in coming to the conclusion that the two criteria mentioned in the Explanation were satisfied by the assessee-company and as such the provisions of section 23A were not attracted to the assessee-company for the assessment year 1951-52. The question referred to us is, therefore, answered thus :

'The assessee-company could be held to be a company in which the public were substantially interested within the meaning of the Explanation to section 23A (1) by reason of the fact that the shares of the company carrying not less than 25% of its voting power were not in fact freely transferable by holders to other members of the public for a large part of the previous year even though they were freely transferable as at the end of previous year.'

11. The revenue will pay the costs of the reference.


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