COMMISSIONER OF INCOME-TAX, NEW DELHI (NOW RAJASTHAN) vs. EAST WEST IMPORT & EXPORT (P).LTD.,(NOW KNOWN AS ASIAN DISTRIBUTORS LTD), JAIPUR

CIVIL APPEAL No. 1294/1975Supreme Court[1989] 1 S.C.R. 57008 February 1989Bench: 2 JudgesAuthor: R.S. PATHAK, RANGANATH MISRA B COMMISSIONER OF INCOME7 pages
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What were the facts?

The assessee, East West Import & Export (P) Ltd., for the accounting year ending March 31, 1951, claimed tax benefit under Section 23A(1) of the Income Tax Act, 1922. The company's Articles of Association initially restricted share transferability. These restrictions were deleted on March 26, 1951, granting shares free transferability. The Income Tax Officer rejected the claim, stating the company only satisfied the requirement for a few days. The Appellate Assistant Commissioner affirmed this. The Income Tax Appellate Tribunal allowed the assessee's appeal. The Revenue referred the matter to the High Court, which upheld the Tribunal's decision. The Revenue then appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the Tribunal and the High Court erred in their interpretation. The Court reasoned that the phrase 'in the course of such previous year' implies a continuous period, meaning free transferability of shares must be present throughout the entire previous year. The Court emphasized that the legislature's use of different phrases ('at the end of the previous year' and 'in the course of such previous year') within the same Explanation indicated an intention to convey distinct meanings. Since the shares were not freely transferable for a large part of the previous year, only acquiring this status shortly before the year-end, the assessee did not meet the conditions stipulated in the Explanation to Section 23A(1). Therefore, the assessee was not entitled to the tax benefit. The appeal was allowed, and the High Court's order was set aside.

What were the issues?

1. Whether the assessee company could be held to be a company in which the public were substantially interested within the meaning of the Explanation to Section 23A(1) of the Income Tax Act, 1922, given that its shares were not freely transferable by holders to other members of the public for a significant part of the previous year, despite becoming freely transferable at the end of that year? (Question of mixed law and fact, turning on Section 23A(1) and its Explanation). Assessee's contention: The Tribunal accepted the assessee's contention that free transferability acquired even for a part of the previous year satisfied the condition. Revenue's contention: The Revenue argued that the phrase 'in the course of such previous year' in the Explanation to Section 23A(1) implies that free transferability must exist throughout the entire previous year. They relied on the principle that differently expressed situations by the legislature indicate different intentions, pointing to the distinct phrasing of 'at the end of the previous year' and 'in the course of such previous year' within the same Explanation.

Which sections of the Income-tax Act were involved?

Section 23A(1),Section 66(1)

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A B COMMISSIONER OF INCOME-TAX, NEW DELHI (NOW RAJASTHAN) v. EAST WEST IMPORT & EXPORT (P).LTD., (NOW KNOWN AS ASIAN DISTRIBUTORS LTD), JAIPUR.· FEBRUARY 8, 1989 [R.S. PATHAK, CJ AND RANGANATH MISRA, J.] > Income Tax Act, 1922: Section 23A (I) & Explanation- --'.~ Requirement "If any such shares have been in the course of such C previous years"-"Are in fact freely transferable by the holders to the other members of public"-"In the course of such previous year"- lnterpretation of-Whether means 'throughout the year' or 'any part of ~ it'.

Statutory Interpretation: Situation differently expressed by the D Legislature-Indication that Legislature intended to express different intention. E F Words and Phrases: 'In the course of such previous year'- Meaning of Under articles 4, 81 and 82 of the Articles of Association of the respondent assessee company there was restriction on the transfer of the shares of the company by the shareholders to the other members of the public. These articles were deleted at an extraordinary general meeting of the Company held on 26th March, 1951 and consequently the shares of the Company acquired free transferability. For the~ * a

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