RAMACHANDRA IYER, J. - This is a reference under section 66 (1) of the Indian Income-tax Act, arising at the instance of the Amrutanjan Co. Ltd., a public limited company. The late Mr. Nageswara Rao was having a business in the manufacture and sale of Amrutanjan, a pain balm. The company, the Amrutanjan Ltd., was formed in September, 1936, and was duly registered under the Indian Companies Act. The business relating to the manufacture and sale of the pain balm and allied products was transferred to the company, for consideration. The authorised capital of the company was Rs. 10,00,000 being composed of 7,000 ordinary shares and 3,000 preference shares of Rs. 5,50,000 - 2,500 ordinary shares and 3,000 preference shares. It is stated that the prospectus issued at the time of the formation of the company stated that dividends exceeding 6 12 per cent. would not be declared, till the reserve fund of the company reached to Rs. 3,50,000. Under the articles of association, the holder of a preference share was entitled to obtain a cumulative dividend of 7 12 per cent. on the shares held by him. But he was not entitled to any further rights in the profits made by the company. In the meetings of the company, his position was equal to that of the holder of an ordinary share. There was no difference in the voting powers of the preference and ordinary shareholders. The company was managed by a partnership concern. It is sufficient, for the purpose of this reference, to state that, after the death of Nageswara Rao the firm of partners, who managed the business, consisted of Ramayamma, his widow, Kamakshi Amma, his daughter, Sambu Prasad, his son-in-law, and Ramachandra Rao, the brother of Ramayamma. Six persons were in the directorate of the company. Amongst them, were Sambu Prasad and Ramachandra Rao; the others were strangers. During the period, to which this reference relates, namely, 1st April, 1946, to 31st March, 1949, the share holdings did not undergo any substantial change. Of the 3,000 preference shares, not more than 382 were held by the directors; the balance was held by persons other than the directors. Of the 2,500 ordinary shares, Ramayamma held 2,185, her daughter Kamakshi Amma 250, and what was left for others, was only 65.
The company made substantial profits during the period under reference, but not all the profits or even a fair portion thereof were distributed to shareholders. The profits made and those distributed are shown below :
Date of Genl Body meeting
Date of notice under S. 23-A
Amounts available after de-duction
The dividends declared were at the rate of 7 12 per cent. of the preference shares and 6 12 per cent. of the ordinary shares. The dividends so declared are considerably below 60 per cent. of the amount available for declaration. On March 31, 1953, the Income-tax Officer issued notices to the company under section 23A of the Income-tax Act for the three years aforesaid, calling upon the company, to show cause why the undistributed profits should not be treated as having been distributed to the shareholders for the purpose of assessment in their hands; the notices were served on the company on the following day. The company objected to any action being taken under the provisions of section 23A on the ground that, being a company in which the public were substantially interested, the provisions of section 23A would not apply. It was urged that, even otherwise, the provisions of section 23A would not apply. It was urged that, even otherwise, the provision of section 23A could not apply, as the company was justified in not declaring more than a 6 12 per cent. dividend on the ordinary shares, as, in the prospectus issued, it had denied itself the liberty of declaring any higher dividend, till the reserve funds was oakum accumulated to the extent of Rs. 3,00,000. Two further reasons were given for not declaring dividends commensurate with the total profits earned, (1) that, according to the provisions of the Public Companies (Limitation of Dividends) Ordinance, 1948, which became effective on October 29, 1948, the company was precluded from declaring any dividend in excess of six per cent.; and (2) that the Ordinance was followed by the Public Companies (Limitation of Dividends) Act 1949, which limited the declaration of dividends to six per cent.
The Income-tax Officer overruled the contentions of the company, and passed an order under section 23A deeming the undistributed profits as having been distributed amongst the shareholders. This was affirmed by the Appellate Assistant Commissioner on appeal, and by the Appellate Tribunal on further appeal. The following questions were, thereupon, referred for the decision of this court under section 66 (1) :
'(1) Whether section 23A of the Indian Income-tax Act is intra vires ?
(2) Whether the serving of the orders on April 1, 1953, for the assessment years 1947-48 and 1948-49, makes them and
(3) Whether the provisions of section 23A were correctly applied for the three relevant years ?'
Question No. 1 : The constitutional validity of section 23A and the contention that it offends against articles 14, 19 (1) (f) and 31 of the Constitution, came up for consideration before a Bench of this court (one of us being a member of that Bench) in Sponsor v. Income-tax Officer, Madras. That contention was negatived. That is authority by which we are bound. In view of that decision, the learned counsel for the company did not argue the point, though he intimated that he should not be taken as accepting the correctness of the decision. Following the decision in Spencers case, we answer this question in the affirmative.
Question No. 2 : It was contended on behalf of the company that a proceeding under section 23A should be deemed to be one coming under section 34 of the Act, and, in order to be valid, it should be initiated within 4 years, as prescribed by that section. If that contention were to be accepted, no order could be passed in regard to 1947-48, as by the time notice was issued more than 4 years had elapsed. As regards the next year, namely, 1948-49, notice was issued on the last day of the four year period, but it was served beyond it. It was urged on behalf of the company that the material date was the date of the service, and that, even in regard to that year, the Income-tax Officer had no jurisdiction to initiate proceedings. There was, however no question of limitation in regard to 1949-50, and it was admitted that the proceedings relating thereto would be within time.
In considering the contention, it is necessary to bear in mind that section 23A only invests a power in the Income-tax Officer to declare that, if certain conditions are satisfied, the provision of section 23A would apply to the company; the result of such a declaration would be that the undistributed profits of the company would be deemed to have been distributed to the shareholders. This cannot amount to the actual assessment on the shareholders. Separate proceedings would be necessary actually to assess the profits. Section 34 would apply only to the latter proceedings, that is, the assessment proceedings, against the shareholders on the basis of the declaration. It has been held that section 23A is only a procedural and not a charging provision. No period of limitation has been prescribed in the Act for initiation of proceedings under section 23A by the Income-tax Officer. It may be that, after the order under section 23A is passed, if the shareholders are sought to be assessed on the dividends which are deemed to have been received by them, the time limit prescribed under section 34 would apply. The mere circumstance that an actual assessment on the shareholder consequent on a declaration under section 23A would be barred, is no reason for imposing any such time limit for initiation of proceedings under section 23A, when the statute provides no such limit. This was the view of the Bombay High Court in Kasturchand Ltd. v. Commissioner of Income-tax. This view was accepted in Spencers case to which we have made reference. Recently, we had occasion to consider in W. P. No. 886 of 1957, whether the time limit prescribed under section 34 would apply to the assessment proceedings, consequently upon the order under section 23A. We held that the period of four years prescribed in section 34 would apply in a case of assessment, consequent upon an order under section 23A. That does not mean that, for the proceedings under section 23A, the provisions of section 34 would apply; the former being merely a procedural matter, there would be limitation; we, therefore answer question No. 2 the negative and against the assessee.
Question No. 3 : The order of the Income-tax Officer in the instant case is contested principally on the ground that the company is one in which the public are substantially interested, and that, therefore, by reason of the third proviso to the section, no action could be taken under section 23A. The case for the company is that the public have more than 51 per cent. of the total number of shares in the company, and, the company not being thus in the control of any person, the provisions of the section should not be applied to it. An analysis of the shareholders shows that the principal shareholder of the company is Ramayamma, who holds about 40 per cent. of the total number of shares in the company. The directors of the company hold less than seven per cent. of the shares. Even if one were to consolidate the shares held by Ramayamma, her daughter, her son-in-law, and her brother, it would be about 47 per cent. The other persons, who undoubtedly are members of the public, would hold more than 51 per cent. But the contention of the learned counsel for the Department is that the percentage of shares should be ascertained only with regard to the ordinary shares held, and no regard should be had for the preference shares; the reason advanced is that a preference shareholder would not be interested in the declaration of the dividends, as his own right is only to get 7 1/2 per cent. whatever might be the profits earned, and that he would either be indifferent or sail with the persons in management. To appreciate the contention, it is necessary to refer to the relevant provision of section 23A, as it stood during the period covered by this reference :
'Where the Income-tax Officer is satisfied that in respect of any previous year the profits and grains 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 super-tax 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 shall be included in the total income of such shareholder for the purpose of assessing his total income : ...
Provided further that this sub-section shall not apply to any company in which the public ares substantially interested...
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 divided, whether with or without a further right to participate in profits) carrying not less that 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 beneficial 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.'
There is no controversy in the present case that the company is a public limited company, that the beneficial interest in the shares belonged to the shareholders, in whose names they were held, that they are freely transferable by them to the members of the public, and the shares were quoted on the stock exchange.
What is urged on behalf of the company is that the provisions of the section will not apply for two reason : (1) that it was not a controlled company, and (2) that even otherwise, as more than 25 per cent. of the voting power in the company is vested in the public, it should be deemed to be a company, in which the public are substantially interested.
The first ground is based on the provisions of the third proviso to the section. A company, in which the public will be substantially interested, will be one in which the voice of the general body of the shareholders would be felt. A company, in which they have no such decisive voice, would be one which is dominated by one or a group of a few by reason of a concentration of voting power in them. Such a company is termed a controlled company, and it cannot be said that the public, that is, that even if there is a control, if the public have the minimum of 25 per cent. of the voting power, the company shall be deemed to be one, in which the public is substantially interested, though it is a controlled one.
Mr. Rama Rao Sahib, the learned counsel for the Department, contended that the explanation to the third proviso to section 23A amounts to a precise definition of what a company, in which the public are substantially interested, means, that is, the explanation is a glossary for the third proviso. According to the learned counsel, the proviso could only apply to the case of a company, covered by the explanation and, if a company does not come within the terms of the explanation, it could not be held to be one in which the public have a substantial interest. To put it in other words, the word 'deemed' in the explanation is sought to be made equivalent to 'means'. Pursuing that line, the learned counsel contended that, in the computation of the voting power, the ordinary shares alone should be taken into account, as preference shareholders were expressly excluded by the terms of the explanation. If that test were to be applied, Ramayamma would have 89 per cent. of the ordinary shares. This would make her a person in control of the company, and the rest of the shareholders who can be said to be members of the public, would not be entitled to 25 per cent. of the ordinary shares.
Prima facie, the terms of the explanation cannot be construed as limiting the operation of the third proviso only to those companies, which come under the explanation. The use of the word 'deemed' creates a fiction. A company, which cannot in reality be styled as one in which the public are substantially interested, is deemed to be such by the explanation. I can only be an addition to the category coming under the third proviso, and not definition of the same. In this connection, it would be useful to refer to the object, with which the section was enacted. That it is permissible to have regard to the evil which a statute intended to suppress in understanding its scope, is a settled rule of construction. In Thomson v. Lord Clanmorris Lord Lindley, M. R., said :
'... in construing any other statutory enactment, regard must be had not only to the words used, but to the history of the Act, and the reasons which led to its being passed. You must look at the mischief which had to be cured as well as at the cure provided.'
Further, while construing a statute, the primary duty of a court is to ascertain the intention of the Legislature from the expressed words of the statute. That may not always be possible; imperfection of language there might be; in such cases, it would be open to the courts, in order to ascertain the intention, to look into the circumstances attending the enactment. That is the rule laid down in Heydons case. In Bengal Immunity Co. v. State of Bihar Das, C. J., observed at page 674 :
'It is a sound rule of construction of a statute firmly established in England as far back as I584 when... Heydons case was decided that -. for the sure and true interpretation of all statutes in general (be they penal or beneficial, restrictive or enlarging of the common law) four things are to be discerned and considered :
first what was the common law before the making of the Act,
second what was the mischief and defect for which the common law did not provide,
third what remedy the Parliament hath resolved and appointed to cure the disease of the Commonwealth, and
fourth the true reason of the remedy;
and then the office of all the judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of the mischief, and pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bono publico.'
That this rule entitled the court not merely to regard the previous common law, but to pre-existing statutory law as well, is laid down in Macmillan v. Dent thus :
'In interpreting an Act of Parliament you are entitled, and in many cases bound, to look, to the state of the law at the date of the passing of the Act - not only the common law, but the law as it then stood under previous statues-in order properly to interpret the statue in question.'
Section 23A was first enacted in 1930, following legislation in England. The object of the Act and the mischief it was intended to prevent have been considered in Spencers case. Shortly stated, it was enacted to hit at the various devices adopted by the individuals to avoid super-tax. Originally, super-tax was charged only on individuals; the companies were not liable, at any rate, to the extent to which the individuals were made liable. This led to an individual adopting the device of transferring his assets to a company, very often a one man company. The income of the individual would then be depending on the amount of dividend declared and distributed to him depending on the amount of dividend declared and distributed to him by the company. There was no obligation on the company to declare dividends. The individual could regulate the declaration of dividends, so as to be within the limits which would enable him to avoid super-tax. The undistributed profits could be accumulated. Devices were adopted to convert the accumulated income with the company as capital, and thus avoid for ever super-tax. The same mischief was possible even in a case, where the company was not a one man company, but one in which an individual or a small group was in a position to control it. By virtue of such control, the declaration of dividends could be manipulated. Evasion of super-tax became thus possible in what could conveniently be called 'controlled companies'. Such a manipulation would not be possible in a company, in which the public have a substantial interest; for it is unlikely that such companies would withhold an unreasonable part of their income from distribution, as the other shareholders, who can be termed as the public, could always be expected to fight for their rights and obtain their aliquot shares of the profits of the company.
Section 23A provides a scheme for taxing the undistributed profits of companies, where there is scope for a avoidance of super-tax, that is, those which are in the control of one or a group of individuals. It would obviously apply to private companies. I would apply to public limited companies, where the avoidance of super-tax was possible. The effect of an order passed under the provisions of the section is that undisbursed profits are treated, for the purpose of tax, as income of the shareholders, and assessed to tax. The object of the statute was thus only to check the avoidance of tax by the controlled companies. Proviso 3, therefore, makes it clear that the provisions of the section would not apply to companies, in which the public are substantially interested, for the evident reason that the evils sought to be remedied could exist only in controlled companies. In Spencers case it observed at page 126 :
'Besides, the legal fiction enacted by section 23A does correspond to reality, if the veil of the legal personality of the corporate person, the company, is pierced, in order to look at the real person behind that corporate personality. It should be remembered that section 23A deals with controlled companies, as distinguished from companies in which the public have a substantial interest. In fact, in popular parlance, such companies have come to be called `section 23A companies, even as in England they are known as `section 245 companies. The extracts from Simons Income Tax, 2nd edition, volume 3, page 341, which we have set out above, explain the real possibilities of evasion by a person or group of persons by resort to the device of a corporate personality. The income does in reality belong to them, and is under their control all the time. The evasion of liability to super-tax is equally real. That in such companies there might be an individual member or two in a minority unable to force a factual distribution at any given point of time, cannot affect the reality of the situation which section 23A was designed to meet. The basic assumption that underlies section 23A is the identity of the interests of the shareholders and the control company. That assumption is founded on reality. The shareholder created a veil of a corporate personality as legally distinct from his juristic personality. That was legal. The Legislature countered that with a legal fiction. That was also legal. If both are forgotten the taxpayer and the tax-gatherer proceed on the realities of the situation. The profits are taxed.'
In the case of controlled companies, an order under section 23A could be avoided only by satisfying the Income-tax Officer that, having regard to the loss incurred by the company in earlier years or to the smallness of the profits made, payment of dividend than that declared would be unreasonable, or by showing that the case came within provisos 1 and 2. Those considerations would also apply to public limited companies which are controlled. Mr. T. V. Viswanatha Aiyar, appearing for the assessee, contended that, even if in the instant case the company is deemed to be a controlled one, he would be entitled to show to the Income-tax Officer that there was a justification for the non-declaration of the divided to the extent of 60 per cent. and that the matters specified in section 23A (1) which are required to be taken into consideration by the officer could not be exhaustive. In the view we are taking in regard to the main question involved in the reference, it is unnecessary to consider this point.
What has principally to be considered is whether the company in this case is one in which the public are substantially interested. If the answer to that question is in the affirmative, the provisions of section 23A will not apply, and the Income-tax Officer will not be entitled to make the order that he passed.
The term 'public' has not been defined. In the Companies Act, section 2 (37) and section 3 state that a public company means a company which is not a private company. In Nash v. Lynde Viscount Sumner, considering the meaning of the word 'public' in section 285 of the English Companies (Consolidation) Act, 1908, which defined the term 'prospectus' as invitation offering to the public, observed at page 169 :
'The public, in the definition section 285, is of course a general word. No particular numbers are prescribed. Anything from two to infinity may serve; perhaps even one, if he is intended to be the first of a series of subscribers, but makes further proceedings needless by himself subscribing the whole. The point is that the offer is such as to be open to any one who brings his money and applies in due form, whether the prospectus was addressed to him on behalf of the company or not.'
There is no controversy in the present case that there was an issue of the prospectus to the prospectus to the public. But what the third proviso to section 23A requires is that the public should be substantially interested. The public cannot be said to be substantially interested, where a company is controlled by an individual or by a group of persons. In Commissioner of Income-tax v. Jeewanlal Ltd. the Supreme Court has observed that, in common parlance, a person is said to have a 'controlling interest' in a company when such a person acquires, by purchase, or otherwise, the majority of the vote carrying shares in that company, for the control of the company resides in the voting powers of its shareholders. It was held in that case that the directors of the company might be regarded as having a controlling interest in the company, when they held the majority of shares which, on the articles of association of the company, carried the right to vote at the meetings. In Raghuvanshi Mills Ltd. v. Commissioner of Income-tax the Bombay High Court held that the expression 'public', in the explanation to section 23A of the Indian Income-tax Act was used in contra-distinction to the directors, and that it could not be given its ordinary natural meaning. It was held that if members of the public, who were shareholders, were under the control of the directors, and if their voting power was controlled by the directors, the votes cast by them being not their own votes but in substance the votes of the directors, then, for the purpose of the third proviso, the shares in effect could not be held to have been held by the public at all, but held by the directors. The learned judges were of the view that the expression 'public' in the section was used in contra-distinction to the directors, as the object of the third proviso was that there must be voting power exercised, which must be independent of the control of the directors. They, therefore, held that the question would depend upon the decision of fact as to whether there was actual de facto control by the directors. With great respect to the learned judges, we are unable to share their view. A control would none the less be a control, whether it be by a director or any other person. A person who has a controlling power, may not de jure be a director, but by virtue of the concentration of power in his hands, could control the company. It is possible to conceive of cases where a person, who is not a director but holds the majority of the shares in the company dominating the directorate; he can effectively control the affairs of the company. In such a case, the real control will be in the individual. Therefore, what decides the control is the voting power which an individual has, irrespective of the circumstances, whether he holds office as a director or not.
In what circumstances can a control exist If a person can command 51 per cent. or more of the total voting power, he would undoubtedly be in a position to control the affairs of the company. In Commissioner of Income-tax v. H. Bjordal the Privy Council had to consider a question similar to the one before us. That was a case from the Easter Africa. The provisions of section 21 of the Income-tax Ordinance No. 8 of 1940, Uganda were identical with section 23A in the Indian Income-tax Act. At the relevant period, the respondent in the case held nearly 73.96 per cent. of the voting power while his brother held 25.99 per cent., the other shareholders having 0.94 per cent. The question arose whether the company, consisting of those persons as shareholders, was one that a member or group of members holding 51 per cent. or more of the voting power, would be able generally to control the company. The remaining shareholders common 25 per cent. of the voting, the company would be able generally to control the company. The remaining shareholders would come within the terms of the explanation to the proviso. The Privy Council held that, in the absence of evidence that the brother had also joined with the respondent in the case, the mere relationship would not be sufficient to consolidate the shares of the brothers, and view the matter as one in which, as against the rest of the public, the brothers had 99.96 per cent. of the shares, making the company one in which the public were not substantially interested. The decision of the privy Council was considered in Jubilee Mills Ltd. v. Commissioner of Income-tax. The learned judges of the Bombay High Court adhered to their own view in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax in preference to the one adopted by the Privy Council. We, however, prefer to follow the decision of the Privy Council.
On that conclusion, it would follow that, before section 23A can be applied to a public limited company, it has to be seen whether any person is in a position to control the company, be he a director or member. There may be cases in which, though the shares are distributed, a person will have a factual control over them. Such a case would depend on the existence of facts which establish a de facto control. But, where no such factual combination or control is proved, what determines control is the existence of 51 per cent. or more of voting power in an individual. If that is found, the company would be a controlled company. If in such a company the public have got 25 per cent. of the voting power, the company would be deemed to be one which the public have a substantial interest, by virtue of the explanation. The provisions of the section will not apply to that case either. If, on the other hand, it were found that in a public limited company a shareholder possesses more than the 51 per cent. of the voting power, and other shareholder do not have 25 per cent. of the voting power, the company would come within section 23A. The decision of the privy Council in Commissioner of Income-tax v. Bjordal makes it clear that the two categories are distinct. That is to say, a public limited company will not come within section 23A, if any one of the two conditions are satisfied : (1) that no member of the company possesses more than 50 per cent. of the voting power, and (2) that, even if a member of a company possesses more, than 50 per cent. of the voting power, the public holds at least 25 per cent. of the voting power.
The term 'public' would mean all other members of the company other than the person having a control, that is, more than 50 per cent. of the voting power.
In the present case, no shareholder has 51 per cent. of the total voting power. The company will, therefore, not come under section 23A. As we have pointed out already, mere relationship of other members of Ramayammas family with her will not make them any the less the members of the public. Even if their shares were to be consolidated with Ramayammas shares for the purpose of section 23A, more than 25 per cent. of the shares would still vest in the other persons who would be public.
It was next contended that the 25 per cent. of the voting power in the explanation should be 25 per cent. of the ordinary shares, and, as Ramayamma has got nearly 89 per cent. of the ordinary shares, there would be no person who will have 25 per cent. of the ordinary shares, and the company would not come within the terms of the explanation. We cannot agree with this interpretation of the explanation. What the section requires is that 25 per cent. of the total voting power should be in the hands of the public. In Commissioner of Income-tax v. H. Bjordal the brother of the major shareholder had held shares commanding more than 25 per cent. of the voting power. The Privy Council held that the company was one in which the public were substantially interested. We are of opinion that the voting power for the purpose of the explanation would depend on the articles of association. In the present case, there is no distinction between a preference shareholder and an ordinary shareholder, in the matter of voting rights. Therefore, the voting power should be ascertained with respect to both preference and ordinary shares held. Ramayamma has got only about 40 per cent. of the total number of shares. She cannot, therefore, be held to be in a position to control the company. Even combining the shares held by Ramayamma, her daughter, her brother and son-in-law, the total percentage is only about 47 per cent. Therefore, even if it were to be held that the third proviso of the section is governed by the explanation thereto in its entirety, the position is that the public are having more than 25 per cent. of the voting power and, therefore, the company is one in which the public would be substantially interested.
The result of the conclusion is that the Income-tax Officer has no authority to take proceedings under section 23A. In view of this conclusion, it is unnecessary to deal with the other points raised on behalf of the company, namely, those relating to the applicability of the Public Companies (Limitation of Dividends) Ordinance, 1948, and the third Public Companies (Limitation of Dividends) Act, 1949. We answer the third question in the negative, and in favour of the assessee. The assessee will be entitled to its costs. Advocates fee Rs. 250.
Questions answered accordingly.