ITR/57/1998 4/ 13 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 57 of 1998 For Approval and Signature: HONOURABLE MR.JUSTICE JAYANT PATEL HONOURABLE MR.JUSTICE AKIL KURESHI ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= COMMISSIONER OF INCOME-TAX - Applicant(s) Versus EMTICI ENGINEERING LTD. - Respondent(s) ========================================================= Appearance : MR MANISH R BHATT for Applicant(s) : 1, MR RK PATEL for Respondent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE JAYANT PATEL and HONOURABLE MR.JUSTICE AKIL KURESHI Date : 20/06/2008 ORAL JUDGMENT
(Per
: HONOURABLE MR.JUSTICE AKIL KURESHI)
This
reference at the instance of Revenue calls for consideration of
question of law preferred in following terms :
ýSWhether
the Appellate Tribunal is right in law and on facts in holding that
the assessee should be treated as a Public Limited Company?ýý
The
concerned assessment year is 1985-1986. The case of the Assessee is
that the Assessee Company is the Company in which the public are
substantially interested as defined under Section 2(18) of the
Income Tax Act, 1961(Act for the 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 :
ýS(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 Reserve Bank of
India or in which not less than forty per cent of the shares are held
(whether singly or taken together) by the Government or the Reserve
Bank of India or a corporation owned by that bank; or]
(aa)
If it is a company which is registered under section 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 under section 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 fulfills 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;ýý
Section
108(b) of the Act reads as follows :
ýS108.
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.ýý
Before
the authorities below, the case of the Assessee Company has been
that more than 50% 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 VVN Manufacturing
and 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 ýSto which this clause appliesýý
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% of the shares of the Assessee Company
are held by P.B. Investments & Trusts Ltd. and K.B. Investments
Ltd. which are the Companies ýSto which this clause appliesýý.
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 VVN Manufacturing and Investment
Ltd., these Companies do not fulfill the requirement of Clause(b) of
Section 108 namely that of ýSa Subsidiary Company of such company
whose whole of the share capital has been held by the parent company
or by its nominees through out the previous year.ýý 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
ýSto which this clause appliesýý nevertheless, P.B. Investments &
Trusts Ltd. and K.B. Investments Ltd. do not fulfill the further
requirement of such Companies which fulfill 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
Assessing Officer in his order dated 24.3.1988 decided this issue
against the Assessee and in favour of the Revenue on the following
premises :
ýSIn
this context, it has to be seen as to whether P.B. & K.B. are
the companies referred to in sub-clause(c). Sub-clause(c) refers to
a ýSCompany to which this clause appliesýý. This clause applies to
the companies referred to in sub-clauses (a), (aa), (ab) & (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.
& K.B. are, therefore not the companies referred to in first
condition of sub-clause(c). In fact, P.B. & K.B. have themselves
been treated as covered within the terms of section 2(18) because
their shares are held by VVN, which is ýSa company to which this
clause appliesýý, because shares of VVN are listed on the Stock
Exchange. In the circumstances, the fact that more than 51% shares
of Emtici Engg. Co. Ltd. are held by P.B. & 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 ýSto which this clause appliesýý. We are therefore
required to examine the issue whether whole of the equity shares
capital of these two subsidiary companies are held by VVN 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 VVN 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 VVN Mfg. and
Investa Ltd. Thus, it can be said that VVN 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 conduction of sub-clause(c) of Section 2(18)(B) of the
Act.ýý
CIT(Appeals)
in its appellate order also upheld the stand of the Revenue,
negatived the contention of Assessee, approved the view of the
Assessing Officer and came to the conclusion that Assessee is not a
Company covered under Section 2(18) of the Act and thus it is not a
Company in which public are substantially interested. The Income tax
Tribunal however, reversed the decision of the authorities below and
held that the Assessee Company is covered under Section 2(18) of the
Act. Reasoning of the Tribunal was as follows :
ýSIn
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% of the shares of
the assessee company belongs to two public hase companies i.e. P.B.
Investments and 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 and Trusts Ltd. and
K.B. Investments Ltd. are public companies. In view of the above, we
allow the contention of the assessee.ýý
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% of shares of the Assessee Company.
2) P.B.
Investments & Trusts Ltd. and K.B. Investments Ltd. are treated
as Companies covered under Section 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 VVN Manufacturing and Investment Ltd, however, it is
equally undisputed that P.B. Investments & Trusts Ltd. and K.B.
Investments Ltd. in their relation to VVN Manufacturing and
Investment Ltd do not satisfy the requirement of clause(b) of
Section 108. In other words, VVN Manufacturing and 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 VVN Manufacturing and Investment Ltd and
such subsidiary companies do not fulfill the conditions laid down in
clause(b) of Section 108, the Assessee Company whose more than 50%
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 ýSany company to
which this clause appliesýý 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 ýSto which this
clause appliesýý and since between P.B. Investments & Trusts
Ltd. and K.B. Investments Ltd. more than 50% shares of Assessee
Company are held, the Assessee Company should be deemed to be one in
which public is substantially interested as required under Section
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 VVN Manufacturing and
Investment Ltd, but it is equally undisputed that VVN Manufacturing
and 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 ýSany subsidiary
company of such company where such subsidiary company fulfills the
conditions laid down in clause(b) of Section 108ýý does not stand
fulfilled. If P.B. Investments & Trusts Ltd. and K.B.
Investments Ltd were themselves not Companies ýýto which this
clause appliesýý 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 ýSany company to which
this clause appliesýý OR ýSany subsidiary company of such company
where such subsidiary company fulfills the conditions laid down in
clause(b) of Section 108.ýý It can thus be seen that to fulfill the
requirement noted above, it would be sufficient if not less than 50%
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 ýSto which this clause appliesýý, alternatively, the
condition could also be fulfilled if more than 50% of the shares
have been alloted or acquired by any subsidiary company of such
company (i.e. any company to which such clause applies) where such
subsidiary company fulfills 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 ýSany company to which this clause
appliesýý, need not thereafter, fulfill 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 ýSany company to which this clause
appliesýý 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 fulfills the requirement of being
Company ýSto which this clause appliesýý 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% of
the capital share of the Assessee Company. P.B. Investments &
Trusts Ltd. and K.B. Investments Ltd are the companies ýSto which
this clause appliesýý 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% of the shares having been
unconditionally alloted 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 ýSto which this
clause appliesýý, 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.
(Jayant
Patel,J.)
(Akil
Kureshi,J.)
(raghu)