Bombay High Court
Commissioner Of Income-Tax vs Mahindra Sintered Products Ltd. on 26 February, 1993
Equivalent citations: [1993]203ITR46(BOM)
Author: Sujata Manohar
Bench: Sujata V. Manohar
JUDGMENT Smt. Sujata Manohar, J.
1. The assessee is a limited company. The reference pertains to the assessment year 1973-74 and the relevant previous year ended on April 30, 1972. Fifty-one per cent. of the total shares of the assessee-company were at the material time held by Mahindra and Mahindra Ltd., a public limited company, whose shares were quoted on the stock exchange except for one share each held by B. C. Mahindra and Indra Chatterji. Forty-nine per cent. of the shares were held by Burn Field Ltd., a company incorporated in the United Kingdom. The assessee-company in articles 30 to 36 of its articles of association had provided for certain restrictions on the transfer of shares. These articles were deleted by a special resolution of the company passed on April 25, 1972, a few days before the end of the relevant previous year.
2. For the year under consideration the Income-tax Officer adjudged that the assessee-company was a company in which the public were not substantially interested. The Appellate Assistant Commissioner, however, in appeal accepted the assessee's contention that by virtue of the special resolution passed by the company on April 25, 1972, it should be held that the company had satisfied condition (ii) of section 2(18)(b)(B) of the Income-tax Act, 1961. This contention was accepted by the Appellate Assistant Commissioner who directed the Income-tax Officer to grant the necessary relief after verifying the other conditions laid down in section 2(18)(b)(B). In appeal before the Tribunal, the Tribunal upheld all the contentions of the assessee relating to the interpretation of the conditions laid down in section 2(18)(b)(H) and held that the assessee was a company in which the public were substantially interested during the relevant assessment year.
3. From the order of the Tribunal, the following two questions are referred to us at the instance of the Revenue :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding the assessee-company to be a company in which the public were substantially interested within the meaning of section 2(18)(b)(B) of the Income-tax Act, 1961, even though the shares of the company carrying not less than 50 per cent. of its voting power were not, in fact, freely transferable by the holders to the other members of the public for a major part of the previous year but were freely transferable only at the end of the relevant previous year ?
2. Whether, on the facts and on a proper interpretation of the expression, in computing the number of five. or less persons used in Explanation 1, the Tribunal was right in holding that in satisfying the conditions of sub-clause (iii) of section 2(18)(b)(B) of the Income-tax Act, 1961, the expression used in Explanation 1 did not hold good in the case of the company with whom the actual control of the assessee-company rests ?"
4. In order to answer these questions, it is necessary to reproduce the relevant provisions of section 2(18) :
"Section 2(18). 'Company in which the public are substantially interested' - A company is said to be a company in which the public are substantially interested - . . .
(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 (. . . . . . .) 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) (i) shares in the company (. . . . . . .) 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 (hereafter in this clause referred to as the subsidiary company), or
(d) the public (not being a director or a company to which this clause does not apply);
(ii) the said shares were, during the relevant previous year freely transferable by the holder to the other members of the public; and
(iii) 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.
Explanation 1. - In computing the number of five or less persons aforesaid -
(i) The Government or any corporation established by a Central, State or Provincial Act or a company to which this clause applies or the subsidiary company of such company shall not be taken into account, and
(ii) persons who are relatives of one another, and persons who are nominees of any other person together with that other person, shall be treated as a single person."
5. The first question which is before us relates to the interpretation of condition (ii) in section 2(18)(b)(B). It is the contention of the Revenue that unless the shares were, throughout the relevant previous year, transferable to the other members of the public, condition (ii) would not be satisfied. Since the restriction on transfers was removed in the case of the assessee only a few days prior to the end of the relevant previous year, the assessee-company does not fulfil condition (ii).
6. In order to interpret condition (ii), it is necessary to look at the scheme of section 2(18)(b)(B). The first condition in clause (B) requires that shares in such a company carrying not less than 50 per cent. of the voting power should have been held by the various entities described therein "throughout the relevant previous year". This condition, therefore, makes it clear that such holding should be throughout the entire relevant previous year. Under condition (iii) also the period prescribed over which the condition laid down there should have been fulfilled is throughout the previous year but this time the period is worded in a different manner. Under condition (iii) "at no time, during the relevant previous year", shares carrying more than 50 per cent. of the total voting power should have been controlled or held by five or less persons. This also makes it clear that this condition is required to be complied with throughout the relevant previous year. In contradistinction to these two provisions, however, under condition (ii) it is prescribed that the shares should have been freely transferable "during the relevant previous year". It the intention was that throughout the relevant previous year the shares should have been so transferable, there is no reason why the phrase "throughout the relevant previous year" should not have been used, especially when this phrase is used clearly in condition (i).
7. Undoubtedly, the phrase "during the relevant previous year" is capable of carrying the meaning "throughout the relevant previous year". But it is also capable of meaning, "at some time during the relevant previous year". The Random House Dictionary, at page 443, defines the word "during" as : (1) throughout the duration, continuance or existence of. He lived in Florida during the winter, (2) at some point of time in the course of. They departed during the night. In view of the tact that the expression is capable of two meanings, one will have to interpret the expression in the context in which it occurs. In the present case, in the preceding and the succeeding conditions, where the entire period of the previous year is sought to be covered, there is a clear use of language to that effect. In condition (ii), however, the phrase "during the relevant previous year" is used. This is in sharp contrast to the specific language used in the other two conditions cover the entire period. Hence in our view the phrase "during the relevant previous year" in condition (ii) is meant to convey the meaning, viz., at some point during the relevant previous year and not throughout the relevant previous year.
8. Our attention, however, has been drawn by Mr. Jetley, learned counsel for the Revenue to a decision of the Supreme Court in the case of CIT v. East West Import and Export P. Ltd. [1989] 176 ITR 155. The Supreme Court was concerned with the interpretation of section 23A of the Indian Income-tax Act, 1922. In the case before the Supreme Court also the articles of association which restricted the transferability of the shares were amended a few days before the end of the relevant previous year. The Explanation to section 23A provided :
"Explanation. - For the purpose of this sub-section, -
A company shall be deemed to be a company in which the public are substantially interested ii shares of the company. . . carrying not less than 25 per cent. of the voting power. . . . are at the end of the previous year beneficially held by the public. . . . and if any such shares have in the course of such previous year been the subject of dealings in any stock exchange. . . . or are in fact freely transferable by the holders to other members of the public."
9. The Supreme Court considered the question whether the phrase "in the course of such previous year" referred to the entire previous year or only a part of it. The Supreme Court said that the Explanation had a reference to the point of time at two places. In the first part of the Explanation, there was a reference to "at the end of the previous year" and the second reference was in the second part which referred to "in the course of such previous year". The Supreme Court said that if all that was required was that at the end of the previous year the shares should be capable of being dealt with on the stock exchange, the Explanation would have said so when it has used a similar expression in the first part. In this context, therefore, the Supreme Court said that the word "course" ordinarily conveys the meaning of a continuing progress from one point to the next in time or space. The phrase "in the course of such previous year" would, therefore, refer to the period commencing with the beginning of the previous year and terminating with the end of the previous year. We are conscious of the fact that the decision of the Supreme Court has interpreted a similar provision under the Indian Income-tax Act of 1922. However, the language of the Explanation which was interpreted by the Supreme Court is somewhat different from the language of section 2(18)(b)(B) which we are required to interpret, particularly the language in which the various points of time have been referred to in the different parts of clause (B). Looking to the difference in the context in which the phrase "during the relevant previous year" is used, in contradistinction to the phrase which was interpreted by the Supreme Court in the context of the language used in the Explanation which was before it, in our view, the interpretation put by the Supreme Court on the Explanation to section 23A will not be attracted to the interpretation of condition (ii) which is before us.
10. We, therefore, answer question No. 1 in the affirmative and in favour of the assessee.
11. Question No. 2 relates to condition No. (iii) in section 2(18)(b)(B). It is first necessary to look at condition No. (i) in sub-clause (B). A company is said to be a company in which the public are substantially interested if the shares in the company carrying not less than 50 per cent. of the voting power are held by the Government or by a corporation established by a Central, State or Provincial Act. Similarly, where not less than 50 per cent. of the shares are held by any company to which this clause applies, i.e., any public company, then also the company is to be considered as a company in which the public are substantially interested, and the last category of such a company is a company where not less than 50 per cent. of the voting power is held by the public. Condition (iii) prescribes that in order to qualify as a company in which the public are substantially interested, it is necessary that during the relevant previous year at no time more than 50 per cent. of its shares are controlled or held by five or less persons. On the face of it, therefore, because of this condition, companies where more than 50 per cent. shareholding is by the Government or a corporation established by a Central, State for Provincial Act or by a public limited company, would get excluded from the category of companies in which the public are substantially interested despite their press inclusion under condition (i).
12. This is clearly not the intention of the Legislature and this is made clear by Explanation 1 which accompanies condition (iii). Explanation 1 provides that for computing the number of five or less persons as set out in condition (iii), the above three categories of companies are to be excluded, viz., where more than 50 per cent. of the shareholding is held either by the Government or any Corporation established by a Central, State or Provincial Act or a company to which this clause applies or the subsidiary of such a company. Therefore, Explanation 1 excludes from the ambit of condition (iii) the companies mentioned under section 2(18)(b)(B)(i)(a), (b) and (c). To such companies condition (iii) will not apply. In the case such as the present one, where 51 per cent. of the shareholding is held by a public limited company, condition No. (iii) is not attracted.
13. We find support for this interpretation in a decision of the Madras High Court in the case of Yercaud Coffee Curing Works Ltd. v. CIT [1978] 11 ITR 787. This decision dealt, inter alia, with the interpretation of section 23A as it stood after its amendment by the Finance Act, 1957. Interpreting a similar condition in the Explanation to the above section, the Madras High Court held that, where a single entity holds more than 50 per cent. of the shares of the company, sub-clause (iii) of clause (b) of the Explanation is not attracted so as to take such a company out of the pale of section 23A. In our view, therefore, the Tribunal has rightly come to the conclusion that supplying condition (iii) to companies which fall in categories (a), (b) and (c) of condition (i) would lead to absurd results. Question No. 2, therefore, is answered in the affirmative and in favour of the assessee.
14. No order as to costs.