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Indian Hume Pipe Co. Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 80 of 1962
Judge
Reported in[1969]74ITR762(Bom)
ActsIncome Tax Act, 1922 - Sections 66(1); Finance Act, 1955 - Sections 23A and 23A(1)
AppellantIndian Hume Pipe Co. Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocatePalkhivala, Adv.
Respondent AdvocateG.N. Joshi and ;R.J. Joshi, Advs.
Excerpt:
(i) direct taxation - exemption - section 66 (1) of income tax act, 1922 and section 23a and 23a (1) of finance act, 1955 - whether assessee entitled to exemption envisaged in third proviso to section 23a (1) - object of section 23a (1) is undoubtedly to prevent avoidance of super-tax by shareholders of company by resorting to expedient of not distributing its dividend or profits - company in which public are only interested to extent of 25 % could easily be company which is controlled or dominated by an individual or group of individuals - dividend policy of company could be capable of being manipulated by individual or group for their own benefit - even under third proviso read with explanation such companies excluded from operation of section 23a (1) - held, assessee-company not one in.....v.s. desai, j. 1. the assessee is a public limited company. out of the total of 30,000 shares of the assessee-company's capital, 29,893 shares are held by its parent company known as the premier construction co. ltd. the parent company is admittedly a company in which the public are substantially interested. the shares of the assessee-company held by the premier construction co. ltd. were not the subject of any dealings in any stock exchange and according to the finding of the tribunal they were freely transferable.2. in the account year of the assessee ended 30th june, 1953, for which the assessment year was 1954-55, the assessee's total computed income was rs. 23,17.722. income-tax and super-tax payable by the company excluding super-tax payable under section 23a was rs. 9,94,834. the.....
Judgment:

V.S. Desai, J.

1. The assessee is a public limited company. Out of the total of 30,000 shares of the assessee-company's capital, 29,893 shares are held by its parent company known as the Premier Construction Co. Ltd. The parent company is admittedly a company in which the public are substantially interested. The shares of the assessee-company held by the Premier Construction Co. Ltd. were not the subject of any dealings in any stock exchange and according to the finding of the Tribunal they were freely transferable.

2. In the account year of the assessee ended 30th June, 1953, for which the assessment year was 1954-55, the assessee's total computed income was Rs. 23,17.722. Income-tax and super-tax payable by the company excluding super-tax payable under Section 23A was Rs. 9,94,834. The assessable income of the company of the previous year as reduced by the amount of income-tax and super-tax payable by the company in respect thereof was, therefore, Rs. 13,22,988. The company had declared Rs. 7,00,000 to be distributed as dividend. Since the said amount was less than 60 per cent. of Rs. 13,22,988, which was the balance of the assessable income of the company after deduction therefrom of the income-tax and super-tax payable by it in respect thereof, the Income-tax Officer was of the opinion that the provisions of section 23A of the Income-tax Act, as it stood at the material time, were attracted. He, therefore, issued a notice to the assessee-company requiring it to show cause why an order under Section 23A should not be made against it. The assessee contended that it was excluded from the operation of Section 23A(1) by reason of the third proviso to that sub-section read with the Explanation thereto. It was contended that the assessee-company was a company in which the public were substantially interested and was also a subsidiary of a company in which the public were substantially interested and consequently was excluded from the operation of Section 23A(1). The claim of the assessee was not accepted by the Income-tax Officer and an order under Section 23A was made against it by him. The Appellate Assistant Commissioner agreed with the decision of the Income-tax Officer and dismissed the appeal. The assessee thereupon went in appeal to the Tribunal. In addition to the contentions urged before the Income-tax Officer and the Appellate Assistant Commissioner it was further argued before the Tribunal that, even if the provisions of Section 23A(1) were attracted in the case of the assessee-company, no order under the said section should have been made inasmuch as, having regard to the smallness of the profits in the previous year, it would be unreasonable to expect it to declare a larger dividend than what was declared by it. The Tribunal negatived all the contentions which were raised by the assessee-company. It held that the assessee was not entitled to exemption from the operation of Section 23A either on the ground that it was a company in which the public were substantially interested or on the ground that it was a subsidiary of a company in which the public were substantially interested. It also further held that the additional argument advanced before it, viz., that the order under Section 23A should not have been made against it having regard to the smallness of its profits, was not available to the assessee. It pointed out that, on the basis of the statement filed by the assessee in the course of the appeal, it had admittedly distributable surplus of Rs. 10,21,734 which was far in excess of the dividend of Rs. 7 lakhs which it had declared. It observed that, for a proper consideration of the matter from the angle as to whether an order under Section 23A was not justified against the assessee on the ground of smallness of profits, the assessee must have declared the whole of the commercial profits and not merely 60 per cent. thereof. In the view that it took, the Tribunal confirmed the orders made by the departmental authorities and dismissed the appeal. On the application under Section 66(1) of the Indian Income-tax Act, the assessee applied to the Tribunal for a reference to this court on the following three questions :

'1. Whether the assessee is entitled to exemption envisaged in the third proviso to Section 23A(1) ?

2. Whether, on the facts and in the circumstances of the case, Section 23A(1) of the Act was rightly applied to the assessee-company ?

3. Whether the Tribunal erred in holding that before the Income-tax Officer can consider whether having regard to the loss incurred by the company in earlier years or to the smallness of the profit the payment of a dividend or a larger dividend than that declared would be unreasonable, the assessee must distribute by way of dividend the whole of its commercial profit ?'

3. The Tribunal agreed to make a reference on the first and the second questions on the ground that they were questions of law arising out of its order. It was, however, of the opinion that the third question did not arise out of its order and, therefore, was not required to be referred to this court. It accordingly drew up a statement of the case and referred the first two questions to this court. When the reference came before this court, a notice Of motion was taken out on behalf of the assessee requesting that a supplementary statement of the case be called for from the Tribunal requiring it to state the third question which the assessee had asked in its application before the Tribunal on the ground that the said question properly arose on the Tribunal's order and was wrongly refused by it. The said notice of motion was allowed by this court and the Tribunal was directed to make a supplementary statement referring the said question also to this court. The Tribunal has accordingly submitted the said question on a supplementary statement. We will treat the said question as question No. 3 in the present reference.

4. So far as the first two questions are concerned, what is required to be considered is whether the assessee-company is exempted from the operation of Section 23A(1) by reason of the third proviso to the said section and the Explanation thereto. The said third proviso and the Explanation, as they stood at the material time, were as follows :

'23A. (1)............

Provided further that this sub-section shall not apply to any company in which the public are substantially interested or to a subsidiary company of such a company if the whole of the share capital of such subsidiary company is held by the parent company or by the nominees thereof,

Explanation,--For the purpose of this sub-section,-- a company shall be deemed to be a company in which the public are substantially interested 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 dealings in any stock exchange in the taxable territories or are in fact freely transferable by the holders to other members of the public.'

5. The assessee claims that it is a company in which the public are substantially interested within the meaning of the Explanation and, therefore, it is excluded from the operation of the provisions of Section 23A(1) under the first part of the proviso read with the Explanation. It also claims that it is exempted also under the latter part of the proviso on the ground that 99.5 per cent of its share capital, i.e., practically the whole of its capital is held by the Premier Construction Co., which is admittedly a company in which the public are substantially interested. So far as the claim for exemption based on its falling under the second part of the proviso is concerned, the said claim, in our opinion, cannot be seriously pressed inasmuch as what the said provision requires is that the whole of its capital and not substantially or practically the whole of its capital must be held by the parent company.

6. In order to substantiate its claim for exemption under the first part of the third proviso read with the Explanation, what the assessee has to satisfy is that it is a company in which the public are substantially interested within the meaning of the Explanation. Now, the requirements of the Explanation are : (1) that the shares of the company carrying not less than 25 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, and (2) such shares have been, in the course of the previous year, the subject of dealings in any stock exchange in the taxable territories or are in fact freely transferable by the holders to other members of the public. The factual position so far as the assessee-company is concerned is that out of the total of 30,000 ordinary shares of the company, 29,893 shares are held by the Premier Construction Company in the name of the company, 57 shares are held in the names of certain nominees of the Premier Construction Company and only 50 shares are held by the other shareholders for their individual benefits. The Premier Construction Company, which holds nearly all the shares, is itself a company in which the public are substantially interested. The shares of the assessee-company have not been the subject of dealings in any stock exchange in the taxable territories but it is admitted that they are freely transferable by the holders to other members of the public. It is on these facts that it is required to be determined as to whether the assessee-company is a company falling in the first part of the proviso read with the Explanation thereto.

7. The main question to be considered is whether the assessee-company is one in which the shares carrying not less than 25 per cent. of the voting power have been unconditionally and beneficially held by the public. As we have seen 99.5% of the shares are held by a single shareholder, viz., the Premier Construction Company. Unless the said shares can be said to be held unconditionally and beneficially by the public, the assessee-company cannot be said to have satisfied the said requirement. The Tribunal has held that the shares held by the Premier Construction Company in the assessee-company cannot be said to be shares held by the public within the meaning of the Explanation on the principle laid down in the Supreme Court case in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax : [1961]41ITR613(SC) , In that case it was held by the Supreme Court that the word 'public' was used in contradistinction to one or more persons who act in unison and among whom the voting power constitutes a block. If such a block exists and possesses more than seventy-five per cent. of the voting power, the company cannot be said be one in which the public are substantially interested. The test to determine whether the company is one in which the public are substantially interested or not is first to find out whether there is an individual or a group which controls the voting power as a block. If there is such a block the shares held by it cannot be said to be unconditionally and beneficially held by the members of the public. In the category of shares held by the public only those shares can be counted which are unconditionally and beneficially held by the public, or, in other words, which are uncontrolled by the group which controls the affairs of the company. According to the test laid down by the Supreme Court, in order that a company may be one in which the public are substantially interested, shares carrying not less than 25 per cent. of the voting power must be possessed by the members of the public and must be free from the control of any person or persons constituting a block controlling the affairs of the company. Concentration of the voting power beyond 75 per cent. in the hands of a single individual shareholder or a group of shareholders acting in concert excludes such shareholder or group of shareholders from the concept of the word 'public' as used in the Explanation. According to the Tribunal, since 95.5% of the shares were held by the Premier Construction Company, voting power in excess of 75 per cent. was held by it as a single shareholder and consequently the shares held by the Premier Construction Company could not be considered as unconditionally or beneficially Held by the 'public' within the meaning of the Explanation. Since the rest of the shares held by the public were far less than the required minimum of 25 per cent., the assessee-company could not qualify to be a company in which the public were substantially interested within the meaning of the Explanation.

8. Mr. Palkhivala, the learned counsel who appears for the assessee, has contended that the Tribunal has erred in taking the view that the shares held by the Premier Construction Company could not be regarded as shares held unconditionally and beneficially by the public within the meaning of the Explanation, His argument is that, having regard to the scheme and object of Section 23A(1) as also the language used in the proviso and the Explanation thereto, shares held by a company in which the public are substantially interested are shares held by the public within the meaning of the Explanation. He has argued that the Supreme Court case in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax was a case which was dealing with the case of individuals as shareholders and the interpretation of the word 'public' given by the Supreme Court in that case was in relation to individuals and not with reference to companies in which the public were substantially interested. Mr. Palkhivala argues that the Supreme Court in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax was not concerned with the consideration as to whether the shares held by a company in which, the public were substantially interested would constitute a holding by the public within the meaning of the Explanation. On the construction of the language of the proviso itself, says Mr. Palkhivala, it would be clear that the legislature has contemplated that a company in which the public are substantially interested would constitute 'public' within the meaning of the Explanation and the shares held by it would be the shares held by the public within the meaning of the proviso and the Explanation thereto. Mr. Palkhivala argues that in the context of the scheme of the section the word 'public' in the Explanation is intented to mean that body of shareholders, who are not likely to and cannot manipulate the dividend policy of the company for their own benefit. It is in view of this concept of the word 'public' that the Supreme Court held in Raghuvanshi Mills' case that the word 'public' was used in contradistinction to one or more persons who acted in unison and among whom the voting power constituted a block. It is also in view of this concept of the word 'public' that the Supreme Court stated that the words 'unconditionally and beneficially' occurring in the Explanation underlined the fact that no person who holds a share or shares not for his own benefit but for the benefit of another and who does not exercise freely his voting power could be said to belong to that body which is designated 'public'. According to Mr. Palkhivala, if this concept of the word 'public' is borne in mind, a company in which the public are substantially interested would undoubtedly fall within the ambit of the word 'public' and its holdings, irrespective of its extent, would constitute the holding by the public.

9. Now, the object of Section 23A(1) is undoubtedly to prevent avoidance of super-tax by the shareholders of a company by resorting to the expedient of not distributing its dividend or profits. The sub-section accordingly has required every company to declare as dividend at least sixty per cent. of its assessable income as reduced by the amount of income-tax and supertax payable thereon and has compelled obedience to the requirement by providing that, if a company fails to do so, certain consequences which are of a penal nature would ensue. By the third proviso to the sub-section, however, it has been provided that the sub-section will not apply to all companies but will exclude from its operation such companies in which the public are substantially interested or companies which are cent, per cent. subsidiaries of such companies irrespective of whether they themselves are companies in which the public are substantially interested or not. Mr. Palkhivala has argued that the exclusion of the companies in which the public are substantially interested or the cent, per cent. subsidiaries of such companies gives a clear clue of the mind of the legislature, viz., that it wants to hit at only such companies in which there is a real danger of an individual or a group of individuals manipulating the dividend policy of the company for his or their benefit with a view to evasion of tax and not to hit at companies where such danger is not very likely or prominent. The exclusion of cent, per cent. subsidiary of a company in which the public are substantially interested from the operation of Section 23A(1) again indicates, according to Mr. Palkhivala, that the legislature has taken the view that where the affairs of a company are wholly in the hands of another company in which the public are substantially interested, the mischief, which is sought to be prevented by the provision of Section 23A(1), is not likely to occur. Mr. Palkhivala has argued that the intendment of the provision will have to be borne in mind when we go to interpret the Explanation and that interpretation of it will have to be favoured which will be consistent with, and in furtherance of, the said intendment. Now, in the first place, it would not be correct in proceeding to interpret a provision of a statute to take any supposed intendment as a guideline for the interpretation. This is all the more so when the provision to be interpreted is of a taxing nature like the Income-tax Act. It is well settled that in a taxing Act one has to look merely at what is clearly said; there is no room for any intendment, nothing is to be read in, nothing is to be implied : one can look only to the language used. Secondly, it is not quite clear that the exclusion of companies in which the public are substantially interested and of cent. per cent. subsidiaries of such companies is based solely on the consideration of the absence of a present and real danger of an individual or a group of individuals manipulating the dividend policy of the company for his or their own benefit in view of the Explanation. It would be seen from the terms of the Explanation that what are deemed to be companies in which the public are substantially interested are not necessarily companies in which the public have a controlling interest but in which the public have some interest, which is not nominal. The minimum limit of public interest which would qualify it to be a company in which the public are substantially interested is only that of voting power of 25 per cent. A company in which the public are only interested to the extent of 25 per cent. could easily be a company which is controlled or dominated by an individual or a group of individuals and the dividend policy of the company could be capable of being manipulated by the individual or the group for their own benefit. Even then under the third proviso read with the Explanation such companies are excluded from the operation of the provisions of Section 23A(1). It would not, therefore, be advisable in proceeding to interpret the Explanation to approach it in the light of a supposed intendment as is suggested by Mr. Palkhivala and the proper thing to do would be to ascertain what, on the language used, is the true meaning of the Explanation.

10. Coming now to the Explanation itself, Mr. Palkhivala points out that the legislature by providing that a company to which the provisions of the sub-section apply is not included within the ambit of the word 'public' has clearly indicated that a company to which the provisions of this sub-section do not apply is necessarily 'public' within the ambit of that word as used in the Explanation. Mr. Palkhivala points out that under the Explanation any holding by a company to which the provisions of the sub-section apply, irrespective of its extent, is discarded as the holding by the public within the meaning of the Explanation. This is indicative, according to Mr. Palkhivala, that so far as the holdings by a company are concerned, the test is qualitative, viz., whether the holding is by a private company or a company to which the provisions of section 23A apply or by a company in which the public are substantially interested : in the former case, the holding is to be discarded from the holding by the public whereas, in the latter case, it is to be treated as the holding by the public. The qualitative test with regard to the holding of companies provided in the Explanation itself taken along with the fact that companies in which the public are substantially interested and companies cent. per cent. controlled by such companies are excluded from the operation of Section 23A(1) are clear pointers, according to Mr. Palkhivala, that the legislature regards the Holding by a company in which the public are substantially interested as a holding by the public irrespective of the extent of the holding. The argument advanced by the learned counsel does not appeal to us. Under the Explanation the condition required to be satisfied is that ordinary shares of the company carrying not less than 25 per cent. of the voting power must have been allotted unconditionally to or acquired unconditionally by, and at the end of the previous year must have been beneficially held by, the public (not including a company to which the provisions of this sub-section apply). This provision, therefore, requires that shares carrying 25 per cent. or more of the voting power must be held unconditionally and beneficially by the public. The question then is which are the shares which are held unconditionally and beneficially by the public The words in parenthesis following the word 'public' exclude from its ambit companies to which the provisions of Section 23A(i) apply so that in computing the shares held by the public those held by companies to which the provisions of the sub-section apply will have to be left out. The words in parenthesis are words of exclusion and state what is excluded so that the inquiry as to which shares are held by the 'public' unconditionally and beneficially will have to be made only with reference to the shares held by shareholders other than companies to which the provisions of the sub-section apply. They have not the effect of positively including within the ambit of the expression 'public' any shareholder or category of shareholders without further inquiry. Mr. Palkhivala says that they must be taken to have such effect, when the reason for the exclusion of the companies to which the sub-section applies is considered. In other words, Mr. Palkhivala's argument is that, although the words by themselves have not the effect which he contends for, such an effect can be gathered on the basis of a supposed intendment. As we have already pointed out earlier, such a course cannot be adopted in interpreting the provisions of a taxing statute. The inquiry as to the shares held unconditionally and beneficially by the public will have to be made in respect of all ordinary shares excluding those held by companies to which the provisions of the sub-section apply and such of them as can be said to be held 'unconditionally' and 'beneficially' by the 'public' will be taken into account in ascertaining the minimum voting power specified in the provision.

11. Now, the Supreme Court has more than once considered the terms of the Explanation and the meaning which the words 'unconditionally' and 'beneficially' and 'public' have in the context of the provision and it has laid down certain tests for ascertaining the companies which will be deemed to be companies in which the public are substantially interested within the meaning of the Explanation. Thus, in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax it pointed out as under :

'The words 'unconditionally' and 'beneficially' underline the fact that no person who holds a share or shares not for his own benefit but for the benefit of another and who does not exercise freely his voting power can be said to belong to that body which is designated 'public.' The word 'public' is used in contradistinction to one or more persons who act in unison and among whom the voting power constitutes a block. If such a block exists and possesses more than seventy-five per cent. of the voting power, the company cannot be said to be one in which the public are substantially interested.'

12. It observed:

'The test is first to find out whether there is an individual or a group which controls the voting power as a block. If there be such a block the shares held by it cannot be said to be 'unconditionally' and 'beneficially' held by the members of the public. In the category of shares held by the public, only those shares can be counted which are unconditionally and beneficially held by the public or, in other words, which are uncontrolled by the group which controls the affairs of the company.'

13. The view taken in this case was followed by the Supreme Court in Commissioner of Income-tax v. Jubilee Mills : [1963]48ITR9(SC) , where it observed :

'In order to decide whether the shares of a company carrying not less than 25 per cent. of the voting power are held beneficially by the public within the meaning of the Explanation to Section 23A(1) of the Indian Income-tax Act, 1922, one has first to see whether there is an individual or a group holding the controlling interest, which group acting in concert can direct the affairs of the company at its will. The controlling interest is effective only if the group owns 51 per cent. of the total shares, but the company still will be a company in which the public can be said to be substantially interested because to cease to be so the shareholding of the group must be more than 75 per cent.'

14. Again in Commissioner of Income-tax v. East Coast Commercial Co. Ltd. : [1967]63ITR449(SC) the Supreme Court observed :

'In deciding whether a distribution order is called for under Section 23A(1) of the Indian Income-tax Act, 1922, the Income-tax Officer must determine: (i) whether there is an individual member who, or a group of members which, can control the voting power of the company as a block. The existence of such a block may be established by showing that the voting power is vested in persons possessing more than 50 per cent. of the shares issued who act in concert; and (ii) that the block exercises a controlling interest over the affairs of the company. This condition is satisfied only if the voting power of the block or group is 75 per cent. or more. If the block holds 75 per cent. of the voting power it shall be deemed that the company is one in which the public are not substantially interested. On the other hand, if the members of the public hold 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 25 per cent. of the voting power allotted unconditionally to, or acquired unconditionally by, them, the company shall be deemed to be one in which the public are substantially interested.'

15. Having regard to these decisions of the Supreme Court, a company cannot be deemed to be a company within the meaning of the explanation if shares carrying 75 per cent. or more of the voting power are vested in a single shareholder or a group of shareholders acting in concert. Such a shareholder or a group cannot be regarded as 'public' within the meaning of the word as used in the Explanation and the shares held by such shareholder or group cannot be regarded as shares held unconditionally and beneficially by the public.

16. In order to satisfy the test laid down in the Explanation shares carrying at least 25 per cent. of the voting power must be distributed amongst shareholders in none of whom either individually or as a group acting in concert, voting power of more than 75 per cent. is concentrated. The word 'public' has reference to the shareholders of the company exclusive of those shareholders who are companies in which the provisions of the sub-section apply and is used in contradistinction with a single shareholder or a group of shareholders acting in concert who form a block and in whom voting power of more than 75 per cent. is concentrated. In computing the minimum percentage of the voting power specified in the Explanation only those shares can be considered which are other than the fixed dividend carrying shares and are held by the shareholders none of whom is a company to which the provisions of the sub-section apply and in none of whom either individually or as a group acting in concert voting power of more than 75 per cent. is concentrated. These qualifications have to be considered in the case of all the shareholders and there is nothing in the words used or in the interpretation put on them by the Supreme Court which would warrant a different consideration in the case of individual shareholders and in the cases where the shareholders are companies in which the public are substantially interested.

17. Mr. Palkhivala has argued that, although no clear words may be found in the Explanation as it was worded at the material time making a distinction between the shares held by a company in which the public are substantially interested and the shares held by the other members of the public, that such was the intention of the legislature would be apparent from the subsequent amendments made in the Act of 1922 and the corresponding provisions of the new Act of 1961 which replaced the old Act. He has accordingly invited our attention to the amendments made in 1955 and 1957 to the Act of 1922 and the corresponding provisions contained in the Act of 1961 and the amendments made in the new Act in 1965.

18. Now, we do not think that, having regard to the nature, scope and extent of the amendments, they can be pressed into service for the purpose of interpreting the provision as it stood before the amendment. By these amendments several additions have been made, new conditions have been added and the amended provision has no more the same ambit or scope as the original provision. It would not, therefore, be right to look to the amended provision for the purpose of ascertaining the true meaning and content of the provision before the amendments. In our opinion, therefore, on the wording of the Explanation as it stood at the material time the shares held by a company in which the public were substantially interested are to be judged by the same tests which are applicable to the shares held by the other members of the public in order to ascertain whether they are held unconditionally and beneficially by the public within the meaning of the Explanation. Concentration of shares carrying more than 75 per cent. of the voting power in a single holder whether it be a company in which the public are substantially interested or any other member of the public will disqualify the shares from being considered as shares held unconditionally and beneficially by the public and since excluding those shares the remaining shares cannot carry the minimum voting power specified in the provisions the company cannot be deemed to be a company in which the public are substantially interested within the meaning of the Explanation. Since in the assessee-company a single shareholder, namely, the Premier Construction Company, holds 99.5 per cent. of the shares, the assessee-company cannot be deemed to be a company in which the public are substantially interested within the meaning of the Explanation.

19. Mr. Palkhivala says that the assessee-company which fails to qualify to be a company in which the public are substantially interested would have qualified itself for exemption provided the parent company had held the remaining 0.5 per cent. shareholding also, i.e., a holding even in excess of the present holding, the consequence of which is to disqualify it from being one in which the public are substantially interested and this, he says, is a highly anomalous result, which follows from the view which we have taken. We do not propose to discuss whether the anomaly pointed out by Mr. Palkhivala is real or otherwise because, as observed by Shadi Lal C.J. in Bhagal Jiwan Das v. Commissioner of Income-tax [1929] 4 I.T.C. 46:

'We cannot extend the scope of the statute by analogy or place upon it what is called a beneficent or equitable construction in order to prevent a real or supposed anomaly. '

20. In our opinion, therefore, the Tribunal was right in the view that it took that the assessee-company is not one in which the public are substantially interested and, therefore, not entitled to exemption from the operation of the provisions of Section 23A(1). In that view of the matter, the first two questions must be decided against the assessee.

21. Coming now to the third question, the same, in our opinion, must be answered in favour of the assessee. It may be that, on merits, the assessee might not have been able to claim that an order against it under Section 23A was not justified as, having regard to the smallness of the profits, a dividend higher than what was declared by the assessee was unreasonable. But in the order of the Tribunal the merits of the claim have not been considered and it has disallowed the claim on the ground that before the assessee could raise the claim it had to satisfy the condition, viz., that it should have distributed the whole of the commercial profits available to it. That view of the Tribunal is clearly wrong and the question as framed, therefore, has got to be answered in favour of the assessee.

22. We accordingly answer the first question in the negative, the second and the third questions in the affirmative. The assessee will pay the costs of the Commissioner.


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