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Mafatlal Gagalbhai and Co. Pvt. Ltd. Vs. Commissioner of Income-tax, Bombay City-i - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 168 of 1970
Judge
Reported in(1979)13CTR(Bom)236; [1980]122ITR382(Bom); [1979]2TAXMAN256(Bom)
ActsFinance Act, 1962; Income Tax Act, 1961 - Sections 99(1)
AppellantMafatlal Gagalbhai and Co. Pvt. Ltd.
RespondentCommissioner of Income-tax, Bombay City-i
Appellant AdvocateB.A. Palkhivala, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
direct taxation - subsidiary company - explanation 2 to third proviso in para d of first schedule to finance act, 1962 and section 99 (1) of income tax act, 1961 - explanation 2 is precise definition in itself of subsidiary company for purpose of applying para d and third part of first schedule - if assessee-company receives dividends from another company in which it holds is more than 50% of nominal equity capital then and then alone can latter company be said to be subsidiary company for applying para d and third part of first schedule. - - 17. it was submitted that the court should, after considering the cumulative effect of all these arguments, come to the conclusion that this was clearly a deeming provision or a fiction or a presumption and not substitution or proof of.....desai, j.1. this is a reference at the instance of the assessee under s. 256(1) of the i.t. act, 1961. 2. there are two questions of law referred to us. but as far as question no. 2 is concerned, counsel are agreed that this question will be required to be answered in favour of the assessee-company in view of the decision of the supreme court in cit v. birla cotton spinning & weaving mills ltd. : [1971]82itr166(sc) . accordingly, the facts pertaining to this question need out be adverted to in this judgment. 3. the assessee before us in m/s. mafatlal gagalbhai & co. private ltd., (hereinafter referred to as 'the assessee-company' for the sake the brevity). we are concerned in this reference with assessment years 1962-63 and 1963-64. during these years the assessee-company received sums of.....
Judgment:

Desai, J.

1. This is a reference at the instance of the assessee under s. 256(1) of the I.T. Act, 1961.

2. There are two questions of law referred to us. But as far as question No. 2 is concerned, counsel are agreed that this question will be required to be answered in favour of the assessee-company in view of the decision of the Supreme Court in CIT v. Birla Cotton Spinning & Weaving Mills Ltd. : [1971]82ITR166(SC) . Accordingly, the facts pertaining to this question need out be adverted to in this judgment.

3. The assessee before us in M/s. Mafatlal Gagalbhai & Co. Private Ltd., (hereinafter referred to as 'the assessee-company' for the sake the brevity). We are concerned in this reference with assessment years 1962-63 and 1963-64. During these years the assessee-company received sums of Rs. 11,95,300 and Rs. 13,95,392, respectively, by way of dividends from Standard Mills Company Ltd., (hereinafter referred to as 'the Standard' for the sake of brevity) and Sassoon Spinning and Weaving Company Ltd., (hereinafter referred to as 'the Sassoon' for the sake of brevity). The assessee-company's direct holding in the aforesaid two companies did not exceed 50% of the issued equity capital in each of the said two companies. The assessee-company, however, with one of its subsidiaries, viz., New Shorrock Spinning and ., held more than 50% of the equity capital of the Standard. Similarly, the assessee-company along with its another subsidiary viz., Mafatlal Fine Spinning and ., also held more than 50% of the provisions of s. 4 of the Companies Act, 1956, both the Standard and the Sassoon were at all relevant times subsidiary companies of the assessee-company.

4. In respect of the dividend income from the said two companies the assessee-company claimed in its assessments super-tax rebate at the rate of 50% as provided in Para. D of Part II of the First Schedule to the Finance (No. 2) Act, 1962, for the first year, and Para. D of Part II of the First Schedule to the Finance Act, 1963, for the second year. The ITO, however, relied on the provisions of Expln. II to Para D of the said Finance Acts and rejected the contention of the assessee-company. It may be pointed out, although we shall extract Expln. II subsequently, that broadly speaking, the ITO read the Explanation as defining a subsidiary company as one in whose equity capital the assessee-company held more than half the nominal value. In his view, although both the said companies, viz., the Standard and the Sassoon, under the general law, viz., the Companies Act, were subsidiary companies of the assessee-company, they were not subsidiary companies as defined in the said Explanation. The assessee-company carried the matter in appeal to the AAC. The AAC concurred with the view taken by the ITO, observing that the definition of 'subsidiary company' in the Companies Act was much too wide and for the purpose of giving relief under the I.T. Act, the Finance Acts have advisedly restricted the meaning of 'subsidiary company'. As, admittedly, the assessee-company by itself did not hold more than half of the equity capital of the two companies, in the view taken by the ITO and the AAC, the two companies, viz., the Standard and the Sassoon, were not subsidiaries of the assessee-company [for the purposes of Finance (No. 2) Act, 1962] and, therefore, the assessee-company was disallowed rebate at the higher rate of 50% as it had claimed.

5. The assessee-company then carried the matter in appeal to the Tribunal. Before the Tribunal one of the contentions urged on behalf of the assessee-company was that the word 'holding' occurring in Expln. II should be read as holding directly or indirectly. The submission was obviously based on the fact that the assessee-company together with its subsidiary, viz., New Shorrock Spinning & ., held more than 50% of the equity capital of the Standard, and similarly with its another subsidiary, viz., Mafatlal Fine Spinning and ., held more than 50% of the equity capital in the Sassoon. It was also urged that if the Explanation was read in the manner in which the ITO and the AAC had read the same, it would result in an anomalous situation and denial of the relief which had hitherto been granted to the assessee-company.

6. The main thrust of the argument of the learned counsel for the assessee-company before the Tribunal was based upon the definition of 'Subsidiary company' to be found in the Companies Act, 1956. The submission was that it is that definition in the Companies Act which must govern and the assessee-company could not be denied the relief of the higher rate of rebate, viz., 50%, merely on the basis that it did not fall within the case covered by Expln. II. We will not advert to the argument in greater detail as is appears to us that the Tribunal has not extracted it property, and since the counsel for the assessee-company before us has adverted to the argument in a manner not reflected in the order of the Tribunal, we will deal with the argument as developed before us rather than with the cursory rejection thereof to be found in the order of the Tribunal. It will be sufficient for our purpose to observe that the Tribunal understood the argument to be that the definition given in Expln. II was not to be applied and if the assessee-company were able to satisfy that the dividends were received from subsidiary companies as defined in the companies Act, that was sufficient for the purpose of being allowed rebate at the higher rate. As put in this manner it is easy to perceive how the argument could be rebutted without much effort. The Tribunal has observed that if the Finance Act, by the said Explanation gave a meaning to or provided a definition of 'subsidiary company', it is that definition which will have to be applied in considering the provisions of the Finance Act, and not the meaning given to that expression to be found in the Companies Act. In this view of the matter all the contentions which upheld the initial order of the ITO. It is from this decision of the Tribunal that the following question of law (designated as question No. 1) had been referred to us :

'Whether, on the facts and in the circumstances of the case, the dividends of Rs. 11,95,300 for the assessment year 1962-63 and Rs. 13,95,392 for the assessment 1963-64, received by the assessee-company from (1) Standard Mills Co. Ltd., and (2) Sassoon Spinning and Weaving Co. Ltd., are entitled to super-tax rebate at the rate of 50% as dividends from subsidiary companies, as provided in Paragraph D of Part II of the First Schedule to the Finance (No. 2) Act, 1962, and the Finance Act, 1963 ?'

7. In order to understand the ramifications of the rival arguments and the substance thereof, it will become necessary to advert to the changes effected both in the Companies Act and in the Finance Act, from time to time. It has been strenuously urged Mr. Joshi, the learned counsel for the revenue, that the provision which is required to be interpreted and applied is abundantly clear and, therefore, there is no warrant for the court trying to interpret the same in the light of changes in the legislation. As, however, we propose to deal with the argument subsequently and reject the same, it will be proper to commence our discussion of the various arguments advanced by Mr. Palkhivala, the learned counsel for the assessee-company, by indicating the change pertaining to the definition of 'subsidiary company' which has taken place in the Companies Act, in the first instance and thereafter in the Finance Act. Section 2 is the definition section in the Companies Act, 1956, and the same provides :

'In this Act, unless the context otherwise requires -

(47) 'subsibiary company' or 'subsidiary' means a subsidiary company within the meaning of section 4.'

8. We now turn to s. 4 of the Companies Act, and we are principally concerned with Sub-section (1) thereof as the sub-section following deals with the manner in which Sub-section (1) of s. 4 is to be considered and applied. Section 4(1), as initially enacted by Parliament in 1956, read as follows :

'(1) For the purposes of this Act, a company shall, subject to the provisions of sub-section (3), 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 holds more than half in nominal value of its equity share capital; or

(c) the first-mentioned company is a subsidiary of any company which is that other's subsidiary.'

9. By the Companies (Amendment) Act, 1960, clause (b) of Sub-section (1) of s. 4 of the Companies Act was substituted, and after the said substitution, Sub-section (1) of s. 4 read as follow :

'(1) For the purposes of this Act, a company shall, subject to the provisions of sub-section (3), 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 than half in nominal value of its equity share capital; or

(c) the first mentioned company is a subsidiary of any company which is that other's subsidiary.'

It may be mentioned that no change was effected in s. 2(47) of the Companies Act.

10. The change in the Companies Act which was brought about by the substitution of clause (b) of Sub-section (1) of s. 4 obviously pertained to existing companies in which the holders of preference shares issued before the commencement of the Companies Act, 1956, had the same voting rights as the holders of equity shares. For such companies it was provided by s. 4(1)(b)(i) that in order to be deemed to be a subsidiary, the holding company must exercise or control more than half of the total voting power which would not follow from merely owning more than half the equity capital. For other companies, s. 4(1)(b)(ii) retained the same definition as had been earlier provided by s. 4(1)(b). It may be pointed out that after the enactment of the Companies Act, 1956, the voting rights of the shareholders of companies formed after the commencement of the Act were restricted to the holders of equity capital only with certain provisions made for varying and reducing the voting rights of the holders of preference shares in existing companies, with which provision we are not concerned. However, since under the Indian Companies Act, 1913, voting rights could be conferred on holders of preference shares, it would be obvious that there would be in existence a number of companies for which there would be issue of preference shares with number of companies for which there would be issue of preference shares with voting rights and to provide for such companies the amendment of s. 4(1)(b) seems to have been made.

11. We have not to turn to the Finance Acts and we find the Finance Acts from the year 1958 onwards collected in division 5 of Vol. II of the Sixth Edn. of the Law and Practice of Income-tax Kanga and Palkhivala. The rates of super-tax are provided in every permitted to an assessee-company old so much of the total income as consists of dividends received by it from a subsidiary Indian company. This is provided for at page 880 of the said volume under the Finance Act, 1958, without there being any Explanation of the nature which is required to be considered and applied by us. A similar situation also seems to exist in the subsequent Finance Acts till we come to the Finance (No. 2) Act, 1962 (hereinafter referred to as '1962 Finance Act' for the sake of brevity). As far as this Act is concerned, we must analyse the provisions in some detail, because it is primarily this Act with which we are concerned and on it arguments have been extensively bases at the bar. In the first place, in s. 2(7) of the 1962 Finance Act are to be found certain definitions for the purposes of that section and for the rates of tax imposed thereby. We then turn to the Schedule of the 1962 Finance Act deals with the taxation of companies other than the Life Insurance Corporation of India. A rate of super-tax at 55% is provided for such companies with provisos affording certain reliefs, and the relief with which we are concerned is to be found is sub-prov. (ii) of the first proviso much gives a rebate at the rate of 50 per cent. on so much of the total income as consists of dividends from a subsidiary Indian company formed and registered before the April 1, 1961. The proviso itself provides that if dividends are received from any other Indian company which is not a subsidiary (obviously which is not the case covered by the earlier sentence) the rebate allowable under the said sub-proviso will be at the rate of 45 per cent. We then find in the said Schedule as many as three provisos followed by two Explanations the second of which is extremely material for our purposes and which any be fully extracted :

'Explanation II. - For the purposes of this Paragraph and Part III of this 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 may be mentioned that Pate III of the said Schedule provides for rates for deduction of tax of source in certain cases where on dividends payable by a subsidiary Indian company to its holding company a nil rate of deduction is provided as contrasted with 20% deduction at source for dividends payable by any other Indian company. As far as the latter case is concerned, a lower rate is prescribed, viz., 5%, for companies formed and registered after April 1, 1959.

13. A perusal of Expln. II will indicate that the phraseology employed is substantially the same as the phraseology to be found is s. 4(1)(b) of the Companies Act, 1956, prior to the amendment thereof in 1960.

14. Before adverting to the rival submission and dealing with the same in detail, it may be broadly stated that Mr. Palkhivala's submission was that by Expln. II what was intended was to restore the meaning of subsidiary company as it existed in the Companies Act prior to 1960 or, in other words, to abrogate the effect of the amendment which took place in that year by which change was effected in s. 4(1)(b). On the other hand, counsel for the revenue submitted that by inserting Expln. II in the Finance (No. 2) Act. 1962, as was done, the Legislature provided for the definition of subsidiary company specifically in the said Finance Act giving a go-by to the definition in the Companies Act which might have been required to be applied for the previous financial years. The Tribunal obviously accepted the latter contention, and it is the correctness of the approach and the conclusion of the Tribunal that is controverted in this reference before us.

15. Mr. Palkhivala urged that is arguments on behalf of the assessee-company had been totally misunderstood by the Tribunal. In his submission, he was not canvassing for preference of the definition of the 'subsidiary company' given in the Companies Act to the definition contained in Expln. II, which we are considering. On the contrary, his argument was the Expln. II did not contain any definition of 'subsidiary company' for the purpose of Para. D of Part II and Part III of the Finance (No. 2) Act, 1962. In his submission, the said Explanation merely contained a deeming provision by which it was sought to add to or alter or modify the definition of the subsidiary company to be found in the Companies Act. According to his submission, such a deeming provision was required to be contained in or prescribed by the Finance (No. 2) Act, 1962, in view of the amendment of the Companies Act which had taken place in 1960. The object of such addition of a deeming provision, in his submission, was to restore the status of companies subsidiary to such companies, which might have lost such status under the new definition of 'subsidiary company' in the Companies Act after 1960 by the change effected in s. 4(1)(b).

16. In support of his submission Mr. Palkhivala offered the following five arguments and it was urged that the cumulative effect of these arguments must lead to a conclusion in favour of the assessee-company which would be not to deny to it the benefit of higher rebate which had been available to it for all these years. These points, which he submitted for our consideration, were as follows :

1. Explanation II is not to be found in the definition provision of Finance (No. 2) Act, 1962, which is in s. 2(7) thereof.

2. The Explanation uses the words 'deemed to be' and not the word 'mean'. The submission whereby a company which is not ordinarily a subsidiary company is required to be treated as a subsidiary company.

3. According to the counsel, the previous submission is borne out by the legislative history, in particular, by the changes effected in the definition of 'subsidiary company' to be found in the Companies Act and the provisions in the Finance Acts from year to year.

4. According to the counsel, it was important to note that in enacting the Explanation the Legislature had advisedly omitted the words 'but only if' which are found in s. 4 of the Companies Act both as originally enacted and after : the amendment of 1960.

In this connection, our attention was also drawn to the Finance Act, 1955 (Act XV of 1955), in which at the end of Part II of the First Schedule is to be found an Explanation when the word 'only' has been used in conjunction with the earlier words 'deemed to be'. The argument, shortly stated, was that if the Legislature enacted Expln. II with the words 'deemed to be a subsidiary of another company only if......, ' then the conclusion which found favour with the Tribunal, viz., that by this Explanation a glossary was supplied for the purpose of Para. D and Part III of the Finance Act (No. 2), 1962, would be correct and proper. On the other hand, in the absence of such word the Explanation as it reads would have to be regarded as merely a deeming provision-a fiction which serves to expand the definition of 'subsidiary company' by bringing within its compass something which may not be a subsidiary company as defined in the Companies Act.

5. Our attention was drawn to the Explanatory Notes to the Finance (No. 2) Bill, 1962, to be found in [1962] 45 ITR 214. In particular, our attention was drawn to Note (iv) to be found at page 230 of the said volume, which does not suggest that a narrower concept of subsidiary company was being enacted by substituting the definition of 'subsidiary company' in the Companies Act with a restricted in the Finance (No. 2) Act, 1962. According to the counsel, fairly read, the Note merely suggests that a higher rate of rebate was to be allowed for dividends received from Indian subsidiary companies (which was also the previously existing position) and no significant words have been used to suggest that the concept of subsidiary company was intended to be radically altered from that what it was understood to be in the prior Finance Acts.

17. It was submitted that the court should, after considering the cumulative effect of all these arguments, come to the conclusion that this was clearly a deeming provision or a fiction or a presumption and not substitution or proof of definition by way of substitution of the definition of 'subsidiary company' to be found in the Companies Act.

18. As and by way of alternative submission, it was submitted by Mr. Palkhivala that if the court was in any doubt as to the effect to be given to the words 'deemed to be' in Expln. II, then by the well-settled principle of interpretation the court must adopt that meaning or prefer that interpretation which would be in favour of the assessee and the effect of which would be to continue in favour of the assessee the higher rate of rebate which had been enjoyed hitherto by the assessee-company.

19. On the other hand, Mr. Joshi submitted that the words clear and the meaning obvious. In his submission, the fact that an Explanation of this nature was provided for the first time indicated that by such addition of the Explanation the Legislature intended to provide a specific glossary for the purpose of applying the Finance (No. 2) Act, 1962, and it is that meaning of the subsidiary company to be found either in the Companies Act or in general law. In his submission, the intention of the Legislature must be found in the words used by the Legislature itself and the question is not what way be supposed to be intended but what has been said. According to him, the said Explanation was appended to Para. D to explain the meaning of the words contained in the said Paragraph and it must be accepted as part and parcel of the enactment. He pointed out that even if the Explanation had used the words 'deemed to be', it did not follow that this was a deeming provision in the sense in which Mr. Palkhivala urged it to be. In Mr. Joshi's submission the user of suck words does not necessarily imply that something is sought to be included in the meaning which would otherwise have been excluded. Further, he disputed the approach of the learned counsel for the assessee-company and submitted that it was not permissible nor proper to seek to give a meaning to a legislative provision of the legislature is clearly borne out by the plain words used. Shortly stated, Mr. Joshi's submission was that a proper meaning was required to be given to the words were properly understood, then Expln. II did not provide for the embodiment of a fiction or a presumption but was in the nature of a definition section.

20. In view of these rival contentions it becomes necessary to consider the same in detail and with reference to the authorities on which reliance was placed at the bar for the purpose of deriving support for the same.

21. As far as the first point of Mr. Palkhivala is concerned, viz., that the Explanation must be regarded as a deeming provision and not by way of a definition provision because it is not found in s. 2(7) but added at the end of Para. D, it will be required to be stated that we have not found any great substance in the point. If a meaning is required to be given not for the purpose of the entire Schedule but for the purpose of a portion there-of, it would be open to the Legislature or the rule-making authority, as the case may be, to insert a definition provision, at the opening or closing stage of the section or para which is sought to be governed by that definition. In this connection, we may also dispose of another submission which was urged by the counsel for the assessee-company during the course of the arguments. In his submission, if Expln. II were to be read in the manner in which the Tribunal had read and applied the same, an anomalous situation would ensue, viz., that for the purposes of being considered as a subsidiary company only the holding in the equity capital would be required to be considered, whereas rebate would be available on the dividends paid both on equity and preference shares. Although this submission was urged, we have not been able to understand what the anomaly is. The same position existed prior to the amendment of the Companies Act when there was no Explanation of this sort to be found in the Finance Acts. In those years if a company was not to be a subsidiary within clause (a) or (c) of Sub-section (1) of s. 4 of the Companies Act, then its status as a subsidiary company would depend only upon the fact that another company held more than fifty per cent. of the equity share capital of the said company. In such a case, even where the status is entirely dependent upon the holding in the equity capital the dividends paid by the subsidiary company both on equity shares as also on preference shares attracted a higher rebate. There is no anomaly of the sort suggested by the counsel for these years as well as for the year 1962, arising from the meaning given to Expln. II by the Tribunal. The basic question is whether Expln. II contains a sort of definition provision which is a glossary to be employed for the purpose of applying the Finance (No. 2) Act, 1962.

22. We are equally unable to accept that the words are so plain and unambiguous that reference to previous legislative provisions is unwarranted. The courts have to take judicial notice of the previous state of the law unless the law is of the special type, as was indicated by Lord Denning M. R. in In re Overseas Aviation Engineering (G.B.) Ltd. [1963] Ch. 24 ; 33 Comp Cas 315, where the court was applying an amending or remedial Act. In such a case, it may be improper or wrong, as Lord Wright puts it, 'to construe it in a niggardly and technical spirit, with an eye fixed on the old law.' Where, however, we do not have such a provision which intends to sweep away the old legislative provision with a view to replacing them with a totally new concept, then it will be proper to take judicial notice of the previous state of the law. This has been observed by Lord Denning himself in Escoigne Properties Ltd. v. IRC [1958] AC 549 , which observation is quoted in Craies on Statute Law, Seventh Edn., at page 67. From this it will not, however, follow, that the courts can put on the statutory provision some meaning on the basis that the legislature did not or could not have contemplated the consequences thereof which consequences are in conformity with the plain words of the statutory provision. Where the language of an Act is clear and explicit effect must be given to it, whatever may be the consequences, for, in that case, the words of the statute will be taken to represent the intention of the legislature.

23. It must be conceded that bearing in mind the legislative history of the provision particularly of the definition of 'subsidiary company' in the Companies Act, an attractive argument had been raised on behalf of the assessee-company that Expln. II must be taken to restore the position as was prevalent prior to the amendment of the Companies Act in 1960 and in view of that intention of the Legislature, it must be accepted not as a definition provision but as a deeming provision introduced to abrogate the change made in clause (b) of sub-s (1) of s. 4 of the Companies Act which was to apply to the existing companies where the holders of the preference capital had to same voting rights as holders of the equity capital.

24. It was submitted at the bar, on behalf of the assessee-company, that normally a deeming provision will not be read as a glossary governing the statutory provision, but merely as incorporating a fiction or a presumption, and strong reliance was placed in support of this proposition on observations to be found in Amrutanjan Ltd. v. CIT : [1961]41ITR21(Mad) , which was subsequently affirmed by the Supreme Court in CIT v. Amrutanjan Ltd. : [1964]53ITR218(SC) . It becomes necessary, therefore, to consider these two decisions in some greater detail, because it appears to us that the observations to be found in the aforesaid decisions constituted the principle basis of the arguments advanced before us on behalf of the assessee-company.

25. In Amrutanjan Ltd.'s case : [1964]53ITR218(SC) the assessee was a public company whose paid up capital consisted of 2,500 ordinary and 3,000 preference shares of Rs. 100 each and there was no difference in the voting powers period R held 2,185 of the 2,500 ordinary shares, her daughter held 250 shares and the balance of 65 shares was held by others. Of the 3,000 preference shares 382 were held by the directors and the balance was held by persons other than the directors. Thus, of the total number of shares, R held by herself about 40 per cent. and with her relatives about 47 per cent. The directors held less than 7 per cent. of the shares and the others, who were members of the public, held more than 51 per cent. The question being considered initially by the Madras High Court and subsequently by the Supreme Court, to whose decisions we shall advert a little later on, was, whether the Explanation to s. 23A of the Indian I.T. Act, 1922, was required to be applied and, if so, in what manner. The said Explanation provided that :

'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......'

26. There was no controversy that the company was a public limited company, that the beneficial interest in the shares belonged to the share-holders in whose names they were held, that they were freely transferable by them to the members of the public and that the shares were quoted on the stock exchange. It was contended on behalf of the department that the Explanation to the third proviso to s. 23A, of which we have extracted the relevant portion, amounted to a precise definition of what a company, in which the public were substantially interested, meant, that is, the Explanation was a glossary for the third proviso. On this contention it was urged that if ordinary shares alone are taken into account the members of the public held less than 25 per cent. of the ordinary shares and, therefore, the company would not be one in which the public are substantially interested. The court did not find merit in this argument nor in the approach. Prima facie, according to the Division Bench of the Madras High Court, the terms of the Explanation cannot be construed as limiting the operation of the third proviso only to those companies, which are covered by the Explanation. The use of the word 'deemed' creates a fiction. A company, which cannot in reality be styled as one in which the public are substantially interested, is deemed to be such by the Explanation. It can only be an addition to the category coming under the third proviso, and not a definition of the same. According to the Madras High Court, this was quite clear if references was made to the object with which the section was enacted and the evil which it was intended to suppress. Bearing these factors in mind the court held that the section was intended to hit at the controlled companies and, therefore, in order to consider whether a company was controlled or not, voting power was required to be ascertained with respect to both ordinary and preference shares held. As far as the said company was concerned, if both the types of shares were considered, the said company could not be regarded as a controlled company or what had been often called 'section 23A company' or what was similarly depicted in England as 'section 245 company'. According to the court, a company, which was not a controlled company, would not become one by reason of the said Explanation. But, a company which ordinarily may not be deemed to be one if it satisfied the requirements prescribed by the Explanation. This, according to the Madras High Court, was what was precisely intended to be supplied by a deeming provision as was contained in the Explanation.

27. Accordingly, the Madras High Court held in favour of the assessee observing that it was not proper on the part of the ITO to take proceedings under s. 23A of the Indian I.T. Act, 1922.

28. The matter was carried in appeal to the Supreme Court by the CIT and the decision of the Supreme Court is to be found in CIT v. Amrutanjan Ltd. : [1964]53ITR218(SC) . It was contended on behalf of the Commissioner before the Supreme Court that the Explanation to Sub-section (1) of s. 23A was in reality a clause which defined what a company, in which the public were substantially interested, was. The Supreme Court, however, did not accept the argument observing (p. 223) :

'In terms, however, the Explanation raises a presumption and does not purport to define a company in which the public are substantially interested.'

29. As earlier observed, the decision in Amrutanjan Ltd.'s case : [1964]53ITR218(SC) formed the most substantial part of the arguments advanced on behalf of the assessee-company before us, and it was contended by counsel on behalf of the assessee-company that we has also before as a similar deeming provision which was required to be given the same effect as had been given by the Madras High Court in Amrutanjan Ltd. 's case : [1961]41ITR21(Mad) . In this connection, reference may also be made to the following observations of Lord Radcliffe in the case of St. Aubyn v. Attorney-General [1952] AC 15 ; 3 EDC 292 , which are found cited in Khatizabai Mohomed Ibrahim v. CED : [1959]37ITR53(Bom) :

'The word 'deemed' is used a great deal in modern legislation. Sometimes it is used to impose for the purposes of a statute an artificial construction of a word or phrase that would not otherwise prevail. Sometimes it is used to put beyond doubt a particular construction that might other-wise be uncertain. Sometimes it is used to give a comprehensive description that includes what is obvious, what is uncertain and what is, in the ordinary sense, impossible.'

30. We have already noted that the argument advanced on behalf of the assessee is not unattactive, regard being had to the previous history of the law and the changes effected in the Companies Act. The difficulty, however, is causes by the language used in Expln. II. It is not difficult to point out how the addition of a certain qualifying phrase would have made the said Explanation clearer to give effect to either of the two meanings canvasses at the bar before us. If the said Explanation had been qualified to indicate that it was being introduced notwithstanding the definition of 'subsidiary company' in the Companies Act simpliciter, then it would be quite clear that the Explanation was to provide for the Finance (No. 2) Act, 1962, the definition of 'subsidiary company', which was to be applied for the purpose of Para. D and Part III, superseding the earlier practice of using and applying the definition of 'subsidiary company' to be found in the Companies Act. Similarly, appropriate words could have been added to the amendment to the Companies Act which had taken place in 1960. Neither method which would have clarified the situation and ended the controversy had been adopted. The Explanation stands, as it does, using the words 'deemed to be' but not incorporating the words 'only if' and hence the problem for interpretation.

31. The principal question which will be required to be considered is whether it would be permissible for us to apply to the problem arising for our determination the same approach as found favour with the Madras High Court in Amrutanjan Ltd.'s case : [1961]41ITR21(Mad) . The Madras High Court had before it a clearer picture which emerged inasmuch as there was English legislative history pertaining to legislation dealing with controlled companies and the devices adopted by those controlling such companies to reduce taxation liability of those who controlled such companies by artificially restricting the dividends declared by such companies. Bearing in mind the nature of the problem, the evil that the section, viz., 23A, was supposed to meet, the Madras High Court in Amrutanjan Ltd. 's case : [1961]41ITR21(Mad) rejected the arguments advanced on behalf of the revenue that the Explanation incorporating the deeming provision was a definition provision introducing a glossary for the said section. Before us we do not have any such background material which would assist us in arriving at the same or similar conclusion. We also do not find the non-incorporation of the words 'only if' to be of material significance. It is to be appreciated that if these words had been there, the meaning would have been clear and the contention advanced on behalf of the revenue would be required to be accepted for the mere asking. However, form the failure of the draftsman to incorporate these words it would not necessarily follow that the intention of the Legislature was not to make this an exclusive definition of 'subsidiary company' to be utilised for the purpose of applying it to Para. D and Part III of the 1962 Finance Act, but a fiction or a presumption to get over the change effected by the amendment of 1960 which affected the depiction of 'subsidiary company' in the Companies Act. Both prior to 1960 and after the amendment of 1960, if one company held more than half in nominal value of the equity capital of another company, then the latter company would be considered to be a subsidiary of the former company under the Companies Act provided (that is, only after 1960) that the holders of preference shares did not have voting rights. Thus, where preference share capital did not posses voting power, the depiction of subsidiary company under the Explanation, and we are not subsidiary company under the Companions Act. Where that is the position, it would be difficult to accept the argument that the description or depiction of 'subsidiary company' to be found in the Finance (No. 2) Act is merely a legal fiction or a legal fiction or a legal presumption as was contended for the purposes of the Finance (No. 2) Act, 1962, or a glossary provision, to use the words of the arguments for the department in Amrutanjan Ltd.'s case : [1961]41ITR21(Mad) ; on appeal : [1964]53ITR218(SC) . In our opinion, bearing in mind the various circumstances, the latter contention appears to us to be the better one.

32. In the view that we have taken of the matter, we are of the opinion that Expln. 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 nominal 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 or the said Part of the First Schedule to the Finance (No. 2) Act, 1962. Since the admitted position is that the assessee-company by itself does not directly own the necessary portion of the nominal equity capital of 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 Expln. 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 purpose 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 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 advances on behalf of the assessee-company that the word 'holding' in Expln. II should be interpreted to mean 'holding directly or indirectly'. It is quite clear to us that the holding which is prescribed pertains to effective direct ownership and in that view of the matter holding in Standard and Sassoon by the subsidiary companies of the assessee-company cannot be aggregated with the direct holding of the assessee-company in order to apply the definition contained in Expln. II.

33. Counsel inform us that the position under the Finance Act, 1963, is identical with that existing under the Finance (No. 2) Act, 1962, and that whatever we have stated as to the effect of Expln. II for the purpose of application of the First Schedule to the Finance (No. 2) Act, 1962, will apply mutatis mutandis to the Finance Act, 1963.

34. Thus, as far as question No. 1 is concerned, it would appear that the view taken by the Tribunal was correct and will be required to be upheld.

35. In the result, the two questions referred to us are answered as follow :

Question No. 1 in the negative and in favour of the revenue.

Question No. 2 in the negative and in favour of the assessee-company.

36. In view of the question in CIT v. Birla Cotton Spinning & Weaving Mills Ltd. : [1971]82ITR166(SC) , the assessee-company had not succeeded with respect thereto, it must pay the costs of the reference to the Commissioner of Income-tax.

37. Order accordingly.


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