Kerala High Court
R. Gao Electrodes Ltd. vs Commissioner Of Income-Tax on 13 October, 1987
Equivalent citations: [1988]173ITR351(KER)
Author: M. Fathima Beevi
Bench: K.S. Paripoornan, M. Fathima Beevi
JUDGMENT M. Fathima Beevi, J.
1. These references under Section 256(1) of the Income-tax Act, 1961, for the two assessment years are at the instance of the assessee. The common question referred reads :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the shares held by the legal heirs of the deceased shareholder, late Sri. M. N. Ramakrishnan, in the company are not to be considered in computing the total shares of the company during the relevant accounting years in determining the total voting power of the company ? "
2. The status of the assessee for the two assessment years 1976-77 and 1977-78 as " a company in which the public are not substantially interested " has to be determined with reference to Sub-clause (iii) of Clause (B)(b) of Section 2(18) of the Income-tax Act, 1961. The assessee claimed to be a non-controlled (widely held) company. According to the Revenue, the shares carrying more than fifty per cent. of the total voting power of the assessee-company had been held by four persons during the relevant previous years and the company is hit by the above clause. Under this sub-clause, a company which is not a private company shall be deemed to be a company in which the public are substantially interested only if the affairs of the company or the shares carrying more than fifty per cent. of its total voting power were at no time during the relevant previous year controlled or held by five or less persons.
3. The assessee is a public limited company. The shares in the company are not listed in a recognised stock exchange. The total number of paid-up shares in the company was 90,000. The majority of the shares had been held by five persons including the late M. N. Ramakrishnan who died on October 23, 1969. Ramakrishnan had held 15,001 shares. His heirs were registered as members only on October 19, 1979. Article 31 of the articles of association of the company provided, inter alia, that a person becoming entitled to a share by reason of the death of the holder shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share, except that he shall not before being registered as a member in respect of the share, be entitled in respect of it to exercise any right conferred by the membership in relation to the meetings of the company. The shareholding in the names of four persons other than the late Ramakrishnan for the assessment year 1976-77 was 41,000 and for the assessment year 1977-78, 39,500. The number of shares carrying voting power on exclusion of the block of 15,001 shares held by the late Ramakrishnan was 74,999.
4. The contention advanced on behalf of the assessee is that in construing the expression " the shares carrying more than fifty per cent. of its total voting power " under Sub-clause (iii), what is to be reckoned is the total number of shares issued and the shareholding of the members concerned, and if the percentage is worked out in that manner, the assessee herein would not fall within the mischief of the aforesaid clause. There can be no dispute that in construing a fiscal statute, nothing can be read into the provision and the words have to be assigned the ordinary meaning attributable to the same. However, a plain reading of the sub-section itself shows that at no point of time during the accounting year, there can be concentration of voting power in less than six persons. The total voting power at any point of time has to be determined with reference to shares carrying voting power. The provision which makes shareholding a distinct and separate test of control is intended to defeat any scheme whereby less than six persons who have a controlling interest in the capital of the company seek to circumvent the statute by giving control of the affairs of the company to six or more persons. The usual mode of exercising control over a company's affairs is by possessing more than fifty per cent. of the voting power. The figure of fifty per cent. has been selected because a member or group of members holding fifty-one per cent. of the voting power would succeed in fulfilling his or their wishes with regard to the original resolutions which come up before the meeting of the shareholders. They would generally have a dominant voice in the election of directors when such elections fall due. Although they would not be without support from others to secure the passing of a special resolution, nevertheless they would be able to resist a special resolution which was not in accordance with their wishes. They would be able generally to control the company.
5. What is to be determined, therefore, is the percentage of the voting power vested in the members whose number is less than six. It is only on the computation of total voting power the shares carry in the aggregate and the shares the said persons hold, that the percentage can be computed. The total voting power at any time carried by the shares would mean the total voting power that could be exercised at any point of time. If, in respect of a block of shares, the members are precluded from exercising the voting power during a particular year, it is not possible to hold that the said block of shares carry voting power during that year. Therefore, it is not the total number of shares but it is the total number of shares carrying voting power at any point of time that has to be reckoned for the purpose of computing the fifty per cent. stipulated under Sub-clause (iii). If in respect of the block of 15,001 shares originally held by the late Ramakrishnan, the heirs of Ramakrishnan could not exercise any voting power until the shares were transmitted to the heirs, the total voting power the shares of the company carried is limited to the remaining 74,999 shares (only) during that period.
6. As pointed out, the articles of association specifically provide that until the date of transmission and until share had been registered in the names of the heirs, the heirs had no voting power. It would, therefore, follow that during the two accounting years, voting power could be exercised only in respect of 74,999 shares. Of these, more than fifty per cent. thereof had been held by less than six persons for both the years. It was, therefore, possible for those shareholders to control the affairs of the company as the voting power was concentrated in less than six persons.
7. Therefore, in our view, the construction placed by the Appellate Tribunal on Sub-clause (iii) is the correct one and the Tribunal has rightly excluded for the purpose of reckoning the 50% of the shares carrying voting power, the shares which have not been registered in the name of the heirs of Ramakrishnan, and correctly found that the status of the assessee is a company in which the public are not substantially interested. The question referred is accordingly answered in the affirmative, in favour of the Revenue and against the assessee.
8. A copy of the judgment under the signature of the Registrar and seal of the High Court shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.