1. The question which has been referred to us in this reference is as follows :
'Whether, on the facts and in the circumstances of the case, the order of the Income-tax Officer under section 23A of the Indian Income-tax Act, 1922, and the corresponding section 104 of the Indian-tax Act, 1961, for the assessment years 1960-61 to 1962-63 was valid in law ?'
2. The assessment years in question are 1960-61, 1961-62 and 1962-63. The shareholding of the several shareholders of the assessee-company have been found to be as follows :
No. of shares
1. Shri R. D. Birla 50
2. Smt. Sharda Devi Birla 50
3. Smt. Gopi Kumari Birla 50
4. Shri Ashok Vardhan Birla 50
5. Messrs. Assam Jute Supply Co. Ltd. 50
6. Messrs. Gwalior Webbing Co. Ltd. 225
7. Messrs. Punjab Produce & Trading Co. Ltd. 36
3. The ITO having come to a finding, into the details of which we do not think it necessary to go, that the assessee-company was a company in which the public were not substantially interested, levied penal super-tax at the rate of 50% of the distributable profit for each of the assessment years under consideration.
4. In appeal, the AAC cancelled the penal super-tax for all the years, though he passed separate orders, one in respect of the assessment year 1960-61 and a consolidated order for the assessment years 1961-62 and 1962-63. The AAC held on examination of the list of shareholders that 50% of the shareholding was held by three companies, namely, Messrs. Assam Jute Supply Co. Ltd., Messrs. Gwalior Webbing Co. Ltd. and Messrs. Punjab Produce & Trading Co. Ltd. He further held that to these three companies, the provisions of s. 23 A were not applicable. He had relied upon a decision of the AAC, B Range, Calcutta, in Appeals Nos. 535, 534 and 523 of 1965-66, in which Messrs. Gwalior Webbing Co. Ltd. was held to be a public limited company.
5. When the matter was taken to the Tribunal by the ITO who appealed against the order of the AAC, the Tribunal held that no material had been brought on record by the revenue that the shareholders of the assessee-company were closely related or they acquired the shares of the assessee-company with a common object. Examining the constitutions of Messrs. Assam Jute Supply Co. Ltd. and Messrs. Gwalior Webbing Co. Ltd. the Tribunal held that those companies were not interconnected and the shares were held by the public. The Tribunal came to the conclusion that since the shares of the assessee-company were held by the public and the affairs of the company were under the control of more than six persons, it considered it unnecessary to advert to the provisions of the Companies Act. The Tribunal having dismissed the appeals filed by the revenue, the question reproduced earlier has been referred to us at the instance of the revenue.
6. When this reference was called out for hearing, Mr. Mehta who appears for the assessee drew our attention to a circular issued by the Central Board of Direct taxes dated 5th April, 1974. which refers to the amendment in the definition of a company in which the public are substantially interested made in s. 2(18) with effect from 1st April, 1965. Explaining the effect of the amendment, the circular states as follows :
'The effect of the amendment was :
(i) That company whose equity shares to the extent of not less than 50 per cent. (40% in the case of an industrial company) are held by another company in which the public are substantially interested or by a 100 per cent. subsidiary of such company will be regarded as a company in which the public are substantially interested, if it satisfies the other conditions of section 2(18)
(ii) In ascertaining whether the affairs of the company or shares carrying more than 50 per cent. of its total voting power were at no time during the relevant previous year controlled or held by five or less persons, no account will be taken of a company in which the public are substantially interested or a 100 per cent. subsidiary of such a company which holds not less than 50 per cent. (40 per cent., as the case may be) of the equity shares of the first-mentioned company.
It was explained in the instructions on the Finance Act, 1965, that this liberalised definition of a company in which the public are substantially interested would apply for the assessment year 1965-66 and subsequent years'.
7. The circular has then referred to a decision of the Kerala High Court in CIT v. Aspinwall & Co. Ltd. : 98ITR291(Ker) . The Kerala High Court in that decision dealt with the definition of a company in which the public were substantially interested in the context of s. 23A of the Indian I. T. Act, 1922, and s. 2(18) of the I. T. Act, 1961. The Kerala High Court in that case, while construing the expression 'the public', observed as follows after referring to the decision in West Derby Union v. Metropolitan life Assurance Society (1897) AC 647 :
'In the light of the principle laid down in this decision it is clear that when two categories of persons, namely, a director or a company to which this clause does not apply, are said to be not included in the expression 'the public', every other category of persons must, by implication, be deemed to be included in the expression 'the public'. Otherwise, the exclusion of certain persons or companies alone becomes meaningless. Thus understood, a company in which the public are substantially interested clearly comes within the expression `the public' in section 2(18)(b)(i) of the Act.'
Adverting to this decision the circular goes on to state as follows :
'It has been held by the Kerala High Court in CIT v. Aspinwall & Co. Ltd. : 98ITR291(Ker) , that even prior to the amendment to section 2(18) made by the Finance Act, 1965, the position in law was the same as brought out by the amendment. The amendment only clarified the existing position and did not make any change in the law. The Board have been advised that the position in the law enunciated by the Kerala High Court in the judgment cited, which is in consonance with and follows the Supreme Court decision in Shree Changdeo Sugar Mills v. CIT : 41ITR667(SC) sets out the current position in law.
In view of this position in law, it may be ensured that all proceedings pending on this issue for and up to assessment year 1965-66 be regulated in the light of the above clarification. Steps may also be taken to withdraw reference applications/appeals filed on this issue and pending at different stages'.
8. When this circular was brought to the notice of Mr. Joshi, it was not possible for him to dispute that in view of this circular and the decision of the Kerala High Court, the answer to the question referred would have to be in favour of the assessee. He, however, expressed his inability to withdraw the reference. The three companies which held more than 50% of the shares of the assessee-company were companies in which the public were substantially interested. Consequently, the assessee-company will be a company to which the provision of s. 23A of the Indian I. T. Act, 1922, or s. 104 of I. T. Act, 1961, will not apply. The question referred to us will, therefore, have to be answered in the negative and in favour of the assessee. The assessee to get the costs of this reference.