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Yercaud Coffee Curing Works Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 225 of 1972 and 290 of 1975 (Reference Nos. 38 of 1972 and 248 of 1975)
Judge
Reported in[1978]111ITR787(Mad)
ActsIncome Tax Act, 1922 - Sections 23A; Finance (No. 2) Act, 1957; General Clauses Act, 1897
AppellantYercaud Coffee Curing Works Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateT.V. Balakrishnan, Adv. for ;C.V. Mahalingam, S. Mathrubhutheswaran and K.J. Rebello
Respondent AdvocateJ. Jayaraman, Adv. and ;Nalini Chidambaran, Special Counsel
Cases ReferredPilani Investment Corporation Ltd. v. Commissioner of Income
Excerpt:
(i) direct taxation - interest - section 23a of income tax act, 1922, finance (no. 2) act, 1957 and general clauses act, 1897 - whether tribunal rightly held in respect of assessment years 1956-57, 1959-60 and 1960-61 that assessee-company was not company in which public were substantially interested - company to which provisions of section 23a do not apply then shares held by such company should not be considered as held by public - in respect of assessment year 1956-57 question answered in affirmative and against assessee - in respect of assessment years 1959-60 and 1960-61 question answered in negative and in favour of assessee. (ii) dividend - expenditure - section 23a of income tax act, 1922 - whether finding of tribunal that it cannot be said that declaration of larger dividend in.....ismail, j.1. the income-tax appellate tribunal, madras bench, has referred the following question of law for the opinion of this court (t.c. no. 225 of 1972).'whether the tribunal was right in law in holding in respect of the assessment years 1956-57, 1959-60 and 1960-61 that the assessee-company was not a company in whieh the public were substantially interested ?' the assessee applied to this court in t.c.p. nos. 22, 23, 26 and 29 of 1974 for a direction to the tribunal to refer another question of law. this court by its order dated 28th august, 1974, directed the tribunal to refer the following question: 'whether, having regard to the facts and circumstances of the case, the finding of the tribunal that it cannot be said that the declaration of a larger dividend in respect of the.....
Judgment:

Ismail, J.

1. The Income-tax Appellate Tribunal, Madras Bench, has referred the following question of law for the opinion of this court (T.C. No. 225 of 1972).

'Whether the Tribunal was right in law in holding in respect of the assessment years 1956-57, 1959-60 and 1960-61 that the assessee-company was not a company in whieh the public were substantially interested ?' The assessee applied to this court in T.C.P. Nos. 22, 23, 26 and 29 of 1974 for a direction to the Tribunal to refer another question of law. This court by its order dated 28th August, 1974, directed the Tribunal to refer the following question: 'Whether, having regard to the facts and circumstances of the case, the finding of the Tribunal that it cannot be said that the declaration of a larger dividend in respect of the assessment years 1956-57, 1959-60 and 1960-61 would have been unreasonable, was erroneous in law ?'

2. This question has been referred by the Tribunal pursuant to the order of this court referred to above and that is the subject-matter of T.C. No. 290 of 1975 and we shall refer to this question as the second question, while the former question will be referred to as the first question in the course of this judgment.

3. The questions referred to above turn upon the interpretation of Section 23A of the Indian Income-tax Act, 1922 (hereinafter referred to 'as the Act'). As the questions themselves will indicate, the assessment years concerned are 1956-57, 1959-60 and 1960-61. The said provision, namely, Section 23A of the Act, stood in one form before 1955 and it was amended in 1955 and again it was amended by the Finance (No. 2) Act of 1957. As far as the assessment year 1956-57 is concerned, the relevant provision will be as amended in 1955. As far as the assessment years 1959-60 and 1960-61 are concerned, the relevant provision will be as amended by the Finance (No. 2) Act of 1957. Since the construction of the provision has to be arrived at with reference to some decisions of the courts prior to the amendment of the Section in 1955, we are extracting the statutory provision, as it stood before its amendment in 1955, as it stood after its amendment in 1955 and as it stood after its amendment by Finance (No. 2) Act of 1957:

Section 23A(1) as it stood before its amendment in 1955.

'23A. Power to assess individual members of certain companies.--(1) 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 are less than sixty per cent. of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super-tax payable by the company in respect thereof he shall, unless he is satisfied that having regard to 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 with 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 and reduced by the amount of income-tax and supertax payable by the company in respect thereof 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 :

Provided that when the reserves representing accumulations of past profits which have not been the subject of an order under this Sub-section exceed the paid up capital of the company, together with any loan capital which is the property of the shareholders, or the actual cost of the fixed assets of the company whichever of these is greater, this section shall apply as if instead of the words 'sixty per cent.' the words 'one hundred per cent.' were substituted :

Provided further that no order under this sub-section shall be made where the company has distributed not less than fifty-five per cent. of the assessable income of the company as reduced by the amount of income-tax and super-tax payable by the company in respect thereof, unless the company, on receipt of a notice from the Income-tax Officer that he proposes to make such an order, fails to make within three months of the receipt of such notice a further distribution of its profits and gains so that the total distribution made is not less than sixty per cent. of the assessable income of the company of the previous year concerned as reduced by the amount of income-tax and super-tax payable by the company in respect thereof:

Provided further that this sub-section shall not apply to any company in which the public are substantially interested or to a subsidiary company of such a company if the whole of the share capital of such subsidiary company is held by the parent company or by the nominees thereof. 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 unconditionally 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.' Section 23A(1) as it stood after amendment by the Finance Act, 1955.

'23A. Power to assess companies to super-tax on undistributed income in certain cases.--(1) Subject to the provisions of Sub-sections (3) and (4), where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than sixty per cent. of the total income of the company of that previous year as reduced by-

(a) the amount of income-tax and super-tax payable by the company in respect of its total income but excluding the amount of any super-tax payable under this section ;

(b) the amount of any other tax levied under any law for the time being in force on the company by the Government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income ; and

(c) in the case of a banking company, the amount actually transferred to a reserve fund under Section 17 of the Banking Companies Act, 1949 (X of 1949);

the Income-tax Officer shall, unless he is satisfied that, having regard to losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable, make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under Section 23 be liable to pay super-tax at the rate of four annas in the rupee on the undistributed balance of the total income of the previous year, that is to say, on the total income reduced by the amounts, if any, referred to in Clause (a), Clause (b) or Clause (c) and the dividends actually distributed, if any :

Provided that-

(a) in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments ; and

(b) in the case of any other company where the reserves (including the amounts capitalised from the earlier reserves) representing accumulations of past profits which have not been the subject of an order under this subsection, exceed either the aggregate of-

(i) the paid up capital of the company exclusive of the capital, if any, created out of its profits and gains which have not been the subject of an order under this sub-section, and

(ii) any loan capital which is the property of the shareholders, or the actual cost of the fixed assets of the company, whichever of these is greater,

this section shall apply as if for the words 'sixty per cent. of the total income', wherever they occur, the words 'the whole of the total income' had been substituted.'

4. The Explanation occurring after Sub-section (9) was :

'Explanation.--For the purposes of this section, a company shall be deemed to be a company in which the public are substantially interested-

(a) if it is a company owned by the Government or in which not less than forty per cent, of the shares are held by the Government;

(b) if it is not a private company as defined in the Indian Companies Act, 1913 (VII of 1913), 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 previous year beneficially held by the public (not including a company to which the provisions of this sub-section apply):

Provided that in the case of any such company as is referred to in Sub-section (4), this sub-clause shall apply as if for the words, 'not less thanfifty per cent.', the words 'not less than forty per cent.' had beensubstituted; (ii) the said shares were at any time during the previous year the subject of dealings in any recognised stock exchange in India or were freely transferable by the holder to other members of the public; and

(iii) the affairs of the company or the shares carrying more thanfifty per cent. of the total voting power were at no time during the previousyear controlled or held by less than six persons (persons who are related toone another as husband, wife, lineal ascendant or descendant, brother orsister, as the case may be, being treated as a single person and persons whoare nominees of another person together with that other person being likewise treated as a single person):

Provided that in the case of any such company as is referred to in Subsection (4), this clause shall apply as if for the words 'more than fifty per cent.', the words 'more than sixty per cent.' had been substituted. Section 23A(1) as it stood after its amendment as a result of the Finance (No. 2) Act, 1957:

'23A. (1) Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year as reduced by-

(a) the amount of income-tax and super-tax payable by the company in respect of its total income, but excluding the amount of any super-tax payable under this section ;

(b) the amount of any other tax levied under any law for the time being in force on the company by the Government or. by a local authority in excess of the amount, if any, which has been allowed in computing the total income ; and

(c) in the case of a banking company, the amount actually transferred to a reserve fund under Section 17 of the Banking Companies Act, 1949 (10 of 1949),

the Income-tax Officer shall, unless he is satisfied that, having regard to thelosses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a largerdividend than that declared would be unreasonable, make an order in writing that the company shall, apart from the sum determined as payable byit on the basis of the assessment under Section 23, be liable to pay supertax at the rate of fifty per cent. in the case of a company whose businessconsists wholly or mainly in the dealing in or holding of investments, andat the rate of thirty-seven per cent. in the case of any other company onthe undistributed balance of the total income of the previous year, that isto say, on the total income as reduced by the amounts, if any, referred toin Clause (a), Clause (b) or Clause (c) and the dividends actually distributed,if any.'

5. The earlier Explanation became Explanation 1 and the same which was again placed after Sub-section (9) was as follows :

'Explanation 1.--For the purposes of this section, a company shall be deemed to be a company in which the public are substantially interested-

(a) if it is a company owned by the Government or in which not less than forty per cent. of the shares are held by the Government;

(b) if it is not a private company as defined in the Indian Companies Act, 1913 (VII of 1913), and

(i) its shares (not being shares entitled to a fixed rate at 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 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) :

Provided that in the case of any such company as is referred to in Clause (ii) of Explanation 2, this sub-clause shall apply as if for the words 'not less than fifty per cent.', the words 'not less than forty per cent.' had been substituted; (ii) the said shares were at any time during the previous year the subject of dealing in any recognised stock exchange in India or were freely transferable by the holder to other members of the public; and

(iii) the affairs of the company or the shares carrying more than fifty per cent. of the total voting power were at no time during the previous year controlled or held by less than six persons, and in computing the number of six persons aforesaid, the Government or any Corporation established by a Central, State or Provincial Act or a company to which the provisions of this section do not apply shall not be taken into account, and persons who are relatives of one another and persons who are nominees of any other person together with that other person shall be treated as a single person, the expression 'relative' in this context meaning husband, wife, lineal ascendant or descendant, brother or sister : Provided that in the case of any such company as is referred to in Clause (ii) of Explanation 2, this clause shall apply as if for the words 'more than fifty per cent.', the words 'more than sixty per cent.' had been substituted.'

6. The facts which have given rise to these questions can now be referred to. During the accounting year relevant to the assessment year 1955-56, the share capital of the assessee-company was comprised of 23,505 ordinary shares of which 13,113 shares were held by a public limited company by name the Sheveroy Estates Ltd. It was common ground that the Sheveroy Estates Ltd. was a company in which the public were substantially interested. The position was more or less the same in the subsequent years also. From the shareholding referred to above, it is clear that more than 50% of the shares of the assessee-company was held by one single entity, namely, the Sheveroy Estates Ltd. The Income-tax Officer took the view that the assessee-company was one to which the provisions of Section 23A of the Act applied. According to him, the company did not fulfil the requirements of a company ia which the public are substantially interested as given in the Explanation to the section referred to above. The Income-tax Officer was of the view that the assessee-company did not satisfy the condition that 50% of the total voting power should not be held by less than six persons, the requirement of the Explanation (b)(iii). He also held that more than 50% of the shares was held by the Sheveroy Estates Ltd. and, therefore, the requirement of the Explanation (b)(i) was also not satisfied. He also took the view that the shares of the company were not freely transferable since the directors were vested with absolute discretion in the matter of registering share transfers. Consequently, according to the Income-tax Officer the company did not satisfy, the requirement of the Explanation (b)(ii) also, with the result he applied the provisions of Section 23 A of the Act to the assessee-company in respect of all the four years, namely, assessment years 1955-56, 1956-57, 1959-60 and 1960-61.

7. When the assessee-company took up the matter in appeal, the Appellate Assistant Commissioner disagreed with the Income-tax Officer on all his findings. He was of the view that by the amendment introduced in 1957 by the Finance (No. 2) Act of 1957 to the Act and by the amendment in 1965, to the Income-tax Act, 1961, the requirement regarding the holding of not less than 50% of the voting power by the public was modified so as to include the holdings by companies in which the public were substantially interested. He also pointed out that similarly in determining whether shares carrying more than 50% of the voting power were at any time during the relevant previous year controlled or held by less than six persons, a company in which the public are substantially interested was not to be taken into account. According to the Appellate Assistant Commissioner, the amendment made to Section 23A of the Act in 1957 and that made to Sections 2(18) and 104 of the Income-tax Act, 1961, in 1965, were merely declaratory of the law as it always stood and, therefore, in the light of the amendments, it was clear that the assessee-company satisfied the requirements of the Explanation (b)(i) as well as (b)(iii). He also held, relying on a decision of the Madras High Court in East India Corporation Ltd. v. Commissioner of Income-tax : [1966]61ITR16(Mad) , that the Income-tax Officer was not correct in stating that the shares of the assessee-company were not freely transferable. In the result, the Appellate Assistant Commissioner took the view that the assessee-company fulfilled all the conditions for its being treated as a company in which the public were substantially interested and, therefore, it was outside the pale of Section 23A of the Act. He considered the appeal preferred by the assessee-company even on the alternative basis, namely, assuming that Section 23A of the Act applied to the assessee-company, whether the requirement as to declaration of any further dividend was unreasonable or not in the circumstances of the case. He was of the view that for the assessment year 1955-56, the Income-tax Officer was not justified in invoking the provisions of Section 23A of the Act having regard to the financial position of the company. But with regard to the other three years, he held that it could not be said that the requirement as to the declaration of further dividend would be unreasonable, with the result he allowed the appeal of the assessee-company for the assessment year 1955-56 on both the grounds, namely, that Section 23A of the Act did not apply to the assessee-company and that even if it applied, the levy of tax by the Income-tax Officer was not warranted. In respect of the other three years, the Appellate Assistant Commissioner allowed the appeals only on the ground that Section 23A of the Act itself was not applicable to the assessee-company. Against this order of the Appellate Assistant Commissioner, the department preferred four appeals to the Income-tax Appellate Tribunal. There were two further appeals before the Tribunal and they related to the rectification orders in respect of the two years 1959-60 and 1960-61. Therefore, in substance, the subject-matter of consideration by the Tribunal was the applicability of Section 23A of the Act to the assessee-company for the four years in question. The Tribunal by its order came to the conclusion that the Appellate Assistant Commissioner was wrong in treating the subsequent amendments made in 1957 to the Act and those made in 1965 to the Income-tax Act, 1961, as merely declaratory. Consequently, on the construction of the relevant statutory provision applicable to the respective years, the Tribunal came to the conclusion that the provi-sions of Section 23A of the Act applied to the assessee-company. For coming to this conclusion, it relied on a decision of the Bombay High Court in Indian Hume Pipe Co. Ltd. v. Commissioner of Income-tax : [1969]74ITR762(Bom) . Having come to this conclusion, it considered the legality and correctness of the order of the Income-tax Officer in respect of the four years. It concurred with the conclusion of the Appellate Assistant Commissioner that with regard to the assessment year 1955-56 there was no warrant for levy of tax by the Income-tax Officer. But with regard to the other three years also the Tribunal agreed with the conclusion of the Appellate Assistant Commissioner that the declaration of a larger dividend would not have been unreasonable and that, therefore, the levy of tax made by the Income-tax Officer was correct. It is the correctness of this conclusion of the Tribunal that is challenged in the form of two questions extracted already.

8. From the questions extracted already, it is clear that only the assessments in respect of the three assessment years remain for consideration before this court, namely, the assessment years 1956-57, 1959-60 and 1960-61, since the assessee has succeeded in respect of the assessment year 1955-56 both before the Appellate Assistant Commissioner and before the Income-tax Appellate Tribunal.

9. As far as the assessment year 1956-57 is concerned, as we have pointed out already, the law that has to be applied is the one as it stood before the amendment of Section' 23A of the Act by the Finance (No. 2) Act of 1957 and with regard to the assessment years 1959-60 and 1960-61, the law that has to be applied is the one as it stood after the amendment of Section 23A by the Finance (No. 2) Act of 1957. A persual of the relevant statutory provisions will clearly show that for a company to be treated as a company in which the public are substantially interested, it has to satisfy all the requirements of the Explanation. When we come to the Explanation in Section 23A as it stood at the relevant time--for the assessment year 1956-57--it is Clause (b) of the Explanation that applies and under that clause, if a company is to be treated as a company in which the public are substantially interested, the requirements of all the three sub-clauses, namely, (i), (ii) and (iii) must be cumulatively satisfied. We are clearly of the opinion that in respect of this assessment year, the requirement of clause (iii) is not satisfied and, therefore, the assessee-company cannot be treated as a company in which the public are substantially interested. Clause (iii) as extracted above says :

'The affairs of the company or the shares carrying more than fifty per cent. of the total voting power were at no time during the previous year controlled or held by less than six persons.'.

10. We have already referred to the fact that more than 50% of the shares was held by the Sheveroy Estates Ltd. Consequently, when one entity holds more than 50% of the shares, certainly that will be less than six persons holding more than 50% of the total voting power. The only question for consideration is whether the Appellate Assistant Commisssioner was right in taking the view that for the purpose of this sub-clause the Sheveroy Estates Ltd. should be excluded. We are of the opinion that there is absolutely no warrantor this conclusion. The word 'person' occurring in the sub-clause is capable of taking in 'a corporate entity like the Sheveroy Estates Limited. Section 3(42) of the General Clauses Act, 1897, defines the expression 'person' as including 'any company or association or body of individuals, whether incorporated or not'. The Act itself has defined the expression 'person' in Section 2(9) thereof as including 'Hindu undivided family and local authority'. Thus, it will be seen that in both the statutes the definition is an inclusive one. The General Clauses Act expressly includes a company, whether incorporated or not. There is nothing in the provisions of the Act to exclude the applicability of that definition so as to hold that the expression 'person' occurring in Sub-clause (iii) of Clause (b) of the Explanation will not take in a company like the Sheveroy Estates Ltd. in the present case. Therefore, here is a case where a single entity or a single person holds more than 50% of the shares of the assessee-company and, therefore, Sub-clause (iii) of Clause (b) of the Explanation is not satisfied in the present case. If so, for the assessment year 1956-57, the assessee-company cannot be treated as a company in which the public are substantially interested so as to take it out of the pale of Section 33A of the Act.

11. The position of the assessee-company in relation to the subsequent two assessment years has to be considered against the background of the statutory provision as it stood after its amendment by the Finance (No. 2) Act of 1957. The Finance (No. 2) Act of 1957 has made express provision with reference to Sub-clause (iii) of Clause (b) of the Explanation so as to exclude a company to which the provisions of Section 23A do not apply in computing the number of six persons provided for therein. Therefore, for the two assessment years 1959-60 and 1960-61, the Sheveroy Estates Ltd. has to be excluded in the computation of six persons referred to in Sub-clause (in) of Clause (b) of the Explanation. If it is so excluded, admittedly the assessee-company cannot be said to be a company controlled by less than six persons. Consequently, the requirement of Sub-clause (iii) of Clause (b) of the Explanation is fulfilled for the two years in question. As we have pointed out already, the requirements of the other two Sub-clauses also have to be cumulatively satisfied. The Tribunal has pointed out in its order that though the revenue had preferred the appeals, it did not challenge the interpretation of the Appellate Assistant Commissioner that the shares of the company were freely transferable. Therefore, the requirement of sub- Clause (ii) of Clause (b) of the Explanation also must be held to have been fulfilled by the assessee-company.

12. Then there remains the only consideration, namely, whether the requirement of Sub-clause (i) of Clause (b) of the Explanation has been fulfilled or not. We have already extracted that sub-clause. According to that clause, in order to treat a company as a company in which the public are substantially interested, the shares of the company carrying not less than 50% of the total voting power should have been allotted unconditionally to, or acquired unconditionally by, and were throughput 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). As we have seen already, the Sheveroy Estates Ltd. held more than 50% of the shares of the assessee-company. Certainly, the said company, namely, the Sheveroy Estates Ltd., will not come within the scope of the expression 'the Government or a corporation established by a Central, State or Provincial Act' as contemplated by Sub-clause (i) of Clause (b) of the Explanation. Therefore, we are left with the only alternative consideration, namely, whether the Sheveroy Estates Ltd. can come within the scope of the expression 'the public (not including a company to which the provisions of this section apply)', as found in the said Sub-clause (i). We have already referred to the fact that it was the common case of the parties that the Sheveroy Estates Ltd. was a company in which the public were substantially interested and, therefore, Section 23A of the Act did not apply to that company, with the result the only other question that has to be decided is whether the expression 'the public' occurring in Sub-clause (i) will take in a company like the Sheveroy Estates Ltd. or not. We are clearly of the opinion that the expression 'the public' occurring in Sub-clause (i) will take in such company.

13. The word 'public' has not been denned in the statute. The expression 'public' is of a very wide connotation and sweep. It is not a word of art, nor is it a technical term. The ordinary dictionary meaning of the word 'public' is :

'The community as an aggregate, but not as organised ; hence, the members of the community.'

14. It may have a limited meaning as collectively referring to the individual members of the public or a group of members of the public or a community, or a section of the public or the community, depending upon the context in which it is used. It may take in artificial personalities also again depending upon the context in which the word is used. It is not as if the word 'public' inherently in itself is not capable of comprehending a corporate personality like a company. Under such circumstances, when the word is used in a statute, it will take its colour from the context in which it is used. It may mean, collectively the members of a society or a community or members of any section of a society or a community and, in addition to referring to the natural persons, it may also take in artificial persons like a company which is brought into existence by individuals.

15. We may, for instance, refer to the provisions of the Companies Act, 1956, in this behalf. Section 3 of the Companies Act, while defining what a private company means, states that it means, a company which, by its articles, among others, 'prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company'. Obviously, the expression 'public' occurring in this provision will take in, not only individuals, but even corporate entities like an incorporated company or local authority or other institutions. We are referring to this merely for the purpose of showing that the word 'public' is not one which under no circumstances will take in or comprehend a corporate entity like the company.

16. Therefore, it is clear that the word 'public' is one, wide in its sweep and scope and capable of taking in even an incorporated company, if the context in which the said expression is used warrants such connotation.

17. In this particular case, the expression 'the public' in Sub-clause (i) of Clause (b) of the Explanation is followed by the expression 'not including a company to which the provisions of this section apply' in brackets. This exclusion of 'a company to which the provisions of Section 23A apply' from the scope of 'the public' will show that but for this exclusion, the expression 'the public' would include and comprehend such a company. Thus, by the use of the expression 'not including a company to which the provisions of this section apply'. Parliament has given a clue to the meaning and scope of the words 'the public' which it had used in that clause. It is only because the legislature was using the expression 'the public' in the most comprehensive sense so as to include a company, it took the precaution of making it clear that the expression 'the public' was not intended to include a company to which the provi-sions of Section 23A applied. From this the inference is irresistible that the expression 'the public' will include companies other than companies to which Section 23A applies.

18. As far as the present case is concerned, the Sheveroy Estates Limited not being a company to which Section 23A applied, certainly that would be comprehended by the expression 'the public'. We reach this conclusion simply as a matter of interpretation of the statutory provisions concerned. This interpretation is based on a well-known principle that no word or expression used by the legislature should ordinarily be held to be superfluous or insignificant. The following passage in Craies on Statute Law, seventh edition, pages 105-106, will support this conclusion of ours:

' 'To reject words as insensible,' said Erle C.J. in R. v. St. John, Westgate, Burial Board [1862] 2 B & S 703, 'is the ultima ratio when an absurdity would follow from giving effect to the words of an enactment as they stand'. In R. v. Berchet [1690] 1 Show 108, it was said to be a known Rule of interpretation of statutes, that such a sense is to be made upon the whole as that no clause, sentence or word shall prove superfluous, void or insignificant, if by any other construction they may all be made useful and pertinent. And in Harcourt v. Fox [1693] 1 Sh 506, Lord Holt said : ' I think we should be very bold men, when we are entrusted with the interpretation of Acts of Parliament, to reject any words that are sensible in an Act.' This rule has often been acted upon Thus, in Green v. R [1876] 1 App Cas 513, Lord Cairns stated, as a reason for differing from the court below, that 'the learned judges absolutely reduce to silence the second part of this sentence, and make it altogether inapplicable.' So in Cooper v. Slade [1858] 6 HLC 746, in the court below, Bramwell B. was inclined to treat the proviso at the end of Section 2 of the Corrupt Practices Prevention Act, 1854, as mere surplusage ; but in his advice to the House of Lords, he stated that he had altered his opinion as to this, because it appeared that a reasonable construction could be put upon that proviso, and therefore that construction ought to be adopted, instead of treating that proviso as if it did not exist at all. Similarly in East London Ry. v. Whitechurch [1874] LR 7 HL 81, Lord Cairns expressed a strong opinion against treating words in an Act of Parliament as surplusage, if any meaning can be put upon them. In that case, the question at issue was as to the meaning of Section 128 of the Eafft London Railway Act, 1865, which enacted that, 'while the company are possessed under this Act of any lands liable to be assessed to any rate, they shall, from time to time, until the railway or works thereof are completed, and assessed or liable to be assessed, be liable to' pay a deficiency rate. It was argued by the parish that this deficiency rate was payable until the whole railway was completed, thus treating the words 'and assessed, or liable to be assessed,' as mere surplusage. But the House of Lords held that these words were not to be so treated. 'If,' said Lord Cairns, 'your Lordships were to adopt this construction the consequence would be that all those words which follow the word 'completed' might be entirely removed, and ought to be removed out of the clause, because, if the deficiency rate is payable before the railway is completed from end to end, the words that ought to have been used would be simply 'until the railway or the works thereof shall be completed,' and those words following, 'and assessed, or liable to be assessed,' ought not to be added; they would be entirely superfluous.'

19. This conclusion of ours derives support from a decision of the Kerala High Court in Commissioner of Income-tax v. Aspinwall & Company Ltd. : [1975]98ITR291(Ker) . In that case the Kerala High Court was dealing with the statutory provision in Section 2(18) of the Income-tax Act, 1961, corresponding to the Explanation-to Section 23A which we have extracted. Section 2(18)(b)(B)(i) corresponded to Sub-clause (i) of Clause (b) of the Explanation which we have extracted except for the difference that in the provisions of the Income-tax Act, 1961, after the expression 'the public' the expression was '(not being a director or a company to which this clause does not apply)'. With reference to that clause, the Kerala High Court observed at page 296 :

'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. Bat 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 [1897] 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.'

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, are 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)(B)(i) of the Act.'

20. Thus, it is seen that the above decision of the Kerala High Court is fully in accordance with the interpretation we ourselves have placed on the relevant statutory provision.

21. As against the above decision, the learned counsel for the revenue drewour attention to a decision of the Bombay High Court in Indian Hume PipeCo. Ltd. v. Commissioner of Income-tax : [1969]74ITR762(Bom) , to which theTnriunal itself has made a reference. In that case, in relation to the assessment year 1954-55, the provision of the Explanation as it stood before itsamendment in 1955 came to be considered. An argument similar to theone which was addressed to us on behalf of the assessee was addressed tothe Bombay High Court, based upon the expression, 'the public (not including a company to which the provisions of this sub-section apply)'. TheBombay High Court observed at page 775 :

'The words in parenthesis are words of exclusion, and state what is excluded so that the inquiry as to which shares are held by the 'public' unconditionally and beneficially will have to be made only with reference to the shares held by shareholders other than companies to which the provi-visions of the sub-section apply. They have not the effect of positively including within the ambit of the expression 'public' any shareholder or category of shareholders without further inquiry.'

22. We are of the opinion that the above observations are not of any assistance to negative the claim at the assessee-company in the present case. In the first place, the Bench of the Bombay High Court was very careful when it stated that the exclusion did not have the effect of positively including within the ambit of the expression 'public' any shareholder or category of shareholders without further inquiry. That means, the learned judges did not lay down as a rule of law that the expression 'the public', in view of the exclusion following after it, was incapable of taking in companies to which Section 23A(1) did not apply. Secondly, the Bench was considering the scope of the Explanation as it stood before its amendment in 1955.

23. When the learned judges were asked to construe the scope of the Explanation in the light of the amendments made in 1955 and 1957 to the Act and the corresponding provisions contained in the Income-tax Act of 1961 and the amendments made in the new Act in 1965, they observed at page 778 :

'Now, we do not think that, having regard to the nature, scope and extent of the amendments, they can be pressed into service for the purpose of interpreting the provision as it-stood before the amendment. By these amendments several additions have been made, new conditions have been added and the amended provision has no more the same ambit or scope as the original provision. It would not, therefore, be right to look to the amended provision for the purpose of ascertaining the true meaning and content of the provision before the amendments.'

24. Consequently, the decision of the Bombay High Court can be said to be only a precedent on the interpretation of the Explanation as it stood before the amendments in 1955 and it cannot constitute an authority for construing the scope of the Explanation after its amendment in 1955 or 1957.

25. We are also of the opinion that the assessee-company is entitled to succeed if the relevant provision is considered from an entirely different angle and approach as an alternative construction on the basis of two decisions of the Supreme Court. The expression used in Sub-clause (i) of Clause (b) of the Explanation is : 'not less than fifty per cent. of the voting power have 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)'. The question for consideration is, can it be said that when a company in which the public are substantially interested has been allotted unconditionally or has acquired unconditionally and was throughout the previous year beneficially holding not less than 50 per cent. of the voting power, the public themselves were allotted or acquired the said voting power and they beneficially held the same throughout the previous year The answer of the Supreme Court is in the affirmative in its two decisions.

26. In Shree Changdeo Sugar Mills Limited v. Commissioner of Income-tax : [1961]41ITR667(SC) , the Supreme Court was dealing with a case where out of 60,000 shares of the assessee-company, 11,880 shares were allotted to Mysore Merchants Ltd. and 4,320 shares to others and the total of these two was 16,200 which was more than 25% of the voting power. The statutory provision as it then stood required not less than 25% as against 50% we have in the relevant statutory provisions to which we have made a reference. In that context, the question for consideration was whether the Mysore Merchants Ltd. could be said to come within the scope of the expression 'the public'. The Supreme Court, with regard to such a question, observed at page 670 :

'In applying the proviso and the Explanation, we have to give effect to the words ' not including a Company to which the provisions of this subsection apply ' and have to determine whether Mysore Merchants Ltd. is a company to which the provisions of Section 23A can be said to be applicable..... 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 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.' An argument was advanced that in view of Clause 14 of the Part B States (Taxation Concessions) Order, 1950, the provisions of Section 23A could not be applied to Mysore Merchants Ltd. Dealing with that argument, the Supreme Court observed at page 671 : 'This concession would be open to Mysore Merchants Ltd. if it satisfied the terms of Clause 14. That, however, cannot detract from the appli- cation of Section 23A to determine whether the shares held by it can be described as those in which the public are beneficially interested in another company. The Explanation requires that the shares held by a company should be considered as held by the public, only-if Section 23A does not apply to it.' (Underlining is ours).

27. The sentence underlined above makes it absolutely clear that in the opinion of the Supreme Court if the company which holds more than 25% or 50% of the shares, as the case may be, is a company in which the public are substantially interested or, in other words, a company to which the provisions of Section 23A do riot apply, then the shares held by such company should be considered as held by the public.

28. The same view is reiterated by the Supreme Court in Pilani Investment Corporation Ltd. v. Commissioner of Income-tax : [1973]89ITR53(SC) . In that case, which dealt with the assessment years 1952-53 and 1953-54, two public limited companies between themselves held 3,21,594 shares out of the total shareholding of 3,70,000 shares of the assessee-company. The question that came to be considered was whether the provisions of Section 23A could be applied to such an assessee-company. Dealing with such a question, the Supreme Court observed at pages 56, 57 :

'The fact that two public limited companies were holding between themselves more than 75 cent. of the shares'of the assessee-company was not sufficient to attract Section 23A of the Act..... In the present case, as appears from the resume of facts, more than 75 per cent. of the shares of the assessee-company are held not by a group of partners, but by two public companies in which the public are substantially interested.' This will also show that in the view of the Supreme Court, the holding of requisite percentage of shares or voting power by a company in which the public are substantially interested should be equivalent to the public holding those shares of voting power.

29. Consequently, when Sub-clause (i) of Clause (b) of the Explanation is construed either way as shown above, it will follow that in the present case the Sheveroy Estates Ltd. in which the public were substantially interested was holding more than 50 per cent, of the shares of the assessee-company, that the requirement of Sub-clause (i) of Clause (b) of the Explanation was fulfilled and that, therefore, the assessee-company must be treated as s company in which the public are substantially interested. If so, Section 23A cannot be applied to the said company. Hence, our answer to the first question is in the affirmative and against the assessee as far as the assessment year 1956-57 is concerned and in the negative and in favour of the assessee as far as the assessment years 1959-60 and 1960-61 are concerned.

30. In view of our answer to the first question in the manner referred to above, the second question will confine itself only to the assessment year 1956-57. With regard to the said assessment year as well as the other assessment years, the Tribunal has stated in paragraph 11 of its order that no long-term plans as such were envisaged, that the construction of godowns was undertaken as and when the necessity arose, and that there were sufficient reserves by that time to meet the necessary capital expenditure. The Tribunal also held that for the detailed reasons given by the Appellate Assistant Commissioner in paragraph 9 of his order, with which it agreed, the declaration of a larger dividend would not have been unreasonable. This is a finding which the Tribunal arrived at on the basis of the materials available and such a finding of fact, not having been challenged by asking for a reference of an appropriate question, will have to stand. Once that finding stands, the answer to the second question is in the negative and against the assessee.

31. As we have pointed out already, the answer to the second question isconfined only to the assessment year 1956-57, because we have held withreference to question No. 1 that the provisions of Section 23A did not applyto the assessee-company in respect of the assessment years 1959-60 and1960-61.

32. There will be no order as to costs.


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