judgement:
Appeal No. 510/ 1963.
Appeal by special leave from the judgment and order dated January 22, 1960 of the Madhya Pradesh High Court in Misc.
Petition No. 35 of 1959.
B. Sen and I. N. Shroff, for the appellant.
K. N. Rajagopal Sastri and A. G. Ratnaparkhi, for the respondent.
April 22, 1964.
The judgment of the Court was delivered by SUBBA RAO, J.
This appeal by special leave raises the question whether the expression "income tax" in cl.
(c) of sub r.
(2) of r. 2 of Schedule I to the Madhya Pradesh Abolition of Proprietary Rights (Estate, Mahals, Alienated Lands) Act, 1950 (M.P. Act No. 1 of 1951), hereinafter cal led the Act, includes super tax.
The facts are as follows: The respondent was the zamindar of Bhadra Estate in Balaghat District of Madhya Pradesh.
His estate was known as Bahela Zamindari consisting of 78 villages.
The Act came into force on January 26, 1951.
Under the Act the proprietary rights of the zamindari vested in the State and he became entitled to compensation in respect of the said rights in the said villages under section 8 ,of the Act.
The compensation was to be determined in ac cordance with the rules contained in Schedule I to the Act.
Under r. 8 of Schedule I the zamindar would be entitled to ,compensation at 10 times the net income.
The net income would be calculated by deducting from the gross income, inter alia, the average of the income tax paid in respect of the income from big forest during 30 agricultural years preceding March 31, 1951.
On November 30, 1951, the Com pensation Officer determined the compensation payable to the respondent at Rs. 2,21,330 12 6.
In arriving at that figure he deducted not only the income tax payable by the respon dent but also the super tax and surcharge payable by him.
The average of the income tax paid by him during the mateI 30 years was only Rs. 3,760 2 9, but if the average of ,the super tax and surcharge was included, the average came 840 to Rs. 7,070 8 0.
The result was that the net yearly income of the estate was reduced by Rs. 3,310 5 3 and compensation was paid to him on the basis of the amount so reduced.
The respondent moved the Settlement Commissioner under section 15 of the Act for enhancement of the compensation, but the Commissioner confirmed the order of the Compensation Officer.
Thereafter, the respondent filed an application in the High Court under articles 226 and 227 of the Constitution for quashing the order of the Compensation Officer.
The High Court held, on a construction of the relevant provisions.
of the Act, that super tax should not be taken into account while calculating the compensation payable to the respondent.
The State of Madhya Pradesh has filed the present appeal against the order of the High Court.
Mr. Sen, learned counsel for the State, contends that the object of r. 2(2)(c) is to provide a method for ascertaining the net income of an estate, that in that context there cannot be any justifiable distinction between income tax and super tax, for both of them have, inter alia, to be deducted from the gross income to arrive at the net income, and that the Legislature used the word "income tax" in its comprehensive sense so as to take in super tax.
He adds that under the Income tax Act super tax is only an additional duty of income tax and, therefore, a part of it.
Mr. Rajagopala Sastri, learned counsel for the respondent assessee, argues that in construing a provision of an ex proprietary Act, the Court will have to construe such a pro vision strictly and if so construed, super tax cannot be in cluded in the expression "income tax".
He took us through the relevant provisions of the Income tax Act to support his contention that super tax is different in its origin, description, scope, incidents and collection from the income tax.
The question turns upon the correct interpretation of r. 2(2)(c) of the rules of Schedule I to the Act.
The relevant provisions of the Act and the rule read: Section 8(1) of the Act: "The State Government shall pay to every proprietor, who is divested of proprietary rights, compensation determined in accordance with the rules contained in Schedule 1.
" Schedule I to the Act Rule 2.
The net income of an estate or mahal in the Central Provinces shall be calculated by deducting from the gross income the sums under the following heads, namely: (c) the average of the income tax paid in respect of the income received from big forest during 841 the period of thirty agricultural years preceding the agricultural year in which the relevant date falls; * * * * * * * Rule 8.
(1) The amount of compensation in the Central Provinces and in Berar shall be ten times the net income determined in accordance with the rules herein contained.
The combined effect of the said provisions is that for the purpose of ascertaining the net income of an estate one of the deductible items is the average of the income tax paid in respect of the income received from the big forest.
That .average is ascertained on the basis of the income tax paid during the 30 agricultural years preceding the agricultural .year in which the relevant date falls.
The compensation payable is ten times the net income ascertained under the rules.
The relevant date for the purpose of ascertaining the average is the date specified by notification by the State Government under section 3 of the Act: for instance, if the relevant date falls in the year 1951, the income tax paid during the years 1921 to 1951 will afford the basis for arriving at the average.
To appreciate the distinction between the concepts of income tax and super tax a brief history of their incidents will not be inappropriate.
Under the Income tax Act of 1886 the total income from various sources was not the criterion for assessment but the different sources alone were the basis for it.
For the first time the 1918 Act introduced the scheme of total income for the purpose of determining the rate of tax.
Under that Act several heads were enumerated, under which the income of an assessee fell to be charged.
The 1922 Act went further and enacted that loss under one head of "income" can be set off against the profit under another head.
Till the 1922 Act super tax was separately levied.
It was first introduced by the Super tax Act of 1917 and then it was replaced by the 1920 Act.
Only in 1922, for the first time, it was incorporated in the Income tax Act.
Though both the taxes are dealt with by the same Act, their distinctive features are maintained.
As regards income tax, in the words of a learned author, "section 3 charges the total income, section 4 define its range, section 6 qualifies it and sections 7 to 12 quantify it.
" There are various other sections which provide the machinery for the ascertainment of the total income for assessment and recovery of tax.
As regards super tax, a separate chapter viz., Ch.
IX, deals with it; it comprises sections 55 to 58.
Section 55 is the charging section for the purpose of super tax; under that section, "In addition to the income tax charged for any year, there shall be charged, levied and paid for that year in respect of the total income of the 842 previous year. . . an additional duty of income tax (in this Act referred to as super tax) at the rate or rates laid down for that year by a Central Act".
Section 56 says that for the purpose of super tax, except in specified cases, the total income shall be the total income as assessed for the purpose of income tax.
Section 56A exempts from super tax certain dividends.
Section 58(1) applies by reference to supertax certain provisions of the Act relating to the charge, assessment, collection and recovery of income tax.
It would be seen from this Chapter that though super tax is described as an additional duty of income tax it is not incorporated in the income tax , its identity is maintained.
A self contained chapter deals with the charge, assessment, collection and recovery of super tax.
There are essential differences between the two taxes emanating not only from the express provisions contained in Ch.
IX but also from the omission to apply the specified sections of the Act to the said tax.
Successive Finance Acts also made a distinction between the two taxes.
This is not the occasion to notice in detail the differences between the two taxes.
It is enough to state that there are pronounced differences between the incidents of the twotaxes.
But two relevant differences may be noticed, namely,(i) though both the taxes are assessed on the total income ofa person, the total income for the purpose of income tax is computed on the basis of income classified and chargeable under the different heads mentioned in section 6 of the Act, whereas super tax is not concerned with the different heads, but is payable on the total income so ascertained , and (ii) while super tax, except in a few cases, is payable by the assessee direct, the income tax is payable by him direct as well as by deduction.
While in the case of income tax by reversing the process the tax attributable to a particular source can be ascertained, in the case of super tax no such process is possible as the said liability springs into legal existence only after the total income is ascertained.
The only possible method by which the said tax may be split up is by working out the proportion of the tax payable by the assessee in respect of an income from a particular source on the basis of the ratio the said income bears to the total income.
But this method is not sanctioned by the Act.
It is not legally possible to predicate what particular part of the super tax is attributable to an income from a particular source, for, unlike in the case of income tax, total income alone is the criterion and the income from different sources is not relevant.
To illustrate: super tax is now levied on income over certain level at present Rs. 25,000/ .
If "A 's" total income is Rs. 35.000/ made up of Rs. 20,000/ from big forest and Rs. 15,000/ from other sources, what is the super tax attributable to the income from the big forest? The answer is, it is not possible to do so.
843 With this background let us give a close look to the provisions of r. 2(2)(c) of Schedule I to the Act.
The legislative intention is manifest from the express language used and also by internal evidence.
With the knowledge that under the Income tax Act two separate duties, namely, in come tax and super tax, are imposed, the Legislature has used the expression "income tax".
If the intention was to refer to both the taxes, it would have stated "income tax and super tax".
The mention of the one and the omission of the other is a sure indication of its intention.
The qualification that income tax paid should have been in respect of the income received from the big forest neces sarily excludes super tax, for under the Income tax Act no super tax is payable in respect of the income received from big forest, but only in respect of the total income.
As we have pointed out earlier, it is not legally possible to disintegrate and allocate a portion of the super tax to the income attributable to the big forest.
It is not paid in respect of the income from the big forest, but is paid only in respect of the total income.
If the contention of the appellant prevails, though the income from big forest falls below the taxable income, it will be deducted if, in combination with the income from other sources, the income goes up to the taxable level.
In that event super tax not payable in respect of the income from big forest will have to be deducted.
That apart, the rules made under the Act do not provide for any machinery for allocating the super tax payable on the total income among the different sources.
It is said that the same difficulties are present even in the case of income tax.
Though income tax is also a tax on the total income of an assessee, the Act, as we have indicated earlier, provides for computing the income under different heads and, therefore, it is not inappropriate to describe a particular tax as attributable to an income from a particular head, but it would wholly be inappropriate to describe that a part of the super tax is payable in respect of an income from a particular source.
The argument of Mr. Rajagopala Sastri, learned counsel for the respondent, that the 30 years mentioned in the rule takes us back to a period when there was no super tax appears to be not sound, for, as we have stated earlier, supertax was payable in one form or other from the year 1917.
That apart, if the income tax takes in super tax, the nonexistence of super tax in a particular year does not make any difference in ascertaining the average, for the income tax for that year will be the income tax without the addition of super tax.
This circumstance is not, therefore, of much relevance and we exclude it from our consideration.
844 The argument that if the Legislature intended not to exclude super tax from the gross income, it would have expressly stated so in the rule is an attempt to put the shoe on the wrong foot.
The proper approach, particularly in the case of an exproprietary statute, is to ask the question why the Legislature did not expressly mention super tax, if it in tended to do so.
The use of one of the two well understood expressions is, on the other hand, an indication that the Legislature provided for the deduction of the one used and not of the other omitted.
The reason for the rule, if it is, legitimate to speculate, appears to be that as it is concerned with the calculation of the net income from the estate after making certain deductions, only those deductions, which have a direct relation to that income are allowed.
If the other construction prevails, speculation would take the place of certainty and super tax not paid factually in respect of the income from big forest would have to be deducted.
Such a construction defeats the purpose of the rule.
Some of the decisions cited at the Bar may now be noticed.
Lord Sumner pithily remarks in Brooks vs The Commissioner of Inland Revenue(1): ". for super tax tax is another and a new tax none the less, though it is an additional duty of Income Tax.
" In Bates, In re: Selmes vs Bates(2), a testator gave to his wife by his will "such a sum in every year as after deduction of the income tax for the time being payable in respect thereof will leave a clear sum of pound 2000.
" It was held that the wife was entitled to the pound 2000 free of income tax only and was not entitled to payment of any sum in respect of super tax.
There the trustees were directed to pay the annuity after deducting the income tax in respect of that annuity.
Rejecting the argument advanced on behalf of the wife that the said annuity should be free from super tax also, Russell.
J., observed: "Now super tax was not a charge in respect of any particular annuity or sum, but was a charge in respect of the recipient 's whole income and was not a matter with which the trustees would be charged or concerned at all, and, in his opinion, what the testator had done was to give the widow the yearly sum of pound 2500 clear of all deductions, for which the trustees were accountable, but that did not include super tax, which she must pay herself." (1)(19l4) 7 T. C. 2 3 6, 2 5 section 2 , 159 160, 161, 845 The learned Judge proceeded to state: "No super tax is really payable 'in respect of ' this sum.
" It is true that the said judgment turned upon the provisions of a particular will, but the reasoning is helpful.
There, income tax was deductible in respect of the sum bequeathed, here income tax is deductible in respect of the income re ceived from big forest.
As super tax is not a charge in respect of the income from big forest, on the parity of reasoning it shall be held that the word "income tax" used in cl.
(c) of r. 2(2) of Schedule I to the Act excludes super tax.
In Reckitt, In re: Reckitt vs Reckitt(1), a fund was bequeathed to trustees upon trust for investment and to pay out of the income of the investments "the annual sum of pound 5000 free of income tax" during the life of the annuitant.
The Court of Appeal held that the annuitant was entitled to have the sum paid to her without deduction on account of super tax and that the trustees must pay the super tax payable in respect of that sum out of the income of the fund.
The conclusion turned upon the provisions of the will.
Lord Hanworth, M.R., distinguished the decision in Bates, In re: Selmes vs Bates(2) on the ground that Russell, J., founded his judgment upon the reference to deductions and also upon the direction to, the trustees that specified sum should be paid after deduction of income tax in respect thereof and proceeded to observe that in the case before them no reference was made to, the system, or the power of the trustees to make deductions .
and that it was simply that a total sum in each year was to be paid free of income tax.
That decision may be right or wrong on the construction of the will before the Court of Appeal, but the features which distinguished Bates case from the decision in Reckitt 's case are also present in the case before us now.
Here also the rule empowers the prescribed authority to deduct from the gross income incometax paid in respect of the income received from big forest.
The earlier decision is more in point to the present case than the later.
Be that as it may, the English decisions on the construction of will are not of much help in construing the express provisions of r. 2(2)(c) of Schedule I to the Act: they shall be construed on their own terms.
Having regard to the terms of the rule, we have come to the conclusion that in come tax does not take in super tax.
In the result, the appeal fails and is dismised with costs Appeal dismissed.

summary/full:
The respondent was an owner of an estate in Madhya Pradesh.
Under the provisions of the Madhya Pradesh Abolition of Proprietary Rights (Estates, Mahals, Alienated Lands) Act, 1950 the respondent 's estate was vested in the State and he became entitled to compensation.
The compensation was to be paid at the rate of ten times the net income.
The net in come would be calculated by deducting from the gross income, inter alia, the average of the income tax paid in respect of the income from big forest during 30 agricultural years proceeding March 31, 1951.
In calculating the net income the Compensation Officer deducted not only income tax but also super tax and the respondent appealed to the Settlement Commissioner against the deduction of super tax.
On the rejection of the appeal the respondent filed a writ petition in the High Court and the High Court held that on a construction of the various provisions of the Act it was wrong to deduct the super tax while calculating the compensation payable to the respondent.
The appellant filed this appeal on special leave granted by this Court.
It was contended on behalf of the appellant that the object of the r. 2(2) (c) of Schedule I to the Act is to provide a method for ascertaining the net income of an estate and therefore there cannot be any distinction between income tax and super tax and the expression "income tax" has been used comprehensively to include super tax also.
The contention on behalf of the respondent was that from a historical point as well as from the provisions of the Act it is seen that income tax and super tax were distinct and separate and the former does not include the latter.
Held:(i) There are two essential differences between income tax and super tax.
They are (1) though both the taxes are assessed on the total income of a person, the total income for the purpose of income tax is computed on the basis of income classified chargeable under the different heads mentioned in section 6 of the Income tax Act whereas super tax is not concerned with the different heads, but is payable on the total income so ascertained and (2) while super tax 1, except in a few cases, is payable by the assessee direct, the income tax is payable by him direct as well as by deduction.
(ii)Examining the provisions of r. 2(2)(c) Schedule I of the Act it is evident that with the knowledge that under the In come tax Act two seperate duties namely income tax and super tax are imposed the Legislature has used the expression "income tax".
If the intention was to refer to both the taxes it would have stated income tax and super tax.
The mention of the one and the omission of the other is a sure indication of its intention.
The qualification that income tax paid should have been in respect of the income received from the big 839 forests necessarily excludes super tax for under the Income tax Act no super tax is payable in respect of the income re ceived from big forest but only in respect of the total income.
(iii)Having regard to the terms of r. 2(2)(c) of Sche dule I to the Act it is clear that income tax does not take in super tax.
Case law reviewed.
Brooks vs Commissioner of Inland Revenue, , Bates.
In re: Salmea vs Bates, and Reckitt vs Reckitt,


judgement:
Appeals Nos. 521 523 of 1963.
Appeals from the judgment dated April 5, 1960 of the Madras High Court in Case referred No. 80 of 1955.
C. K. Daphtary, Attorney General, K. N. Rajagopal Sastri and R. N. Sachthey, for the appellant (in all the appeals).
section Narayanaswamy and R. Gopalakrishnan, for the respondent (in all the appeals).
April 28, 1964.
The Judgment of the Court was delivered by SHAH, J.
One Nageswara Rao Panthulu set up a business of manufacturing a "pain balm" which was marketed.
in the trade name of "Amrutanjan".
In September 1936 the respondent company was floated as a public limited company under the Indian Companies Act, 1913, to acquire and carry on the business of manufacture and sale of "Amrutanjan".
The authorised capital of the company was 7,000 ordinary shares and 3,000 preference shares of Rs. 100/each, and the issued and paid up capital was 2,500 ordinary and 3,000 preference shares.
The preference shareholders were under the Articles of Association entitled to a fixed dividend of 71 per cent on the face value of the shares, with no right in the balance of the profits.
The respondent company took over the business conducted by Nageswara Rao Panthulu for Rs. 5,50,0001 paid in the form of 2,500 ordinary and 3,000 preference fully paid up shares.
This company was managed by a firm which after the death of 12 Nageswara Rao Panthulu consisted of Ramayamma, widow of Nageswara Rao, Kamakashamma, his daughter, Ramayamma 's brother Ramchandra Rao and Kamaksham ma 's husband Sambu Prasad.
Between April 1, 1946 to March 31, 1949 Ramayamma, widow of Nageswara Rao was holding 2,185 ordinary shares and her daughter Kamakhamma was holding 250 ordinary shares.
Out of the preference shares only 385 were held by the directors including Ramayamma and Kamakshamma.
Under the Articles of Association of the company, both preference and ordinary shareholders were entitled to vote at the meeting of the company each shareholder being entitled to exercise one vote for each share.
In the course of assessment proceedings of the respondent company, the Income tax Officer found that for the three years ending March 31, 1947, March 31, 1948 and March 31, 1949 the company had declared each year a total dividend of Rs. 38,750/ at the rate of 71/2 per cent on the preference shares and 61 per cent on the ordinary shares which was considerably less than sixty per cent of the amount available for distribution as computed under section 23 A of the Income tax Act.
as it stood at the material time.
The Income tax Officer served a notice, after obtaining the approval of the Inspecting Assistant Commissioner of Income tax, reauiring the respondent company to show cause why an order under section 23 A of the Income tax Act, 1922, should not be passed against the company and after considering the objections raised by the company ordered on March 31, 1953, 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 payable by the company in respect thereof, shall be deemed to have been distributed as dividend amongst the shareholders as at the date of the respective general meetings.
This order was confirmed in appeal by the Appellate Assistant Commissioner and the Income tax Appellate Tribunal.
Several contentions were raised before the Revenue authorities and the Tribunal challenging the competence of the income tax officer to pass an order under section 23 A includ 13 ing the contention that the said provision was unconstitu tional or ultra vires.
These have been negatived by the Tribunal and also by the High Court and it is unnecessary to refer to those contentions in these appeals as they do not survive for determination.
To a reference made under section 66(1) of the Indian Incometax Act, the Tribunal referred three questions to the High ,Court of Judicature at Madras.
The third question, which alone is material in these apeals, reads as follows: "Whether the provisions of section 23 A were correctly applied for the three relevant years?" The High Court held that the respondent company was one in which the public were substantially interested, and there fore the Income tax Officer had no jurisdiction to pass the order under section 23, A of the Income tax Act for any of the three years and on that footing answered the question in the negative.
Against the order passed by the High Court, with certificate of fitness the Commissioner of Income tax has appealed to this Court.
Section 23 A of the Indian Income tax Act, 1922 before it was amended by the Finance Act, 1955, stood as follows: "(1) Where the Income tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month after its accounts for that previous year are laid before the company in general meeting are 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 he shall,.
make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income tax purposes and reduced by the amount of income tax and super tax payable by the company in respect thereof 14 shall be deemed to have been distributed as dividends amongst the shareholders as at the date of the general meeting aforesaid Provided Provided further Provided further that this 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.
Explanation.
For the purpose of this sub section, a company shall be deemed to be a company in which the public are substantially interested it 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 have been allotted uncoiiditionally 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) . . .
The section was enacted with the object of preventing avoidance of super tax by shareholders controlling the affairs of a company in which the public are not substan tially interested, by the expedient of not distributing dividend out of the profits.
Under the annual Finance Acts for many years the rates of super tax applicable to companies were much lower than the higher rates applicable to other assessees.
That gave an inducement to persons controlling companies to avoid the higher incidence of super tax by transferring to limited companies their businesses.
Thereby the sow ce of earning was secured, the profits of the business could be accumulated till they were distributed in the form of capital, and in the meanwhile accumula 15 tions of undistributed profits remained available to them for purposes of their other businesses.
With a view to foil attempts made by persons holding controlling interests in companies to avoid payment of super tax applicable to non corporate assessees by refusing to agree to distribution of profits, section 23 A was enacted by the Legislature.
The Incometax Officer was thereby authorised, if satisfied when less than sixty per cent of the assessable income of the company, subject to reductions permitted thereby, was not distributed, to pass an order under which the income was deemed to be distributed among the shareholders entitled thereto.
By the order so made a fictional or notional income which was not in fact received by the shareholders was deemed to be distributed, and in the hands of the shareholders such deemed income was liable to tax as if it had arisen or accrued to them.
But by the express provision contained in section 23 A, as it stood at the material time, no order could be passed in respect of any company in which the public were substantially interested and to a subsidiary company of such a company if the whole of the share capital of such subsidiary company was held by the parent company, or by the nominees thereof.
The Act, however, did not define the expression "company in which the public are substantially interested".
Normally a company would be deemed to be one in which the public are substantially interested, where more than half the voting power is vested in the public.
Where the controlling, interest i.e. a minimum of fifty one per cent of the voting right is held by a single individual or a group of individuals acting in concert, the company would be regarded as one in which the public are not substantially interested.
But the Legislature by the Explanation has raised a conclusive presumption in those cases where shares of the company carrying not less than twenty five per cent of the voting power are held by persons other than the controlling group.
For the purpose of computing twenty five per cent of the voting power, however, rights of holders of shares entitled to a fixed dividend have to be excluded.
It is now settled law that the distinction between the controlling group and the public is not along the line which distinguishes directors from the remaining members of the 16 company.
If a director does not belong to the controlling group, he will be regarded as a member of the public for the purposes of the third proviso and the Explanation to section 23 A even though such director was directly entrusted with the management of the affairs of the company.
The Commissioner contends that the Explanation to sub section
(1) of section 23 A is in reality a clause which defines what a company, in which the public are substantially interested, is.
In terms, however, the Explanation raises a presumption and does not purport to define a company in which the, public are substantially interested.
On an analysis of the provisions of the third proviso to section 23 A and its explanation, the following position emerges: (1) Where there is no individual member or a group of members acting in concert holding fifty one per cent or more of the voting power, which controls the working of a company, it is from its very nature a company in which there is no controlling member or group and therefore the public are substantially interested; (2) Where a shareholder holds or a group of shareholders acting in concert hold fifty one per cent or more of the voting power, the question is one of fact to be determined in each case, whether it is a company in which the public are substantially interested, having regard to the purpose for which the holding of fifty one per cent or more is utilised; (3) Where not less than twenty five per cent of the voting power is allotted unconditionally to, or is acquired unconditionally by or is beneficially held by the public, it shall be presumed that the company is one in which the public are substantially interested.
But in considering whether shares carrying not less than twenty five per cent of the voting right are held by the public, shares entitled to a fixed rate of dividend have to be excluded.
17 The reason of the rule which excludes from the computation of voting power holders of shares entitled to a fixed rate of dividend is that section 23 A is directed primarily against the accumulation of undistributed dividends to avoid payment of non corporate rates of super tax.
But shareholders who are entitled to a fixed rate of dividend are not directly interested in such accumulation: it matters little to them whether the dividend is immediately distributed to the ordi nary shareholders or is accumulated, and therefore in assessing whether the twenty five per cent of the shares are vested in persons other than the controlling group, the shares yielding a fixed rate of dividend have to be ignored.
But for the purpose of ascertaining the voting power, voting rights attached to all the shares must be taken into account.
No investigation has been made by the Income tax Department whether there is any group of persons controlling the working of the company.
It is true that Ramayamma was holding 87 40 per cent of the ordinary shares issued by the company, and there is obviously no person who could hold twenty five per cent or more of the ordinary shares.
In the present case, as already observed, the preference shareholders were entitled to vote at the meeting, and the Articles of Association of the Company made no distinction between the preference and the ordinary shareholders in the matter of exercise, of voting rights.
The total voting power was 5,500 one vote, for each share, ordinary and preference alike and twenty five per cent of that voting power is 1,375, but to invite the presumption under the Explanation this power must be exercisable only by the or dinary shareholders, and not by shareholders entitleci to a fixed rate of dividend.
The presumption under the Ex planation could arise only, if twenty five percent of the voting power was held by persons entitled to ordinary shares outside the controlling group.
It was suggested that the expression "twenty five per cent of the voting power" would mean not twenty five per cent of the total voting power, but power exercisable in respect of shares other than shares entitled to a fixed rate of dividend.
Prima facie, such an interpretation is not war ranted if regard be had to the terms of the Explanation.
51 section C 2 18 But even that argument is of no value, for twenty five per cent of the voting power attached to the ordinary shares is not exercisable by the public.
This, therefore, is a case in which shares not entitled to a fixed dividend carrying not less than twenty five per cent of the voting power are not shown to have been allotted unconditionally to, or acquired unconditionally by or beneficially held by the public.
The Explanation, therefore, has no operation.
Whether inview of the third proviso the company may be regarded asone in which the public are substantially interested, isa question to which no attention was paid by the Tribunal.
Whether in fact there exists such a control ling interest inthe hands of one shareholder or a group of shareholders as would render the company one in which the public are not substantially interested is a question which therefore cannot be decided by this Court.
The order of the High Court must therefore be continned, but on different grounds.
The interpretation of the Explanation by the High Court, for reasons already set out, was incorrect.
The Explanation had no application, because no presumption on the facts found could arise thereunder.
The Revenue authorities have not made any investigation on the question whether there existed any controlling interest in a group of persons.
so as to bring the case within the third proviso.
The appeals must be dismissed with costs.
One hearing fee.
Appeals dismissed.

dataset_name: IN-Abs

summary/full:
The Income tax Officer found that the respondent company had, declared during the three years ending March 31, 1947, March 31.
1948 (1) 10 and March 31, 1949, dividends which were considerably less than 60% of the amount available for distribution as computed under section 23 A of the Income tax Act, 1922.
He served a notice on respondent company to show cause why an order under section 23 A be not passed against it.
After hearing the respondent the Income tax Officer passed an order that the undistributed portion of the assessable income of the respondent as computed for income tax purposes and reduced by the amount of income tax and super tax payable by the company in respect thereof, shall be 'deemed to have been distributed as dividend among the share holders.
The order of the Income tax Officer was upheld by the Appellate Assis tant Commissioner and the Income tax Appellate Tribunal.
A reference was made to High Court and the relevant question referred was whether the provisions of section 23 A were correctly applied for the three relevant years.
The High Court held that respondent company was one in which the public were substantially interested and, therefore, the Income tax Officer had no jurisdiction to pass the order under section 23 A for any of the three years.
The appellant came to this Court with certificate of fitness from the High Court.
Dismissing the appeal.
HELD: The respondent company was one in which the public were substantially interested and therefore, the Income tax Officer had no jurisdiction to pass an order under section 23 A.
The Indian Income tax Act, 1922 does not define the expression "company in which the Public are substantially interested".
Normally, a company would be deemed to be one in which the public are substantially interested where more than half the voting power is vested in the public.
Where the controlling interest i.e. a minimum of 51% of the voting right is held by a single individual or a group of individuals acting in concert, the company would be regarded as one in which the public are not substantially interested.
The distinction between the controlling group and public is not along the line which distinguishes directors from the remaining members of the company.
If a director does not belong to a controlling group, he will be regarded as a member of the public for purposes of the third proviso and explanation to section 23 A, even though such 'director was directly entrusted with the management of the affairs of the company.
Section 23 A was enacted with the object of preventing avoidance of super tax by share holders controlling the affairs of a company in which the public are not substantially interested, by the expedient of not distri buting dividends out of the profits.
For many years, the rates of super tax applicable to companies were much lower than the higher rates applicable to other assessees.
That gave inducement to Persons controlling companies to avoid the higher incidence of super tax by transferring to imited companies the businesses.
The profits of business could be accumulated till they were 'distributed in the form of capital and in 'the meanwhile accumulations of undistributed profits remained available to them for the purposes of their other businesses.
Section 23 A was enacted with a view to full attempts made by persons holding cotnrolling 11 interests in companies to avoid payment of super tax applicable to noncorporate assessees by refusing to agree to distribution of profits.
Under section 23 A an Income tax Officer was authorised to make an order by which .a fictional or notional income which was not in fact received by the ,share holders, was deemed to be distributed and was liable to tax as it had arisen or accrued to them.
However, no such order could be passed in respect of a company in which the public were substantially interested and to a subsidiary company of such a company if the whole of the share capital of such subsidiary company was held by the parent company or by the nominee thereof