1. The question referred to us by the Income-tax Appellate Tribunal (Bombay Bench 'C') is as follows :
'Whether, on the facts and in the circumstances of the case, 330 equity shares of Western India Match Co. Ltd. registered in the names of the nominees of the assessee-company could be said to have been 'held' by the assessee-company within the meaning of that expression occurring in Explanation II, of Para. D of Part II of the First Schedule to the Finance (No. 2) Act 196 2 ?'
2. The assessee is a non-resident company. We are concerned in this reference with the assessment year 1963-64. In that year, the assessee had a total income of Rs. 35,46,510, which income included a sum of Rs. 26,06,484 which the assessee had received as dividend from two Indian companies, namely, the Western India Match Co. Ltd., (hereinafter referred to as 'WIMCO') and the Assam Match Co. Ltd. It was claimed that these two companies were subsidiaries of the assessee-company. The dividend received from WIMCO came to Rs. 21,94,800.
3. As against 50 per cent. claimed by the assessee, the ITO allowed super-tax rebate at 30 per cent. on the dividend received from WIMCO, relying upon the provisions of Para. D of Part II of Sch.I to the Finance (No. 2) Act of 1962. The total share capital of WIMCO consisted of 2,75,000 equity shares. Of these, the assessee claimed to hold 1,37,505 shares, and of these 330 shares were held in the name of four persons who were admittedly, the nominees of the assessee. The ITO, however, held that the assessee directly held in its name 1,37,175 shares only and that this was less than 50 per cent. of the share capital of WIMCO. In his view, the shares held by the nominees could not be counted for the purpose of allowing rebate at 50 per cent.
4. Aggrieved by this decision to allow super-tax rebate at the lesser rate of 30 per cent. the assessee moved the AAC. Before the AAC, relying upon the dictionary meaning of the word 'hold', it was submitted that even a beneficial owner of the shares would have to be regarded as the holder of shares within the meaning of Expln. II to the Finance Act. The matter had come up before the AAC also for the earlier assessment year 1962-63, the AAC followed his decision in the earlier appeal and accepted the submission of the assessee that the shares could as well be held in the names of the nominees through whom control could be exercise. The AAC distinguished the word 'holds' occurring in Expln. II from the 'holder of shares' or 'shareholder', the AAC also referred to s. 4 of the Companies Act, 1956, and observed that the provisions of the said Expln. II were more or less copies from s. 4 of the Companies Act. The AAC, therefore, upheld the appeal and directed the ITO to give rebate at the higher rate, namely, 50 per cent.
5. From the decision of the AAC, the Department appealed to the Tribunal. A number of authorities were cited before the Tribunal. It was contended that the AAC was in error in applying the definition to be found in the Companies Act. This argument was accepted by the Tribunal, but the Tribunal found it necessary to look into the analogous provisions of other enactments, since the expression 'holds' was not defined by the Explanation. According to the Tribunal, the expression 'holder of shares' was wider than the expression 'shareholder' and the legislature had knowingly chosen the wider expression which would also go to prove that holding by the 'other company' may be through its nominee or nominees. It is from this decision of the Tribunal upholding the contention raised on behalf of the assessee that the Commissioner has preferred this reference.
6. Mr. Joshi referred us to two recent decisions to be found reported in Vol. 122 of the Income-tax Reports and submitted that the Tribunal was completely in error in observing that the expression 'holder of shares' was wider than the expression 'shareholder'. Again, according to Mr. Joshi's submission, direct ownership alone was required to be considered and not ownership through a nominee.
7. Before dealing with the provisions of the Companies Act, 1956, the said Explanation and the aforesaid two decisions, it may be mentioned that there is no dispute whatever between the assessee and the Department that the four nominees collectively hold 330 shares in WIMCO for the benefit of the assessee and the names of these persons and their shareholding has been given in para. 3 of the order of the AAC dated February 21, 1969, which is the order for the assessment year 1962-63. It has been pointed out by Mr. Dastur that even in the balance-sheet of the 'subsidiary company', namely, WIMCO, the holding of the assessee-company has been given at the larger figure, namely, 1,37,505 shares, which would include this holding of 330 shares in the names of the four nominees. We are not concerned with a situation in which there is some conflict between a registered owner of shares and a purchaser, but with a slightly different situation, and there is no doubt whatever that under the Companies Act, WIMCO is, admittedly, a subsidiary of the assessee-company. The question is whether in the absence of certain portion of the definition of 'subsidiary company' occurring in s. 4 of the Companies Act, which is found lacking in Expln. II, a curious situation would result, namely, that WIMCO would be the subsidiary of the assessee-company for the purposes of the Companies Act but not a subsidiary to enable the assessee to get the higher rebate of 50 per cent. under the Finance Act.
8. Mr. Joshi submitted that a similar curious situation had come to light even in the decision in Mafatlal Gagalbhai & Co. Pvt. Ltd. v. CIT : 122ITR382(Bom) . In the said decision, given by a Bench of which I was a member. We have fully set out the provisions of the Companies Act and of the Finance Act. But it is important to note that the assessee-company was claiming that two other companies, referred to as Standard and Sassoon in the decision, were its subsidiaries, not on the basis of shareholding but on the basis of the other parts of the definition of 'subsidiary company' contained in s. 4 of the Companies Act.
9. We may immediately turn to s. 4 of the Companies Act. Section 4 gives the meaning of 'holding company' and 'subsidiary'. Sub-s. (1) of s. 4 provides that a company shall be deemed to be a subsidiary of another if, but only if, -
'(a) that other controls the composition of its board of directors; or
(b) that other -
(i) where the first-mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company;
(ii) where the first-mentioned company is any other company, holds more that half in nominal value of its equity share capital; or
(c) the first-mentioned company is a subsidiary of any company which is the other's subsidiary.'
10. We then have sub-s. (3) of s. 4 which provides as under :
'(3) In determining whether one company is a subsidiary of another -
(a) any shares held or power exercisable by that other company in a fiduciary capacity shall be treated as not held or exercisable by it;
(b) subject to the provisions of clause (c) and (d), any shares held or power exercisable -
(i) by any person as a nominee for that other company (except where that other is concerned only in a fiduciary capacity); or
(ii) by, or by a nominee for a subsidiary of that there company, not being a subsidiary which is concerned only in a fiduciary capacity;
shall be treated as held or exercisable by that other company;
(c) any shares held or power exercisable by any person by virtue of the provisions of any debentures of the first-mentioned company or of a the provisions of any debentures of the first-mentioned company or of a trust deed for securing any issues of such debentures shall be disregarded;
(d) any shares held or power exercisable by, or by a nominee for, that other or its subsidiary not being held or exercisable as mentioned in clause (c) shall be treated as not held or exercisable by that other, if the ordinary business of that other or its subsidiary, as the case may be, includes the lending of money and the shares are held or the power is exercisable as aforesaid by way of security only for the purposes of a transaction entered into in the ordinary course of that business.'
11. Now, if one turns to Expln. II to Para. D of Part II of Sch. I to the Finance (No. 2) Act 1962, we find the same as under :
'Explanation II. - For the purposes of this paragraph and Part III of the Schedule, a company shall be deemed to be a subsidiary of another company if that other company holds more than half in nominal value of the equity share capital of the first-mentioned company.'
12. It is obvious, therefore, that for the purposes of the Finance Act, only one part of the definition of 'holding company' and 'subsidiary' found in s. 4 is retained, and that is the one contained in s. 4(1)(b)(ii) of the Companies Act. Company X may control the composition of the board of directors of company Y. In such a case, company X will be the holding company and company Y will be the subsidiary company for the purpose of the Companies Act but not for the purpose of Expln. II. Company X may have a subsidiary company Y, which subsidiary company may in turn have a subsidiary, namely, company Z, in that case, company Z will be the subsidiary of company X for the purpose of the Company Act will not for the purpose of Expln. II.
13. Mr. Joshi, however, submitted that the rules of determination to be found in sub-s. (3) of s. 4 were only to be applied to the Companies Act and such rules were not available for considering whether a company holds more than half in nominal value of the equity share capital of the first-mentioned company as provided in Expln. II. It may be mentioned that the phraseology of the said Explanation is identical with the phraseology employed in s. 4(1)(b)(ii) of the Companies Act. Mr. Joshi then drew our attention to the two decisions, both reported in Volume 122 of the Income-tax Reports. In Rameshwarlal Sanwarmal v. CIT : 122ITR1(SC) . It has been observed that the beneficial owner of shares whose name does not appear in the register of shareholders of the company cannot be said to be a 'Shareholder'. According to the Division Bench, he may be beneficially entitled to the shares but he is certainly not a shareholder. The Supreme Court in an earlier decision. Howrah Trading Co. Ltd. v. CIT : 36ITR215(SC) , had observed that under the Indian Companies Act, 1913, the words 'member', 'shareholder' and 'holder of a share' had been used interchangeably in the Companies Act. According to the Supreme Court, the words 'holder of a share' are really equal to the word 'shareholder' and the expression 'holder of share' denoted, in so far as the company is concerned, only a person who, as a shareholder, has his name entered in the register of members. Relying upon these two decisions, Mr. Joshi submitted that the word 'holds' occurring in Expln. II must be read as 'holds as a shareholder'. Which must imply a registered shareholder or a shareholder whose name is found on the register of shareholders maintained by the alleged subsidiary company, Mr. Joshi also relied on the observations to be found at pages 397 and 398 of the decision in Mafatlal Gagalbhai & Co. Pvt. Ltd. v. CIT : 122ITR382(Bom) :
'In the view that we have taken of the matter, we are of the opinion that Explanation II at the end of the third proviso in Para. D of the First Schedule to the Finance (No. 2) Act, 1962, will be required to be accepted as containing within itself a precise definition of what a subsidiary company is for the purposes of applying Para. D and Part III of the First Schedule to the 1962 Finance Act. If the assessee-company receives dividends from another company in which it holds more than 50 per cent. of the normal equity capital, then and then alone can the latter company be considered to be a subsidiary company for the purpose of applying the said Paragraph of the said Part of the First Schedule to the Finance (No. 2) Act, 1963. Since the admitted position is that the assessee-company by itself does not directly own the necessary portion of the nominal equity capital or the two companies, viz., Standard and Sassoon, the latter two companies cannot be considered to be subsidiary companies of the assessee-company in terms of Explanation II as interpreted by us. In our view, the fact that the Standard and the Sassoon could be regarded as subsidiary companies of the assessee-company for the purpose of the Companies Act makes no difference, for, we have taken the view that the Explanation contains the definition of 'subsidiary company' for the purposes of Para, d and Part III of the First Schedule to the Finance (No. 2) Act, 1962. It is that definition alone which would have have to be looked at for the purpose of that Paragraph and that Part and the definition contained in the Companies Act will be required to be ignored whatever may have been the position for the earlier financial years. We have already mentioned that the Tribunal had rightly rejected the alternative argument advanced on behalf of the assessee-company that the word 'holding directly of indirectly.'
14. Mr. Joshi, then drew our attention to various sections of the I.T. Act, 1961, and submitted that where the intention was to include nominees, the Act specifically provided for the same. Since in his submission Expln. II did not provide for holding in the name of nominees, the nominees' holdings were required to be excluded when the question of allowing the higher rebate at 50 per cent. came to be considered. Our attention was drawn, in particular, to s. 47, where sub-ss. (4) and (5) deal with the transfer of capital assets by a company to its subsidiary company and by the subsidiary to the holding company respectively. In sub-s. (4), we find the requirement that the 'parent company or it nominees holding the whole of the share capital of the subsidiary company' is provided for. The words 'or its nominees' are absent in the requirement under sub-s. (5).
15. When dealing with the provisions it has to be remembered in the first place that we are concerned with an allowance by way of higher rebate to be allowed to the assessee in a particular contingency, thus it is clear from our decision in Mafatlal Gagalbhai & Co.'s case : 122ITR382(Bom) , that this definition came to be provided for the first time after 1960. We have observed in that decision that till that time the authorities applying the taxation laws would perforce have to go to the Companies Act to consider which was the holding company and which was the subsidiary company. We have made if clear by the said decision that merely because a company could control the composition of the board of directors or because the company could control another company through a third company, which third company was the subsidiary of the first company, would not entitle the higher rebate to be claimed as the company giving the dividend would not be a subsidiary as defined by Expln. II. The words 'directly' and 'indirectly' have been used in the context of the claim made under s. 4(1)(b)(ii).
16. The short question is whether it is proper and correct to read the rules of determination provided under s. 4(3) of the Companies Act,1956, as a special provision or a clarification made for the sake of extra caution. Mr. Dastur submitted that absurd results were likely to follow if it were to be held that the word 'holds', to be found in Expln. II, is not equivalent to beneficial ownership, and he illustrated the submission by referring to trustee companies. According to his argument, a trustee company may have invested its own funds and, therefore, be beneficially interested in 10 per cent. of the share capital of another company. It may on the other hand have invested moneys of the beneficiaries or estates administered by it to purchase about 50 per cent. of the share capital of the other company. In its own income-tax assessment it will show dividend income only in respect of its own 10 per cent. beneficial investments but if Mr. Joshi's arguments were correct, it would be entitled to the higher rebate on the dividend income on the footing that its legal ownership exceeds 50 per cent. of the capital of the other company. On the other hand, Mr. Dastur pointed out that we have the case of the present assessee where the assessee-company has been receiving income and being taxed in respect of 1,37,505 shares. This is also its beneficial holding. If that be so, there was no reason, he submitted - and we find no good reason not to accept the said submission - for reading Expln. II in this extremely narrow manner and ignoring the nominees' or the beneficial shareholdings. In reality the nominees, admittedly, are only ostensible owners, and the assessee is the real, substantial or the beneficial owner of these 330 shares.
17. It is also to be remembered that we are considering a provision for giving certain enhanced benefit by way of additional rebate to the assessee. If both constructions are possible, and in our opinion, they are, then also it is desirable to adopt the construction which will benefit the assessee. The said construction is also required to be adopted, because as far as this type of subsidiary company is concerned. By adopting this construction for Expln. II we shall prevent further dichotomy between the provisions governing such subsidiary companies under the Companies Act and under the I.T. Act. WIMCO will be a subsidiary of the assessee both for the purposes of the Companies Act as well as for applying Expln. II and earning for the assessee the higher rebate of 50 per cent.
18. We may add that the reference to the Finance (No. 2) Act of 1962, in the question appears to be incorrect, but we find that the language employed in the Finance Act, 1963, is identical to that contained in the Finance (No. 2) Act, 1962 as far as Expln. II is concerned. We, therefore, reframe the question by making this slight correction as under :
'Whether, on the facts and in the circumstances of the case, 330 equity shares of WIMCO registered in the names of the nominees of the assessee-company could be said to have been 'held' by the assessee-company within the meaning of that expression occurring in Explanation II of Para. D of Part II of the First Schedule to the Finance Act, 1963 ?'
19. In the result, the question referred to us, is answered in the affirmative and in favour of the assessee. The Commissioner will pay the costs of the reference to the assessee.