1. Both the above appeals arise out of the same facts and give rise to the same question. They are, therefore, dealt with by this common order.
2. The assessee had sold certain shares and land and invested a part of sale proceeds thereof in equity shares of Manish Organics India Ltd. The assessee claimed relief under Section 54E read with Section 80CC of the Income-tax Act, 1961 ('the Act'), on the ground that the said investment in shares was investment in specified assets. His contention was that the shares were allotted to him by reason of being a promoter of the company. The ITO allowed relief claimed under Section 54E.However, the Commissioner considered that the order of the ITO was erroneous and prejudicial to the interests of the revenue and directed the ITO to withdraw the exemption. The Commissioner's reason was that it appeared from the prospectus that the promoters of the company was the assessee's HUF and, therefore, the relief could not be granted to the assessee in his individual capacity.
3. Before us the assessee's counsel, Shri H.M. Talati, has argued that the assessees in their investments also were promoters and the fact that the HUF had been named as promoters in the prospectus did not contradict this fact. He has pointed out that certain passages from the Commentaries on Companies Act by various authors and relied upon them to show that apart from naming as promoters in the prospectus other activities also can make a person a promoter. The material parts of the passages in the various commentaries are reproduced below: The term is not one of law but familiar to the business world. It points to a person who forms a company and gets it going. It indicates 'a person who originates the scheme for the formation of the company, has the Memorandum and articles prepared, executed and registered and finds the first directors, settles the terms of the preliminary contracts and prospectus (if any) and makes arrangement for advertising and circulating the prospectus and placing the capital, is emphatically a promoter in the fullest sense'. He controls the formation and future of the company and it is this control which lies at the root of the fiduciary relation of the promoter to the company....
(Guide to the Companies Act by A. Ramaiya, Advocate, Ninth edition (Revised), 1980, page 174) Promotor - The term applies to those who set in motion the machinery by which the Act enables them to create an incorporated company or float it. This involves the idea of exertion for setting up and starting the company. It means a person who originates the scheme for the formation of the company, arranges to get it registered and is a party to the preparation of the prospectus. The term does not include a person who has acted in a professional capacity, such as counsel, solicitor, accountant, printer and the like for persons engaged in the formation of the company. A person who does not take a prominent part may so act in the formation of the company as to bring himself under the term 'promoter'....
Datta on the Company Law by C.R. Datta, Third Revised Edition, 1982, page 148.
The word 'promoter' conveys to the layman a picture of a person whose activities are directed specifically and deliberately towards the bringing into being of a company or companies : but just as, for the purpose of the Companies Acts, the word 'director' covers a wider field than that pictured by the layman, so, in company law, does the name 'promoter' : in each case it is a question of fact whether or not a person is a promoter. Any person who undertakes to take part in forming a company, or who, with regard to a proposed or newly formed company, undertakes a part in raising capital for it, is prima facie a promoter of.the company, for he has taken part in setting going a company formed with reference to a given object.
Thus a person may be a promoter though he has taken a comparatively minor part in the promotion proceedings....
Palmer's Company Law by Clive M. Schmitthoff, Volume I, Twenty-Second Edition, page 166.
He has pointed out the following evidence to show that the individual assessees are promoters: (a) Signatories to the prospectus, memorandum and articles are the assessees without mentioning the HUF that they have signed in their individual capacity.
(b) The first directors of the company are the assessees without mentioning the HUF which again shows their capacity as individual.
(c) The sentence at the end of the memorandum and articles of association shows that the persons whose names and addresses are subscribed are desirous of being formed into a company. The persons whose names and addresses are subscribed are, inter alia, the assessees without mentioning any HUF which shows their individual capacity.
(d) The assessees had acquired the shares of the company from the promoters' quota and paid for them out of the funds of the individuals.
The assessee's counsel also argued that the name of the HUF had been put as promoter in the prospectus in order to derive the benefit of the reputation of the commercial house. He elaborated this by an illustration of a house of Birla's or of Tata's carrying a certain reputation which helped in raising of capital, etc.
4. On the other hand, the learned departmental representative has argued that the statement that HUF was the promoter had been made in the important document, namely, the prospectus which was filed in before the Government authority in all the seriousness and displayed before the public. He pressed this point further that if the assessee wanted to mention the individuals as promoters, nothing prevented him from stating the HUF that in the prospectus and the assessee having named the HUF as promoter should now be held to that position and none other. He argued that the fact that funds for the payment of shares belonging to the individual, did not mean that the shares belonged to the individual; on the contrary the shares continued to belong to the HUF since they had been given from the promoters' quota since the HUF was promoter. He has generally relied upon the Commissioner's order.
Sarvashri Laxmikant Bhagubhai, Janmejay Bhagubhai and Narendra-parasad C. Patel shall give stamped undertakings: (a) to raise and invest in the proposed project the equity share capital of Rs. 50 lakhs which shall be maintained during the currency of the loan. Of this the promoters shall subscribe for equity shares for a minimum amount of Rs. 20 lakhs.
Regarding this para a question was put to the assessees' counsel by the Bench that this para showed that there was a distinction between the assessees-individuals and the promoters which showed that the assessees were not promoters. To this he gave a reply that para only showed that out of the total amount of Rs. 50 lakhs which was to be raised and invested by the assessees-promoters had to subscribe Rs. 20 lakhs.
6. Regarding the meaning of the term 'promoter' the first two quotations above describe the normal activity of a promoter and thus identify them. The third quotation gives a more comprehensive meaning of that word so as to cover the case of any person who takes a part in forming the company and also states that the question is one of fact.
The following passage from Gower's Principles on Modern Company Law, 4th edition, offers considerable guidance.
It will have been apparent from the foregoing that the expression 'promoter' covers a wide range of persons. Indeed it is still wider both professional promoter and the village grocer are promoters to the fullest extent in that each undertakes to form a company with reference to given object and set it going...takes necessary steps to accomplish their purposes. But a person may be a promoter who has taken much less active and dominating roll; expression may, for example cover any individual or company that arranges for some one to become a director, places the shares or negotiates preliminary agreements who...constitutes a promoter in any particular case is therefore a question of fact.
(b) It is not necessarily confined to a person who is recognised as a promoter in the commercial world. (c) Any person who takes part in the formation of the company would be a promoter. This does not include professional or technical persons who do only ministerial acts in the formation. This means that the professional person must do only his professional duties and must not be interested in the ultimate result that the company should come into existence.
(d) Applying the above test, every time it is a question of fact whether a person is a promoter or not.
(e) Taking steps like getting memorandum and articles prepared, arranging to raise capital, formulating the scheme for the business activity of the company, finding the first directors, arranging preliminary contracts, are definite indications that the person is a promoter.
In this particular case the activities of the assessees indicated above definitely show that they are promoters. Para 1(a) in the prospectus may show that there is some distinction between the promoters mentioned in the prospectus and the assessee. But the question whether a person is a promoter or not has to be judged independently. If there is evidence according to the test indicated above that a person is a promoter then he is a promoter and that will not depend upon any specific mention of any one as a promoter or, we make bold to say, even a denial thereof. The test is objective and the decision depends upon the evidence. The reason is simple. The word 'promoter' has been evolved and given its meaning in company law with a view to protect the interest of investors and that cannot be allowed to depend upon whether any person denies or admits that fact. There is no specific denial in para 1(d). It is much less, being only a matter of implication or inference.
8. We, therefore, hold that the assessees are promoters. They would, therefore, be entitled to the relief under Section 54E read with Section 80CC(4). The Commissioner's order is set aside and the appeals are allowed.