PILANI INVESTMENT CORPORATION LTD. vs. THE COMMISSIONER OF INCOME TAX (CENTRAL)

CIVIL APPEAL No. 2177/1969Supreme Court[1973] 3 S.C.R. 20609 January 1973Bench: 2 JudgesAuthor: P. JAGANMOHAN REDDY, HANS RAJ KHANNA5 pages
AI SummaryAllowed

What were the facts?

The assessee, Pilani Investment Corporation Ltd., is challenging the invocation of Section 23A of the Indian Income Tax Act, 1922, for assessment years 1952-53 and 1953-54. The Income Tax Officer initiated proceedings because the company had not declared any dividend despite a substantial income. The officer noted that over 75% of the shares were held by two companies, Jiyajeerao Cotton Mills Ltd. (JC Mills) and Punjab Produce and Investment Co. Ltd. (PPI Co.). The officer considered JC Mills not to be part of the public due to board representation and PPI Co. to be subject to Section 23A. The Memorandum and Articles of Association also allowed directors to refuse share transfers without reason. The Appellate Assistant Commissioner dismissed the assessee's appeal, finding that groups controlling these two companies were in control of the assessee. The Income Tax Appellate Tribunal, however, found both JC Mills and PPI Co. to be public companies substantially interested in the public, and that the directors' power to refuse transfers did not restrict free transferability. The Tribunal set aside the Income Tax Officer's order, holding Section 23A was wrongly invoked. The High Court, relying on Commissioner of Income-tax, West Bengal v. Tona Jute Co. Ltd., answered the reference in favour of the revenue.

What did the Supreme Court hold?

The Supreme Court allowed the appeals, setting aside the High Court's judgment and answering the referred question in the negative, in favour of the assessee. The Court held that the decision of the High Court in Commissioner of Income-tax, West Bengal v. Tona Jute Co. Ltd. was impliedly overruled by this Court's decision in Shree Krishna Agency Ltd. v. Commissioner of Income-tax (Central), Calcutta. The Court reiterated the principle that the mere existence of a power in the Memorandum and Articles of Association allowing directors to decline to register a transfer of shares without assigning any reason does not, in the absence of evidence of its exercise to eliminate free transferability, affect the free transferability of shares as contemplated by the Explanation to Section 23A. The Court found no evidence in the present case that the directors had eliminated the element of transferability of shares. Furthermore, the Court noted that the revenue had failed to produce cogent material to show that any group acting in concert was in control of the assessee company, and therefore, declined the prayer for remand. The fact that two public limited companies, in which the public was substantially interested, held more than 75% of the shares was not sufficient to attract Section 23A. The Court distinguished the case of Commissioner of Income-tax v. Jubilee Mills Ltd. on the grounds that in that case, more than 75% of voting power was held by a group of partners, whereas here, it was held by two public companies. The Court found no material bearing from the Jubilee Mills case.

What were the issues?

1. Whether, in the facts and circumstances of the case, the provisions of section 23A of the Indian Income Tax Act, 1922, were rightly invoked. This question turns on whether the assessee company is a company in which the public are substantially interested and whether its shares are freely transferable. Assessee's Contentions: - The decision of the Calcutta High Court in Commissioner of Income-tax, West Bengal v. Tona Jute Co. Ltd. has been impliedly overruled by this Court's decision in Shree Krishna Agency Ltd. v. Commissioner of Income-tax (Central), Calcutta. - JC Mills and PPI Co. are public companies in which the public is substantially interested, and their shareholding should be considered as held by the public. - The usual clause in the Memorandum and Articles of Association empowering directors to decline to register a transfer of shares without assigning any reason does not amount to a restriction on the transferability of shares. - There was no material to show that any group acting in concert was in control of the assessee company. Revenue's Contentions: - The High Court's decision was correct, relying on Commissioner of Income-tax, West Bengal v. Tona Jute Co. Ltd. - The revenue initially sought an adjournment to ascertain if there was cogent material showing a group acting in concert controlling the assessee company. Upon resumption, the revenue conceded it had not found such material but prayed for a remand to investigate this question.

Which sections of the Income-tax Act were involved?

Section 23A

AI-generated summary — verify with the full judgment below

.,, 206 PILANI INVESTMENT CORPORATION LTD. v. THE COMMISSIONER OF INCOME TAX (CENTRAL)

January 9, 1973 [P. ]AGANMOHAN REDDY AND H. R. KHANNA, JJ.] /11co11;e-tax Act (11 of 1922), s. 23A and Explanation-Men1ora,1- ::iu1n and Articles of Association e1npo1vering directors to refu~ to. register transfer of shares without assigning any reason-It elen:ent vf free trc.nsfer eliminated.

This Court, in Shree Krishna Agency Ltd. v. C. f. T. (Central)

Calcutta,· (1971) 82 I.T.R. 372, had held that in the absence of evidence to show that the directors had been exercising their pov.'er to decline to register any transfer of shares freely and had thus ''ll'tually eliminated t)le element of free transferability of the shares in the company, the mere existe,oce of a power in the :t-.iemorandum and Articles of Association giving such a discretion could not be said to <1fiect the free transferability of the shares as contemplated by the Explanation to s. 23A, of the Income·tax Act, 1972. [20GD-E] In the present case, more than 75% of the shares of the assessee· con1pany \\'ere held not by a group. of partners but by two public curllpani·es i,n which the Trib

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