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Purna Investment Ltd. Vs. Bank of India Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation;Company
CourtKolkata High Court
Decided On
Case NumberAppeal No. 271 of 1981
Judge
Reported in[1984]55CompCas737(Cal)
ActsIncome-tax Act, 1918 - Section 5, 5(1) and 5(3)
AppellantPurna Investment Ltd.
RespondentBank of India Ltd. and ors.
Appellant AdvocateR.C. Deb, ;Ahin Chaudhury and ;Samar K. Basu, Advs.;P.C. Sen and ;Hirak Mitra, Advs.
Respondent AdvocateDepankar Gupta, ;S. Pal and ;P. Choudhury, Advs.;R.C. Deb, ;S.B. Mukharji and ;U. Mukharji, Advs.
DispositionAppeal dismissed
Cases ReferredCharanjit Lal Chaudhari v. Union of India
Excerpt:
- .....not possible to accept the contention that the shareholder acquired any right in the assets of the company. a shareholder has no right in the property of the company. the supreme court observed that there was nothing in the indian law to warrant the assumption that a shareholder who bought shares acquired any interest in the property of the company which was a juristic person entirely distinct from the shareholder. the true position of a shareholder was that, on buying shares, an investor became entitled to participate in the profits of the company in which he held the shares if and when the company declared dividends subject to the articles of association that the profits or any portion thereof should be distributed by way of dividends among the shareholders. he had undoubtedly a.....
Judgment:

Sabyasachi Mukharji, J.

1. In the other appeal, which was filed by Purna Investment Co. Ltd., in which it was not a party to the suit or to the Section 397-application, but was only a shareholder in the company concerned, the learned trial judge had not given them leave to intervene in the suit. It may incidentally be mentioned that Puma Investment Co. Ltd. is a company in which Mohonlal Mittal and his group are closely associated and they have the controlling interest. Being aggrieved by the said order of the learned trial judge, this appeal has been filed before this court praying, inter alia, for leave to intervene and oppose the terms of settlement. Various questions have arisen on this aspect, but the main question is, whether a shareholder, as such, has such interest in a company which entitles him to intervene in respect of a suit pending against the company in respect of some of its assets. It is well settled that a shareholder has certain interest. It has been said very clearly that the shareholder's right is to participate, firstly, in the winding up in case a winding up order is made and, secondly, a shareholder has a right of payment of dividend where dividends are declared. In aid of the submission that the shareholder has sufficient interest in the company, the learned advocate for Purna Investment Co. Ltd. seeking to intervene in the appeal, drew our attention to certain observations in Modern Corporate Law by Oleck, vol. 3, Article 1595, at page 668. Our attention was also drawn to Order 1, Rule 10. It was submitted that under Order 1, Rule 10, Sub-rule (2), as the plaintiff had a share in the assets of the company, he was interested when question of bona fide of the settlement has been raised. Our attention was also drawn to certain observations in the decision of the American Supreme Court in McCabe v. Atchison [1914] (235 US 151) at page 162. On the nature of the right of the shareholder of the company in respect of the assets of the company, reliance was placed on certain observations of the Supreme Court of India in the case of Charanjit Lal Chaudhari v. Union of India : [1950]1SCR869 and our attention was drawn to p. 37. The Supreme Court was considering, in that case, the question of the locus standi of the shareholder in maintaining an application under Article 32 of the Constitution in respect of certain actions taken against the company which affected the assets of the company. The Supreme Court, at p. 37 of this judgment, referred to the decision of the United States of America, namely, decision in the case of McCabe v. Atchison [1914] (235 US 151), to which, as we have mentioned hereinbefore, our attention was independently drawn. The United States Supreme Court reiterated that injury to the complainant of a legal right justified judicial interference. Reliance was placed on these observations in aid of the proposition that if a legal right was interfered with, which it was contended that the companyhad in respect of the assets of the company, interference with those legal rights justified right to intervene. The Supreme Court was categorical on the nature of the shareholder's right vis-a-vis the assets of the company in the case of Bacha P. Guzdar v. CIT : [1955]27ITR1(Mad) , where the Supreme Court observed that a shareholder acquired rights to participate in the profits of the company, might be readily conceded but it was not possible to accept the contention that the shareholder acquired any right in the assets of the company. A shareholder has no right in the property of the company. The Supreme Court observed that there was nothing in the Indian law to warrant the assumption that a shareholder who bought shares acquired any interest in the property of the company which was a juristic person entirely distinct from the shareholder. The true position of a shareholder was that, on buying shares, an investor became entitled to participate in the profits of the company in which he held the shares if and when the company declared dividends subject to the articles of association that the profits or any portion thereof should be distributed by way of dividends among the shareholders. He had undoubtedly a further right to participate in the assets of the company which would be left over after distribution among the creditors. But he had no right in the assets as a whole.

2. Mr. Nag appearing for the appellant also drew our attention to the decision of the Court of Session (Scotland), Second Division, in the case of IRC v. Forrest [1924] 8 TC 704. In that case, on the 25th of November, 1919, the respondent purchased certain shares in an industrial company for a sum exceeding their par value by 50, the excess being expressed in the contract to be paid 'to cover the portion of the dividend accrued to date'. On the 13th May, 1920, a dividend of 10 per cent, free of income-tax was declared and paid by the company for the year ending 28th February, 1920. The respondent-assessee contended that of the dividend so receivable on his shares 50 plus income-tax, altogether 71, should be treated as capital in view of the terms of the contract of purchase and should not be included in the computation of the income for the year 1920-21 for the purposes of super-tax for the following year and his contention was accepted by the Special Commissioners on appeal. It was held that the transaction was in essence an ordinary one of purchase of shares and the sum of 71 in question could not be deducted from the full amount of the dividend receivable by the respondent on 13th May, 1920, which, under Section 5, Sub-sections (1) and (3)(c) of the I.T. Act, 1918, was required to be included in the computation of income for the purposes of super-tax for the year 1921-22. Our attention was drawn to the observations of Lord Anderson at page 710 of the report, where it was observed as follows :

'Now when an investor enters into a transaction of that sort he does two things with his money. He buys two things with his money. He buys, in the first place, a share of the assets of the industrial concern proportionate to the number of shares which he has purchased ; and he also buys the right to participate in any profits which the company may make in the future. Now, when a transaction of this nature is entered into during the currency of the financial year of the industrial concern, it is obvious that what happens is this, that not only is a part of the assets purchased outright but that a chance is bought as well--a chance of sharing in any profits which may be made during the currency of that financial year ; and that is just what the respondent bought on this particular occasion. And it matters not in my judgment whether it is expressly stated that a part of the purchase price is in respect of the chance which I have alluded to, or whether that is not expressed, because if it is not expressed it is ordinarily implied, and there is no doubt that that is the nature of the transaction. Now, at the end of the financial year when the chance which had just been purchased had materialised and a dividend was declared and paid, what the respondent maintains, as I understand his position, is this, that a part of the purchase price which was given for that totality should be deducted or set off against the sum which he received as dividend. Now, it seems to me that if we assent to an argument of that sort we will not only be revolutionising stock exchange practice, but I think we will be upsetting the established precedent of the Inland Revenue authorities and deciding against the general terms of the Act of Parliament. Not only that, but we shall be offending, as Mr. Fenton plainly pointed out, against the well settled practice of Inland Revenue law, which is to the effect that capital expenditure which, as Mr. Fenton put it, has not earned profits, may not be deducted from profits in estimating the amount of tax which is due. Accordingly, it seems to me that this case is quite clear and that we ought to sustain the appeal and answer the question of law as contended for by the Crown'.

3. This decision was relied on by Mr. Nag in aid of the proposition that as a shareholder his client had an interest in one of the assets of the company, namely, Dunkuni plant, and as such was entitled to say that he was a necessary and proper party in the settlement. Mr. Nag also submitted that the learned judge did not appreciate the true effect of the aforesaid decision. In our opinion, the aforesaid observations of Lord Anderson were made in an entirely different context. It is well settled that the shareholder has a right to participate on the distribution of the assets in case of winding up and also a right to dividend declared by the company out of the profits made by the company by the user of the assets. In that context perhaps, he has an interest in the assets of the company, but thatkind of interest cannot, in our opinion, be said to be an interest in a particular property in respect of which asset a shareholder has such an interest that would entitle him to intervene and object to dealing with this property independently of the company as such.

4. In this connection, the Supreme Court reiterated the observations in the decision in the case of Charanjit Lal Chaudhari [1951] 21 Comp Cas 33, and the observations in the case of IRC v. Forrest [1924] 8 TC 704. Our attention was also drawn to the decision in the case of Turner Morrison & Co. Ltd. v. Hungerford Investment Trust Ltd. : [1972]85ITR607(SC) , and reliance was placed on the observations at pages 528-29. It was contended further that the terms of settlement pursuant to which the decree was passed against the company was beyond the authority of the company. Therefore, it was submitted that it was bad. The observations which were relied on in aid of this submission in the aforesaid case, in our-opinion, is not of any relevance. In aid of the proposition about the locus standi to make this application, our attention was drawn to the decision of the learned single judge of the Madras High Court in the case of G.M.V. Krishnamachari v. Dhanalakshmi, : AIR1968Mad142 , and reliance was placed on the observations at page 143. It was submitted relying on the said decision, that even if the present appellant were not necessary parties they were proper parties. Having regard to the clear pronouncements of the Supreme Court on the position of a shareholder of a company in the case of Charanjit Lal Chaudhari v. Union of India : [1950]1SCR869 , and in the case of Mrs. Bacha F. Guzdar v. CIT : [1955]27ITR1(SC) , and the framing of the suit in the present case we are of the opinion that the present appellant was neither a necessary nor a proper party and, as such, dismissal of its application to be joined as party by the learned trial judge was not irregular or invalid. The other contentions impeaching the validity of the settlement, assuming that the present appellant was entitled to intervene, have been discussed by us in the other appeal. More or less same contentions were urged before us. It is not necessary to discuss these in any detail. In the premises, we dismiss this appeal and uphold the finding and order of the learned trial judge on this aspect of the matter. In the facts and circumstances of this case, however, there will be no order as to costs.

Suhas Chandra Sen, J.

5. I agree.


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