P. B. MUKHARJI J. - The assessees only objection is that it is a company in which the public are substantially interested and therefore section 23A of the Income-tax Act cannot be applied to it.
This is a reference under section 66(1) of the Indian Income-tax Act at the instance of the applicant. Messrs. James Alexander & Co. Ltd., the assessee, for the decision of this court on the following questions of law :
'(1) Whether, in the facts and circumstances of this case, the firm of Soorajmull Nagermull was not a member of the public within the meaning of section 23 ?
(2) Whether, in the facts and circumstances of this case, the group of individuals consisting of the partners of Surajmull Nagermull and the wives of the of the partners held more than seventy five per cent. of the shares of the assessee compan ?
(3) In the circumstances, whether the provisions of section 23A were applicable in this cas ?'
The assessee is a public company. The assessment year under consideration is 1949-50 and the relevant accounting year is that ending on the 31st December, 1948. In the statement of case it is stated that the shares of the assessee company were freely transferable by the holders to the other members of the public.
It will be necessary however to indicate below the shareholders of the assessee company in order to determine and decide the questions raised.
The shareholders of the assessee company are as follows :
No. of shares held.
D. Logan Edwards }
C. L. Bajoria } Directors
K. D. Jalan }
M/s. Soorajmull Nagermull
D. N. Jalan - partner of M/s. Surajmull Nagermull
Raigarh Jute Co. Ltd.
Cooch-Behar Trading Co. Ltd.
Bikaner Trading Co. Ltd.
(The shares stood in the name of Radheshyam Agarwalla, a nominee of Bikaner Trading Co. Ltd. The Appellate Assistant Commissioner has by mistake, shown the name of the shareholders as 'Orient Trading Co. Ltd.' instead of 'The Bikaner Trading Co. Ltd.)'
Mrs. Krishna Devi Jalan
Shmt. Shanti Jalan
Shmt. Radha Jalan
Shmt. Chanda Jalan
Shmt. Panna Jalan
Shmt. Chandramani Jalan
A. E. Mitchell
M. E. Maggie
J. A. Leslie
N. A. Skiper
The three shareholder companies will be seen to be (1) Raigarh Jute Co. Ltd. (2) Cooch-Behar Trading Co. Ltd. and (3) Bikaner Trading Co. Ltd., to which the provisions of section 23A were applicable and they held substantial number of shares of the assessee company.
The Income-tax Officer by his order dated 12th March, 1954, came to certain findings of fact before the applied section 23A. He holds that Messrs. Soorajmull Nagermull have a controlling interest in the assessee company because the number of shares held by them or their benamidars, nominees and persons under their control amounted to 98,793 out of the total of 1 lakh shares. Therefore, the Income-tax Officer finds that much less than twenty-five per cent. of the voting power has been unconditionally allotted to the public and this fact, by itself, is enough to hold that the public are not substantially interested in the company and the Income-tax Officer therefore applied the provisions of section 23A to this company. In addition to this, the Income-tax Officer also finds that though the shares were quoted in the stock exchange, there had not been any dealings in stock exchange as would be apparent from the fact that during the years 1945 to 1948, the identical persons held the companys shares and even later the shares were never made available to the public but were merely transferred to the associated concerns. Thus, the Income-tax Officer finds that the public are not substantially interested in the company and also that there has been no free transfer of shares to any outsider public. He also finds that the assessee suffered no loss in the past and the profit earned in relevant year was substantial. On this finding the Income-tax Officer rejected the assessees claim for exemption from section 23A on the ground of substantial public interest.
He finds that the profits of the company on the books of account of the assessee amounted to Rs. 92,000 and odd, while the income actually assessed for the year was Rs 1,19,741. According to him the net income available for distribution as dividends after deduction of income-tax and corporation tax payable on the assessed income amounting to Rs. 52,387 worked out at Rs. 67,354. He, therefore proceeds, to say that out of this available amount no dividend had been declared by the assessee on the relevant date of the general meeting i.e., the 30th December, 1949. He, therefore, ordered that a sum of Rs. 67,354 being 100 per cent. of the surplus profit available after deduction of taxes should be deemed to have been distributed as dividend to the shareholders on the 30th December, 1949. The Income-tax Officers order is dated the 12th March, 1954.
The assessee appealed to the Appellate Assistant Commissioner from this decision. The order of the Appellate Assistant Commissioner was made on the 28th March, 1955. He comes to the conclusion that the assessee falls within the mischief of section 23A in the first year, whereas, in the second year, it should be deemed to be a company in which the public were substantially interested and hence exempted from the provision of this section. Therefore, the order of the Appellate Assistant Commissioner was that the Income-tax Officers order was to stand for the first year but was cancelled for the second year.
The Appellate Assistant Commissioner, however, records some significant facts. The assessees contention before him was that out of one lakh of shares Messrs. Soorajmull Nagermull held only 3,638 shares. 32,400 shares were held by ladies belonging to the family of the partners of a Messrs. Soorajmull Nagermull. It was admitted before him by the assessee that excepting Must. Dakhi holding 10,000 shares, the other ladies were the wives of the partners of the firm. It was, however, contended by the assessee that the shares were purchased by these wives out of their own moneys and they were being separately assessed on their returns and dividends on those shares. It was of course contended by the assessee that these wives were not the benamidars of the firm and as much it was asserted that the firm could not have control over their voting power. So far as shares held by the three companies are concerned, it was contended by the assessee that the public were not substantially interested in Raigarh Jute Co. Ltd. and in Cooch-Behar Trading Co. Ltd. but in the other company, namely, the Bikaner Trading Co., holding 8,549 shares, the public were substantially interested. It was then contended by the assessee that the three partners of Messrs. Soorajmull Nagermull - (1) C. L. Bajoria, (2) K. D. Jalan and (3) D. N. Jalan held 1,370 shares each individually which were purchased by them with their own money. Out of these three partners C. L. Bajoria and K. D. Jalan were also directors of the assessee company. They were not nominees of the firm of Soorajmull Nagermull but they became directors in their individual capacity and not on behalf of the firm. It was argued that the dividend from these shares held by them, the directors, fees and commission earned from the assessee company were not treated as income of the firm but had been included in their individual assessment. It is further recorded by the Appellate Assistant Commissioner that the firm of Messrs. Soorajmull Nagermull consists of 8 partners belonging to different groups of families. In the firm. K. D. Jalan and C. L. Bajoria, the two directors, had about one-third share while the balance was held by other partners. It was, therefore, urged by the assessee that Messrs. Soorajmull Nagermull should be treated as a separate member of the Soorajmull Nagermull should be treated as a separate member of the public as the firm consisted of 8 partners and only two partners having one-third share were directors of the assessee company.
The Appellate Assistant Commissioner on those facts, however, holds assuming for arguments sake that the two directors had control over the shares held by the firm in which they were partners, that it was difficult to presume that the directors also controlled the shares held by the ladies belonging to the family of the partners and also by D. N. Jalan, another partner of Messrs. Soorajmull Nagermull. The total shares held by these ladies together with D. N. Jalan and the four Europeans shown above came to 34,479 out of lakh shares. Besides these 34,479 shares, the Orient Trading Co. Ltd. in which the public were substantially interested held 8,549 shares. Therefore, the Appellant Assistant Commissioner expressed the view that the assessee company passed the first test laid down in section 23A of the Income-tax Act.
With regard to the second test the Appellate Assistant Commissioner finds that there was no actual dealing of the shares of the company in the stock exchange during the previous year, but subsequently there were transfers of shares to other limited companies. He notices the argument of the assessee that the public are substantially interested in these companies as the Income-tax Officer tried to apply section 23A to these companies, but he had eventually to drop these proceedings. Besides, the Appellant Assistant Commissioner on scrutiny of the articles of association of the company notices that till the end of the first accounting year, namely, 31st December, 1945, there was some restriction in the transfer of shares which by a special resolution on the 2nd December, 1946, was removed. Therefore, he comes to the findings that so far as the first year is concerned, there were some restrictions in the transfer of shares and, moreover, there was no transaction on the stock exchange, while, in the second year, there was no such restriction in the articles and actually there was such transfer in subsequent years. Hence, he concluded that in the second year the company satisfied the second test also as laid down in the Explanation, but it failed to do so for the first year. He accordingly made the order as indicated already.
The Income-tax Officer thereafter appealed to the Tribunal. The Tribunal allowed the appeal. The findings and conclusions of the Tribunal may now be briefly noted. The Tribunal finds by analysis of the shareholding that Soorajmull Nagermull held 3,638 shares. It was admitted by the assessee that the shares standing in the names of D. N. Jalan, A. E. Mitchell and J. A. Leslie virtually belonged to the firm of Soorajmull Nagermull, so that aggregate holding of the said firm of Soorajmull Nagermull was 8,949. Included in that group also were the shares standing in the names of three directors. It was also admitted by the assessee before the Tribunal that to the aggregate of 8,949 the shares belonged to the said firm of Soorajmull Nagermull. Raigarh Jute Co. Ltd. held 40,000 shares. Cooch-Behar Trading Co. Ltd. held 10,000 shares. In Raigarh Jute Co. Ltd. the firm of Soorajmull Nagermull held shares worth Rs. 14,00,000 out of the total subscribed capital of Rs. 15,00,000 and the balance of Rs. 1,00,000 was held by the managing agents of the said Raigarh Jute Co. Ltd. All the shares of Raigarh Trading Co. Ltd. were virtually held by Soorajmull Nagermull. The Tribunal also notices the admission of the assessee that most of the shares of Bikaner Trading Co. Ltd. were held by the firm Nagermull. The Tribunal recorded the fact that by the word 'mostly' it meant more than 75 per cent. of the shares. From these circumstances the Tribunal inferred that these two companies, Raigarh Jute Co. Ltd. and Bikaner Trading Co. Ltd., were controlled by Soorajmull Nagermull. Therefore, the Tribunal was of the opinion that the extent of 57,498 shares out of the total trading holding of 1,00,000 shares the firm of Soorajmull Nagermull was either the holder or had a virtual control. From this the Tribunal drew the conclusion that the firm of Soorajmull Nagermull was not a member of the public for the purpose of section 23A.
The Tribunal thereupon proceeded to consider whether the other shareholders were members of the public and whether they were holding 25 per cent. of the shares. Shareholder Nos. 10 to 16 of the of aforesaid list were wives of the partners of the firm of Soorajmull Nagermull. The Tribunal examined whether these ladies were members of the public and whether it should being them in the group of Soorajmull Nagermull which held more than 15 per cent. of the shares of the assessee company.
The argument before the Tribunal, as well as before the this court on this reference has been on behalf of the assessee that there can be no presumption of control exercisable by the husband on the wife in respect of the above shares. The Tribunal negatived the contention by the following observations :
'In the ordinary way of Indian society, husband and wife can be grouped together as a group of individuals having unity of purpose and unity of interest, and it will be only reasonable to infer that the wives and the shares were held by the said group. We have already held that the firm of Soorajmull Nagermull ceased to be a member of the public by reason of controlling more than 50% of the shares in the company. Thus, the group of individuals consisting of the partners of the said Soorajmull Nagermull and the wives of the these partners held more than 75% of the shares. In the circumstances we must hold that the group of individuals consisting of the partners of Soorajmull Nagermull and their wives held more than 75% of the shares of the assessee company and in this view of the matter we are of opinion that the provisions of section 23A were applicable in this case.'
Upon this order of the Tribunal the present reference has been made. The central point of controversy on this reference is whether the assessee company can lawfully claim to be 'a company in which the public are substantially interested' within the meaning of the last proviso to section 23A of the Income-tax Act before the amendment of 1955 read with the Explanation appended to sub-section (1) of section 23A. A company in which the public are interested are exempted from the operation of section 23A and the proviso reads as follows :
'Provided further that his 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.'
The decision on this reference depends on the interpretation, construction and meaning of the expression 'any company in which the public are substantially interested' used in the proviso.
The proviso, however, does not stand by itself. But there is an Explanation given which is part of the statute, the section and the proviso. The Explanation reads as follows :
'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 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 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.'
It will be seen from the statutory explanation that it is intended expressly to be 'for the purpose of this sub-section'. It describes the case of a company which shall be deemed to be company in which the public are substantially interested provided it satisfies the conditions laid down there. It will be, therefore, necessary in the facts of this case to find whether those conditions as laid down in the Explanation are satisfied here in this present case.
When the matter first came up before the Income-tax Reference Bench, the Supreme Court decision in Raghuvanshi Mills v. Commissioner of Income-tax had just been published in blue print, although not then reported. In the light of that decision on 'actual control', the Bench called for an additional statement of facts under section 66(4) of the Income-tax Act to decide the point. The Bench, therefore, ordered :
'In order to enable this court to effectively and finally determine the questions raised we should, in the light of the said recent decision of the Supreme Court, refer the case back to the Appellate Tribunal under section 66(4) of the Income-tax Act to make such additions and alternations to the statement of the case on the point of actual control by the husbands in respect of the shares and voting strength held by the wives represented by the said Nos. 10-16. For this purpose both the Tribunal and the assessee will be free to take and adduce any further evidence and also notice any other relevant fact already on record. We must record the fact that both Mr. Mitter, learned counsel for the assessee, and Mr. Meyer, learned counsel for the Commissioner of Income-tax do not oppose this course and do not want to take a risk of a decision on the statement of the case as it now stands.'
The Tribunal pursuant to that order had submitted a supplementary statement of the case in this court. In the supplementary statement of the case the Tribunal records that the assessee had no evidence to tender and the counsel for the assessee said so before the Tribunal. The income-tax authorities also produced no evidence. Therefore, no evidence was taken before the Tribunal under section 66(4) of the Income-tax Act. The relevant facts on records however have been noticed and place before the court in a supplementary statement of case on the point involved.
These relevant facts as found by the Tribunal in the supplementary statement of case are material and must be set out briefly. The assessment orders in respect of Chanda Jalan, wife of B. L. Jalan, Shanti Jalan wife of K. D. Jalan, Chandramani Jalan, wife of S. P. Jalan, Radha Debi Jalan, wife of K. L. Jalan, Panna Jalan, wife of M. N. Jalan and Shanti, daughter-in-law of Bansidhar Jalan, were produced before the Tribunal which showed the purchase of (1) 2,200 shares, (2) shares, (3) 5,600 shares, (4) 2,300 shares, (5) 2,200 shares, (6) 5,600 shares and (7) 2,300 shares respectively in the names of these ladies. The others referred to debits in their accounts for the purchase of these shares. But in the case of Chanda Jalan, Chandramani Jalan, Radha Debi Jalan and Panna Jalan, there were entries also to show that cash gifts of Rs. 1,50,000, Rs. 1,50,000, Rs. 1,50,000 and Rs. 1,00,000 respectively had been given by Bansidhar Jalan, whereas in the case of Krishna Jalan there was a credit entry of Rs. 45,000. The Tribunal records the fact that Soorajmull Jalan and Bansidhar Jalan were brothers. It further proceeds to record the fact that most of the gifts have been made by Bansidhar, Jalan, sometimes to his own daughter-in-law. The Tribunal found that the counsel for the assessee could not give any reason why Bansidhar Jalan gave such gifts nor could be explain the source from which these funds flowed, though he stated it must have been from his funds. Similarly, the assessee could not explain how Rs. 45,000 cash was given to Krishna Jalan. The Tribunal, therefore, concludes that its findings on a study of these figures is that the shares could not have been got by the ladies except from the funds either transferred to them by way of gift by Bansidhar Jalan or by other cash flowing. Therefore, the Tribunal holds that in the absence of any evidence to the contrary, all cash followed from the firm of Soorajmull Nagermull. This inference seems to us to be unexceptionable, because it was open to the assessee, its directors, who were husbands of some of the ladies concerned, to call either themselves or their wives to give evidence to explain these points and to resist this inference. The assessee was given expressly this opportunity to call evidence to show the control or otherwise and did not take that opportunity.
The Tribunal thereupon proceeds to record that the actual dates of this transfer of shares acquired in James Alexander & Co. were not proved by the assessee or by any of the ladies either individually or any one in their behalf. The Tribunal examined the share transfer register of the assessee company. Late in 1941 or 1942, the Jalans entered the assessee company. On the 19th of March, 1941, at an extraordinary general meeting of the company, a resolution was moved that the entire undertaking and assets of the company be transferred to Soorajmull Nagermull for Rs. 6,00,000 but this attempt failed being voted out. On the 11th of April 1942, in an ordinary general meeting, a resolution was passed to transfer the shares to the various members of the Jalan family and this resolution was in fact carried out and given effect to. The Tribunal also found that the holding of shares by each branch of the family was roughly equal. There is nothing to show on the contrary nor was any attempt made by the assessee to prove or establish that this was not so.
The Tribunal then proceeds to record that an examinations of the minute books of the assessee company showed that none of the ladies ever attended any of the meetings of the assessee company however, important and that they had given proxies always either to their husbands or to some other member of the Jalan family except in one case where proxy was given to one Leslie, but then that was at a meeting where none of the members of the Jalan family was present.
The Tribunal, therefore, finally records their findings in the following terms :
'From these we are led to think that the ladies purchased the shares from out of the funds supplied by the firm of Soorajmull Nagermull, that the ladies did not act as independent owners of the shares from the fact that they never attended any of the meeting however, important, and proxies were given, though not necessarily to the husbands, but nevertheless, always to some member of the Jalan family, except in one solitary instance when no member of the family attended, when it was given to one Leslie. The only conclusion that can be drawn is that the shares were purchased not out of individual funds, that the ladies did not act as independent owners though they paid taxes on that income, that the ladies individually took no further interest in the shares and from the fact that even the shareholding was roughly in the proportion of the shareholding in the firm of Soorajmull Nagermull it is reasonable to infer that the ladies did not own their shares in their own rights but on behalf of the firm of Soorajmull Nagermull. Thus control by the husbands of their families can be inferred.'
On this findings of fact it is difficult to resist the conclusion to which the Tribunal arrived. Mr. S. Mitra, learned counsel for the assessee, tried his best to assail this finding of fact but his handicap was that his client the assessee, chose not to produce any fact or evidence in spite of opportunities to come to any other conclusion. He, therefore, fell back on the argument that the inference of fact which the Tribunal was drawing was not justified and argued that it was for the taxing authorities to establish that section 23A applied to the facts of the case. The main answer to Mr. S. Mitras argument is that the facts of the case. The main answer to Mr. S. Mitras argument is that the facts do establish here, in our opinion, that the husbands who are the partners of the firm of Sooorajmull Nagermull did control the voting power of the wives. Very cogent reasons, grounds and facts have been put forward by the Tribunal as stated above and the inferences that the Tribunal drew from these facts are, in our opinion, entirely justified.
While it is true no doubt that the onus is on the taxing authorities always to bring the assessee within the meaning of a particular section for the purpose of taxation, nevertheless it is equally true that, if the section prima facies applies and the assessee contends that he is entitled to an exemption because of some proviso or an Explanation, then it is for the assessee to show that he is within the exemption. It may not be out of place here to refer to the observation of Bhagwati J. in Commissioner of Income-tax v. R. Venkataswami Naidu, a decision of the Supreme Court where it was said at page 534 :
'They rightly placed the burden of proof on the assessee but the High Court erroneously framed the question in the negative form and placed the burden on the income-tax authorities of proving that the income from the sale of milk received by the assessee during the accounting year was not agricultural income. In order to claim an exemption from payment of income-tax authorities proper materials which would enable them to come to a conclusion that the income which was sought to be assessed was agricultural income. It was not for the income-tax authorities to prove that it was not agricultural income. It was this wrong approach to the question which vitiated the judgment of the High Court and led it to an erroneous conclusion.'
It is not disputed in this case that prima facie section 23A is attracted by reason of the non-declaration of the necessary percentage of profits as dividends. It is admitted on the facts of this case that the assessee claimed to be exempt from its operation as coming within the exception provided in the proviso read with the Explanation. We are, therefore, satisfied that it was for the assessee to prove and establish that he came within the letter and spirit of such exception.
Far from proving, they have, in our opinion, in spite of opportunity, failed to even rebut facts on record and irresistible inference drawn from them that the husbands were controlling the wives shares.
It remains now to discuss the interpretation of section 23A bearing on the proviso and the Explanation occurring therein. The important expressions that we will have to notice and interpret are, (1) 'any company in which the public are substantially interested' appearing in the proviso; (2) shares carrying not less than twenty-five per cent. of the voting power allotted unconditionally to, or acquired unconditionally by, and are at the end of the previous year beneficially held by the public; and (3) 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 the other members of the public. These expressions, as will appear are taken from the proviso and the Explanation attached to it under sub-section (1) section 23A of the Income-tax Act quoted above, before this amendment of 1955.
Before discussing the points of interpretation the best course will be, at the outset, to refer to the decision of the Supreme Court on this point so that the points decided there finally may at once be noticed so that further discussion of the same will be unnecessary.
The latest decision on this point is, as already mentioned, Raghuvanshi Mill Ltd. v. Commissioner of Income-tax. It deals with section 23A before the amendment in 1955 and the interpretation of the expression, 'company in which the public are substantially interested' and also the meaning of the words 'unconditionally' and 'beneficially' and 'shares carrying not less than twenty-five per cent. of the voting power', as used in the statutory Explanation. This decision of the Supreme Court lays down clearly the following principles :
(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% 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 emphasised that the essence of the Explanation lies not 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 facts that no person who holds a share or shares not for his own 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 words '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 seventy-five 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, one 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 that very matter in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax.
(4) The test, according to the Supreme Court is first to find out whether there is an individual or a group which controls the voting power as a block. If there be such a block the shares held by it cannot be said to be 'unconditionally' and 'beneficially' held by members of the public. The group itself may be composed of directors or their nominees or relations in different combinations, but none can be said to belong to that group, be he a director or a relative, unless he does not hold the shares unconditionally and beneficially for himself. It is only such a person who can fall properly outside the word 'public'.
(5) The Supreme Court by its decision makes it clear that the directors cannot, by reason only of being directors, be said not to be members of the public. If the directors and some of them do not act as a body or in concert with others, the fact that they are directors is of no significance.
(6) Lastly the Supreme Court lays down that relationship is not by itself decisive. There again the question is not the relationship is not by control. If relatives do not act freely, but with others, they cannot be said to belong to that body which is described as the 'public' in the Explanation. In other words, mere relationship is not of any consequence unless control of voting power held by the relative is proved and established.
In none of these cases including one in Raghuvanshis case, the relationship of husband and wife was the subject of a decision. Other relationships were examined in different decisions. Whether in Indian social context husband and wife constitute a kind of relationship which ipso facto or prima facie indicates a control of the wife by the husband may be a debatable question and whether legislation after the amendment of 1955 according a special recognition of this relationship of husband and wife to be treated as a single person, is an argument for or against such view, may also be debatable. But I do not think, after the decision of the Supreme Court in Raghuvanshis case, it is any more necessary to discuss this aspect of control under section 23A(1) read with the proviso and the Explanation.
A plain reading of these statutory provisions indicates, in the first place, that no confusion should be made between a public company and a private company. The words used in this context are not public companies or private companies. The expression used is 'any company in which the public are substantially interested'. That is very different from a public company as technically understood and defined by the Companies Act. A private company equally may be a company in which the public are substantially interested within the meaning of this section 23A of the Income-tax Act. The distinction between public and private companies according to the limited definitions of the Companies Act is not necessarily valid and relevant in connection with the interpretation of the expression 'any company in which the public are substantially interested', in the proviso to section 23A(1) and the Explanation thereto. Secondly, the Explanation makes it abundantly clear that the question of the public being substantially interested in closely linked up with 'voting power'. The word 'control' is not used either in the proviso or in the Explanation to section 23A(1). It has come by way of interpretation of the words 'voting power'. Mere title to 25 per cent. of the shares is not enough. Thy must be shares carrying 25 per cent. of the voting power. Thirdly, those shares must either be allotted or acquired be allotted or acquired unconditionally. Qualified, controlled or conditional allotment or acquisition of shares, therefore, is outside the Explanation. Fourthly, even unconditional allotment or unconditional acquisition would not be enough. These shares must in addition, be held beneficially by the public. The words 'beneficially' has already been construed by the Supreme Court in Raghuvanshis case. These four characteristics do not exhaust the tests laid down in the Explanation. It goes on to provide that, in addition, there must be one more test : the shares must either be the subject of dealings in stock exchange or must, in fact, be freely transferable by the holders to other members of the public. This last test emphasises the significant features of the Explanation and 'subject to dealings in stock exchange' emphasises that the shares are actually sold and purchased in the open market by members of the public. I is only then that the public can be said to be substantially interested. 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 other members of the public. The words 'in fact' and the word 'freely' again emphasise that theoretical or legal transferability of the shares was not what was intended but the factual free transferability of such shares. That is the point emphasised in the Explanation. That seems to agree well with the previous alternative of actual dealings in the stock exchange. Only when that is not available, the other test of free transferability, in fact, is put forward and which will only be a really equal alternative if it means that even though there may not be dealings through the stock exchange the shares are, in fact dealt with and transferred.
Having regard to the recent decision of the Supreme Court in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax, it is no longer necessary for us to discuss either the Privy Council case, Commissioner of Income-tax v. Bjordal, or the previous Supreme Court decision in Sardar Baldev Singh v. Commissioner of Income-tax, or the Bombay decision in Jubliee Mills. Ltd. v. Commissioner of Income-tax, or the English decision in Tatem Steam Navigation Co. Ltd. v. Commissioner of Inland Revenue, because the Supreme Court has discussed all of them in Raghuvanshis case.
To complete the review of the case we need only notice the decision of the Madras High Court in Amrutanjan Ltd. v. Commissioner of Income-tax. There a Bench of the Madras High Court - Rajagopalan and Ramachandra Iyer JJ. - had to interpret section 23A of the Income-tax Act. This decision lays down the principle that, prima facie, the terms of the Explanation to section 23A(1) of the Income-tax Act do not limit the operation of the third proviso of that section to those companies only which came within the Explanation. The use of the word 'deemed' creates a fiction according to that decision. In other words, it is said that a company which could not in reality be styled as one in which the public are substantially interested, is deemed to be such by the Explanation and, therefore, that should only be an addition to the category, coming under the third proviso and not a definition of a company in which the public are substantially interested.
On this point a recent decision of the house of Lords contains many relevant observations, though it must be pointed out at the outset that the statute which the House of Lords was considering was not in pari materia with the statute before us in spite of some similarities between the two. That recent decision of the House of Lords is Barclays Bank Ltd. v. Inland Revenue Commissioners. It was concerned with the interpretation of section 55 of the Finance Act of 1940 in England and its various other sections. It interpreted the expression 'control' in the context of that section. The majority decision of the House of Lords, of Viscount Simonds, Lord Cohen and Lord Keith expressed the view that a person who had power by the exercise of voting rights in accordance with the constitution of a company to carry a resolution in general meeting had on the principle of J. Bibby & Sons Ltd. v. Inland Revenue Commissioner, 'control' for the purpose of section 55(1) of the British Finance Act. It also expressed the view that it was irrelevant in that context that a shareholder who had therefore the 'deeming' provision of section 55(3) of that Act was expansive of sub-section (1) and if a case fell naturally within sub-section (1) it was unnecessary to look beyond it. The decision also of the majority was that person who had control of the company jointly with orders has 'control' of the company for the purpose of section 55 of that Act. It was, however, pointed out there that if he held the joint holding in a fiduciary capacity only it did not count, but if he held it beneficially or is himself the founder of the point holding, having created it for his own disposition then it counted as giving him control just as if he was single owner for 'control' in that particular Act. The House of Lords decision clearly lays down the ratio that 'control' means real control and not apparent control. On that Lord Reid, who was dissenting, also agreed.
Viscount Simonds at page 523 of that report expressed to view of the deeming proviso in the following manner :
In the present case I is agree with Romer L. J. in thinking that the so-called deeming provision subscription (3) is expansive of subsection (1) and that, if a case of sub section (1) it is unnecessary to look beyond it. I bear in mind what Lord Radcliffe said in St. Aubyns case about the words deem but nevertheless regard its primary function as to bring in something which would otherwise be excluded.'
Lord Cohen, another member of the majority Bench, expressed the same view at page 536 of the report in the following terms :
'It is said that subsection (3) is a definition section, and that the deceased did not fall within any branch of that definition. The use of the word deemed seems to me inappropriate to a definition section, and I should be inclined to agree with Romer L. J. that it is supplementary to or expansive of subsection (1) and not merely expository thereof.'
Lord Keith, another member of the majority view, expressed himself on that point in the following terms :
'I incline, therefore, to the view that subsection (3) is not a definition of the meaning of control of a company under subsection (1) but an extension of the meaning under that section.'
It is not necessary, however, for the purposes of this reference before us to decide the question whether the 'deeming' provision in the Explanation to section 23A(1) of the Income-tax Act about 'a company in which the public are substantially interested' is an exhaustive definition of that expression occurring in the last proviso to that section or merely illustrative or expository thereof, except to notice that the House of Lords decision took the view that it was expository and not exhaustive and the Madras decision in Amrutanjans case also took the same view independently of the House of Lords decision. Incidentally, the Madras decision is also an authority for saying that section 23A(1) could be applied to a public limited company if the requisite conditions laid therein were satisfied.
In this view of the decisions already noticed it is unnecessary for us to discuss the English case of S. Berendsen Ltd. v. Inland Revenue Commissioners and the observations of Lords Evershed M. R. at page 36-39 on the nature of controlling interest or the British American Tobacco Co. Ltd. v. Inland Revenue Commissioner. The decision of the Australian High Court in Avon Downs Proprietary Ltd. v. Federal Commissioner of Taxation was cited at the Bar before us for the following observations of Dixon J. at pages 364-65 :
'It remains to apply the words beneficially. It might be imagined that is meaning could occasion no doubt. But in section 80(6)(a) you find the remarkable expression beneficially held by the trustee of his estate. There I think it must be intended to convey the idea that the trustee of the estate holds it as part of the estate and not for some person claiming adversely to the beneficiaries. In other words. if the testator was a nominee, his executor is to be in no better position than he is. It seems to me that a transferor of a share who has been paid the consideration for the transfer, holds simply as a passive trustee until the registration of the transfer and the entry of the transferees name on the register. He could not be said to hold beneficially.'
This view of Dixon J. is in accord with the view of the Supreme Court here in Raghubanshis case and the construction that we are making of the word beneficially in the Explanation to section 23A(1) of the Income-tax Act.
For these reasons we hold that the firm of Soorajmull Nagermull was not a member of the public within the meaning of section 23A of the Income-tax Act and that the group of individuals consisting of the partners of the firm of Soorajmull Nagermull and the wives of those partners held more than 75 per cent. of the shares of the assessee company and, therefore, the provisions of section 23A of the Income-tax Act were applicable to the facts of this case. We, therefore, answer the first question in the negative, and both the second and the third questions in the affirmative.
The assessee will pay the costs of this reference. Certified for two counsel.
NIYOGI J. - I agree.
Questions answered accordingly.