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Judgment
NARASIMHAM C.J. - The question referred to this court by the Income Tax Tribunal u/s 66(1) of the Income Tax Act in the aforesaid two consolidated cases is as follows :
"Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the provisions of section 23A of the Income Tax Act were not applicable to the assessee-company for the assessment year 1953-54 and 1954-55 ?"
The assessee is a limited company and the list of shareholders of the said company for the relevant previous years, namely, 31st August, 1952, and 31st August, 1953, is as follows :
Number of shares on
31-8-1952
31-8-1953.
Shri Ashok Kumar Jain, managing director
10,000
10,000
Shri R. Sharma, director
10
10
Shri N. Jain, director
10
10
Shri S. P. Jain
10,000
10,000
Shrimati Rama Jain
10,000
10,000
Shri Alok Prakash Jain
10,000
10,000
Shri Rishabh Investment Ltd.
5,000
5,000
Dalmia Jain Co. Ltd.
2,000
2,000
Universal Bank of India Ltd.
980
980
Ashoka Agencies Ltd.
2,000
2,000
50,000
50,000
Shrimati Rama Jain is the wife of Shri S. P. Jain. Shri Ashok Kumar Jain is one of the sons of Shri S. P. Jain and he attained majority only on the 5th March, 1952, though he was shown as managing director of the company even prior to the date of his attaining majority. Alok Prakash Jain is another son of Shri S. P. Jain, who is still a minor. The assessee-company claimed the company to be a public company for the purpose of section 23A of the Income Tax Act (as is stood during the relevant period), urging that the shares of the company carrying not less than twenty-five per cent. of the voting power had been allotted unconditionally to and are beneficial held by the public, as required by the Explanation to sub-section (1) of the section 23A. The Appellate Assistant Commissioner of Income Tax rejected this contention on two main grounds. Firstly, he held that the company as in fact a one mans company wholly under the control of Shri S. P. Jain, that his two sons and his wife were action in concert with him and with the other directors and that the Rishabh Investment Limited and Dalmia Jain Company were also practically under his control. Alternatively he held that even if Shri S. P. Jains wife, namely, Shrimati Rama Jain, he held to be acting independently of her husbands, nevertheless the total shares held by Shri S. P. Jain and his two sons came to 30,000 and 7,980 shares were held by Rishabh Investment Limited, Dalmia Jain Company and Universal Bank of India Limited, to whom the provisions of section 23A had already; been made applicable. Thus, out of the total of 50,000 shares, 37,980 shares were held by a group and hence the minimum of twenty-five per cent. of the total shares required to be held unconditionally and beneficial by the public by the Explanation to section 23A was not satisfied. On appeal, however, the learned Tribunal took a contrary view. It held that there was no evidence to show that either Shrimati Rama Jain or the two sons of Shri S. P. Jain, namely, Shri Ashok Kumar Jain and Shri Alok Prakash Jain, were the nominees of Shri S. P. Jain. The Tribunal took into consideration the fact that there was no evidence that; the consideration for the acquisiton of 10,000 shares by Shrimati Ramam Jain was provided by Shri S. P. Jain. Hence it excluded 20,000 shares as being outside the control of Shri S. P. Jain, and adding 2,000 shares belonging to Ashoka Agencies Ltd., which was not a company to which section 23A had been made applicable, the Tribunal though that out of the total of 50,000 shares, 22,000 shares were held by persons who were not under the control of Shri S. P. Jain, and, consequently, the minimum requirement of twenty-five per cent in the Explanation to section 23A was satisfied.
The main contention of Mr. Datta for the department is that the Tribunal has misdirected itself and has assumed that once it is held that Shrimati Rama Jain and Shri Alok Prakash Jain are not the nominees of Shri S. P. Jain, it necessarily follow that they are not under the control of Shri S. P. Jain. He contended that even though they may not be the nominees in the sense that there is no evidence that the consideration for the purchase of the shares by those persons was meet by Shri S. P. Jain, nevertheless, it was open to the court of fact, bearing in mind all the facts and circumstances of the case to hold that they all acted in concert. He relied very much on the two decisions of the Supreme Court, namely, Raghuvanshi Mills Ltd. v. Commissioner of Income Tax and Commissioner of Income Tax v. Jubilee Mills Ltd., where their Lordships have pointed out the true scope of the Explanation to section 23A of the Income Tax Act. In fairness to the Tribunal, however, it should be pointed out that their order was passed on the 26th January, 1961, whereas the judgment in the Raghuvanshi Mills case by the Supreme Court was delivered only on the 7th December, 1960, and presumably not brought to their notice.
The law on the subject has now been fully clarified. If it is founds that in a company there are shareholders who act in union and their voting power constitutes as it were a block or group, and that group possess more than seventy-five per cent. of the voting power, that company cannot be said to be one in which the public are substantially interested. The fact that the shareholders are related to one another, that some of them are directors of the company, and other considerations are not decisive. To quote their Lordships observation in Raghuvanshi Mills case :
"In deciding if there is such a controlling interest, there is no formula applicable to all cases. Relationship and position as director are not by themselves decisive. If relatives act, not freely, but with others they cannot be said to belong to that body, which is described as public in the Explanation. But it would be otherwise if they were free."
The true test was pointed out at page 622 as follows :
"In our judgment, the test is first to find out whether there is an individual or a group which controls the voting power as a block. If there be such a block, the shares held by it cannot be said to be unconditionally and beneficial held by members of the public... The group itself may be composed of directors or their nominees or relations in difference the combinations, but none can be said to belong to that group, be he a director or a relative unless he does not hold the shares unconditionally and beneficial for himself."
In the Jubilee Millss case, their Lordships, while reiterating the aforesaid observations in Raghuvanshi Mills case further added at page 20 :
At the hearing a point was raised that t has to be roved as a fact that the persons constituting] the group which owns shares carrying more than seventy-five year per cent of the voting power, were acting in unison. The test is not whether they have actually acted in concert but whether the circumstances are such that human experience tells us that it can safely be taken the they must be acting together."
The Tribunal should, therefore, have reviewed the entire evidence available before the lower Income Tax authorities and come to an independent finding (irrespective of whether the shareholders were not the nominees of Shri S. P. Jain) that the circumstances of this case are such that, judging from human experience, it can be safely held that Shri S. P. Jain his wife and his two wons were acting in concert. Direct evidence of acting in concert will generally not be available, and it is ultimately a question of reasonable inference based on the broad facts and circumstances of the case. As the Tribunals finding is based on the main reason that Shri Ashok Kumar Jain and Shrimati Rama Jain were not the nominees of Shri S. P. Jain and they did not further examine with a view to ascertain whether" the circumstances are such that human experience tell us that it can safely be taken that they must be acting to the with Shri S. P. Jain it can safely be taken that they must be acting mother" with Shri. S. P. Jain it is obvious that the statement of the case is incomplete. The necessary finding of fact is wanting. We, therefore, direct the Tribunal it state the following supplementary case to this court, namely, whether bearing in mind the principles laid down by the Supreme Court in Raghuvanshi Mills Ltd. v. Commissioner of Income Tax and Commissioner of Income Tax v. Jubilee Mills Ltd. Shrimati Rama Jain an Shri Ashok Kumar Jain or either of them, could be safely taken to have acted on concert with Shri S. P. Jain during the years in question in respect of affairs of the assessee-company. The Tribunal may take additional evidence, if it considers it necessary to enable it to state the supplementary case as directed above. Costs will abide the result.
S. N. P. SINGH J. - I agree.