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Star Company Ltd. Vs. Commissioner of Income-tax (Central), CalcuttA. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 94 of 1960
Reported in[1965]58ITR149(Cal)
AppellantStar Company Ltd.
RespondentCommissioner of Income-tax (Central), CalcuttA.
Cases ReferredJames Alexander & Co. Ltd. v. Commissioner of Income
Excerpt:
- .....there was no evidence that the shares of the company were actually the subject of dealings in any stock exchange in the course of the relevant previous years. an official bulletin of the calcutta stock exchange in which the shares were quoted were produced before the income-tax authorities. the quotations as given therein did not carry any weight with the tribunal on the ground that the shareholding of the beneficial owners remained unaltered. this indicated that there was absence of any dealing in shares by them. the applicant-company according to the tribunal did not show by production of its register of shareholders or otherwise, that there had, in fact, been dealings in the shares in the course of the relevant previous years. the tribunal also found that the assessee did not satisfy.....
Judgment:

K. C. SEN, J. - This is a reference under section 66(1) of the Income-tax Act, 1922, hereinafter called the Act. The Star Company Limited, Calcutta, is the applicant before us and the following question of law has been referred to this court for its opinio :

'Whether, on the facts and in the circumstances of the case, the Income-tax Officer was justified in passing an order under section 23A(1) of the Indian Income-tax Act on the assessee-company for the assessment years 1948-49 and 1949-5 ?'

The assessment years are 1948-49 and 1949-50 and the corresponding accounting years ended on 31st March, 1948, and 31st March, 1949, respectively. The assessee is a company limited by shares. In the general meetings of the shareholders for the respective accounting years no dividends were declared, although sufficient profits were available for distribution. It was urged before the Income-tax Officer that it was a company in which 'the public were substantially interested' within the meaning of third proviso to section 23A(1) read with the Explanation thereto and, therefore, the provisions of sub-section (1) of section 23A were not attracted. The Income-tax Officer came to the conclusion, firstly that 75 per cent of the shares and the voting power of the company were held by persons who could not be regarded as belonging to 'the public' and, secondly, under the articles of association of the company the shares were not freely transferable. So concluding, he made the order under section 23A(1) of the Act. His order was affirmed in appeal by the Appellate Tribunal Commissioner.

In the appeal before the Tribunal the same points were urged in support of the assessees contention. The Appellate Tribunal upon consideration of the materials before it found that, in the relevant accounting period, the total share capital of the applicant-company consisted of 10,400 shares of which the real and beneficial shareholders were as follow :

(1) Mugneeram Bangur & Co

125

(2) Ramcoomar Bangur

1,950

(3) Naraindas Bangur

1,000

(4) Govindlal Bangur

350

(5) Gokulchand Bangur

180

(6) Narsingdas Bangur

65

(7) Bond Co. Ltd. Didwana

1,400

(8) Indian Investment Co. Ltd., Didwana

340

(9) Swadeshi Investment Co. Ltd

300

(10) Eastern Trading Syndicate Ltd., Sambar Lakes

4,300

(11) Cambay Trading Co. Ltd., Cambay

550

Total

10,400

Amongst the shareholders stated above six were individuals of whom Govindlal Bangur and Gokulchand Bangur were directors holding respectively, 350 and 180 shares and five were companies in Rajasthan. Excluding the two directors, the other four individual shareholders held as between themselves 3,140 out of 10,400 shares. On these facts, the Tribunal came to the conclusion that the shares of the company carrying more than 25 per cent. of the voting power were, at the end of the previous year, beneficially held by the public within the meaning of section 23A(1). Although such a finding was made, it came to the conclusion that the assessee did not satisfy the second condition of the Explanation under section 23A(1) which will be referred to in detail later on. The reasons which weighed with the Tribunal were that there was no evidence that the shares of the company were actually the subject of dealings in any stock exchange in the course of the relevant previous years. An official bulletin of the Calcutta Stock Exchange in which the shares were quoted were produced before the income-tax authorities. The quotations as given therein did not carry any weight with the Tribunal on the ground that the shareholding of the beneficial owners remained unaltered. This indicated that there was absence of any dealing in shares by them. The applicant-company according to the Tribunal did not show by production of its register of shareholders or otherwise, that there had, in fact, been dealings in the shares in the course of the relevant previous years. The Tribunal also found that the assessee did not satisfy the other alternative condition regarding the free transferability of its shares as article 13 of the articles of association of the company lays down that the directors may refuse to register any transfer of a share and also 'veto any transfer without assigning any reason'. As the second condition of the Explanation to the third proviso was not fulfilled, the Tribunal refused to give any relief to the assessee.

Article 13 of articles of association of the company runs as follow : 'The directors may refuse to register any transfer of a shar :

(a) Where the company has lien on the share.

(b) Where it is not proved to their satisfaction that the proposed transferee is a responsible person.

(c) Shares may at any time be transferred by a member to any other member or a non-member by the instrument of transfer in accordance with the procedure provided in clauses 14, 15, 16, 17 and 18 of the articles of association.

(d) The directors may also veto any transfer without assigning any reason.'

Mr. Meyer has contended before us on behalf of the assessee that once the Tribunal had found that more that more than 25 per cent. of the shareholdings are not controlled by any group, the second branch of the finding of the Tribunal as stated before cannot be warranted in law. His second contention is that the Tribunal has found that in the official quotation of the stock exchange in both the relevant accounting years, the shares have been quoted and that the caption at the top of the official quotation has not also been disbelieved by the Tribunal. After coming to such a conclusion the Tribunals attack that the assessee failed to produce any evidence to show dealings in the shares of the relevant previous years cannot be treated as reasonable. The approach, according to Mr. Meyer, is wrong as the expression 'dealings' in the Explanation of section 23A(1) referred to above only means that it must refer to dealings in the stock exchange which was clearly apparent on the face of the bulletin. Thirdly, his contention is that the Tribunal has indulged in surmises and conjectures in supposing that there might have been fictitious and colourable transactions in respect of these shares in the past without coming to any finding that such was indeed the fact. Further the Tribunals judgment is self-contradictory as it has already found that the shares of the assessee are the properties of the Bangur group. This finding, according to Mr. Meyer, is based on conjecture and surmise on the face of its previous finding that 25 per cent. of the shares is held by the public. Lastly, it was contended that the Tribunal ought not to have ignored the official quotation inasmuch as the recognised stock exchange official bulletin is the best evidence of public transaction in shares.

The main point of controversy in this reference is whether the company can lawfully claim to be 'a company in which the public are substantially interested' within the meaning of the third proviso to section 23A of the Income-tax Act, 1922, before the amendment of 1955, read with the Explanation to sub-section (1) of section 23A. According to this proviso the company in which the public are interested are exempted from the operation of section 23A(1). The proviso runs as follow :

'Provided further that this sub-section shall not apply to any company in which the public are substantially interested or to subsidiary company of such company if the whole of the share capital of such subsidiary company is held by the nominees thereof.'

The Explanation runs as follow :

'For the purpose of this sub-section. -

a company shall be deemed to be a company in which the public are substantially interested if the 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 25 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 years 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.'

The scope of this Explanation has been dealt with by their Lordships of the Supreme Court in the case of Raghuvanshi Mills Ltd. v. Commissioner of Income-tax, the relevant portions whereof have been summarised by a Reference Bench of this court (P. S. Mukharji and Niyogi JJ.) in a case James Alexander & Co. Ltd. v. Commissioner of Income-tax. We proceed to quote below only the points which are necessary for deciding the instant cas :

'This decision of the Supreme Court lays down clearly the following principle :

(1) The statutory Explanation to section 23A(1) of the Income-tax Act lays down, among the tests, the minimum interest which can be called substantial by saying that shares of the company carrying not less than 25 per cent. of the voting power must be allotted unconditionally to, or acquired unconditionally by, the public and they must also be beneficially held by the public.

(2) It is emphasized that the essence of the Explanation lies nor merely in the percentage which only shows the limit of the minimum holding by the public but also lies in the words unconditionally and beneficially This decision lays down that these words unconditionally and beneficially underline the fact that no person who holds a share or shares not for his own benefit but for the benefit of another and who does not exercise freely his voting power can be said to belong to that body which is designated public.

(3) Thirdly, the Supreme Court lays down the interpretation of the word public and points out that it is used in contradistinction to one or more persons who act in unison and among whom the voting power constitutes a block. Therefore, if such a block exists and possesses more than 75 per cent. of the voting power the company cannot be said to be one in which the public are substantially interested. Such a group, according to the Supreme Court, may be formed by the directors of a company acting in concert or by some directors acting in concert with others, or even by some shareholder or shareholders, none of whom may be a director. In holding this, they set aside the decision of the Bombay High Court of Chagla C.J. and Tendolkar J. in the very matter in Raghuvanshi Mills Ltd. Commissioner of Income-tax...'

The Explanation to the third proviso of section 23A consists of two parts. viz., -

(1) The shares of the company (not being shares entitled to a fixed rate of dividend carrying not less than 25 per cent. of the voting power) have been (i) allotted unconditionally to or (ii) acquired unconditionally by and are (iii) at the end of the previous year beneficially held by the public (not including a company to which the provisions of section 23A(1) apply); and

(2) 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 to the members of the public.

On a perusal of the Supreme Court decision in Raghuvanshi Mills case, it appears that their Lordships have decided as to what are the ingredients which should be considered with regard to the first part of the Explanation and this decision does not point to the question whether both the conditions should be fulfilled in order to obtain an exemption from the operation of section 23A(1). This section contains a penal provision and, as such, the initial burden is on the Income-tax Officer to show that his order is in compliance with the terms of section. Since his order, which was ultimately confirmed by the Tribunal, shows that the initial burden was discharged by him, the onus of proving that a company is one where both the ingredients of the said Explanation are applicable, so as to avoid the operation of section 23A(1), is on the assessee-company. In the circumstances, it is necessary to consider whether both the above conditions in the said Explanation are necessary to be fulfilled or whether the assessee could escape the penal provision by only proving one of the two elements set forth above.

The word 'and' used in the said Explanation unmistakably shows that the conditions are conjunctive and both of them must be proved for avoiding the penal provision and the proof of one of the elements does not exonerate the assessee from the liability. In addition to what has been stated in Raghuvanshi case by the Supreme Court the Explanation provides that there must be one more test; the shares must either be subject of dealings in a stock exchange or must in fact be freely transferable by the holders to the other members of the public. The expression 'subject of dealings in any stock exchange', emphasises that the shares are actually sold and purchased in the open market by members of the public. It is only then that the public can be said to be substantially interested. If there is no such actual dealing in the stock exchange, the other test is that these shares must be 'in fact freely transferable' by the holders to the other members of the public.

The Tribunal in paragraph 4 of the order has come to the conclusion that in view of the fact that the shareholding of the individual members who are not directors carry more than 25 per cent. of the voting power, it follows that the company satisfies the first of the above conditions. This is a finding of fact on which Mr. Meyer relies and, therefore, it may very well be said that the assessee has fulfilled some of the main ingredients as set forth by the Supreme Court in Raghuvanshi Mills case towards proof of the fact that the shares of the company carrying not less than 25 per cent. of the voting power was unconditionally allotted or acquired unconditionally by the members of the public. After this was proved, it was incumbent upon the assessee to prove the additional element for escaping the liability that 'any such shares' which were held by the members of the public were in the course of the previous year the subject of dealings in a stock exchange or were in fact freely transferable to the members of the public.

As regards the second condition the Tribunal has found that it was not satisfied. The reasons are that (1) there is no evidence of dealings in any stock exchange and the production of the stock exchange bulletin in which the shares were quoted was not by itself sufficient. (2) The shareholdings of the beneficial owners remained unaltered in the two years of account and there were no dealings thereon in these years. (3) The restrictive clause regarding transferability of shares in the memorandum of association does not show that the alternative ingredient in the second condition was fulfilled.

In giving the above reasons the Tribunal has observed that 'the shares of the assessee-company are the property of the Bangur group and if there had been any fictitious or colourable transactions in respect thereof in the past and on that basis quotations were made in the official bulletin of the Calcutta Stock Exchange, that does not satisfy of the requirement of law. Mr. Meyer has criticised this part of the order on the ground that the Tribunal has committed an error by stating that the shares of the assessee-company are the property of the Bangur group inasmuch as such a finding was made on conjecture and surmise. According to him after making a finding that not less than 25 per cent. of the shares were held by the public, such an observation was unwarranted by law. It is true that in appropriate cases this court may interfere if it appears that the Tribunal has misunderstood the statutory language or that it has made a finding for which there is no evidence or which is inconsistent with the evidence and contrary to it. But in the instant case there appears that the Tribunal has misunder stood the statutory language or that it has made a finding for which there is no evidence or which is inconsistent with the evidence and contrary to it. But in the instant case there appears to be no reason for interference as this finding was made with reference to the recitals in the stock exchange bulletin and the other materials in record including the list of shareholders, independently of its findings in paragraph 4 of the order. This has reference exclusively, to the second condition of the Explanation. In view, however, of the submissions made by Mr. Meyer it is necessary for us to examine whether the findings on the second condition were justified.

We have already held that the expression 'subject of dealings in any stock exchange' used in the second condition of the Explanation emphasizes that the shares are actually sold and purchased in the open market by the members of the public. Therefore, the question arises whether the quotations in the stock exchange bulletin as found in the instant case are by themselves conclusive to show that the shares were sold and purchased in the open market. A very important fact has been found by the Tribunal that the shareholdings of the beneficial owners remained unaltered in the two accounting years, thereby indicating that there were nor dealings thereon in those years. This static condition does not at all show as to who were the members of the public who had purchased the shares and had dealings therein in the ordinary course of business. On this context the Tribunal found that the shares of the assessee-company are the property of the Bangur group and if there had been any fictitious or colourable transaction in respect thereof in the past and on that basis quotations were made in the official bulletin of the Calcutta Stock Exchange, that does not satisfy the requirement of law. It is profitable to repeat that such a finding was the result of the inference on the materials place before them in this regard and the finding cannot be said to be based on conjecture and surmise, requiring our interference.

The quotations in the stock exchange bulletin are undoubtedly prima facie evidence as to dealings in shares in a stock exchange, but since the Tribunal considered on facts stated in the foregoing paragraph that no value should be attached to the quotations in the stock exchange bulletin as to actual dealings in shares, its decision based on facts in this regard cannot be interfered with. There is also a finding of fact to the effect that if the assessee wanted to avail of the benefit conferred by the third proviso and the Explanation aforesaid, in so far as the second condition therein was concerned, it was its imperative duty to adduce further evidence in addition to the stock exchange bullet in to prove conclusively the ingredients of the second condition of the Explanation. It appears from the paper book that although an opportunity was given to the assessee to produce satisfactory evidence in this regard, it was at no point of time availed of. Accordingly, we are of opinion that as the assessee had failed to discharge the onus to prove that it is entitled to the exemption from the operation of section 23A(1), no benefit arising out of the third proviso and the Explanation can be bestowed upon it. It has further been argued on behalf of the assessee that as the Tribunal has made a finding on the fringe of evidence, it cannot be sustainable in law. We do not think that this court can enter into the questions of sufficiency or insufficiency of evidence as the Tribunal being the last court of facts was the final judge as to the sufficiency of evidence on this point discussed above.

As regards the question whether the restrictive clause in the articles of association regarding transfer of shares deprives the company of its characteristic that 'the public' are substantially interested', reference may be made to the decision in Commissioner of Income-tax v. Tona Jute Co. Ltd. The Reference Bench of this court (G. K. Mitter and A. N. Ray JJ.) held that a public company whose directors have absolute discretion to refuse to register the transfer of any share to any person, whom it shall in their opinion be undesirable in the interest of the company to admit to membership and are not obliged to give any reason for refusal to register, is not a company the shares of which are freely transferable to other members of the public within the meaning of section 23A(1) of the Income-tax Act and section 23A(1) can be applied to such a company even if the board of directors have not objected to the transfer placed before them. In this reported decision it appears that a clause similar to that of clause 13 of the articles of association in the instant case quoted before was under consideration of this court and it came to the conclusion as follows at page 91 :

'Therefore in considering whether the shares of the assessee-company are freely transferable, one cannot lose sight of the fact that the directors have the unqualified right to reject any transfer and the mere fact that have not so far objected to any transfer placed before them does not mean that they cannot use the power given to them by article 39 of the articles of association of the assessee-company.'

It may be pointed out accordingly that a member of a company is only authorised to transfer his shares in the manner laid down by the articles and if article 13 as referred to in the instant case gives the directors a power to control the entry of a stranger to the company by holding up registration, the same operates as a restriction of transfer. This being the position, we are of opinion that the Tribunal was correct, when it finds that so long as the directors possess the right to refuse to register any transfer without any reason or to veto any transfer it follows that the shares of the company are not freely transferable, within the meaning of the third proviso and the alternative ingredient of the second condition in the Explanation of section 23A(1) of the Act.

In the above premises, we find that the Tribunal was justified in finding that as the assessee could not prove the second condition of the said Explanation it cannot be said to be a company in which the members of the public are substantially interested. Accordingly, the order under section 23A(1) of the Act passed by the Income-tax Officer on the assessee-company is not liable to attack.

Our conclusion may be summarised as follow :

(1) The Explanation of the third proviso to section 23A(1) envisages two conditions under which an assessee can claim exemption from the penal provisions of section 23A(1) and the burden of proving these conditions is on the assessee.

(2) The conditions in the said Explanation are conjunctive and, therefore, the proof of one of the two conditions only does not exonerate the assessee from the operation of the penal provision of section 23A(1).

(3) In the instant case the Tribunal has found as a fact that not less than 25% of the voting power is held by the members of the public unconditionally an beneficially. This finding alone is not sufficient to bestow any benefit on the assessee-company inasmuch as the second condition of the said Explanation has not been proved.

(4) The second part of the Explanation provides that there must be one more test, i.e., such shares as held by the members of the public must either be subject of dealings in a stock exchange or must in fact be freely transferable by the holders to the other members of the public. In the instant case the second condition was found as a fact not to have been fulfilled.

(5) The quotations in the stock exchange bulletin are, prima face, evidence of dealings in shares in the stock exchange but in the instant case the Tribunal did not depend upon this document as the shareholdings of the beneficial owners remained static in the two years of account indicating thereby that there were no dealings in the open market and that the shares were controlled by the Bangur group of shareholders. This being a finding of fact cannot be interfered with by this court.

(6) In the instant case, clause 13 of the articles of association of the assessee-company shows that the directors have absolute discretion to refuse to register the transfer of any share to any person who is considered by them as undesirable without assigning any reason. Such a restrictive clause is an impediment to the shares being freely transferable within the meaning of the alternative clause of the second condition of the said Explanation.

In the result, the question referred to us is answered in the affirmative.

The applicant shall pay costs to the respondent.

SANKAR PRASAD MITRA J. - I agree.

Question answered in the affirmative.


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