SUPREME COURT OF INDIA

Before:- J.C. Shah, V. Ramaswami and V. Bhargava, JJ.

Civil Appeals Nos. 672 and 673 of 1965. D/d. 11.10.1966.

Commissioner of Income Tax, West Bengal - Appellant

Versus

East Coast Commercial Co. Ltd. - Respondent

For the Appellant :- Mr. S. T. Desai, Senior Aclvocate, (M/s. R. Ganapathy Iyer and R. N. Sachthey Advocates.

For the Respondent :- Mr. A. K. Sen, Senior Advocate, Mr. D. N. Mukherjee, Advocate.

A. Income Tax Act, 1922, Section 23-A (as is stood before Finance Act of 1955) - Assessment of Income Tax - Determination of question as to whether company was the one in which public were substantially interested - Tests to determine - To establish that it is not a condition that actual exercise of control by a group must be established - It is holding in the aggregate of a majority of the shares issued by person or a persons acting in concert in relation to the affairs of the company which established the existence of a block.

[Paras 12 and 14]

B. Income Tax Act, 1922, Section 1 - Constitution of India, 1950 Article 226 Evidence Act, 1872 Section 1 Assessment of Income Tax - Admissibility of the report of Income Tax - Investigation Commission - Income Tax authorities, not strictly bound by rules of evidence - Mere fact that certain provisions of Taxation on Income (Investigation Commission) Act, 1947, relating to inquiries to be held were declared to be ultra vires by Supreme Court, did not render Commission an unlawful body, and in any event admissions which are recorded by the Commission cannot be ignored - Commission's report has evidentiary value and can be taken into account by Income Tax authorities after giving assessee an opportunity to make his representations there against and to tender evidence against truth of recitals contained therein.

[Para 15]

Cases Referred :-

Raghuvanshi Mills Ltd. v. Commissioner of Income Tax, 1961-41 ITR 613.

Commissioner of Income Tax, Bombay City I v. Jubilee Mills Ltd., 1963-48 ITR 9 (SC).

JUDGMENT

Shah, J. - M/s. East Coast Commercial Company Ltd., - hereinafter called 'the Company-disclosed in its return for the assessment years 1950-51 and 1951, a consolidated net profit of Rs. 8,89,241 for the account period April 7, 1949 to July 16, 1950. The Income-Tax Officer computed the income of the Company for the assessment year 1950-51 at Rs. 7,27,824 and for the assessment year 1951-52 at Rs. 2,00,803. It came to the notice of the Income Tax Officer that the Company was one in which the public were not substantially interested within the meaning of Section 23A of the Income Tax Act, 1922, and that the distributable profit after deducting tax due on the total income was Rs. 4,32,151 for the assessment year 1950-51, and Rs. 1,13,579 for the assessment year 1951-52 and that the Company had distributed Rs. 43,910 only as dividend. The Income Tax Officer commenced proceedings under Section 23A of the Income Tax Act, 1922 and passed an order that the undistributed portion of the assessable income of the Company as computed for income-tax purposes and reduced by the amount of income-tax and super-tax shall be deemed to have been distributed as dividends among the shareholders. The order was confirmed by the Appellate Assistant Commissioner. But the Income Tax Appellate Tribunal reversed the order. The Tribunal held that Section 23-A did not apply to the Company since it was not established that the Company was one in which the public were not substantially interested.

2. At the instance of the Commissioner of Income Tax, three questions were referred to the High Court of Judicature at Calcutta. In these appeals the first question alone is material :

" Whether on the facts and in the circumstances of the case the Tribunal erred in law in holding that the assessee-company was one in which the public are substantially interested within the meaning of Section 23-A of the Indian Income Tax Act?" The High Court answered that question in the negative. The Commissioner of Income Tax has, with certificate granted under Section 66A (2) of the Income Tax Act, 1922, appealed to this Court.

3. Relationship between the members of the family jointly referred to as 'the Kedias' is explained by the following genealogy :

The joint status between the members of the family was severed on July 4, 1943, and the members of the family formed themselves into a partnership and carried on the family business. Some time thereafter Benarashi Prosad and Puranmal retired from the partnership and started an independent business with an outsider in partnership. This business was taken over by a private company styled 'East Coast Commercial Company Ltd'. Later the private company was converted into a public limited company bearing the same name and having a paid-up capital of Rs. 4, 39,100 divided into 4391 shares of Rs. 100 each.

4. Investigation was started against the members of the Kedia family under the Taxation on Income (Investigation Commission) Act, 1947. In the course of the investigation the heads of the four branches of the Kedia family admitted that the shares in the respondent company numbering 4,115 were purchased by them out of their joint income which had not been disclosed and a majority of the shares in the Company was held benami. An offer of settlement was then made by the members of the Kedia family before the Investigation Commission. In paragraph 26 of the report, the Commission observed as follows :

"These figures have been accepted by Madangopal Kedia for himself and as a manager of the joint Hindu family consisting of himself and his minor sons, Benarashi Prosad Kedia for himself and as manager of the joint family consisting of himself and his minor son and also as the executor and legal representative of his deceased elder brother Prohladrai, Puranmal Kedia, and Mahabir Prosad Kedia for himself and as manager of the joint family Consisting of himself and his son, and they have jointly filed a settlement application. Though these persons are now divided and separate assessments to income-tax are being made on each, they have admitted that so far as the secret profits in question were concerned, they were earned by all the members jointly and have, therefore, requested that a single assessment may be made treating them as an Association of Persons and making each member and his joint family jointly and severally liable for the tax.

It appears that 2000 shares of the Company were standing in the name of Durgadatt Jhunjhunwalla who had declared himself to be the sole proprietor of the business styled 'Mohanlal Murarilal' carried on in the State of Hyderabad. It was found in the course of the investigation before the Investigation Commission that the shares were held by Durgadatt Jhunjhunwalla benami for the members of the Kedia family. By letter dated December 18, 1951 it was admitted by them that Durgadutt Jhunjhunwalla was only a "working; partner" having a tenth share and that the entire capital of the firm had been advanced by the Kedias jointly. Out of the 2000 shares registered in the name of Mohanlal Murarilal, 1000 shares were then transferred to the executor of the estate of Prohladrai Kedia and the balance was taken over by Durgadutt Jhunjhunwalla on January 30, 1951, when his account was finally settled, his personal account being credited with the sum of Rs. 1,00,000 representing his remuneration for service rendered till October 20, 1949 and he being debited with that sum representing the value of 1000 shares made over to him. Therefore upto the account year 1951-52 in the 1000 shares held in the name of Durgadutt Jhunjhunwalla the members of the Kedia family had a 9/10 share.

5. By September 17, 1952 the members of the Kedia family got all the shares transferred to their own names from the benamidars. The shareholding of the various members of the family thereafter was as follows:

1. Madangopal Kedia	120 shares.
2. Benarshi Prosad Kedia	495 shares.
3. Prohladrai Kedia	1,389 shares.
4. Puranmal Kedia	650 shares.
5. Mahabir Prosad Kedia	461 shares.

(Out of 1389 shares held in the name of Prohladrai Kedia, 1000 shares were those which were transferred by Durgadutt Jhunjhunwalla. ).

Taking into account 900 shares-being 9/10th shares of the holding of 1000 shares which were transferred on January 30, 1951 in the name of Durgadutt Jhunjhunwalla, the total holding of the members of the Kedia family in the Company; therefore stood at 4015 shares. This holding was in excess of seventy-five per cent. of the total number of the shares issued by the Company.

6. The Income Tax Officer held that Madangopal Kedia and others formed an association of persons. In his view 4115 shares had been purchased benami out of the income earned jointly by the members of the family and that the income was invested by them as an association of persons, and that there was no evidence that the income from those shares was taken individually by the members of the family who even after disruption of the joint family on July 4. 1943, had continued to work together and make their investments as an association of persons. The Income Tax Officer further held that since the shares were never quoted in the market and the affairs of the Company were under the control of the members of the Kedia family, an order under Section 23A of the Income Tax Act could appropriately be made.

7. In appeal, the Appellate Assistant Commissioner agreed with the Income Tax Officer and held that the shares were acquired jointly by the members of the family out of their "joint secreted earnings". The Appellate Assistant Commissioner also proceeded to analyse the minutes of the meetings of the Company showing the attendance at the meeting of the Company held between April 10, 1946 and December 30, 1951 and held that the members of the Kedia family had controlled the affairs of the Company, and on their admissions they had formed an association for acquisition of the shares of the Company and for various other purposes and therefore it could be inferred that the members of the association who controlled more than 75 per cent of the total shares and the voting power had acted in concert.

8. But the Income Tax Appellate Tribunal held that the offers made by the members of the Kedia family to the Income Tax Investigation Commission that a single assessment be made in respect of their "secreted income" treating them as an association of persons and that every member of the family be treated as jointly and severally liable to pay tax, on that income were not relevant in determining whether the Company was one in which the public were not substantially interested, and that from the fact that the members of the Kedia family held 4015 shares, it could not be inferred that the shares were jointly acquired, or that the members of the family exercised control over the affairs of the Company. The Tribunal observed :

"x x x that unless and until the department clearly established by proper material that the Kedias were acting in concert there is absolutely no case for holding that the provisions of Section 23-A become applicable to the facts of the case as in this case we have held that there is nothing to indicate that the separated members of the Kedia family acted in concert we hold that no case has been made out by the Department for holding that the assessee-company is one in which the public were not substantially interested."

The High Court expressed a doubt that the report made by the Income Tax Investigation Commission "may not be evidence of anything contained therein", and proceeded to observe :

"There is no doubt upon the facts stated above, that the five Kedias who held between them 3115 shares, and also had an interest in the 1000 shares of Messrs Mohanlal Murarilal, were in a position to control the affairs of the company. x xx x In my opinion, Tribunal came to right conclusion. It may be that the holders of the shares are in a position to control the Company. The majority of shareholders may be directors or relatives of directors or relatives of shareholders. But, that is not by itself sufficient to satisfy the test. There must not only be evidence to show that a number of individuals are in a position to control the company, but it must be shown that they are in fact acting in concert and they have constituted a "block" so as to control the affairs of the company by themselves. This requires some overt act. x x x There is not a single fact to show that the Kedias who their nominees were in fact acting in concert or operating as a 'block" x x x x The Tribunal was right in coming to the conclusion that no materials were placed before it by the Department to establish the fact that the Kedias in question acted in concert or operated as a block, so as to bring the assessee company within the provision of Section 23-A".

9. By Section 28A (1) of the Income Tax Act as it stood in the relevant years the Income Tax Officer was required, if satisfied that in respect of any previous year the profits and gains distributed as dividends by any company were less than sixty per cent. of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super-tax payable by the company in respect thereof, to make an order that the undistributed portion of the assessable income of the company of that previous year shall be deemed to have been distributed as dividends among the shareholders as at the date of the general meeting. But this power could not be exercised in respect of any company in which the public are substantially interested. By the Explanation to Section 23-A (1) it was enacted that "a company shall be deemed to be a company in which the public are substantially interested if shares of the company...carrying not less than twenty-five 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..... and if any such shares have in the course of such previous year been the subject of dealings in any stock exchange....or are in fact freely transferable by the holders to other members of the public."

10. This Court in Raghuvanshi Mills Ltd. v. Commissioner of Income Tax, 1961-41 ITR 613 examined the scheme of Section 23-A as it stood before the Finance Act of 1955 and observed :

"The word "public" is used (in the Explanation) in contradistinction to one or more persons who act in union and among whom the voting power constitutes a block. If such a block exists and possesses more than seventy-five per cent. of the voting power, then the company cannot be said to be one in which the public are substantially interested. xx x x

x x x the test is first to find out whether there is an individual or 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."

It is clear that in deciding whether an order Under Section 23-A (1) is called for the Income Tax Officer must determine - (i) whether there is an individual or a group which can control the voting power as a block. The existence of such a block may be established by showing that the voting power is vested in persons possessing more than fifty per cent of the shares issued who act in concert; and (ii) that the block exercises a controlling interest over the affairs of the company. This condition is satisfied only if the voting power of the block or group is seventy-five per cent. or more. If the block holds seventy-five per cent of the voting power it shall be deemed that the Company is one in which the public are not substantially interested. On the other hand, if the members of the public hold 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 twenty-five per cent of the voting power allotted unconditionally to, or acquired conditionally by them the Company shall be deemed to be one in which the public are substantially interested.

11. It is unfortunate that the Tribunal did not record a finding whether there was a group of persons controlling the affairs of the Company. In the view of the Tribunal, since the acquisition of 4015 shares of the Company was not joint and there was no other evidence that the members of the Kedia family were in fact acting in concert, the Company could not be deemed one in which the public were not substantially interested. The High Court also made a similar approach. They were of the view that even on the finding that the members of the Kedia family were in a position to control the affairs of the Company, there was no evidence of any overt act showing that they were acting in concert and thereby constituted a block.

12. In our judgment, that approach to the problem was erroneous. The Tribunal had to decide in the first instance whether there was a group of persons acting in concert holding a sufficient number of shares which may control the voting as a block. But the existence of a block is not decisive. If there be a group of persons holding control over voting, the Company would still be a Company in which the public are substantially interested, if twenty-five per cent or more of the voting power has been allotted unconditionally to and beneficially held by the public and the shares were in the previous years subject of dealings in any stock exchange in the taxable territories or were in fact freely transferable by the holders to other members of the public. The two enquiries are distinct. The Tribunal in paragraph 9 of its order observed that there was no material placed by the Department to show that the Kedias in question acted in concert so as to bring the assessee company within Section 28-A. If thereby the Tribunal meant that "there was no evidence to prove that the members of the Kedia family actually acted in concert," the view taken by the Tribunal was, in our judgment, wrong, since to establish that a Company is one in which the public are not substantially interested, it is not a condition that actual exercise of control by a group must be established. The High Court was apparently of the view that the members of the Kedia family were in a position to control the affairs of the Company, but there was no evidence of any overt act or concert between them.

13. But in Commissioner of Income Tax, Bombay City I v. Jubilee Mills Ltd., 1963-48 ITR 9 (SC) this Court held that no direct evidence of overt act or concert between the members of the group having control over voting was necessary to prove that the Company was not one in which the public were substantially interested. It was observed in Raghuvanshi Mills' case, that "in deciding if there is such a controlling interest, there in no formula applicable to all cases. Relationship and position as director are not by themselves decisive. If relatives act, not freely but with others, they cannot be said to belong to that body, which is described as "public" in the Explanation". In Jubilee Mills' case, 1963-48 ITR 9 (SC) this Court elaborated those observations and stated :

"The test is not whether they have actually acted in concert but whether the circumstance are such that human experience tells us that it can safely be taken that they must be acting together. It is not necessary to state the kind of evidence that will prove such concerted actings. Each case must necessarily be decided on its own facts."

14. On an analysis of the reasons recorded by the Tribunal and the High Court, it is clear that the Tribunal held that the Kedias did not form a controlling group because there was no evidence that they actually controlled the voting, even though they held more than seventy-five per cent of the shares issued by the Company: the High Court observed that the members of the Kedia family held 4015 shares of the Company and were in a position to control the affairs of the Company, but there was no evidence to show that they did in fact act in concert and controlled the affairs of the Company as a block. But, as already observed, if the members of the Kedia family formed a block and held more than seventy-five per cent: of the voting power, it was not necessary to prove that they actually exercised controlling interest. It is the holding in the aggregate of a majority of the shares issued by a person or persons acting in concert in relation to the affairs of the Company which establishes the existence of a block. It is sufficient, if having regard to their relation etc., their conduct, and their common interest, that it may be inferred that they must be acting together: evidence of actual concerted acting is normally difficult to obtain, and is not insisted upon.

15. We may observe that the High Court appears to have felt some doubt as to the admissibility of the report of the Income Tax Investigation Commission. But the Income Tax authorities are not strictly bound by the rules of evidence, and the mere fact that certain provisions of the Taxation on Income (Investigation Commission) Act relating to the inquiries to be held were declared to be ultra vires by this Court did not render the Commission an unlawful body, and in any event the admissions which are recorded by the Commission, as having been made before them, cannot be ignored. The report had evidentiary value and could be taken into account. Undoubtedly the report had to be brought to the notice of the Company, and the Company had to be given an opportunity to make its representation against the report and to tender evidence against the truth of the recitals contained therein. It is not suggested that this opportunity was not given. It was for the Tribunal to determine, having regard to ordinary human experience whether it may be safely taken that the members of the Kedia family must have acted together as a controlling block. That enquiry has not been made, and the case has been decided on the application of a test, which is erroneous. We are, therefore, unable on the statement of case to answer the question referred.

16. We accordingly set aside the order passed by the High Court and direct that the Tribunal do submit a supplementary statement of the case under Section 66(4) of the Income Tax Act, 1922, because in our view the statement of the case already referred to is not sufficient to enable determination of the case raised thereby. The Tribunal may make such additions or alterations in the statement of the case in the light of the observations made in the course of this judgment. The Tribunal will submit the supplementary statement of the case to the High Court. The High Court will then proceed to determine the question according to law. The costs of this hearing will be costs in the proceedings before the High Court.

Order accordingly.