Supreme Court Allows Assessee in Income Tax Act Section 23A Matter Due to Public Shareholding and Freely Transferable Shares. Public Limited Companies Holding More Than 75% Shares and No Evidence of Group Acting in Concert Exclude Company from Section 23A of Income Tax Act, 1922.

Income tax appeal before the Supreme Court concerning applicability of Section 23A of the Income-tax Act, 1922 to the assessee company for assessment years 1952-53 and 1953-54.

The assessee appellant sought to set aside the Calcutta High Court judgment answering the referred question in favour of the revenue, and to have the question answered in the negative, i.e., that Section 23A was not rightly invoked.

The Income Tax Officer invoked Section 23A because the assessee company had not declared any dividend despite substantial income, holding that the two major shareholders were not members of the public, that the public shareholding was less than 25%, and that the Articles of Association restricted free transferability of shares.

Income Tax Officer applied Section 23A and deemed distribution; Appellate Assistant Commissioner dismissed the assessee's appeal; Income Tax Appellate Tribunal reversed and held Section 23A not applicable; Calcutta High Court answered the question in affirmative in favour of the revenue; Supreme Court reversed the High Court.

Whether in the facts and circumstances of the case, the provisions of Section 23A of the Income-tax Act, 1922 were rightly invoked against the assessee company for assessment years 1952-53 and 1953-54. Whether the shareholding of two public companies, each in which the public was substantially interested, could be treated as held by a group acting in concert, thereby excluding the assessee from the definition of a company in which the public are substantially interested. Whether the existence of a clause in the Memorandum and Articles of Association empowering directors to decline to register transfer of shares without assigning reasons affected the free transferability of shares under the Explanation to Section 23A.

Appellant contended that the two major shareholders, JC Mills and PPI Co., were public companies in which the public was substantially interested, and their shareholding should be considered as held by the public, not by a group. Appellant relied on Shree Krishna Agency Ltd. v. CIT, arguing that mere existence of a power in the articles to decline transfer without reasons did not affect free transferability unless directors exercised it to eliminate transfers. Appellant submitted that there was no evidence of any group acting in concert controlling the assessee company, and the Tribunal had correctly found shares freely transferable. Revenue initially argued that the two companies' shareholding was controlled by a group and the article restricting transfer made the company not one in which the public was substantially interested, but later conceded it had no cogent material to show a group acting in concert in control. Revenue prayed for remand to authorities to investigate the group acting in concert issue, but the Court declined as the matter pertained to old assessment years and no material was found despite adjournment.

Mere existence of a power in the Memorandum and Articles of Association empowering directors to decline to register transfer of shares without assigning any reason does not affect the free transferability of shares under the Explanation to Section 23A of the Income-tax Act, 1922, unless there is evidence that the directors exercised the power to virtually eliminate free transferability. Two public limited companies holding more than 75% of the shares of an assessee company are not a group acting in concert if the public is substantially interested in those companies; therefore, the assessee company is a company in which the public is substantially interested and Section 23A is not applicable.

It was held that in the absence of evidence to show that the directors had been exercising their power under article 37 freely and had virtually eliminated the element of free transferability of the shares in the company, the mere existence of an article like article 37 could not be said to affect the free transferability of the shares as contemplated by the explanation to section 23A of the Act. There is in the present case also no evidence to show that the directors had eliminated the element of transferability of shares. The fact that two public limited companies were holding between themselves more than 75 per cent of the shares of the assessee company was not sufficient to attract section 23A of the Act. We accordingly accept the appeals, set aside the judgment of the High Court and discharge the answer given by it to the question referred to it. We answer the said question in the negative and in favour of the assessee.

The Income Tax Officer invoked Section 23A of the Income-tax Act, 1922 for assessment years 1952-53 and 1953-54 against the assessee company on grounds of no dividend declaration, majority shareholding by two companies allegedly not public, and articles restricting transfer. The assessee appealed to the Appellate Assistant Commissioner, who dismissed the appeal. On further appeal, the Income Tax Appellate Tribunal held Section 23A not applicable and set aside the Income Tax Officer's order. The revenue sought reference to the Calcutta High Court, which answered the question in the affirmative in favour of the revenue. The assessee then appealed to the Supreme Court by certificate under Civil Appeal Nos. 2177 and 2178 of 1969. The Supreme Court allowed the appeals, overruling the High Court and answering the question in the negative.

• Income-tax Act, 1922: Section 23A, Explanation to Section 23A