Commissioner of Income Tax vs Emtici Engineering Ltd.

Akil Kureshi, J.—This reference at the instance of Revenue calls for consideration of question of law preferred in following terms:

Whether the Tribunal is right in law and on facts in holding that the assessee should be treated as a public limited company?

The concerned assessment year is 1985-86. The case of the assessee is that the assessee company is the company in which the public are substantially interested as defined u/s 2(18) of the IT Act, 1961 (''Act'' for short).

On the other hand, the case of the Revenue is that the assessee company is not covered by the definition of the company in which public are substantially interested as contained in Section 2(18) of the Act. Before adverting to the factual background and the legal controversy, it would be useful to note statutory provisions applicable in the present case.

Section 2(18) of the Act insofar as the same is relevant for our purpose reads as follows:

(18) ''company in which the public are substantially interested''- a company is said to be a company in which the public are substantially interested-

(a) If it is a company owned by the Government or the RBI or in which not less than forty per cent of the shares are held (whether singly or taken together) by the Government or the RBI or a corporation owned by that bank; or)

(aa) If it is a company which is registered u/s 25 of the Companies Act, 1956 (1 of 1956); or

(ab) If it is a company having no share capital and if, having regard to its objects, the nature and composition of its membership and other relevant considerations, it is declared by order of the Board to be a company in which the public are substantially interested:

Provided that such company shall be deemed to be a company in which the public are substantially interested only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration; or

(ac) If it is a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government u/s 620A of the Companies Act, 1956 (1 of 1956), to be a Nidhi or mutual benefit society; or

(b) If it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely:

(A) Shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder;

(B) Shares in 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 fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by-

(a) The Government, or

(b) A corporation established by a Central, State or Provincial Act, or

(c) Any company to which this clause applies or any subsidiary company of such company where such subsidiary company fulfils the conditions laid down in Clause (b) of Section 108.

Explanation - In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words ''not less than fifty per cent'', the words ''not less than forty per cent'' had been substituted;

Section 108(b) of the Act reads as follows:

Nothing contained in Section 104 shall apply-

(a) to any company in which the public are substantially interested; or

(b) to a subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year.

Before the authorities below, the case of the assessee company has been that more than 50 per cent shares of assessee company are held by P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. taken together. These two companies are subsidiaries of WN Manufacturing & Investment Ltd. which is the company whose shares are listed on the stock exchange. It is also the case of assessee that P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. are assessed to tax at Bombay and they have been treated as companies covered by the definition of Section 2(18) of the Act. It is thus the case of the assessee that P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. are the companies "to which this clause applies" as referred to in Sub-clause (c) in Section 2(18)(b)(B). It is thus the case of assessee that the assessee company should also be treated as a company covered within the definition of Section 2(18) of the Act since more than 50 per cent of the shares of the assessee company are held by P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. which are the companies "to which this clause applies".

On the other hand, the case of the Revenue is that though P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. are companies which are subsidiaries of WN Manufacturing & Investment Ltd., these companies do not fulfil the requirement of Clause (b) of Section 108 namely that of "a subsidiary company of such company whose whole of the share capital has been held by the parent company or by it� nominees throughout the previous year." It is thus the case of the Revenue that P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. though are subsidiary companies of a company "to which this clause applies" nevertheless, P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. do not fulfil the further requirement of such companies which fulfil the conditions laid down in Clause (b) of Section 108. It is on this premise that the Revenue contends that assessee company is not a company in which public are substantially interested as defined in Section 2(18) of the Act. The AO in his order dt. 24th March, 1988 decided this issue against the assessee and in favour of the Revenue on the following premises:

In this context, it has to be seen as to whether P.B. and K.B. are the companies referred to in Sub-clause (c). Sub-clause (c) refers to a ''company to which this clause applies''. This clause applies to the companies referred to in Clauses (a), (aa), (ab) and (ac) belonging to the special categories of the companies, and, this clause also applies to the companies referred to at items (A) and (B), viz, companies whose shares are listed on the stock exchange and companies whose shares are held by the Government and companies whose share are held by statutory corporations. That is all.

4.10 P.B. and K.B. are, therefore not the companies referred to in first condition of Sub-clause (c). In fact, P.B. and K.B. have themselves been treated as covered within the terms of Section 2(18) because their shares are held by WN, which is ''a company to which this clause applies'', because shares of WN are listed on the stock exchange. In the circumstances, the fact that more than 51 per cent shares of Emtici Engg. Co. Ltd. are held by P.B. and K.B., taken together, does not entitle the Emtici to be covered under the definition of Section 2(18). Thus, the case is not covered under the first condition of Sub-clause (c).

4.11 The facts of the case certainly draw us to the other condition referred to in Sub-clause (c). P.B. and K.B. are subsidiary companies of a company ''to which this clause applies''. We are therefore required to examine the issue whether whole of the equity shares capital of these two subsidiary companies are held by WN or not. It is observed that only 4 out of 6 equity shares of Rs. 100 each of P.B. Investments & Trust Ltd. are fled by WN Mfg. & Investa Ltd. It is further observed that only 3 out of 5 equity shares of Rs. 100 each of K.B. Investments Ltd. are held by WN Mfg. & Investa Ltd. Thus, it can be said that WN Mfg. & Investa Ltd. which is a widely held company is not holding whole of the equity share capital of any of the two companies mentioned before which is the second condition of Sub-clause (c) of Section 2(18)(B) of the Act.

CIT(A) in its appellate order also upheld the stand of the Revenue, negatived the contention of assessee, approved the view of the AO and came to the conclusion that assessee is not a company covered u/s 2(18) of the Act and thus it is not a company in which public are substantially interested. The Tribunal however, reversed the decision of the authorities below and held that the assessee company is covered u/s 2(18) of the Act. Reasoning of the Tribunal was as follows:

In our view, the conditions which have been emphasised by us in the above section are fully applicable to the assessee. It is not disputed that the assessee is not a private company so defined in the Companies Act, 1956 as Section 43A of the Companies Act, 1956 clearly rules out such possibility. More than 50 per cent of the shares of the assessee company belongs to two public base companies i.e. P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. In our view, any company to which this clause applies is any public limited company and in this case both P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. are public companies. In view of the above, we allow the contention of the assessee.

Before adverting to the rival contentions and seeking to resolve the legal controversies, few undisputed facts emerging from the record may be noted:

(1) P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. between them are holding more than 50 per cent of shares of the assessee company.

(2) P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. are treated as companies covered u/s 2(18) of the Act and are thus companies in which the public are substantially interested as defined under the said provision.

(3) P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. are subsidiaries of WN Manufacturing & Investment Ltd. However, it is equally undisputed that P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. in their relation to WN Manufacturing & Investment Ltd. do not satisfy the requirement of Clause (b) of Section 108. In other words, WN Manufacturing & Investment Ltd. does not hold the whole of the share capital of P.B. Investments & Trusts Ltd. or K.B. Investments Ltd.

In view of the above background, learned Counsel Shri Bhatt appearing for the Revenue submitted that the Tribunal erred in interpreting Sub-clause (c) in Section 2(18)(b)(B) of the Act. It was contended that since P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. are subsidiaries of WN Manufacturing & Investment Ltd. and such subsidiary companies do not fulfil the conditions laid down in Clause (b) of Section 108, the assessee company whose more than 50 per cent shares are held by P.B. Investments & Trusts Ltd. and K.B. Investments Ltd., cannot derive benefit of Sub-clause (c) in Section 2(18)(b)(B) of the Act.

On the other hand, learned advocate Mr. Bhargav Karia appearing for the assessee contended that the correct interpretation of Sub-clause (c) in Section 2(18)(b)(B) of the Act would be that "any company to which this clause applies" would also include any company which may be subsidiary of a holding company. Since P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. are companies "to which this clause applies" and since between P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. more than 50 per cent shares of assessee company are held, the assessee company should be deemed to be one in which public is substantially interested as required u/s 2(18) of the Act.

Having thus heard the learned advocates appearing for the parties, and having taken note of the undisputed facts emerging from the record, the entire question boils down to the interpretation of Sub-clause (c) in Section 2(18)(b)(B) of the Act. At the outset, it may be recalled that admittedly P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. are subsidiaries of WN Manufacturing & Investment Ltd., but it is equally undisputed that WN Manufacturing & Investment Ltd. does not hold the whole of the share capital of such subsidiary companies. In that view of the matter, learned Counsel Shri Bhatt for the Revenue would be justified in contending that in case of assessee company, second part of Sub-clause (c) in Section 2(18)(b)(B) of the Act namely; that of "any subsidiary company of such company where such subsidiary company fulfils the conditions laid down in Clause (b) of Section 108" does not stand fulfilled. If P.B. Investments & Trusts Ltd. and K.B. Investments Ltd were themselves not companies "to which this clause applies" as provided in Sub-clause (c) in Section 2(18)(b)(B) of the Act, the assessee company would not be in a position to get the benefit of the said provision. However, we find that admittedly, P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. are the companies to which the said clause applies.

Upon careful reading of Sub-clause (c) in Section 2(18)(b)(B) of the Act, it would emerge that the same is in two parts. Requirements of Sub-clause (c) could be fulfilled either by "any company to which this clause applies" or "any subsidiary company of such company where such subsidiary company fulfils the conditions laid down in Clause (b) of Section 108." It can thus be seen that to fulfil the requirement noted above, it would be sufficient if not less than 50 per cent of the shares of the assessee company have been allotted unconditionally to or acquired unconditionally by and held throughout the relevant previous year by a holding company. For company "to which this clause applies", alternatively, the condition could also be fulfilled if more than 50 per cent of the shares have been allotted or acquired by any subsidiary company of such company (i.e. any company to which such clause applies) where such subsidiary company fulfils conditions laid down in Clause (b) of Section 108. Two parts of Sub-clause (c) in Section 2(18)(b)(B) of the Act, are separate and independent of each other. If the company which is subsidiary company of holding company but which satisfies the requirement of being "any company to which this clause applies", need not thereafter, fulfil the further requirement of being a company whose whole of the share capital has been held by the parent company as provided in Section 108(b). In other words, there is nothing in the first part of Sub-clause (c) in Section 2(18)(b)(B) of the Act, namely "any company to which this clause applies" which would exclude the company which is a subsidiary of a parent company. Thus if a company which is subsidiary of a parent company but which independently fulfils the requirement of being company "to which this clause applies" requirement of Sub-clause (c) in Section 2(18)(b)(B) of the Act, stands fulfilled.

With this clarity in mind, if one reverts back to the present case, it is an admitted position that between P.B. Investments & Trusts Ltd. and K.B. Investments Ltd., the two companies hold more than 50 per cent of the capital share of the assessee company. P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. are the companies "to which this clause applies" as per Sub-clause (c) in Section 2(18)(b)(B) of the Act. This being the case so far as assessee company is concerned, it''s not less than 50 per cent of the shares having been unconditionally allotted to P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. together and since P.B. Investments & Trusts Ltd. and K.B. Investments Ltd. are companies "to which this clause applies", the assessee company stands covered within the definition of Section 2(18) of the Act. In our opinion, the Tribunal was justified in so holding.

We thus answer the question in affirmative i.e., against the Revenue and in favour of assessee. Reference stands disposed of accordingly.