KANIA, AG. C.J. - This a reference under section 66(1) of the Indian Income-tax Act by the Income-tax Appellate Tribunal for the opinion of the Court on the following question :-
'Whether, in the circumstances of the case, it has been rightly held that the assessee company is a company in which the public are not substantially interested within the meaning of the explanation (b) to sub-section (1) of Section 23-A of the Indian Income-tax Act ?'
The question relates to the assessment years 1939-40 and 1940-41, and the previous years in question therefore are the calendar years 1938 and 1939. The relevant facts as can be gathered from the statement of case and the judgment are these : Messrs. P.M. Hutheesingh & Sons Ltd., are a limited company. The share capital of Rs. 1,000 is divided into one thousand shares of Rs. 1 each, out of which 750 are promoters shares and 250 are ordinary shares. The 750 promoters shares were taken up by the eleven persons at the time the first allotment was made by the company. Mr. Narotam Lalbhai was one of the persons to whom 94 promoters shares were allotted. The 250 ordinary shares of the company were issued in the ordinary course and one share was applied for and allotted to Mr. Narotam Lalbhai. None of the holders of the other promoters shares applied for any ordinary shares. The company was incorporated in 1928. The memorandum of association of the company shows that before the formation of this company the partnership firm of Messrs. P.M. Hutheesingh & Sons was doing business. It appears that the Aruna Mills Ltd. was then floated and the assessee company were to work as the managing agents of the Aruna Mills. In the years 1938 and 1939 one ordinary share was held by Mr. Narotam Lalbhai while the remaining 249 shares were held by the public. The taxing authorities considered that the profits of the assessee company were not distributed in the normal way, and acting under Section 23-A(1) an order was passed directing that the proportionate share of the profits which were not distributed should be considered as the income of each shareholder and included in the total income for the purpose of assessing his total income. The relevant provisions of the Income-tax Act are in Section 23-A(1) which runs as follows :-
'Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are laid before the company in general meeting increased by any income-tax payable thereon are less than sixty per cent. of the assessable income of the company of that previous year, he shall, unless he is satisfied that having regard losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income.'
Proviso 3 to that sub-section, which is relevant, for the present discussion, is in these terms :-
'Provided further that this sub-section shall not apply to any company in which the public are substantially interested.....'
Explanation (b) to that proviso runs in these terms :-
'A company shall be deemed to be a company in which the public are substantially interested if shares of the company....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.... and if any such shares have in the course of such previous year been the subject of dealings in any stock exchange in British India or are in fact freely transferable by the holders to other members of the public.'
On behalf of the assessee it was contended that Section 23-A(1) did not apply to this company as it was a company in which the public are substantially interested within the meaning of the explanation. The burden of proving this is clearly on the company. In order to establish that the assessees are such a company, according to the words of the explanation, they have to establish that shares of the company carrying not less than 25 per cent. of the voting power have been allotted (1) unconditionally to, or acquired unconditionally by, and (2) are at the end of the previous year beneficially held by - the public; and (3) such shares (a) have in the course of such previous year been the subject of dealings in any stock exchange in British India, or (b) are in fact freely transferable by the holders to other members of the public.
In order to find out the necessary facts articles 3 and 6 of the articles of association of the company are relevant to be considered. They are in these terms :-
'3. These shall be maintained by or at the instance of each of ordinary shareholder a deposit in the Aruna Mills Ltd., of a sum of Rs. 2,000 for each ordinary share of this company. The said deposit shall be continued and shall not be liable to be paid for a term of 7 years from the date or dates on which the deposit monies shall have been paid. The depositor shall get thereon from the said Aruna Mills Ltd., interest at the rate of 6 per cent. per annum for the deposit, which interest, he will be at liberty to draw at the end of each year.
6. No. holder of promoters shares shall transfer, by way of sale his promoters shares to any person other than a holder of promoters shares unless, he first offers the same to such holders at a price not exceeding ten times the average dividend declared or to be declared for the three years immediately preceding the sale and unless the acceptance of such offer is communicated in writing by any one or more of such holders within a fortnight of the receipt of such offer. In the case of a larger number of holders accepting the offer, the transferor will have the right to select, at his absolute discretion and choice, his transferee or transferees. And no shareholder, whether a holder of promoters shares or otherwise, shall be entitled to transfer the shares standing in his name to any persons who is not a member of the company except with the express permission of the directors.'
In order to prove that in the course of such previous years the shares were the subject of dealings in any stock exchange in British India, the assessee produced a letter from the president of the Ahmedabad Share and Stock Brokers Association dated 4th March, 1944. That is addressed to the assessee company and is in the following terms :-
'In reply to your letter.... I am to state that the shares of your company (Aruna Commission Shares) are amongst the securities dealt with on the cash section of my Association. It is a practice with my Association to issue a daily official list of closing prices of shares on the forward list only. Hence no quotation is given in the daily official list of closing prices of shares of your company. However I am in a position to state that the transactions in the shares of your company (Aruna Commission Shares) were frequently being engaged in by members of my Association inter se during the course of the years 1938 and 1939.'
The assessee further filed a statement showing the transfers of shares which took place in 1938 and 1939 from the shareholders who were on the list in the previous years and the balance sheets showing transfer fees earned by the company in respect of such transfers of shares.
The assessee company contended that although there might be difficulty in respect of the 750 promoters shares, the 250 ordinary shares were held by members of the public and that brought them within the words 'carrying not less than twenty-five per cent. of the voting power,' of the explanation referred to above. It was therefore contended that Section 23-A did not apply to them. On behalf of the Commissioner this position was disputed. It was not admitted that having regard to the articles of association the allotment of shares was unconditional, or that the shares were acquired unconditionally by members of the public at the end of the relevant two years. It was not admitted that such shares were in the course of such years the subject of dealings in any stock exchange in British India, or were in fact freely transferable by the holders to other members of the public. In this connection it was pointed out that under article 3 there was an obligation on the holder of each ordinary share to make a deposit of Rs. 2,000 with the Aruna Mills and which deposit was not liable to be repaid for a term of seven years. It was further pointed out that under article 6 the ordinary shares were not capable of being transferred to a non-member without the express permission of the directors. It was therefore contended that there was no unconditional allotment or unconditional acquisition of shares by the public within the meaning of the explanation. Relying on the same facts not freely transferable by the holders to other members of the public. In respect of the evidence led on behalf of the assessee company on the question whether the shares had in the course of previous years been the subject of dealings in any stock exchange in British India, it was contended before the Tribunal that this had not been established by the assessee company.
I must point out here that both in the statement of case and in the judgment there are certain inaccuracies. When a fact finding authority is in the position of the Tribunal (whose findings of fact are considered conclusive), it is always very desirable for them to be accurate in their statement of facts. Under rule 55 framed by the Tribunal for preparing a statement of case to be submitted to Court, there is power to have an agreed statement, if possible, with the assistance of the parties. It is a desirable and wholesome provision which may be usefully borne in mind so that the contesting parties may have no grievance when the matter is discussed before the High Court. It prevents the contention that a certain material and relevant facts is omitted to be stated, or in fact is not correctly stated having regard to the documents before the Tribunal.
Keeping these inaccuracies apart in the present case the Tribunal has come to two conclusions. At the end of para. 9 of their judgment they have stated that all the 250 shares are not freely transferable. At the end of para. 12 of the judgment they have further stated as follows :-
'In these circumstances we are of opinion that it is not proved that the ordinary shares of Messrs. P.M. Hutheesingh & Sons Ltd., have been the subject of dealings in any stock exchange in British India or in fact freely transferable by the holders to other members of the public.'
The first statement about the 250 shares not being freely transferable is a result of the construction of article 3 and 6 of the articles of association of the company. That is not seriously challenged. The other conclusion is very strongly attacked by the assessee company before us. The question whether such shares have in the course of the previous years been the subject of dealings in any stock exchange in British India or not is a pure question of fact. As an advisory body we have no jurisdiction to disturb or go behind the findings of fact by the Tribunal. We can only consider whether there was any evidence on which the conclusion can be based In the present case in paragraph 11 of the judgment the Tribunal has stated that the statement filed by the assessee company shows that during the calendar year 1938 eleven transfers in all involving 29 shares took place. We are told that his is a misstatement on the part of the Tribunal. The statement in fact shows transfers of twenty-five shares. The original statement is now produced before us and shows that the assessee is correct. In para. 12 of its judgment the Tribunal has considered the letter of the president of the Ahmedabad Stock Exchange dated 4th March, 1944, mentioned above. The criticism of the Tribunal on the assessee company being called 'Aruna Commission' appears to be based on a misreading of the letter. The letter is addressed to the limited company and there are express references to the shares of that company. The words 'Aruna Commission Shares,' which are put in brackets, only describe the right of the shareholders according to what is conveniently described as the effect of the memorandum and articles of association of the company. The rest of the criticism of that letter is based on the actual wording of the letter. It shows that the Tribunal fully considered the effect of the letter. It is pointed out that the latter does not show if it refers to the promoters shares or ordinary shares. It was therefore not considered satisfactory evidence in respect of the ordinary shares, as contended by the assessee company. It was further pointed out, that the statement in this letter that the transfers of the shares of the assessee company were frequently being engaged in by members of the Association during the years 1938 and 1939 was incorrect, because according to the assessees own admission the share register showed transfer of three shares only in 1939. That again may be in one lot or in more than one lot. The Tribunal therefore criticized this statement and considered it unreliable or insufficient in any event. Now the burden of proof being on the assessee it was the duty of the assessee to lead evidence to show that in the course of the previous years these ordinary shares had been the subject of dealings in the Ahmedabad Stock Exchange. This letter does not show that the Ahmedabad Stock Exchange maintains a register of actual transactions in the ordinary shares. The president who signed the letter does not say that he himself had effected any transactions in any of these shares in either of the two years. The effect only is that some members of the Association had told the president that there were many transactions. It is on that information that the president wrote this letter. It is clear that if the transactions having in fact been effected on the stock exchange is sought to be proved such information evidence of a person who had not been engaged in any transaction is far from satisfactory or sufficient. We cannot say that the Tribunal in the circumstances was in error in holding that the allegation of the assessee was not proved. We cannot say that there was no evidence before the Tribunal on which they could come to that conclusion. As the assessee had failed to establish the necessary facts which it was their duty to establish before the Tribunal we cannot go behind that conclusion of the Tribunal. The answer to the question referred to us under the circumstances must be in the affirmative. The assessee company must pay the costs of the reference.
CHAGLA, J. - I agree. I would like to join the learned Chief Justice in emphasizing the duty cast upon the Appellate Tribunal with regard to findings of facts. Under the Act it is the final fact finding authority and I think it is the duty of the Tribunal when they submit a statement of case to the High Court to state the facts clearly, carefully and precisely. After all the High Court only exercises an advisory jurisdiction. Its jurisdiction is to advise the Tribunal on questions of law submitted to it and that advisory jurisdiction cannot be exercised usefully unless the fact finding authority submits the facts carefully, clearly and accurately. I am sorry to say that in the reference with which we are dealing both in the statement of case and in the judgment there are several inaccuracies which in some cases are patent. A little more care would have been sufficient to make the Tribunal realise that the statement of facts prepared by them was not as correct and as satisfactory as it should have been. I hope that in future the Tribunal will bear this in mind when preparing the statement of case.
Reference answered in the affirmative.