ORDER
R.P. Garg, Vice President
1. The President, Tribunal had constituted this Special Bench to decide these two appeals by the Revenue, both for the asst. yr. 1991-92. The common issue referred for our decision is :
“Whether, the second subsidiary company of first subsidiary company (parent company listed in the recognised stock exchange of India) falls within the definition of a ‘company’ in which public are substantially interested as per Section 2(18)(b)(B)(c) of the IT Act, 1961, notwithstanding the fact that neither parent company is holding any shares (or requisite shares) in the second subsidiary company nor is the first subsidiary company holding 100 per cent shares in the second subsidiary company ?”
2. In both the cases the assessee claimed ‘the status of a “widely held
company” under Section 2(18) of the Act. Both the assessees’ equity shareholding is
of 100 shares each. 50 shares each were held by Samudaya Investment Ltd.
(hereinafter referred to as “Samudaya”) in the 1st case of Ajax Investment Ltd.
and by Adavat Investment Ltd. (hereinafter referred to as “Adavat”) in the case
of Acropolish Investment Ltd. throughout the previous year. Not less than 50
per cent of equity shares of these two companies are held respectively by Sifa
Trading Co. (hereinafter referred to as “SIFA”) and Akash Agencies (hereinafter
referred to as “Akash”) throughout the previous year. Whole of the shares of
Samudaya and Adavat are held by Sifa and Akash. Both Sifa and Akash are
listed on Bombay Stock Exchange on the last day of the previous year ended on
31st March, 1991.
3. The assessee claimed that they satisfied the conditions laid down under Section 2(18)(b)(B)(C) of the Act and, therefore, they are widely held companies.
4. The AO did not agree with the assessees. He observed that Samudaya and Adavat which are holding 50 per cent equity shares of the assessees are not companies listed in the stock exchange. According to him, the assessee’s whole of the share capital is not held by the parent company i.e., Samudaya and Adavat and therefore, they cannot be treated as ‘widely held companies’. The CIT(A) followed in earlier years 1986-87 to 1989-90 dt. 31st March, 1992 and allowed the claim of the assessee.
5. The Revenue filed both the appeals. When the matter came up before the Division Bench, it noticed that in earlier years, the Tribunal has accepted the claim of the assessee. The detailed order is in the case of Alligator Investment Ltd. for asst. yrs. 1986-87 to 1989-90 in ITA Nos. 2567 to 2570/Ahd/1992, dt. 7th Nov., 1997 and the Tribunal in this order observed as under :
“8. It is an admitted fact that the assessee-company is a public limited company under the Companies Act, 1956. It is also not disputed that 50 per cent of the voting power of the assessee-company has throughout the relevant previous year been beneficially held by M/s Adavat Investment Ltd. which is also a company in which public are substantially interested. 50 per cent of the voting power of Adavat Investment Ltd. has throughout the previous year been
held by the Akash Agencies Ltd. It is also claimed that equity shares of Akash Agencies Ltd. was listed in the Bombay Stock Exchange for all the years. We also find that before the CIT(A) a copy of the assessment order for asst. yr. 1990-91 relating to M/s Akash Agencies Ltd. has been filed, wherein the said firm has been assessed in the status of company in which public are substantially interested. In view of the Board’s Circular No. 372, dt. 21st Nov., 1983 (supra), the assessee is entitled to be treated as a company in which public are substantially interested or widely-held company under Section 2(18)(b)(B) (C) of the Act. The assessee company satisfied the conditions specified in Section 2(18)(b)(B)(C) of the IT Act, In view of ‘the above discussions, we do not find any legal infirmity in the findings of the first appellate authority in this issue. The appeals are meritless.”
6. The Board Circular No. 372, dt. 21st Nov., 1983, referred to by the Tribunal is as under :
“9.1. Section 2(18) of the IT Act defines the expression ‘company in which the public are substantially interested’ (that is, a widely held company, Sub-clauses (a), (aa) and (ab) of the said definition deal with special categories of companies (e.g. Government-owned companies, registered under Section 25 of the Companies Act, 1956, companies having no share capital) which are regarded as widely held companies. Sub-clause (b), which is applicable in the generality of cases, provides that a company will be regarded as widely-held company if it is not a private company as defined in the Companies Act, 1956, and it fulfils either the conditions specified in item (A) or in item (B) of the said clause. The condition specified in item (A) aforesaid is that shares in the company (not being shares entitled to a fixed rate of dividend) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Security Contracts (Regulation) Act, 1956 and the rules made thereunder. A company which does not fulfil the condition laid down in item (A) has to fulfil the three conditions specified in item (B).
9.2. The Finance Act has substituted item (B) by a new item. The effect of the substituted item (B) will be that where the shares of a company are not listed in a recognized stock exchange in India as on the last day of the relevant previous year, the company will not be regarded as a widely held company, unless the shares of the company (not being shares entitled to a fixed rate of dividend) carrying not less than 50 per cent of the voting power (40 per cent in the case of Indian companies engaged in manufacturing activities, etc.) have been allotted unconditionally to, or acquired unconditionally by and were throughout the relevant previous year beneficially held by the Government, or a statutory corporation, or a widely held company or a wholly owned subsidiary of such company. If the requisite percentage of the shares of the company are not so held, the company would be regarded as a closely held company even though fifty per cent or more of its shares are held by the public generally.”
7. The Divisional Bench, however, did not find favour with the reasoning in the said order and had observed that “the plain reading of that section reveals that a company which on the last day of the relevant previous year is listed in a recognized stock exchange in India in accordance with the Securities
(Contracts) Regulation Act, 1956 (42 of 1956 and any rules made thereunder), qualifies to be a company in which public are substantially interested. Sifa Trading Co. Ltd. is admittedly a company listed in a recognized stock exchange in India and, accordingly, qualifies to fall within the category of a company in which public are substantially interested under Section 2(18)(b)(A). Samudaya Investments Ltd. is a subsidiary company of Sifa Trading Co. Ltd. having not less than 50 per cent of the voting power of Samudaya Investments Ltd. throughout the previous year unconditionally and beneficially. Samudaya Investments Ltd. qualifies to be a company in which public are substantially interested within the meaning of Section 2(18)(b)(B)(C). Ajax Investment Ltd. is a subsidiary of Samudaya Investment Ltd. Sifa Trading Co. Ltd. does not have any shares in Ajax Investment Ltd. A subsidiary company of Samudaya Investments Ltd. would qualify to fall in the category of a company in which public are substantially interested provided the whole of the share capital of the subsidiary company were held by the parent company or by its nominees throughout the previous year.”
8. The Division Bench, therefore, raised a serious doubt about the correctness of the said decision of the Tribunal and recommended for a constitution of Special Bench, which request is accepted by the President of ITAT and that is how the matter placed before us.
9. The learned counsel of the assessee, Shri J.P. Shah, strongly supported the order of the Tribunal in the case of Alligator Investment Ltd. According to him, the assessee-companies are public limited companies under the Companies Act, 1956. He submitted that SIFA and Akash are listed companies and they held not less than 50 per cent shares of Samudaya and Adavat, the latter became company to which Clause (b) applies. As their shares carrying not less than 50 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 any company to which this clause applies”, namely M/s Samudaya Investment Ltd. in the first case and M/s Adavat Investment Ltd. in the second case, the assessee satisfies the condition of item ‘B’ of Clause (b) of Section 2(18) of the Act. He submitted that the enquiry should stop there and the requirement of 100 per cent holding of shares by parent company does not apply to the facts of these cases. He also submitted that the Tribunal decision has been accepted all along by the assessee and even by the Revenue in many cases and the tax effect being meagre the Special Bench should refrain from expressing a contrary view.
10. The claim of the learned Departmental Representative, Smt. Vibha Desai on the other hand, is that Samudaya/Adavat Investment Ltd. though held not less than 50 per cent of the voting power by the assessee, they were not the companies to which this clause applies of their own as they acquire that status by virtue of their specified holding by SIFCO and Akash. According to her, it has to be a subsidiary company whose whole of the share capital should be held by the parent companies i.e., Samudaya Inv. Ltd. or Adavat Investment Ltd. as the case may be. As neither of parent company is holding (SIFCO and Akash) any shares in the second subsidiary (assessee) nor the 1st subsidiary (Samudaya or Adavat) is holding 100 per cent shares in 2nd subsidiary
company i.e., the assessee, they cannot be granted the status of company in which public are substantially interested within the meaning of Section 2(18) of the Act.
11. We have heard the parties and considered their rival submissions. Section 2(18) which is relevant for our purposes is reproduced hereunder for the sake of convenience :
“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 :
(a) if it is 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
(ad) if it is a company, wherein shares (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, one or more co-operatives societies;
(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 recognized 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 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.
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 word “not less than fifty per cent”, the words “not less than forty per cent” had been substituted.”
12. Clause (b) of Section 2(18) as we understand on a plain reading applies to a company :
(i) which is not a private company as defined under the Companies Act, and
(ii) which fulfil the conditions of : “either item ‘A’ i.e. whose shares are listed on a recognized stock exchange on the last date of the accounting year;
or
item ‘B’ i.e., whose shares at least of 50 per cent voting power are allotted unconditionally to or acquired unconditionally by and were beneficially held throughout the relevant previous year by :
(a) Government ;
(b) A Corporation established by Central/State or Provincial Act;
(c) Company to which claus applies
or
any subsidiary of such company if whole of the share capital of such subsidiary company has been held by the parent company or by its nominees-throughout the previous year.
13. The two assessee-companies are public limited companies, therefore, they satisfied the first condition of Section 2(18)(b) namely, they are not private limited companies under the Companies Act. To be companies in which public is substantially interested they have to further satisfy conditions specified in item ‘A’ or in item ‘B’ of Section 2(18)(b). Shares of these two assessee-companies are not listed in a recognised stock exchange, therefore, they do not satisfy condition specified in item ‘A’. However, the shares of these assessee-companies are held by Samudaya and Adavat. These are not private limited companies and there is no dispute that these shares held by them are not shares entitled to fixed rate of dividend; that the shares so held carry not less than 50 per cent of voting powers, and were unconditionally allotted to or acquired by Samudaya and Adavat; and they were held beneficially throughout the previous years relevant to asst. yr. 1991-92 under consideration. But the question is whether Samudaya and Adavat are any of the entity mentioned in Clause (a), (b) or (c) mentioned in item ‘B’ above. These
are neither Government nor corporation established by Central, State or Provincial Act. These are thus companies falling in the category of “any company to which this clause applies” not less than 50 per cent of their shares are held by SIFGO and Akash which are public limited companies and their shares are listed on Bombay Stock Exchange on the last day of the previous year as required by item ‘A’ because in other words, these are companies as specified in Clause (b) of Section 2(18) of the Act.
14. As assessees shares carrying not less than 50 per cent voting powers are unconditionally allotted to or unconditionally acquired by Samudaya and Adavat and they held these shares beneficially throughout the previous year, the assessee companies are to be held as the companies in which public is substantially interested under Section 2(18)(b) of the Act.
15. In view of the aforesaid discussions, we are of the view that there is no requirement in Section 2(18)(b) to the effect that either parent company (SIFCO or Akash) should hold any shares of requisite shares in the 2nd subsidiary (assessee) or that the 1st subsidiary company (Samudaya or Adavat) should hold 100 per cent shares of the assessee. In our opinion, Samudaya and Adavat are companies to which Clause (b) applies and since they held requisite number of shares in assessee companies, it would meet the requirement of being companies in which public is substantially interested,
16. It is true that Samudaya and Adavat are not companies to which this clause applies of its own and that they acquire that status by virtue of their being subsidiaries of SIFCO/Akash Agencies Ltd. but that cannot be a ground for holding that the second part of Clause (c) becomes operative and, therefore, 100 per cent of its holding must be held by Samudaya and Adavat to make it eligible to grant the derivative status to the assessee in which it holds 50 per cent shares. We do not find any such condition that in order to be eligible to be a company “to which this clause applies” it has to have that status of its own and not by virtue of its being a subsidiary of another company; nor that, otherwise it has to be a 100 per cent subsidiary of the holding company to which this Clause (c) applies. It would be reading something which is not there in the statute Section 2(18)(b) of the Act. This in our opinion, is not permissible on any principle of interpretation.
17. We also do not find any force in the submission of the Revenue that if the contention of the assessee is accepted then second part of Clause (c) of the definition requiring 100 per cent holding by their parent company would become redundant as it could become a company to which this clause applies by mere holding of 50 per cent shares by virtue of the opening words of Part “B” of Clause (c) itself. In our opinion, though, it may be that a company by acquiring shares carrying not less than 50 per cent of voting power, becomes subsidiary of the first mentioned company, yet, the different circumstances would ensue in both types of subsidiary companies and both, the clauses of item B could operate independently and to the exclusion of each other.
18. In the case of a 100 per cent subsidiary, the only requirement is that the whole of its capital must be held by the parent company either by holding it in
its own name or through its nominee, which is a requirement under the corporate law where it is a must that there must be more than one member to constitute a company. On the contrary, in the other case of the subsidiary, by virtue of holding not less than 50 per cent, the requirement and considerations are many to become “a company to which this clause apply”. It has to undergo the different circumstances which may be stated as under :
(i) The existence and owning of voting rights by virtue of the holding of shares to the extent of 50 per cent is a must in one case whereas no such apparent consideration is there for holding whole of the capital of the subsidiary which may be with or without voting rights;
(ii) The shares not entitled to the fixed rate of dividend, whether with or without right to participate in profits, are not taken into account in one case whereas these are to be taken into consideration for determining the status of wholly-owned subsidiary company as these would be part of the whole of the capital;
(iii) The allotment of not less than 50 per cent shares has to be unconditional, namely, the allottee subsidiary, company cannot impose any condition for the allotment of such shares but there is no such requirement for wholly-owned subsidiary and even the conditional allotment can form part of the whole of the capital of the subsidiary company;
(iv) The acquisition of such shares (not less than 50 per cent) has to be again unconditional meaning thereby that even the parent company cannot put any such condition for acquiring such shares and this condition is also missing for owning 100 per cent shares in the subsidiary company;
(v) The requirement of holding not less than 50 per cent shares is further condition by a term that it should be held beneficially by the parent company and it would not be sufficient that it is holding otherwise as a legal owner whereas in the case of a wholly-owned subsidiary no such condition is imposed. Even if, the parent company is holding shares in a fiduciary capacity or a representative capacity, or in any other capacity like that of a trustee, a mortgagee or a pledgee, etc., it can fulfil the test of holding the whole of the capital of the subsidiary.
19. These are the five broad distinctions which we see apparently, distinguish the holding of not less than 50 per cent shares by a parent company in one case and the holding of whole of the capital of the subsidiary company in the order.
20. In view of the aforesaid discussion, we find ourselves in agreement with the decision of the Tribunal in the case of Alligator Investment Ltd of the Division Bench and uphold the orders of the CIT(A) in accepting the claim of the assessee based on the aforesaid order of the Tribunal.
21. In the result, the appeals are dismissed.
