Shree Changdeo Sugar Mills, Ltd. v. the Commissioner of Income Tax, Bombay

Bombay HIDAYATULLAH, J.-This appeal, on a certificate by Hidayatullah J. the High Court, has been filed by Shree Cbangdeo Sugar Mills, Ltd., to which s. 23A of the Income-tax Act (prior to its amendment by the Finance Act, 1955) .: was applied in respect of the assessment year, 1948-49. The question which was referred to the High Court was whether at the relevant time the assessee Com­ pany could be deemed to be a Company, in which the public were substantially interested. This question was answered in the negative by the High Court. During the assessment year, the Company had not distributed dividends to the extent of ·60 per cent. of its profits, and an order under s. 23A(l) of the Indian Income-tax Act was passed by the Income-tax Officer. The Company appealed to the Appellate Assistant Commissioner, who dismissed the appeal. It next appealed to the Tribunal, but was unsuccessful. The Tribunal, however, referred the above question which, as already stated, was answered in the negative by the High Court. The issued, subscribed a.nd paid-up capital ef the assessee Company consisted of 60,000 shares, which were distributed as follows: 1960 Shree Changden Sugar Mills, Ltd. v. Commissioner of I mo me-tax, Bombay Hidayatullah ]. (1) 11 Directors of the Company (2) The Managing Agency Firm (3) Mysore Merchants Ltd. (4) Others .. . 41,500 shares. 2,300 shares. . . . 11,880 shares. 4,320 shares. 60,000 shares. The question arose in determining .whether the pub­ lic were substantially interested in the Company, that is to say, held 25 per cent. of the voting power. The Bombay High Court in determining this point follow­ ed its decision in Raghuvanshi Mills v. Commissioner of Income-tax (' ), and held that no holding by the Directors of a company could be regarded as one in which the public were substantially interested. We have heard Civil Appeal No. 30 of 1957 from the decision of the Bombay High Court in the Raghuvan­ shi Mills case (1), in which judgment has been pro­ nounced today, and have held that that is not the correct test to apply. We have remanded the said appeal, after setting out the .correct test to apply. What we have said there applies equally here. There is yet another question, which arose in this · appeal but not in the appeal of the Raghuvanshi Mills. As we have already stated, Mysore Merchants Ltd., held 11,880 shares of the assessee Company. If these shares could be said to be held by the public along with 4,3~0 shares, the public would be holding 25 per cent of the voting power, whether or not th_e Directors of the Company held the rest of the shares. It was, therefore, necessary for the High Court to consider whether the shares held by Mysore Merchants Ltd., could be said to be held by the public. The High Court held against the assessee Company that they could not be counted as part of the holding by the public, and, in our judgment, the High Court has reached the correct conclusion. The matter has to be judged under the third pro­ viso to s. 23A(l), which read as follows: "Provided further that this sub-section shall not apply to any company in which the public are (1) [19,3] .. I.T.R. 338. r _.,. __ 2 S.C.R. SUPREME COURT REPORTS 993 .i. substantially interested or to a subsidiary company of r96o such a. company if the whole of the share capital of - . ' .( such subsidiary com_Pany is held by the parent com- s~.h·:: z~~;.'~1~. pany or by the nommees thereof. c v. Explanation.-For the purpose of this sub-section, Commissioner of -a company shall be deemed to be a company in Income-las, which the public are substantially interested if shares Bombay of the company· (not being shares entitled to a fixed rate of dividend, whether with or without a further Hidayatullah J. right to participate in profits) carrying not less than twenty-five per cent of the voting power have been allotted unconditionally to, or acquired unconditio- nally by, and are at the end of the previous year beneficially held by, the public (not including a com- pany 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 British India or are in fact freely transferable by the holders to other members of the public." In applying the proviso and the Explanation, we have to give effect to the words "not including a com­ pany to which the provisions of this sub-section apply", and have to determine whether Mysore Mer­ chants Ltd., is a. Company, to which the provisions of s. 23A can be said to be applicable. , Learned counsel for the assessee Company contends that in deciding this, we have to be satisfied on three points, which he summarises as follows: (a) The public should not be substantially inte­ rested in that Company; (b) It must have assessable profits for the rele­ vant assessment year; and (c) It must not have distributed 60 per cent of its net assessable profits. He contends that unless these three conditions are ful. filled, s. 23A will not apply to Mysore Merchants Ltd., and that . the shares held by it will be deemed to be held by the public. He points out that Mysore Mer­ chants Ltd., had no assessable income -in the corres- ponding assessment year and had suffered a loss, that conditions (b) and (c) did not,. therefore, apply, and 994 SUPREME COURT REPORTS (1961] '960 that s. 23A is not applicable to that Company. In Sh'" --;;-;:..14, 0 our opinion, the para~ount condition is tha~ even. in s«ia• Mills, Ltd. that Company the public should be benefi01ally m- v. terested in 25 per cent. of the voting power, and Commissioner of it was admitted before us that it was not a public Income-tax, Company at all but a private Company, and that, Bombay therefore, the public were not interested in that Com- Hidayatull•h J. pany. The shares held by Mysore Merchants Ltd., cannot at all be counted as a holding in which the public are beneficially interested, in view of the exclu­ sion contained in the Explanation. This point will not, therefore, be open for the determination of the High Court, when the question is reconsidered by the High Court in the light of our observations in The Raghuvanshi Mills Ltd. v. Commissioner of Income-tax, Bombay('), decided today. Learned counsel for the assessee Company also con­ tended that in view of cl. 14 of the Part B States (Taxation Concessions) Order, 1950, the provisions of s. 23A could not be applied to Mysore Merchants Ltd. That clause reads as follows: "14. Requiring distribution of div·idends by private companies.- The provisions of section 23A of the Act shall not be applied in respect of the profits and gains of any previous year ending before the appointed day unless the State law contained a provision correspond­ ing thereto." This Concession would be open to Mysore Merchants Ltd., if it satisfied the terms of Cl. 14. That, however, cannot detract from the.application of s. 23A to deter­ mine whether the shares held by it can be described as those in which the public are beneficially interested in another company. The Explanation requires that the shares held by a company should be considered as held by the public, only if s. 23A does not apply to it. The Concessions Order does not seek to negative this test; it only confers a benefit on a company, to which cl. 14 applies. Mysore Merchant! Ltd., may be able to avail of that concession, and still fall within (1) [1961) • S.C.R. 978. > 2 S.C.R. SUPREME COURT REPORTS 995 -< s. 23A for other purposes. This contention has no I960 force. Sliree Changd•o The appeal is allowed, and the case is remitted to sugar Mills, Ltd. the High Court for deciding the question in ~he light v, of the observations in our decision in the Rag'//,uvanski Commissioner of Mills case (1). As the case is remanded, the cost~ of Income-ta"· this appeal shall be paid by the respondent, but the Bo.,,bay costs in the High Court will abide the result. HSJayatullali J . .Appeal allowad . . WORKMEN OF THE HERCULES INSURANCE CO., LTD. v. HERCULES INSURANCE CO., LTD., CALCUTTA (P. B. GAJENDRAGADXAR, K. N. WANCHOO and K. C. DAS GUPTA, JJ.) Industrial Dispute-Claim of bonus-General Insurance busi­ ness-Validity of reference-Industrial Disputes Act, z947 (r4 of r947), s. IO(I)-Insurance Act, z938 (IV of z938), s. 3rA(I)(c),pro­ viso (vii). In view of the unqualified and absolute prohibition contain~ ed ins. 31A(1)(c) of the Insurance Act, 1938, against payment of bonus to the employees in general insurance business, the exception made by proviso (vii) to that section must be strictly confined to the limits prescribed by the said proviso.· The policy underlying the proviso clearly is to exclude the intervention of Industrial Tribunals·and leave the question of payment of such bonu!! entirely to the discretion of the Central Government. Consequently, where the w.orkmen in general insurance business claimed bonus and the Central Government referred the dispute for adjudication to the Industrial Tribunal under s. 10(1) of the Industrial Disputes Act, i947, and the Tribunal, on a preliminary ·objection under s. 31A(1}(c) of the Insurance Act, 1938, read with proviso (vii) thereof, held that· the refe- rence was invalid, _ - ·- · >f' t•J [t96•l 2 s.c.R. 978. z960 De&ember 7.