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Commissioner of Income-tax Vs. Aspinwall and Co. Ltd. and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference Nos. 31 and 32 of 1970
Judge
Reported in[1975]98ITR291(Ker)
ActsIncome Tax Act, 1961 - Sections 2(18)
AppellantCommissioner of Income-tax
RespondentAspinwall and Co. Ltd. and anr.
Appellant Advocate P.A. Francis and; P.K. Ravindranatha Menon, Advs.
Respondent Advocate P.K. Kurian,; V. Desikan and; K.A. Nayar, Advs.
Cases ReferredShree Changdeo Sugar Mills Ltd. v. Commissioner of Income
Excerpt:
.....income tax act, 1961 - whether company satisfied requirements of section 2(18) - company in which public substantially interested included in expression ' the public' under section 2 (18) - as such assessee-company satisfied requirements of section 2(18). - - of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by, the government or a corporation established by a central, state or provincial act or the public (not being a director, or a company to which this clause does not apply)..10. in 1965, section 2(18) was again amended thus :2. (18) 'company in which the public are substantially interested 'a company is said to be a company in which the public are substantially..........interested in 25 per cent. of the voting power and it was admitted before us that it was not a public company at all but a private company and that, therefore, the public were not interested in that company. the shares held by the mysore merchants ltd. cannot at all be counted as a holding in which the public are beneficially interested in view of the exclusion contained in the explanation.'17. this shows that a company in which the public are substantially interested is included in the expression 'the public'. this decision was rendered on 7th december, 1960, and we do not find any basis to adopt a different interpretation to the same expression contained in the 1961 act. this also, according to us, clearly warrants the conclusion which we have arrived at in this case.18. the.....
Judgment:

Viswanatha Iyer, J.

1. These two references are made to this court by the Income-tax Appellate Tribunal, Cochin Bench, under Section 256(1) of the Income-tax Act, 1961. In I.T.R. No. 31 of 1970, the question reads as follows:

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the company satisfies the requirements of Section 2(18) of the Income-tax Act, 1961, and hence it is a company in which the public are substantially interested '

2. An identical question is raised in I.T.R. No. 32 of 1970. The assessee-companies in the two cases are different. The assessment years are also different. But the major shareholders of these companies are the same; and our answer to the question in one case will cover the other case too.

3. During the period from December 31, 1960, to December 31, 1961, which was the previous year for the purpose of the assessment of the assessee-company in I.T.R. No. 31 of 1970 for the year 1962-63, 55 per cent. of the equity shares of that company were held by Messrs. J.H. Vavasseur & Co. Ltd. During the period between December 31, 1962, and December 31, 1963, which was the previous year for assessment of the assessee-company in I.T.R. No. 32 of 1970, the same M/s. Vavasseur & Co. Ltd. held 54.68 per cent. of the equity shares of the assessee-company. It is not disputed that Messrs. J. H. Vavasseur & Co. Ltd. was a company in which the public were substantially interested during the relevant previous years. The Income-tax Officer, Companies Circle, Ernakulam, in passing the assessment orders, treated the status of the assessee-companies as that of a private limited company. Aggrieved by the determination of that status the assessees filed appeals before the Appellate Assistant Commissioner of Income-tax, Ernakulam. The Appellate Assistant Commissioner found that the description of the assessee-companies as private limited companies was wrong. But, according to him, what the Income-tax Officer wanted to convey was only that these were companies in which the public were not substantially interested. On that question the Appellate Assistant Commissioner also took the view that the companies were not companies in which the public were substantially interested. Against his decision the assessees filed appeals before the Income-tax Appellate Tribunal and the Tribunal took the view that the companies were companies in which the public were substantially interested. According to the Tribunal, the expression 'the public' in Section 2, Clause (18)(b)(i) of the Income-tax Act, as it stood prior to the amendment by the Finance Act of 1965, took within its purview a company in which the public were substantially interested and what was done by the Finance Act of 1965 was only to clarify that position and not to effect any change in the pre-existing law. In that view, the Tribunal allowed the appeals. The department applied for references to this court; and it is under these circumstances that these references have come up for consideration and the same question is involved in both the cases and hence these cases are considered and decided by this judgment.

4. An answer to the question referred for consideration is relevant to decide the applicability of Section 104 of the Income-tax Act to the assessees ; and strictly this question would arise only when steps are sought to be taken under that section and not at this stage.

5. To appreciate the contention raised, a brief narration of the legislative history of this provision in Section 2, Clause (18), is necessary. Under the Indian Income-tax Act, 1922, before the introduction of Section 23A, a company, as a unit of assessment, had certain advantages not available to the other assessees. The rate of tax was less to a company and it was assessed at a fiat rate. Other assessees were taxed at a graduated scale or on a slab system. This applied for levy of super-tax also. An individual might avoid the high incidence of super-tax by transferring to a private limited company, in return for shares, the source of his income and by securing that, instead of any dividends being declared, the profits made by the company might be allowed to accumulate in the hands of the company and might be ultimately distributed in a capital form by creating bonus shares. The legislature wanted to foil this attempt to avoid super-tax by such means. So, one of the reasons for the introduction of Section 23A to the Indian Income-tax Act, 1922, was this. By Section 23A, undistributed profits of a company, subject to some restrictions and conditions, were deemed to be distributed as dividends and the proportionate share thereof of each shareholder was directed to be included in the total income of the shareholder for the purpose of his assessment.

6. Under Section 23A, as it stood prior to 1955 amendment, all companies were not sought to be roped in. A company in which the public were substantially interested and a subsidiary company of such a company if the whole of the share capital of such subsidiary company was held by the parent company or by the nominees thereof, were exempted, A company in which the public were substantially interested was also defined thus:

' 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 unconditional 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.'

7. In 1955, Section 23A was recast and Sub-section (9) to Section 23A provided for exemption of companies in which the public were substantially interested from the scope of this section. There also, a company in which the public were substantially interested was separately defined in Explanation I to that section.

8. This definition of a company in which the public were substantially interested was again amended by the Finance Act of 1957. According to the section, after its 1957 amendment, if a company was not a private company and if its shares carrying not less than 50 per cent. of the voting power had been allotted unconditionally to, or acquired unconditionally by, and were throughout the previous year beneficially held by the Government or a corporation established by a Central, State or Provincial Act or the public (not including a company to which the provisions of this section apply), it was treated as a company in which the public were substantially interested.

9. This definition was substantially retained in the Income-tax Act, 1961, with only this difference--a company in which the public were substantially interested was defined separately in Clause (18) of Section 2. The relevant portion of the clause reads as follows:

'2. (18) company in which the public are substantially interested.--A company is said to be a company in which the public are substantially interested--......

(b) if it is not a private company as defined in the Companies Act, 1956; and

(i) its shares (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 fifty per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by, the Government or a corporation established by a Central, State or Provincial Act or the public (not being a director, or a company to which this clause does not apply)......'

10. In 1965, Section 2(18) was again amended thus :

'2. (18) 'company in which the public are substantially interested '. --A company is said to be a company in which the public are substantially interested--......

(b) if it is not a private company, as defined in the Companies Act 1956(1 of 1956), and -

(i) its shares (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 fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by --

(a) the Government, or

(b) a corporation established by a Central, State or provincial Act, or

(c) any company to which this clause applies or any subsidiary company of such company where such subsidiary company fulfils the conditions laid down in Clause (b) of Section 108 (hereinafter in this clause referred to as the subsidiary company), or

(d) the public (not being a director or a company to which this clause does not apply).'

11. From this amendment, the department takes the stand that before this, companies like the assessee-companies did not come within the category of companies in which the public were substantially interested. How far this stand is correct is the question.

12. As per Section 2(18), in order that the assessee-company can be said to be a company in which the public are substantially interested, it must satisfy the conditions laid down in Clauses 2(18)(b)(B)(i) to (iii), namely,--

(a) it should not be a private company,

(b) its shares carrying more than 50 per cent. of the voting power should be unconditionally and beneficially held by the Government, statutory corporation or the public,

(c) the said shares should have been during the relevant previous year freely transferable to the members of the public, and

(d) the affairs of the company or the shares carrying more than 50 per cent. of the voting power should not be controlled or held by five or less persons.

13. Who all belong to the body which is designated as 'the public' in Section 2, Clause (18)(b)(B)(i), is not clear. The expression ' the public' is not defined in the Act. It is an expression of wide import. It will certainly include 'the people' or 'general body of mankind'. Is that all: or does it include other legal persons as well In the context in which it occurs in Section 2(18)(b)(B)(i) unaided by the exception, its meaning is ambiguous and its scope doubtful. But the words mentioned immediately after and put within brackets, namely, ' not being a director or a company to which this clause does not apply ' are stated by way of exception to the scope of the expression ' the public '. They throw considerable light upon the otherwise ambiguous import of the expression ' the public '. These words in brackets really act as a guide to understand the intention of the legislature. When the words in brackets exclude a company to which this clause does not apply, they necessarily imply that a company to which this clause applied will come within the scope of the expression 'the public'. Looking at the exception or proviso clause for purposes of ascertaining the meaning of the main provision of the enactment is recognised as a proper method of construction by the Supreme Court in the case of Hindustan Ideal Insurance Co. v. Life Insurance Corporation of India, : [1963]2SCR56 . In support of this proposition the Supreme Court also relies on a decision of the House of Lords. Craies on Statute Law also refers to this decision of the House of Lords in support of this use of an exception or a proviso. Paragraphs 28 and 29 of the Supreme Court decision read as follows :

' (28) There is no doubt that where the main provision is clear its effect cannot be cut down by the proviso. But where it is not clear the proviso, which cannot be presumed to be a surplusage, can be properly looked into to ascertain the meaning and scope of the main provision. By looking at the proviso for this purpose the rule of construction referred to by learned counsel will not be infringed.

(29) In the West Derby Union v. Metropolitan Life Assurance Society, [1997] AC 647 Lord Watson observed '..... . I perfectly admit that there may be and are many cases in which the terms of an intelligible proviso may throw considerable light on the ambiguous import of the statutory words. '

In the same case Lord Herschell admitted that a proviso may be a useful guide in the selection of one or other of two possible constructions of words in the enactment or to show the scope of the latter in a doubtful case. '

14. In the light of the principle laid down in this decision it is clear that when two categories of persons, namely, a director or a company to which this clause does not apply, arc said to be not included in the expression 'the public', every other category of persons must, by implication, be deemed to be included in the expression 'the public'. Otherwise, the exclusion of certain persons or companies alone becomes meaningless. Thus understood, a company in which the public are substantially interested clearly comes within the expression 'the public' in Clause 2(18)(b)(R)(i) of the Act.

15. This understanding of the expression 'the public' is further strengthened by the wording of Section 2(18)(b)(iii). Who all can control or hold shares carrying 50% of the voting power in the assessee-company are stated in Clause (18)(b)(B)(i) of Section 2. They are the Government, statutory corporations and the public, only. In Clause 2(18)(b)B(iii) the possibility of control of the assessee-company by the Government, statutory corporations and companies in which the public are substantially interested arc visualised and they are directed to be excluded in reckoning the five or less persons controlling the company or holding shares carrying more than 50 per cent. of the voting power. The Government and statutory corporations are specifically mentioned in Section 2, Clause (18)(b)(B)(i). So, every other person or body including a company in which the public are interested controlling the assessee-company should come within the body designated as ' the public ' in Section 2, Clause (18)(b)(B)(i). That means a company in which the public are interested is included within the body designated ' the public ' in Section 2, Clause (18)(b)(B)(i). Section 2(18)(b)(B)(iii) therefore removes all doubts in understanding the scope of the expression ' the public ' in Section 2(18)(b)(B)(i) before the 1965 amendment. Therefore, there is no room for doubt, according to us, in coming to the conclusion that a company like the assessee-company will come within the category of companies mentioned in Section 2(18) of the Income-tax Act.

16. Again, this conclusion is further supported by the decision of the Supreme Court in Shree Changdeo Sugar Mills Ltd. v. Commissioner of Income-tax, : [1961]41ITR667(SC) That case arose under Section 23A of the Indian Income-tax. Act, 1922. The question that arose for consideration in that case was whether the shares held by Messrs. Mysore Merchants Ltd. in the assessee-company were to be reckoned as shares held by the public. Messrs. Mysore Merchants Ltd. was a private company and the Supreme Court held :

'In our opinion, the paramount condition is that even in that company the public should be beneficially interested in 25 per cent. of the voting power and it was admitted before us that it was not a public company at all but a private company and that, therefore, the public were not interested in that company. The shares held by the Mysore Merchants Ltd. cannot at all be counted as a holding in which the public are beneficially interested in view of the exclusion contained in the explanation.'

17. This shows that a company in which the public are substantially interested is included in the expression 'the public'. This decision was rendered on 7th December, 1960, and we do not find any basis to adopt a different interpretation to the same expression contained in the 1961 Act. This also, according to us, clearly warrants the conclusion which we have arrived at in this case.

18. The learned counsel for the department relied on the Explanatory notes to the clauses of the Finance Bill of 1965 and the speech of the Honourable Minister who piloted the Bill in Parliament and argued that, the provision in Section 2(18) before its amendment did not take in a company like the assessee-company. We do not think that this is the proper way to understand and interpret Section 2(18) before its 1965 amendment Statements by Ministers and Explanatory notes on the clauses of the Bill cannot be used as aids to the construction of the enactment. The law is well-settled on this point.

19. The 1965 amendment by expanding the expression 'the public' in Section 2(18)(b)(B)(i)(c) has, according to us, only clarified the pre-existing position and it does not make any change in the law.

20. In this view of the matter, the decisions in the two cases rendered by the Appellate Tribunal are right. We answer the questions in the affirmative, i.e., against the department. No costs.

21. In each case a copy of this order shall be sent to the Income-tax Tribunal as required by Section 260 of the Income-tax Act, 1961.


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