Shree Changdeo Sugar Mills, Ltd vs The Commissioner Of Income Tax, Bombay on 7 December, 1960

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 380 of 1957

Decision Date: 07/12/1960

Coram: M. Hidayatullah, J.L. Kapur, J.C. Shah

In the matter titled Shree Changdeo Sugar Mills, Ltd. versus The Commissioner of Income Tax, Bombay, the Supreme Court of India delivered its judgment on the seventh day of December, 1960. The opinion was authored by Justice M. Hidayatullah, who was joined on the bench by Justice J. L. Kapur and Justice J. C. Shah. The petitioner in the appeal was Shree Changdeo Sugar Mills, Ltd., and the respondent was the Commissioner of Income Tax for the Bombay jurisdiction. The case is reported in the 1961 volume of the All India Reporter at page 1154 and also appears in the 1961 second series of the Supreme Court Reports at page 990. The statutory provision that formed the core of the controversy was Section 23A(1) of the Indian Income‑Tax Act, 1922 (Act No. 11 of 1922), together with the provisions of Part B of the States (Taxation Concession) Order, 1950, clause 14, which relate to the treatment of undistributed income of companies in which the public is substantially interested.

The headnote of the judgment set out the factual background and the legal issue that the Court was called upon to resolve. During the assessment year that fell in 1948‑49, the company under dispute had retained a portion of its profits and had not distributed dividends amounting to sixty percent of its total earnings. Consequently, the Income‑Tax Officer issued an order invoking Section 23A(1) of the Act, which provides for a super‑tax on undistributed profits of certain companies. The matter was referred to the Tribunal, which in turn posed a question to the High Court of Bombay: whether, at the relevant point in time, the assessee company could be classified as a company in which the public held a substantial interest, meaning that the public possessed at least twenty‑five percent of the voting power. The High Court answered this question in the negative. The Supreme Court examined the correctness of the test applied by the High Court. It held that the test which excluded any shareholdings by directors from being counted as public interest was not the proper criterion. Instead, the Court adopted the test articulated in the earlier decision of Raghuvanshi Mills Ltd. v. Commissioner of Income‑Tax, reported in the second series of the Supreme Court Reports, 1961 at page 978. According to that precedent, the decisive factor is whether the public, considered as a class, beneficially controls at least twenty‑five percent of the voting power of the company. The Court further explained that the proviso and the explanation to Section 23A(1) require a genuine public beneficial interest in that proportion. The explanation to Section 23A stipulates that a company’s own shares are to be regarded as held by the public only when Section 23A does not apply to those shares. The Court also clarified that clause 14 of the States (Taxation Concession) Order, 1950, does not negate the test laid down in Section 23A; it merely grants a concession to a company that satisfies the conditions of clause 14, while the company may still fall within the ambit of Section 23A for other purposes. Accordingly, the precedent set in Raghuvanshi Mills Ltd. v. Commissioner of Income‑Tax was deemed applicable to the present case.

The procedural posture of the appeal was outlined in the judgment. The appeal, numbered Civil Appeal No. 380 of 1957, arose from a judgment and order dated the eighth of March, 1956, rendered by the Bombay High Court in Income‑Tax Reference No. 4 of 1956. The petitioners were represented by counsel drawn from the Bar, while the respondents were also represented by their own counsel. The appeal was filed on a certificate granted by the High Court, indicating that the question of whether the company qualified as one in which the public were substantially interested warranted further consideration by the Supreme Court. The Court noted that Section 23A of the Income‑Tax Act, as it existed before its amendment by the Finance Act of 1955, had been applied to the assessment year 1948‑49 in relation to the petitioner. The central issue referred to the High Court concerned the proper interpretation of the statutory test for public substantial interest. After hearing the submissions, Justice Hidayatullah delivered the judgment of the Court, providing the detailed analysis set forth above and reaching the conclusions described, thereby resolving the dispute in accordance with the established legal principles.

In this appeal the Court examined whether, at the relevant time, the assessee Company could be regarded as a company in which the public were substantially interested. The Bombay High Court had answered that question in the negative. During the assessment year the Company had not distributed dividends equal to sixty percent of its profits, and consequently the Income‑Tax Officer issued an order under section 23A(1) of the Indian Income‑Tax Act. The Company first appealed to the Appellate Assistant Commissioner, whose dismissal was affirmed, and then appealed to the Tribunal, which also rejected the claim. Although the Tribunal referred the same question to the High Court, the High Court again held that the public were not substantially interested. The issued, subscribed and paid‑up capital of the assessee consisted of sixty thousand shares, allocated as follows: the eleven Directors together held forty‑one thousand five hundred shares; the Managing Agency Firm held two thousand three hundred shares; Mysore Merchants Ltd. held eleven thousand eight hundred eighty shares; and other shareholders held four thousand three hundred twenty shares, making a total of sixty thousand shares. The issue was whether the public held at least twenty‑five percent of the voting power, which would satisfy the requirement of substantial public interest. The Bombay High Court, relying on its earlier decision in Raghuvanshi Mills v. Commissioner of Income‑Tax, held that shares owned by the directors could not be counted as belonging to the public for that purpose. The Supreme Court, having heard Civil Appeal No. 30 of 1957 arising from the same Raghuvanshi Mills decision, explained that the test applied by the High Court was incorrect, set out the correct test and remanded that appeal. The Court indicated that the same correct test applied to the present case. A further question, not present in the Raghuvanshi Mills appeal, concerned whether the shares held by Mysore Merchants Ltd. could be treated as public holdings. If those eleven thousand eight hundred eighty shares were counted together with the four thousand three hundred twenty shares held by “others,” the public would own exactly twenty‑five percent of the voting power, irrespective of the directors’ holdings. The High Court concluded that the shares of Mysore Merchants Ltd. could not be treated as public holdings, and the Supreme Court agreed with that conclusion. The matter had to be decided according to the third proviso to section 23A(1), which reads: “Provided further that this sub‑section shall not apply to any company in which the public are (1) [1953] 24 I.T.R. 338. 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. Explanation.–For the”.

For the purpose of the sub‑section, a company is regarded as one in which the public are substantially interested when the following situation exists. Shares of the company that are not entitled to a fixed rate of dividend – whether or not they carry an additional right to share in profits – must represent at least twenty‑five percent of the total voting power. Those shares must have been allotted unconditionally to, or acquired unconditionally by, members of the public and must be beneficially held by the public at the end of the preceding financial year. The definition expressly excludes any shares held by a company to which the provisions of the sub‑section themselves apply. In addition, during that preceding year the shares in question must either have been dealt with on any stock exchange in British India or must be freely transferable by their holders to other members of the public.

When the proviso and the accompanying Explanation are applied, it is necessary first to give effect to the words “not including a company to which the provisions of this sub‑section apply.” Accordingly, it must be determined whether Mysore Merchants Ltd. qualifies as a company to which the provisions of section 23A are applicable. Counsel for the assessee argued that this determination requires satisfaction of three conditions, which he summarised as follows: (a) the public should not be substantially interested in the company; (b) the company must have assessable profits for the assessment year in question; and (c) the company must not have distributed sixty percent of its net assessable profits. He maintained that unless all three conditions are met, section 23A does not apply to Mysore Merchants Ltd., and consequently the shares held by that company would be treated as being held by the public. He further pointed out that Mysore Merchants Ltd. recorded no assessable income in the relevant assessment year and incurred a loss, meaning that conditions (b) and (c) were not satisfied, and therefore section 23A could not be said to apply to that company.

The Court’s view was that the chief condition is that the public must beneficially hold at least twenty‑five percent of the voting power in the company. It was admitted before the Court that Mysore Merchants Ltd. was a private company, not a public company, and therefore the public did not hold any voting interest in it. As a result, the shares owned by Mysore Merchants Ltd. cannot be counted as a holding in which the public are beneficially interested, because the Explanation expressly excludes such shares. This question, therefore, is not open for further determination by the High Court, especially in view of the observations made in the decision of The Raghuvanshi Mills Ltd. v. Commissioner of Income‑Tax, Bombay decided on the same day.

Counsel for the assessee also relied on clause 14 of the Part B States (Taxation Concessions) Order, 1950, asserting that the provisions of section 23A could not be applied to Mysore Merchants Ltd. Clause 14 provides that the provisions of section 23A shall not be applied in respect of the profits and gains of any previous year ending before the appointed day unless the State law contains a corresponding provision. While that concession would be available to Mysore Merchants Ltd. if it satisfied the terms of clause 14, it does not affect the test required to decide whether the shares held by the company can be described as being held by the public. The Explanation demands that the shares be treated as public holdings only when section 23A does not apply to the company. The concession order merely confers a benefit on a company meeting clause 14; it does not negate the operation of the test under section 23A for other purposes. Consequently, the contention based on clause 14 has no force. The appeal was allowed, and the matter was remitted to the High Court for determination of the remaining question.

The Court quoted the provision stating that “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 corresponding thereto.” It observed that the concession contained in clause 14 of the Part B States (Taxation Concessions) Order, 1950 would be available to Mysore Merchants Ltd. only if that company satisfied the conditions laid down in clause 14. However, the Court held that this possibility does not diminish the relevance of section 23A in deciding whether the shares held by Mysore Merchants Ltd. can be described as shares in which the public are beneficially interested in another company. The Explanation to the provision requires that the shares of a company may be treated as held by the public solely when section 23A does not apply to those shares. The Concessions Order, according to the Court, does not intend to overturn this test; rather, it merely grants a benefit to any company to which clause 14 is applicable. Consequently, Mysore Merchants Ltd. might be able to claim the concession while still falling within the operation of section 23A for other purposes, as noted in the earlier decision cited as (1) [1961] 2 S.C.R. 978. The Court found that the argument advanced by the respondent that the concession would exempt the company from section 23A lacks merit and therefore has no force. Accordingly, the appeal was allowed and the matter was remitted to the High Court for a fresh determination of the issue, this time in accordance with the observations made in the Court’s decision in the Raghuvanshi Mills case (1). The Court ordered that, because the case was remanded, the respondent would bear the costs of this appeal, while the costs incurred in the High Court would depend upon the outcome there. Appeal allowed.