Commissioner of Income Tax, West Bengal v. Messrs. Jeewanlal Ltd

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 78 of 1952

Decision Date: 8 October, 1953

Coram: M. Patanjali Sastri, Vivian Bose, Ghulam Hasan, Natwarlal H. Bhagwati, DAS

In the matter titled Commissioner of Income-Tax, West Bengal versus Messrs Jeewanlal Ltd, the judgment was delivered on 8 October 1953 by the Supreme Court of India. The bench that heard the case comprised M Patanjali Sastri, Vivian Bose, Ghulam Hasan and Natwarlal H Bhagwati, with Justice Das authoring the opinion. The petitioner was the Commissioner of Income-Tax for West Bengal and the respondent was Messrs Jeewanlal Ltd. The official citation for the decision is 1953 AIR 473 and 1954 SCR 0. The dispute concerned the interpretation of section 2(11) of the Excess Profits Tax Act (XV of 1940), which defines a “director-controlled company” and addresses whether directors authorised by another entity, which holds a majority of shares, can render a company director-controlled.

The headnote of the judgment explains that, for the purposes of the Excess Profits Tax Act, a company is ordinarily considered a “company, the directors whereof have a controlling interest therein” only when those directors actually hold, and are entered in the register of members as holders of, a majority of the voting shares. It is not necessary for the directors to possess a beneficial interest in the shares; however, the mere fact that a director of the company has been authorised by another company, which itself holds the majority of shares, to vote on its behalf does not make the company a director-controlled company. The Court relied upon several earlier decisions, including Glasgow Expanded Metal Co. Ltd. v. Commissioners of Inland Revenue (12 Tax Cas. 573), Commissioners of Inland Revenue v. B W Noble (12 Tax Cas. 911), Inland Revenue Commissioners v. T Bibby and Sons Ltd. (14 I.T.R. Suppl. 7, 29 Tax Cas. 167), Commissioner of Income-Tax v. Bipin Silk Mills Ltd. (14 I.T.R. 344) and Commissioners of Inland Revenue v. Hodgkinson (Salford) Ltd. (29 Tax Cas. 395). In contrast, the cases of British American Tobacco Co. Ltd. v. Commissioners of Inland Revenue ([1943] A.C. 335) and New Shorrock Spinning and Manufacturing Co. Ltd. v. Commissioner of Income-Tax, Bombay (18 I.T.R. 712) were distinguished.

The proceeding was a civil appeal numbered 78 of 1952, arising from the judgment and order dated 17 January 1951 of the Calcutta High Court, which had sat in its special income-tax jurisdiction to consider Income-Tax Reference No. 50 of 1950. The appellant was represented by the Solicitor-General for India, C K Daphtary, assisted by G N Joshi, while the respondent was represented by N C Chatterjee, assisted by S C Majumdar. Justice Das delivered the appellate judgment, noting that the appeal concerned a reference made by the Income-Tax Appellate Tribunal under section 21 of the Excess Profits Tax Act, 1940, read with section 66(1) of the Indian Income-Tax Act. The High Court had answered affirmatively the legal question referred to it, namely whether, in the facts and circumstances of the case, the Income-Tax Appellate Tribunal was correct in holding that the directors of the respondent company possessed a controlling interest as contemplated by section 2(11) of the Excess Profits Tax Act.

The Court explained that the dispute concerned whether the respondent company was to be treated as having a controlling interest, as defined in section 2(21) of the Excess Profits Tax Act. The controversy arose during assessment proceedings for excess-profits tax covering five chargeable accounting periods that ended on 31 December of each year from 1939 through 1943. The factual background, which was not contested, was set out as follows. The respondent company was incorporated in British India and had a paid-up capital of rupees 3,600,000, represented by 360,000 shares of rupees 10 each. A Canadian corporation called Aluminium Limited owned the overwhelming majority of those shares: it held 359,790 shares for the periods ending 31 December 1939 and 31 December 1940, and 359,600 shares for the periods ending 31 December 1941, 31 December 1942 and 31 December 1943. Under article 105 of the respondent’s articles of association, Aluminium Limited was authorised to appoint three permanent directors to the board of the respondent company. Two of those directors later retired, leaving only one, Mr L. G. Bash, who continued to serve as a director nominated by Aluminium Limited.

During the periods ending 31 December 1939 and 31 December 1940, Mr Bash together with the other directors of the respondent company held a total of 210 shares. In the later periods ending 31 December 1941, 31 December 1942 and 31 December 1943, the directors’ combined holding increased to 400 shares, although Mr Bash himself held no share in those later periods. By a resolution of the directors of Aluminium Limited, Mr Bash was authorised to vote on behalf of Aluminium Limited and, from time to time, to appoint either a special or a general proxy to vote for Aluminium Limited with respect to the shares it owned in the respondent company at any ordinary or extraordinary general meeting of the respondent’s shareholders.

The Court then recited the wording of article 90 of the respondent’s articles of association, which provided:

“90. Where a company registered under the provisions of the Indian Companies Act or not is a member of this company a person duly appointed to represent such company at a meeting of this company in accordance with the provisions of section 80 of the Indian Companies Act, 1913, shall not be deemed to be a proxy but shall be entitled to vote for such company on a show of hands – and to exercise the same power on behalf of the company which he represents as if he were an individual member of this company including the power to appoint a proxy whether special or general and the production at the meeting of a company of such resolution appointing such representative duly signed by one director of such company and by the secretary (if any) and certified by them or him as being a true copy of the resolution shall on production at the meeting be accepted by this company.”

It was held that the document establishing Mr L G Bash’s appointment served as sufficient proof of the validity of that appointment. Mr L G Bash, at every material moment, exercised the authority granted by the article of association in his capacity as the representative of Aluminium Ltd. The respondent company contended that it should be treated as a company whose directors possessed a controlling interest, on the ground that Mr L G Bash, who was one of those directors, had the authority to exercise the voting rights of Aluminium Ltd. Consequently, the company argued that the directors could dominate the affairs of the respondent company and that, for the purpose of calculating standard profits, the statutory rate ought to be applied at ten per cent per annum rather than at eight per cent per annum. The Excess Profits Tax Officer rejected this contention. The respondent company appealed, and the Appellate Assistant Commissioner of Excess Profits Tax affirmed the officer’s decision. The respondent then appealed to the Income-Tax Appellate Tribunal, which reversed the earlier decision. The Tribunal observed that, because Aluminium Ltd. had granted a power of attorney to Mr L G Bash, there was no doubt that the respondent company, then the appellant before the Tribunal, was a director-controlled company. Upon the Commissioner of Income-Tax’s application, the Appellate Tribunal referred the legal question raised in the present appeal to this Court. The High Court of Calcutta, by its judgment dated 11 January 1951, answered the question affirmatively. The Commissioner of Excess Profits Tax, West Bengal, has now appealed to this Court, supporting the appeal with a certificate issued under section 66-A(2) of the Indian Income-Tax Act. In ordinary language, a person is said to have “a controlling interest” in a company when that person acquires, by purchase or otherwise, the majority of the shares that carry voting rights, because control of a company rests in the voting power of its shareholders. Accordingly, the directors of a company may be regarded as having “a controlling interest” when they are registered as holders of the majority of voting shares under the company’s articles of association. See Glasgow Expanded Metal Co., Ltd. v. Commissioners of Inland Revenue (1) and Commissioners of Inland Revenue v. B W Noble (2). However, it is not necessary for the holders of the majority voting shares to possess a beneficial interest in those shares. The shareholders may hold the shares as trustees, may be accountable to beneficiaries, and may be liable for voting in breach of trust, yet, as shareholders in relation to the company, they are deemed to have a controlling interest.

In the matter before the Court, reference was made to Inland Revenue Commissioners v. J. Bibby & Sons Ltd. (1) and Commissioner of Income-tax v. Bipin Silk Mills Ltd. (2). The factual record showed that the directors of the respondent company did not themselves hold a majority of the shareholding; instead, the majority of the shares were registered in the name of Aluminium Ltd. Consequently, applying the principles previously discussed, the directors could not be said to possess a “controlling interest” in the respondent company. Counsel for the respondent company, however, relied on the reasoning adopted by the House of Lords in British American Tobacco Co. Ltd. v. Commissioners of Inland Revenue (3). Counsel argued that although Mr L. G. Bash does not hold the majority of shares and has no beneficial interest in the shares held by Aluminium Ltd., and although he may be bound to cast votes according to the directions of his principals, the Aluminium Ltd., and may be answerable to the latter if he acts in breach of his duty, the director’s authority, while not revoked, places the majority of the vote-carrying shares directly or indirectly under his will and ordering. Accordingly, the counsel submitted that the directors of the respondent company in fact control its affairs at general meetings and therefore have a “controlling interest”, regardless of the machinery or means by which that result is achieved. This line of argument found favour with the Appellate Tribunal and the High Court. The Court, however, could not accept this argument as sound, finding that it oversimplifies the position. Assuming, without expressing any final opinion, the correctness of the decisions reported in (1) [1946] 14 I.T.R. (Suppl.) 7; [1945] I All E.R. 667; 29 Tax Cas. 167, (2) A.I.R. 1947 Bom. 45; 14 I.T.R. 344, and (3) [1943] A.C. 335; 11 I.T.R. (Suppl.) 29; 29 Tax Cas. 49, the Court was convinced that the analogy was inapt, because the principle of those decisions cannot be applied to the present case. In situations where directors hold the majority of shares as trustees, they are, for the purposes of the company, the registered shareholders and the voting right is vested in them, even though the beneficial interest may lie with the beneficiaries. In such circumstances the directors cast their own votes as registered holders. This situation differs entirely from one in which directors act merely as agents of the holders of the majority of shares. When a majority shareholder authorises an agent to vote on his behalf, the agent acquires no legal or beneficial interest in the shares; the title in the shares remains vested in the shareholder, who may at any time revoke the agent’s authority and may also attend the meeting and vote personally. Thus, the controlling interest continues to vest in the shareholder and never passes to the agent.

The Court observed that a shareholder always possesses the right to cancel the authority of any agent that has been appointed to vote his shares, and that such revocation may be effected at any moment. Even after assigning an agent, the shareholder is free to attend the shareholders’ meeting personally and to cast his own votes, thereby confirming that the legal ownership and direction over the shares remain with the shareholder and do not pass to the agent. Consequently, because the shares remain subject to the shareholder’s will and instructions, the controlling interest that belongs to the holder of the majority of shares never transfers to the appointed agent.

Turning to the facts of the present matter, the Court noted that pursuant to article 90, when Mr L G Bash appeared before the general meeting of the respondent company in his capacity as agent of Aluminium Ltd., he was required to produce the resolution passed by his principals that authorized him to cast votes on their behalf. The Court emphasized that the votes tendered by Mr Bash were not his personal votes; they were the votes of Aluminium Ltd. In the view of law, the controlling interest therefore continued to reside with Aluminium Ltd. and was never vested in Mr Bash at any time. The shares that conferred the controlling interest were not held by Mr Bash, nor were they, directly or indirectly, subject to his will or instructions, and accordingly, applying either of the tests previously discussed, Mr Bash could not be said to possess a controlling interest in those shares.

The Court found the decision of the Court of Appeal in Commissioners of Inland Revenue v Jamed Hodgkinson (Salford) Ltd. (1949) 29 Tax Cas. 395 to be appropriate and relevant to the point under consideration. The Court expressed regret that this authority had not been cited before the High Court when the judgment under appeal was delivered. The Court also observed that a dissenting view had been expressed in the judgment under appeal, which relied on the recent Bombay High Court decision in New Shorrock Spinning and Manufacturing Co. Ltd. v Commissioner of Income-Tax, Bombay. The Court held that the facts of that Bombay High Court case were wholly different from the facts before it, and therefore the decision could not be applied to the present dispute. Accordingly, the Court deemed it unnecessary to analyse or comment on whether the observations made in that judgment were well founded.

For the reasons set out above, the Court allowed the appeal and concluded that the answer to the question referred by the Appellate Tribunal to the High Court must be negative. Accordingly, the respondent company was ordered to pay the costs of the appellant both in the Supreme Court and in the High Court. The appeal was therefore allowed. The Court recorded that the agent for the appellant was G H Rajadhyaksha and the agent for the respondent was S C Banerjee.