JUDGMENT
Dr. B.P. Saraf J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following questions of law to this court for opinion :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-company was not a company in which the public are substantially interested as defined in the Finance (No. 2) Act of 1971, for the purpose of the First Schedule to the said Finance Act ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal rightly held that no appeal lies against charge of interest under section 139 of the Act ?”
2. Though this reference pertains to the assessment years 1971-72 to 1975-76, the second question is confined to the assessment year 1974-75 only.
3. The assessee is an Indian company incorporated under the Companies Act in India. During the relevant assessment years, it was a wholly-owned subsidiary of a company incorporated in the United Kingdom known as Gulf Oil (Great Britain) Ltd., London (hereinafter for the sake of convenience, referred to as “the U.K. company”). The said U.K. company itself was also a subsidiary of another company incorporated in the U.S.A., viz., Gulf Oil Corporation, Pittsburgh (hereinafter for the sake of convenience, referred to as “the U.S. company”). In the course of assessment of the income of the assessee-company under the Income-tax Act, 1961, for the assessment years 1971-72 to 1975-76 a controversy arose in regard to the appropriate rate of income-tax applicable to it. The rates of tax applicable for the assessment year 1971-72 are prescribed in the Finance (No. 2) Act, 1971 (hereinafter referred to as “the Finance Act”). Paragraph F of the Finance Act contains the rates applicable to “companies” other than the Life Insurance Corporation of India. For the purpose of rate of income-tax, companies are divided into two broad categories, viz. “domestic company” and “company other than domestic company”. Domestic companies are again sub-divided into two categories, viz., (i) a company in which the public are substantially interested, and (ii) not a company in which the public are substantially interested. For the purpose of tax, the second category of domestic company is further sub-divided as “industrial company” and “others”, i.e., non-industrial companies. The same position prevailed in the Finance Acts applicable to assessment for other assessment years. The assessee-company is a “domestic company”. It claimed to be a “domestic company in which the public are substantially interested” within the meaning of section 2(6) (a) of the Finance Act. This contention was made on the basis that it was a wholly-owned subsidiary of the U.K. company, which, in turn, was a subsidiary of the U.S. company in which the public were substantially interested. According to the assessee, section 108 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), having been incorporated by reference in the definition of “a company in which the public are substantially interested” it should also be deemed to be a company in which the public are substantially interested by reference to clause (b) of section 108 of the Act. The Income-tax Officer did not accept the above contention of the assessee. The assessee appealed to the Appellate Assistant Commissioner of Income-tax who, by order dated March 7, 1978, decided in favour of the assessee and on an interpretation of section 108 of the Income-tax Act held that a subsidiary of a subsidiary also falls within the ambit of clause (b) of section 108 of the Income-tax Act if it satisfies the requirements prescribed therein. In view of the above finding, he held the assessee-company to be a company in which the public were substantially interested within the meaning of section 2(6) (a) of the Finance Act. This view of the Appellate Assistant Commissioner did not find favour with the Income-tax Appellate Tribunal. The Tribunal was of the opinion that section 108 of the Income-tax Act did not cover a sub-subsidiary. It only covers a company in which the public are substantially interested if such a company meets the conditions specified in clause (b) of section 108 of the Income-tax Act. In that view of the matter, the Tribunal by its order dated October 31, 1977, held that the assessee-company was a domestic company assessable at the rate of income-tax applicable to a company in which the public are not substantially interested. The assessee sought reference of the question of law arising out of the order of the Tribunal to this court and the Tribunal, on being satisfied that the above questions of law did arise out of its order, referred the same to this court for its opinion.
4. As is evident from a reading of question No. 1 itself, the real controversy is whether the assessee-company was a company in which the public are substantially interested as defined in section 2(6) (a) of the Finance Act for the purpose of the First Schedule to the said Act. The First Schedule to the Finance Act deals with the rates of income-tax applicable to different categories and sub-categories of assessees. In sub-section (6) of section 2 of the Finance Act, certain expressions have been defined for the purpose of the First Schedule. Clauses (a), (b) and (c) thereof define a company in which the public are substantially interested, a domestic company, and an industrial company, respectively. In clause (e) of sub-section (6) of section 2, it has been further provided that the words and expressions used in section 2 or in the First Schedule to the said Finance Act which are not defined in section 2(6) of the Finance Act but are defined in the Income-tax Act shall have the meanings, respectively, assigned to them in that Act. Sub-section (6) of section 2, in so far as it has a bearing on the controversy in this case, reads as below :
“(6) For the purposes of this section and the First Schedule, –
(a) ‘company in which the public are substantially interested’ means a company which is such a company as is referred to in section 108 of the Income-tax Act;
(b) ‘domestic company’ means an Indian company, or any other company which, in respect of its income liable to income-tax under the Income-tax Act for the assessment year commencing on the 1st day of April, 1971, has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preference shares) payable out of such income in accordance with the provisions of section 194 of that Act;
(c) ‘industrial company’ means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining;
Explanation. – For the purposes of this clause, a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, if the income attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making any deduction under Chapter VI-A of the Income-tax Act) is not less than fifty-one per cent. of such total income; ….
(e) all other words and expressions used in this section and the First Schedule but not defined in this sub-section and defined in the Income-tax Act shall have the meanings, respectively, assigned to them in that Act.”
5. The First Schedule to the Finance Act prescribes the rates of income-tax and surcharge on income-tax. It has been divided into different paragraphs dealing with different categories of assessees. Paragraph “A” prescribes the rates of income-tax applicable to “Individuals, Hindu undivided families, unregistered firms, other associations of persons or body of individuals”. In Paragraph B, rates of income-tax applicable to co-operative societies have been set out. Paragraph C contains the rates of income-tax applicable to registered firms. Paragraph D deals with the rates of income-tax applicable to local authorities. Paragraph E prescribes the rates of income-tax applicable in the case of the Life Insurance Corporation of India. Paragraph F, which is material for our purpose, contains the rates of income-tax applicable in the case of companies other than the Life Insurance Corporation of India. This paragraph, having a material bearing on the determination of the controversy in this case, is set out below :
“Paragraph F
In the case of a company, other than the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), –
Rates of income-tax
I. In the case of a domestic company –
(1) Where the company is a company in which the public are substantially interested, –
(i) in a case where the total income 45 per cent. of the total
does not exceed Rs. 50,000 income;
(ii) in a case where the total income 55 per cent. of the total
exceeds Rs. 50,000 income;
(2) where the company is not a company in which the public are substantially interested, -
(i) in the case of an industrial company -
(a) on so much of the total income 55 per cent.;
as does not exceed Rs. 10,00,000
(b) on the balance, if any, of the 60 per cent.;
total income
(ii) in any other case 65 per cent. of the total
income :
Provided that the income-tax payable by a domestic company, being a company in which the public are substantially interested, the total income of which exceeds Rs. 50,000, shall not exceed the aggregate of -
(a) the income-tax which would have been payable by the company if its total income had been Rs. 50,000 (the income of Rs. 50,000 for this purpose being computed as if such income included income from various sources in the same proportion as the total income of the company); and
(b) eighty per cent. of the amount by which its total income exceeds Rs. 50,000.
II. In the case of a company other than a domestic company -
(i) on so much of the total income as consists of -
(a) royalties received from an
Indian concern in pursuance of an agreement
made by it with the Indian concern after
the 31st day of March, 1961, or
(b) fees for rendering technical services
received from an Indian concern in
pursuance of an agreement made by it
with the Indian concern after the 29th
day of February, 1964,
and where such agreement has, in 50 per cent.;
either case, been approved by the
Central Government
(ii) on the balance, if any, of the total 70 per cent."
income
6. It may also be expedient at this stage also to set out section 108 of the Income-tax Act which has been incorporated by reference in the definition of "company in which the public are substantially interested" contained in section 2(6)(a) of the Act. Section 108 reads :
"108. Savings for company in which the public are substantially interested. -
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."
In fact, section 108 of the Income-tax Act is intended to take out of the purview of section 104 of the Act which provides for levy of income-tax on undistributed income of certain companies, companies in which the public are substantially interested as also the wholly owned subsidiaries of such companies.
Counsel for the assessee submitted before us that we must read section 108 of the Act independently of section 2(6) (a) of the Finance Act, 1971, and Paragraph F of the First Schedule and interpret clause (a) of section 108 itself to mean “any company in which the public are substantially interested or a subsidiary company of such company mentioned in clause (b)” and if it is so read, the subsidiary of a subsidiary or a sub-subsidiary will also fall in clause (b). To appreciate the above contention, it may be expedient to mention that the Income-tax Act itself contains a definition of “companies in which the public are substantially interested” in clause (18) of section 2. “Company” has also been defined in clause (17) of section 2 thereof. These two clauses, as they stood at the material time, read as under :
“2. (17) ‘company’ means –
(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country outside India, or
(iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1992), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or
(iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company :
Provided that such institution, association or body shall be deemed to be a company 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;
(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
(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) (i) 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 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; …”
7. From the above discussion, it is evident that the real controversy in this case is about the rate of income-tax applicable to the assessee-company. The rates as stated earlier, are prescribed in Paragraph F of the First Schedule to the Finance (No. 2) Act of 1971. In the above paragraph, for the purpose of rates of income-tax, companies are divided into two broad categories, viz. “domestic company” and “company other than a domestic company”. The rates of income-tax applicable to the former category of companies are specified in sub-paragraph I and those applicable to the latter category in sub-paragraph II of Paragraph F. Sub-paragraph I deals with a domestic company. In the said sub-paragraph, for the purpose of rates of income-tax, domestic companies have been further sub-divided into two categories : (1) company in which the public are substantially interested, and (2) not a company in which the public are substantially interested.
8. Under section 2(6) (a) of the Finance Act read with section 108 of the Act, a company in which the public are substantially interested also includes “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”. Apparently, the object of redefining the expression “company in which the public are substantially interested” in section 2(6) (a) of the Finance Act for the purpose of the First Schedule when the very same expression has been defined in the Income-tax Act in sanction 2(18), is to widen its scope so as to bring within its ambit a wholly-owned subsidiary company of “such company” also. In other words, the benefit of the lower rate of income-tax under clause (1) of sub-paragraph I of Paragraph F of the Finance Act applicable to a domestic company “which is a company in which the public are substantially interested” has also been extended to a wholly-owned subsidiary of such company. This clearly and unambiguously presupposes that the parent company is a domestic company in which the public are substantially interested. If the parent company is not a domestic company, sub-paragraph I of Paragraph F will not apply to it. In that event, the question of its applicability to a wholly-owned subsidiary of such company would not arise. In that situation, the question whether a sub-subsidiary also falls within clause (1) of sub-paragraph 1 by virtue of clause (b) of section 108 will become purely academic. In that view of the matter, the real question for determination in the instant case is whether the assessee-company, which is a domestic company but wholly-owned by the U.K. company, which in turn is a wholly-owned subsidiary of the U.S. company, can be held to be a company in which the public are substantially interested by reference to the U.S. company which is, admittedly, not a domestic company. Or to put it differently, whether on a proper interpretation of the various categories of companies specified in sub-paragraph I(1) of Paragraph F of the First Schedule to the Finance Act in the light of the definition of “company in which the public are substantially interested” contained in section 2(6) (a) of the Finance Act read with section 108 of the Income-tax Act, the assessee-company can be said to be a “company in which the public are substantially interested” if the U.K. company and the U.S. company are not domestic companies.
9. Before we proceed to examine the merits of the controversy, it may be expedient to dispose of the preliminary objection of learned counsel for the assessee, Mr. Dastur, in regard to the power of this court to examine the above aspect of the question. According to Mr. Dastur, the above aspect having not been examined by any of the authorities below including the Tribunal, this court should not examine the same for the first time while hearing a reference from the order of the Tribunal. We have given our careful consideration to the above contention of learned counsel. We however find it difficult to accept the same for the simple reason that what we propose to do is to examine a facet of the question which in our opinion, is most crucial for deciding the real controversy involved in the question referred to us. The question referred by the Tribunal is wide enough to take within its ambit all facets of the controversy. The controversy, in fact, is whether the assessee-company is a “company in which the public are substantially interested” as defined in section 2(6) (a) of the Finance (No. 2) Act, 1971, for the purpose of the First Schedule to the said Finance Act. This question definitely involves interpretation of Paragraph F of the First Schedule to the Finance Act with reference to the definitions contained in section 2(6) of the Finance Act. The Tribunal did not consider this aspect of the matter and straightaway proceeded to interpret section 108 of the Income-tax Act. Section 108 of the Income-tax Act will undoubtedly be relevant but not independently of Paragraph F of the First Schedule and section 2(6) (a) of the Finance Act. Section 108 has been incorporated by reference in the special definition of “company in which the public are substantially interested” contained in section 2(6) (a) of the Finance Act only for the limited purposes of the said section and the First Schedule. This act of the Legislature cannot be an exercise in futility. The Legislature definitely intended to give a different meaning to the expression “company in which the public are substantially interested” for the purposes of interpretation of the First Schedule to the Finance Act than the one given under the Income-tax Act by the definition contained in section 2(18) of the Act. Sub-paragraphs I(1) and I(2) of Paragraph F of the First Schedule to the Finance Act deal with the rates of income-tax applicable to the two categories of domestic companies. In our opinion, it is permissible for this court to examine the question referred to it in the proper perspective. Such a power of the High Court is well settled by a catena of decisions of the Supreme Court. Reference may be made in this connection to the decision of the Supreme Court in CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589. The following observations (at page 612) are pertinent :
“Now a question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that section 66(1) requires is that the question of law which is referred to the court for decision and which the court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section 66(1) of the Act.”
10. To the same effect are the various other decisions of the Supreme Court. It may be expedient to refer to a recent decision in Salem Co-operative Central Bank Ltd. v. CIT , where the Supreme Court repelled the contention of the assessee that the High Court while deciding a reference is bound by the terms of the question and if the Appellate Tribunal proceeds on an assumption, which was erroneous in law and refers a question to the High Court, the High Court is bound to consider the question in terms thereof and is not empowered to act on its own assumption. The controversy in that case was whether additional surcharge under the relevant Finance Act was attracted or not. The contention of the assessee was that his entire income was exempt under section 81(i) (a) of the Income-tax Act. In tune with this submission, the assessee submitted that a sum of Rs. 19 was also a business income and, therefore, the liability to additional surcharge did not attach to the assessee. The Income-tax Officer took the view that the said sum of Rs. 19 represented income from other sources and, therefore, the liability to additional surcharge was attracted. On appeal, the Appellate Assistant Commissioner and the Tribunal upheld the assessee’s contention that it was “income from business” and accordingly dismissed the appeal filed by the Revenue. On a reference at the instance of the Revenue, the Revenue for the first time contended before the High Court that the Tribunal laboured under an erroneous assumption that liability to additional surcharge was not attracted if the sum of Rs. 19 represented business income and that whether that amount was business income or income from other sources, the liability to additional surcharge was attracted. The assessee submitted that it was not open to the Revenue to take the new stand inasmuch as it had agreed before the Tribunal that liability to additional surcharge was not attracted in case the amount constituted business income. On an examination of the relevant Finance Act, the High Court held that the assumption made by the Appellate Assistant Commissioner and the Appellate Tribunal was erroneous and that, in such a situation, it possessed the power to correct the error. The assessee appealed to the Supreme Court and contended that the High Court had no such jurisdiction. The Supreme Court, affirming the decision of the High Court, held that the High Court cannot be called upon to act on an erroneous assumption of law and to answer the question stated. It observed (at page 703) :
“Such a course would neither be in the interest of law or of justice. That the Revenue was also a party to the erroneous assumption of law makes little difference to the principle.”
11. The above decision of the Supreme Court is a clear answer to the objection of learned counsel for the assessee that the controversy having not been examined by the Tribunal from a particular angle, it is not open to this court to do so for the first time. Accepting the contention of the assessee, in our opinion, would neither be in the interest of law nor of justice. In that view of the matter, we are of the clear opinion that it is open to this court to examine the crucial aspect of the matter as to whether the assessee is a domestic company in which the public are substantially interested for the purposes of sub-paragraph I of Paragraph F of the First Schedule to the Finance Act or not. We, therefore, proceed to examine the controversy from the above angle.
12. A careful reading of Paragraph F of the First Schedule to the Finance Act in the light of the definition of some of the expressions contained in section 2(6) of the said Act, and section 2(17), section 2(18) and section 108 of the Income-tax Act, makes it abundantly clear that, (1) the rates of income-tax applicable to companies will have to be determined with reference to Paragraph F to the Finance Act; (2) Paragraph F to the Finance Act classifies companies for the purpose of rates of income-tax into two categories, viz., (I) domestic company, and (II) company other than a domestic company; (3) A domestic company has further been sub-divided on the basis of the nature of the interest of the public therein, viz., (i) a company in which the public are substantially interested, and (ii) not a company in which the public are substantially interested; (4) Separate rates of income-tax based on the total income have been specified for each category and sub-category of the companies. In the instant case, the assessee-company is a “domestic company”. There is no dispute about that. That being so, one of the rates ranging between 45 per cent. to 65 per cent. of the total income, as specified in sub-paragraph I will be chargeable. The only controversy is regarding the category or sub-category in which the assessee-company would fall. The case of the assessee-company is that it falls in clause (1) of sub-paragraph I of Paragraph F to the First Schedule. The case of the Revenue is that it falls in clause (2) of sub-paragraph I.
13. We should, therefore, concentrate on the language of clause (1) of sub-paragraph I of the Paragraph F to the First Schedule to decide whether the assessee-company meets the description of the “company” specified therein. The said clause (1) of Sub-Paragraph I is in the following terms
“Rates of income-tax
I. In the case of a domestic company –
(1) where the company is a company in which the public are substantially interested, –
(i) in a case where the total income 45 per cent. of the total
does not exceed Rs. 50,000 income;
(ii) in a case where the total income 55 per cent. of the total
exceeds Rs. 50,000 income :
(2) where the company is not a company in which the public are substantially interested, -
(i) in the case of an industrial company -
(a) on so much of the total income 55 per cent.;
as does not exceed Rs. 10,00,000
(b) on the balance, if any, of the 60 per cent.;
total income
(ii) in any other case 65 per cent. of the total
income.
14. On a plain reading of the above provision, it is evident that sub-paragraph I of Paragraph F to the Finance Act deals with the rates of income-tax applicable only in the case of a “domestic company” and the word “company” used in that sub-paragraph clearly refers to certain categories of domestic company only. The fact that the expression “domestic” is not repeated with the word “company” in that Paragraph does not mean that company which is a sub-category of a “domestic company” can be “a company other than a domestic company”. In fact, domestic company is the genus and the two categories mentioned therein are its species. The species cannot be different from the genus. In the instant case, sub-paragraph I of Paragraph F prescribes the rates of income-tax applicable to domestic companies. For that purpose, the rates of income-tax applicable to domestic companies have been divided into two categories, viz., (1) a company in which the public are substantially interested, and (2) not a company in which the public are substantially interested. “Domestic company” has again been defined in clause (b) of sub-section (6) of section 2 of the Finance Act to mean, (i) an Indian company, (ii) or any other company which, in respect of its income is liable to pay income-tax under the Income-tax Act for the assessment year commencing on the April 1, 1971, and has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preferences shares) payable out of such income in accordance with the provisions of section 194 of that Act. Evidently, the U.S. and U.K. companies were not domestic companies. It is also not the case of the assessee that any of these companies during the assessment year commencing on the first day of April, 1971, was liable to pay income-tax in India under the Income-tax Act. The contention of the assessee is that the U.S. company being a company in which the public were substantially interested within the meaning of section 108 of the Income-tax Act, it would fall within section 2(6) (a) of the Finance Act. The Tribunal has also proceeded on the same assumption that the U.S. company was a company in which the public were substantially interested within the meaning of section 2(6) (a) of the Finance Act. In our opinion, the question whether the U.S. company is a company in which the public were substantially interested will be relevant only if it is a domestic company. According to the assessee, it is not necessary for the purpose of clause (a) of section 2(6) of the Finance Act that the U.S. company should be a domestic company. It is enough to satisfy the requirements of the section to show that it is a company in which the public are substantially interested within the meaning of section 108. This submission is based on interpretation of section 108 of the Income-tax Act. The contention of the assessee is that section 108 takes within its ambit and sweep all companies – domestic and non-domestic – and the same having been incorporated by reference in section 2(6) (a) of the Finance Act for the purpose of the First Schedule to the said Act, a company falling under section 108 of the Income-tax Act, would be entitled to get the benefit of the lower rate of income-tax specified in sub-paragraph I of Paragraph F. According to counsel, to read the word “company” appearing in clauses (1) and (2) of sub-paragraph I of Paragraph F as domestic company would amount to doing violence to the clear language of section 108 of the Act.
We have carefully considered the above submission. We, however, find it extremely difficult to accept the same. The principle governing interpretation of statutes which are incorporated by reference in another statute is no more res integra. It is a well accepted rule of interpretation that in the interpretation of an incorporated provision, the court is sometimes left to formal variation of details in the context of the incorporating Act. In support of the above principle of interpretation, we can refer to no better authority than the decision of the Supreme Court in Paresh Chandra Chatterjee v. State of Assam, . In that case, the provisions of the Land Acquisition Act, 1894, were applied mutatis mutandis for determination of compensation in respect of requisitions under the Assam Land (Requisition and Acquisition) Act, 1948. The Land Acquisition Act of 1894, does not prescribe any principles for compensation in the matter of requisition as it deals with only acquisitions of land. Repelling the argument of the land owner that in such a case, the provisions of the Land Acquisition Act cannot be applied for determination of compensation in respect of requisitions, the Supreme Court observed that for the purposes of requisitions under the Assam Land (Requisition and Acquisition) Act, 1948, the provisions relating to “acquisition” in the Land Acquisition Act, 1894, should be read “with due alteration of details or appropriate changes”. It was observed (at page 171) :
“Sections 23, 24 and 25 [of the Land Acquisition Act, 18941, lay down the principles for ascertaining the amount of compensation payable to a person whose land has been acquired. We do not see any difficulty in applying those principles for paying compensation in the matter of requisition of land. While in the case of land acquired, the market value of the land is ascertained, in the case of requisition of land, the compensation to the owner for depriving him of his possession for a stated period will be ascertained. It may be that appropriate changes in the phraseology used in the said provisions may have to be made to apply the principles underlying those provisions.”
15. It was further observed (at page 171) :
“If instead of the word ‘acquisition’ the word ‘requisition’ is read and instead of the words ‘the market value of the land’ the words ‘the market value of the interest in the land’ of which the owner has been deprived are read, the two sub-sections of the section can, without any difficulty, be applied to the determination of compensation for requisition of a land. So too, the other sections can be applied”.
16. We do not propose to refer to other decisions on the subject where an identical opinion has been expressed by the Supreme Court. It is a well accepted principle of interpretation that any word in a statute should be read in the context in which it appears. The same is the position where a particular provision has been incorporated by reference. Literal interpretation of any word or expression used in a statute out of context might lead to serious complications. In the light of the principles enunciated by the Supreme Court in Paresh Chandra Chatterjee v. State of Assam, , we are of the clear opinion that the two clauses of section 108 of the Income-tax Act which are incorporated by reference in the definition of “company in which the public are substantially interested” contained in section 2(6) (a) of the Finance Act must be read in the context in which they appear. The expression “company in which the public are substantially interested” for the purposes of sub-paragraph I of Paragraph F relate only to domestic companies. That being so, the two clauses of section 108 of the Income-tax Act incorporated in the Finance Act cannot refer to anything else than a domestic company. A combined reading of sub-paragraph I of Paragraph F of the First Schedule to the Finance Act, section 2(6) (a) of the Finance Act and clauses (a) and (b) of section 108 of the Income-tax Act makes it abundantly clear that the expression “company” referred to therein means only a domestic company and no other company. When we read the word “company” in sub-paragraph II of Paragraph F to the Finance Act, it will mean a company “other than a domestic company”. Though the word “company” has been defined to mean and include all companies, whether domestic or non-domestic, this expression has to be read in the context in which it appears and not out of context. So read, it is absolutely clear that in order to fall within sub-paragraph I(1) of Paragraph F of the Finance Act, company must be a domestic company first.
17. In the instant case, the assessee-company is a wholly-owned subsidiary of the U.K. company. The U.K. company, in turn, is a wholly-owned subsidiary of the U.S. company. The statement of the case clearly goes to show that the assessee claimed to be a company in which the public are substantially interested on the footing that the U.S. company was a company in which the public were substantially interested within the meaning of clause (a) of section 108 of the Income-tax Act, by reference to the fact that the shares of the said company were at all material times during the relevant years subject to dealings in the stock exchange, New York and other stock exchanges and were freely transferable by the holders to the other members of the public. Counsel for the assessee contended before us that as controversy did not arise before the Tribunal or any of the authorities below or it was never an issue raised by the Revenue before any of the authorities below that to fall within section 2(6) (a) of the Finance Act read with section 108 of the Income-tax Act, the U.S. company and the U.K. company should also be domestic companies within the meaning of section 2(6) (b) of the Finance Act, the necessary facts were not brought by the assessee on record to that effect. We asked learned counsel for the assessee to inform us as to whether it was the case of the assessee that the U.S. company and the U.K. company were also domestic companies within the meaning of section 2(6) (b) of the Finance Act. Counsel expressed his inability to make any statement in that regard at this juncture.
18. We have considered the objections of learned counsel for the assessee. We have held that in order to give the benefit to the assessee-company of the rates of income-tax applicable to a company in which the public are substantially interested by recourse to the definition of, “company” contained in section 2(6) (a) of the Finance Act read with section 108 of the Income-tax Act, the parent company, of which the assessee-company is a subsidiary, must also be a domestic company. If that company is not a domestic company, such company itself would not fall under clause (1) of sub-paragraph I of Paragraph F and hence the question of extending the benefit of the rates applicable to companies falling under that clause to their subsidiary company would not arise. In that view of the matter, whether a sub-subsidiary should also be treated as subsidiary within the meaning of clause (b) of section 108 of the Act becomes academic.
19. However, in view of the liberty given by us to the assessee to satisfy the Tribunal, if it can, by placing requisite material before it, that the U.S. and U.K. companies too were domestic companies, it becomes necessary to decide the second aspect of the question also, i.e., whether in the event of those two companies being found to be domestic companies within the meaning of section 2(6) (b) of the Finance Act, the assessee-company, which was a wholly-owned subsidiary of the U.K. company which in turn was a wholly-owned subsidiary of the U.S. company in which the public were substantially interested, can be held to be a company in which the public are substantially interested within the meaning of section 2(6) (a) of the Finance Act read with clause (b) of section 108 of the Income-tax Act. We have already set out above the two clauses of section 108 of the Income-tax Act which have been incorporated by reference in section 2(6) (a) of the Finance Act. The companies mentioned therein are : (a) any company in which the public are substantially interested, or (b) a subsidiary company of such a 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. The admitted position is that the U.S. company calls in category (a) and the U.K. company falls in category (b). The only question that falls for determination is whether by reference to the subsidiary company given in the Companies Act, a wholly owned subsidiary of a subsidiary mentioned in clause (b) will also fall within clause (b) of section 108 of the Income-tax Act for the purposes of section 2(6) of the Finance Act.
20. The expression “subsidiary company” has not been defined in the Income-tax Act. There is no dispute about the fact that the said expression is most commonly used in the Companies Act. Under the circumstances, the question that arises for consideration is whether the meaning of the said expression given in the Companies Act can be applied for the purposes of section 2(6) (a) of the Finance Act read with clause (b) of section 108 of the Act. The expression “subsidiary company” has been defined in section 4 of the Companies Act as under :
“4(1) For the purposes of this Act, a company shall, subject to the provisions of sub-section (3), be deemed to be a subsidiary of another if, but only if, –
(a) that other controls the composition of its board of directors; or
(b) that other –
(i) where the first-mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company;
(ii) where the first-mentioned company is any other company, holds more than half in nominal value of its equity share capital; or
(c) the first-mentioned company is a subsidiary of any company which is that other’s subsidiary.”
21. In view of the above definition of “subsidiary company” it is clear that under the Companies Act, a subsidiary company of a subsidiary is also deemed to be a subsidiary of another company of which such company is a subsidiary. The following illustration appended to the above section makes this position further clear :
“Company B is a subsidiary of Company A, and Company C is a subsidiary of Company B. Company C is a subsidiary of Company A, by virtue of clause (c) above. If Company D is a subsidiary of Company C, Company D will be a subsidiary of Company B and consequently also of Company A, by virtue of clause (c) above; and so on.”
22. In the instant case, the assessee-company being a wholly-owned subsidiary of the U.K. company which in turn is a wholly-owned subsidiary of the U.S. company has also to be deemed to be a subsidiary of the U.S. company. The only question that requires consideration is whether the definition of the Companies Act can be adopted for the purpose of interpreting section 2(6) (a) of the Finance Act read with section 108 of the Income-tax Act. We find a complete answer to the above question in the decision of the Supreme Court in Howrah Trading Co. Ltd. v. CIT [1959] 36 ITR 215. It was a case under the Indian Income-tax Act, 1922. The question, for consideration before the Supreme Court was whether the meaning given to the expression “shareholder” used in section 18(5) of the Indian Income-tax Act, 1922, was correct. In that case, the word “shareholder” used in that section had been interpreted with reference to the definition of the said expression given in the Indian Companies Act, 1913. The Supreme Court observed that (p. 220) : “No valid reason exists why ‘shareholder’ as used in section 18(5) should mean a person other than the one denoted by the same expression in the Indian Companies Act, 1913”. The Supreme Court referred, with approval, to the following observations of Chitty J. in Wala Wynaad Indian Gold Mining Company, In re [1882] 21 Ch D 849, 854 (p. 220) :
“I use now myself the term which is common in the courts, ‘a shareholder’, that means the holder of the shares. It is the common term used, and only means the person who holds the shares by having his name on the register.”
23. Reference may also be made in this connection to the decision of the Supreme Court in CIT v. Shantilal Pvt. Ltd. [1983] 144 ITR 57, wherein the Supreme Court observed (p. 60) : “There is no reason why the sense conveyed by the law relating to contracts should not be imported into the definition of ‘speculative transaction'”. In that case, the controversy pertained to the true meaning of the expression “speculative transaction” which is defined in sub-section (5) of section 43 of the Income-tax Act, 1961, to mean a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The Supreme Court referred to the provisions of sections 63 and 73 of the Contract Act for interpreting the above expression. We do not propose to multiply authorities on this point in view of the clear decisions of the Supreme Court in Howrah Trading Co. Ltd. v. CIT [1959] 36 ITR 215 and CIT v. Shantilal Pvt. Ltd. [1983] 144 ITR 57.
24. Following the ratio of the above decisions of the Supreme Court, once we import the meaning given to the expression “subsidiary company” for interpreting clause (b) of section 108 of the Income-tax Act, the conclusion is inevitable that a sub-subsidiary which fulfils the requirements of that clause will also be a subsidiary within the meaning of clause (b) of section 108 of the Income-tax Act. Dr. Balasubramaniam, learned counsel for the Revenue, was fair enough to concede that on the face of the above decisions of the Supreme Court it is difficult for him to seriously oppose the legal proposition that in the absence of any definition of the expression “subsidiary company” in the Income-tax Act, the sense conveyed by the definition given in the Companies Act might be imported into the definition of subsidiary company for the purposes of the Income-tax Act subject however to the condition that it should be suitably varied or modified in the context where it is used. We do not find any difficulty in accepting the rider added by Dr. Balasubramaniam. We have discussed that aspect of the matter in the earlier part of this judgment and held that the meaning given to certain expressions in other enactments has to be suitably modified or varied in the context in which it is used.
25. Once we import the definition of the expression “subsidiary company’ appearing in section 4(1) of the Companies Act, 1956, to find out the true meaning of the word “subsidiary company” in clause (b) of section 108 of the Income-tax Act, 1961, it will have to be read in the context of the (requirements of clause (b) of section 108. In other words, “subsidiary company” in section 108 of the Act can be understood to mean a subsidiary company as defined in section 4(1) of the Companies Act, 1956 while meets the further requirements of clause (b) of section 108, viz., 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. If company ‘A’ holds 100 per cent. of the shares of a subsidiary company ‘B’ which holds 100 per cent. of the shares of another company ‘C’, under the Companies Act, Company ‘A’ can be said to be holding 100 per cent. of the shares of company ‘C’ also. We however do not accept the contention of learned counsel for the assessee that a subsidiary company can also be a nominee within the meaning of clause (b) of section 108. But that does not affect our conclusion that section 2(6) (a) of the Finance Act read with section 108(b) of the Income-tax Act covers the case of a subsidiary company which is a subsidiary of a subsidiary company falling therein if it also meets the requirements mentioned in that clause.
26. In the above view of the matter, in order to get the benefit of the lower rate of income-tax prescribed in clause (1) of sub-paragraph I of Paragraph F of the First Schedule to the Finance (No. 2) Act, 1971, which is applicable to “domestic companies”, every company, whether a holding company as well as the subsidiary or subsidiary of a subsidiary company, must be a domestic company and should also meet the requirements of section 2(6) (b) of the Finance Act, read with section 108 of the Income-tax Act, 1961. If a company is not a domestic company, clause (1) of sub-paragraph I of Paragraph F of the Finance Act will not be applicable to such a company and in that event its benefit will not be available to its subsidiary or sub-subsidiary also. If the subsidiary company, which is an Indian company, is a domestic company, it will get the benefit of the rates prescribed for that category of companies viz., not a company in which the public are substantially interested. In other words, in order to get the benefit of the lower rates of income-tax applicable to a company in which the public are substantially interested in the capacity of a subsidiary of a company in which the public are substantially interested by reference to clause (b) of section 108 of the Act, it is necessary that the parent company or the holding company should also be a domestic company. If such a company is not a domestic company falling under clause (1) of sub-paragraph I of Paragraph F of the Finance Act, the subsidiary or sub-subsidiary of such a company will also not fall in that clause.
27. In the instant case, there is nothing to show in the order of the Tribunal or in any of the orders of the authorities below that the U.S. company and the U.K. company were domestic companies within the meaning of section 2(6) (b) of the Finance (No. 2) Act, 1971. Counsel for the assessee could not make any statement in that regard. As this aspect of the matter did not arise for consideration before the Tribunal and as the facts in that regard are not available on the record, we think it will meet the ends of justice if the assessee is given the liberty to satisfy the Tribunal, if it can, that the U.S. company and the U.K. company were also domestic companies. If it can do so, the assessee-company will also be deemed to be a company in which the public are substantially interested within the meaning of section 2(6) (a) of the Finance Act read with section 108(b) of the Income-tax Act, 1961, otherwise not.
28. In the result, question No. 1 is answered in the above terms.
We are now left with question No. 2 which pertains to the maintainability of appeal against charge of interest under section 139 of the Income-tax Act. The scope of an appeal under section 246 against levy of interest is now settled by decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 wherein (at page 967), it has been held : “….. where interest is levied under section 139 of the Act, the assessee may deny his liability to pay such interest on the ground that the return was not belated or that the penal provision was not attracted at all to his case. In such a case also, he denies his liability to be assessed to interest”. In the instant case, from para. 7 of the statement of the case, we find that the assessee was denying its liability to the levy of interest under section 139 of the Act on two grounds. First, that if the contention of the assessee that it was a company in which public are interested is accepted, no interest would be chargeable. Second, that it had a reasonable cause. The Tribunal held that as the assessee has been held to be not a company in which the public are substantially interested, interest was chargeable under section 139 of the Income-tax Act. As such the question of denial of liability did not arise. As regards the second contention of the assessee that it had a reasonable cause, the Tribunal held that it was without merit as in its opinion, once the assessee had admittedly delayed filing of the return beyond the time allowed the provisions for charging of interest were automatically attracted and as there is no separate right of appeal against the charge, the assessee was not entitled to agitate the same by way of an appeal. In view of the above factual position, if the assessee can succeed in satisfying the Tribunal that it was a company in which the public are substantially interested in the manner set out above, the contention of the assessee that no interest was at all leviable might amount to denial of the liability and an appeal against levy of interest would be maintainable. But if the decision on that count is against the assessee and it is found that the assessee is chargeable to interest, the denial of the liability on the ground of existence of reasonable cause will not fall within the ambit of denial of the liability. It will tantamount to going into the merits of the levy of interest which is not permissible in view of the decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961.
29. We, therefore, leave it to the Tribunal to decide the question of maintainability of an appeal against levy of interest in the light of the ultimate finding in regard to the status of the assessee for the purpose of assessment and the decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961. We answer question No. 2 accordingly.
30. In the result, this reference stands disposed of in the above terms. Under the facts and circumstances of the case, there shall be no order as to costs.
31. Certified copy expedited.
D.R. DHANUKA J.
32. I regret that I am unable to persuade myself to agree with, the view taken by Brother, Justice Dr. Saraf, on several aspects concerning this reference. I am, therefore, constrained to dictate a separate judgment in this matter discussing the controversy concerning this reference in detail and setting out the conclusions arrived at by me as indicated below.
33. The Income-tax Appellate Tribunal has referred the following two questions to this court for its opinion under section 2(6)(1) of the Income-tax Act, 1961.
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-company was not a company in which the public are substantially interested as defined in the Finance (No. 2) Act of 1971 for the purpose of the First Schedule to the said Finance Act ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal rightly held that no appeal lies against charge of interest under section 139 of the Act ?”
34. The relevant assessment years are assessment years 1971-72, 1972-73, 1973-74, 1974-75 and 1975-76.
35. For the reasons discussed in detail in the later part of this judgment, I have reached the conclusion that question No. 1 must be answered in the affirmative and in favour of the Revenue and question No. 2 must be answered in the negative and in favour of the assessee.
36. The Finance (No. 2) Act, 1971, read with the First Schedule appended thereto prescribed a concessional rate of income-tax in respect of “domestic companies” in which the public are substantially interested. Section 2(6) (a) of the Finance Act, 1971, defines “company in which the public are substantially interested” as a company referred to in section 108 of the Income-tax Act, 1961. The assessee is a “domestic company” being “an Indian company”. The assessee claims to be a company in which the public are substantially interested within the meaning of section 2(6) (a) of the Finance Act. The Revenue disputes the claim of the assessee.
37. The basic controversy arising in this reference is as to whether the assessee is “a company referred to in section 108(b) of the Income-tax Act, 1961” for purpose of the Finance (No. 2) Act, 1971, and the First Schedule appended thereto. The assessee is an Indian company. The assessee is thus a domestic company within the meaning of the expression “domestic company” as defined in section 2(6) (b) of the Finance (No. 2) Act, 1971. The assessee is wholly owned subsidiary of Gulf Oil (Great Britain) Limited, London, hereinafter referred to as the “U.K. company” for the sake of convenience. At all material times, all the shares of the assessee-company were held by the U.K. company. The U.K. company is a wholly owned subsidiary of Gulf Oil Corporation, Pittsburgh, hereinafter referred to as the “U.S. company”. The U.S. company does not hold any share of the assessee-company. The assessee is not a subsidiary of the U.S. company. There is no dispute that the U.S. company is a company in which the public are substantially interested for the following reasons :
(a) The equity shares of the U.S. company carrying not less than 50 per cent. of the voting power were allotted unconditionally to or were beneficially held by the members of the public throughout all the relevant years;
(b) that the shares of the U.S. company were at all times subject to dealings in the Stock Exchange, New York, and various other stock exchanges;
(c) that the shares of the U.S. company were freely transferable
(d) that at all relevant time, the affairs of the U.S. company were controlled by more than six persons who were not related to one another.
38. The U.S. company admittedly falls under section 108(a) of the Income-tax Act, 1961. The assessee-company is not a subsidiary of the U.S. company. The assessee-company is a subsidiary of the U.K. company. The principal controversy which arises in this reference is as to whether the assessee-company being a sub-subsidiary of the U.S. company falls under section 108(b) of the Income-tax Act, 1961. The U.S. company did not hold any share of the assessee-company at any time in its own name or through its nominee.
39. The relevant provisions having a bearing on question No. 1 are briefly summarised hereinafter.
Section 2(6) (a) of the Finance (No. 2) Act, 1971, defines the expression “company in which the public are substantially interested” to mean a company which is such a company as is referred to in section 108 of the Income-tax Act, 1961. Section 2(6) (a) of the Finance (No. 2) Act, 1971, reads as under :
“2. (6) For the purposes of this section and the First Schedule, –
(a) ‘company in which the public are substantially interested’ means a company which is such a company as is referred to in section 108 of the Income-tax Act.”
Section 108 of the Income-tax Act, 1961, refers to two different categories of companies for the purpose of excluding such companies from the purview of section 104 of the Income-tax Act, 1961. Section 108 of the Income-tax Act, 1961, reads as under :
“108. 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 a 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.”
“A company which is referred to in section 108 of the Income-tax Act, 1961, falls under section 2(6) (a) of the Finance (No. 2) Act, 1971.
Section 2(6) (e) of the Finance (No. 2) Act, 1971, provides that “all other words and expressions used in this section and the First Schedule but not defined in this sub-section and defined in the Income-tax Act shall have the meanings, respectively, assigned to them in that Act”. Both the Acts above referred to are statutes in pari materia. It is necessary to refer to some other provisions of the two Acts also for the purpose of interpreting section 2(6) (a) of the Finance (No. 2) Act, 1971, and section 108 of the Income-tax Act, 1961, as indicated below.
Section 2(17) of the Act defines expression “company” so as to include any body corporate incorporated by or under the laws of a country outside India. The definition of expression “company” shall have to be treated as incorporated in sections 108(a) and 108(b) of the Income-tax Act, 1961, wherever the expression “company” appears therein unless there is something in the context or operative part of section 108 to compel the court to ignore the said definition. Section 2(18) of the Act defines expression “company in which the public are substantially interested”. In view of the contentions urged at the Bar, it is necessary to refer to the definition of the expression “domestic company” as set out in section 2(6) (b) of the Finance (No. 2) Act, 1971. The expression “domestic company” as defined in section 2(6) (b) of the Act does not mean merely an Indian company. The expression “domestic company” as defined for the purpose of the Finance (No. 2) Act, 1971, consists of two different categories, i.e., (a) an Indian company, (b) any other company which, in respect of its income liable to income-tax under the Income-tax Act for the assessment year commencing on the 1st day of April, 1971, has made the prescribed arrangements for the declaration and payment within India of the dividends (including dividends on preference shares) payable out of such income in accordance with the provisions of section 194 of that Act. Section 2(6) (b) of the Finance (No. 2) Act thus takes within its sweep “non-Indian companies” which fulfil the prescribed conditions as stated above.
Section 2 of the Finance (No. 2) Act, 1971, read with the First Schedule appended thereto, prescribes the rates of income-tax and surcharge to be charged to the assessees depending upon the category in which the assessee falls. Paragraph F-I(1) of the First Schedule prescribes the rates of income-tax to be charged where the assessee is a “domestic company” in which the public are substantially interested. If the assessee is a “domestic company” within the meaning of section 2(6) (b) of the Finance (No. 2) Act, 1971, and if it is a company referred to in section 108 of the Income-tax Act, 1961, Paragraph F-I (1) of the First Schedule prescribing the concessional rate of income-tax is applicable. Paragraph F-I (1) of the First Schedule to the Finance (No. 2) Act, 1971, reads as under :
“In the case of a company, other than the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), –
Rates of income-tax
1. In the case of a domestic company –
(1) where the company is a company
in which the public are substantially
interested, –
(i) in a case where the total income 45 per cent. of the total does not exceed Rs. 50,000 income; (ii) in a case where the total income 55 per cent. of the total exceeds Rs. 50,000 income ....."
“The court is required to consider and decide as to whether the assessee fulfils the prescribed conditions so as to be entitled to avail of the above referred to rate of income-tax prescribed by section 2 of the Finance (No. 2) Act, 1971, read with Paragraph F-I (1) of the First Schedule appended thereto. If the assessee is not so entitled, the rate of chargeable tax would be higher than the above referred to rate.
Before I discuss the rival contentions of learned counsel urged at the Bar, it is necessary to preface the discussion by formulation of the following propositions :
(a) Each of the three companies referred to hereinabove is a separate legal entity having distinct corporate personality of their own. The corporate personality of the companies concerned cannot be ignored. Each of the above referred to three companies is a separate taxable entity.
(b) Section 108(b) of the Income-tax Act, 1961, makes specific provision in respect of some of the subsidiary companies for the purpose of exclusion thereof from section 104 of the Income-tax Act, 1961. The expression “such” used in section 108(b) of the Act is of considerable importance. All the subsidiaries of the company falling in section 108(a) of the Act do not automatically fall under section 108(b) of the Act. Section 108(b) takes within its sweep only a limited category of subsidiaries which fulfil the conditions prescribed by the section. It is not open to this court to add words or to add additional categories to section 108 of the Act by analogy.
(c) The U.K. company falls under section 108(b) of the Act.
40. Learned counsel for the assessee has submitted as under :
(a) Once it is held that the U.K. company (being a subsidiary of the U.S. company) falls under section 108(b) of the Income-tax Act, 1961, the U.K. company should also be deemed to be a company in which public are substantially interested within meaning of section 108(a) of the Income-tax Act, 1961, and the status of the assessee-company as a subsidiary of the U.K. company should be examined on this premise.
(b) The assessee-company is deemed to be a company referred to in section 108(b) of the Income-tax Act, 1961, by the following process of reasoning;
(i) A subsidiary of a subsidiary is deemed to be a subsidiary of the parent company itself. If so, the assessee is liable to be treated as a subsidiary of the U.S. company although the U.S. company may not hold any share of the assessee-company at any time.
(ii) The shares of the assessee-company-are deemed to be held by the U.S. company and the U.K. company is a 100 per cent. subsidiary of the U.S. company. The U.K. company holds the shares of the assessee-company as a nominee of the U.S. company. If necessary, the doctrine of piercing the veil of corporation should be applied. In view of the controlling interest of the U.S. company in the U.K. company, it should be deemed that the assessee-company is a subsidiary of the U.S. company and its shares are deemed to be held by the U.S. company.
(iii) Section 4 of the Companies Act (1 of 1956), defines the expression “subsidiary company” for purposes of the Companies Act, 1956. According to the said definition, a subsidiary of the subsidiary is deemed to be a subsidiary of the holding company for purposes of the Companies Act. The expressions “holding company” and “subsidiary company” are not defined by the Income-tax Act, 1961. The expression “subsidiary company” used in section 108(b) of the Act should be, therefore, interpreted to mean and include a sub-subsidiary company also. If section 4 of the Companies Act (1 of 1956), is treated as incorporated in section 108(b) of the Income-tax Act, 1961, for the purpose of interpreting the expression “subsidiary company”, it would become clear that the assessee-company falls under section 108(b) of the Act although it is not a subsidiary of the parent company, i.e., the U.S. company as such.
41. I am not impressed by the submissions of learned counsel. I see no merit in these submissions. I shall discuss the contentions urged at the Bar little later.
42. Learned counsel for the Revenue has submitted as under
(a) The U.S. company falls under section 108(a) of the Act. The U.K. company being the wholly owned subsidiary of the U.S. company falls under section 108(b) of the Act.
(b) The assessee-company being a subsidiary of the U.K. company cannot be considered as subsidiary of the U.S. company as such. The shares of the assessee-company are not held by the U.S. company. The U.K. company cannot be treated as a shareholder of the assessee-company as if the nominee of the U.S. company.
(c) The assessee-company does not fall under section 108(b) of the Act as it is merely a sub-subsidiary of the U.S. company and as it does not satisfy the prescribed conditions.
(d) The court cannot extend section 108(b) of the Act to companies which do not strictly fall under section 108(b) of the Act by analogy. The court cannot add additional categories to section 108 of the Act by process of interpretation.
(e) Even if the meaning of the expression “subsidiary company” used in section 108(b) of the Act is to be ascertained in light of section 4 of the Companies Act (1 of 1956), it makes no difference to this case as on any view of the matter, the assessee does not satisfy the conditions prescribed by section 108(b) of the Act. The fact remains that the shares of the assessee-company are not held by the company referred to in section 108(a) of the Act, i.e., the U.S. company. The U.K. company is the shareholder of the assessee-company in its own right and title and not as nominee of the U.S. company.
43. I find considerable merit in these submissions of learned counsel for the Revenue.
44. Learned counsel for the Revenue further submitted as under :
45. In any event, section 108(b) of the Act is liable to be interpreted in the light of the heading and sub-heading pertaining to Paragraph F-I (1) of the First Schedule to the Finance (No. 2) Act, 1971. The relevant sub-heading attached to Paragraph F-I (1) of the Schedule is “domestic company”. The relevant portion of the clause forming part of paragraph F-I(1) of the Schedule is “company in which the public are substantially interested”. In view of the above provisions, learned counsel for the Revenue submits that section 108(b) of the Act can be invoked only by such subsidiaries of which the parent company is “a domestic company” within the meaning of the expression “domestic company” as defined in section 2(6) (b) of the Finance Act. Learned counsel submits that it is not enough for applicability of the above referred to provision that the assessee is a domestic company and it is a company referred to in section 108 of the Income-tax Act, 1961. Learned counsel wants the court to read to section 108(b) of the Act as under :
“to a subsidiary company of such a ‘domestic company’ if the whole of the share capital …..”
“Section 108(a) of the Act does not limit its applicability to a domestic company. Section 108(b) of the Act does not limit its applicability to subsidiary of a domestic company. Sections 108(a) and 108(b) of the company use the expression “the company”, the said expression having been defined by section 2(17) of the Act. This contention was never urged by anyone before any of the authorities below. Mr. Dastur, learned counsel for the assessee, submitted that this aspect of the controversy was not covered by the question referred to this court and did not arise out of the order of the Tribunal. On the merits, Mr. Dastur submitted as under : Section 2(6) (a) of the Finance (No. 2) Act, 1971, defined company in which the public are substantially interested as a company referred to in section 108 of the Income-tax Act, 1961. The two Acts contemplate uniform construction of section 108 of the Income-tax Act, 1961, for purposes of both the Acts and not different construction thereof for the purpose of the Finance Act. There was no warrant for restricting the applicability of section 108(b) of the Act to subsidiary companies of “domestic companies” only. As regards interpretation of Paragraph F-I(1) of the First Schedule to the Finance (No. 2) Act, 1971, learned counsel submitted that the sub-heading appended to the above referred to Paragraph of the Schedule merely required that the assessee must be a domestic company within the meaning of section 2(6) (b) of the Finance (No. 2) Act, 1971. The rates of tax prescribed by the relevant clause of the First Schedule were applicable provided that the assessee (to whom the rate was to be applied) was a “domestic company” and the assessee was a company referred to in section 108 of the Income-tax Act, 1961. Learned counsel submitted that if the assessee fell under section 108(b) of the Income-tax Act, 1961, for purposes of the Income-tax Act, it could not be held that it did not fall under the said section for the purposes of section 2(6) (a) of the Finance (No. 2) Act, 1971. In my opinion, on this limited aspect Mr. Dastur appears to be correct. There is nothing in the language of section 108(b) of the Income-tax Act, 1961, or of Paragraph F of the First Schedule to the Finance (No. 2) Act, 1971, so as to restrict the applicability of section 108(b) of the Act to subsidiaries of which the holding company is “a domestic company”. It is therefore irrelevant to enquire as to whether the U.K. company or the U.S. company was “a domestic company” at the material time, within the meaning of the said expression as defined in section 2(6) (b) of the Finance (No. 2) Act, 1971.
Section 108(b) of the Act is applicable only to such subsidiaries which fulfil all the conditions prescribed thereunder. The expression “such” used in the first part of section 108(b) of the Act is of considerable significance. Section 108(b) of the Act is satisfied only if the entire share capital of “such subsidiary” is held by the company failing under section 108(a) of the Act. In the present case, neither of the two conditions prescribed by section 108(b) of the Act are satisfied by the assessee-company. The assessee is not the subsidiary of the U.S. company. The assessee is not the subsidiary of a company failing under section 108(a) of the Act. It is not enough for the purpose of applicability of section 108(b) of the Act that the assessee is a subsidiary of a company which in its turn is a subsidiary of a company falling under section 108(a) of the Act. Thus, one of the conditions prescribed by section 108(b) of the Act for the purpose of its applicability is not satisfied. The shareholding of the assessee-company is not held by a company falling under section 108(a) of the Act, i.e., the U.S. company in this case. The U.K. company holds the shares of the assessee in its own right and title as a separate corporate body and not as nominee of the U.S. company. A person can be considered as a nominee of another only if the alleged nominee has no beneficial title to the asset. In this case, the U.K. company as a separate legal entity is entitled to shares held by it in the assessee-company in its own right and title and it has legal and beneficial interest both in the shares of the assessee-company. In theory of law, the assets of the U.K. company do not belong to the U.S. company merely because of the control exercised by the U.S. company over affairs of the U.K. company. The separate corporate personality of the U.K. company as well as the U.S. company cannot be ignored. Thus, on a plain reading of section 2(6) (a) of the Finance (No. 2) Act, 1971, and sections 108(a) and 108(b) of the Act, I have reached the conclusion that the assessee cannot be treated as a company referred to in section 108 of the Income-tax Act, 1961. The court cannot add additional categories to section 108 of the Act by analogy or by process of interpretation or add words in the section. A subsidiary of the subsidiary or a subsidiary of a subsidiary of a subsidiary and so on cannot be treated as falling under section 108(b) of the Act by some sort of analogy.
46. Mr. Dastur, learned counsel for the assessee, wants the court to adopt the definition of holding company and subsidiary company as set out in section 4 of the Companies Act (1 of 1956), for the purpose of interpreting section 108(b) of the Companies Act (1 of 1956) on the ground that these expressions are not defined in the Income-tax Act, 1961. By this process of reasoning, learned counsel for the assessee wants the court to interpret section 108(b) of the Income-tax Act so as to take a sub-subsidiary within its sweep and introduce a fiction that a sub-subsidiary company is deemed to be the subsidiary of the holding company itself. I am not at all impressed by this submission of Mr. Dastur for the following reasons :
47. Section 4 of the Companies Act (1 of 1956) defines the expression “holding company” and “subsidiary company” for purposes of the Companies Act (1 of 1956) only. The definition provided in section 4 of the Act is an inclusive definition and includes various categories therein by using the legislative device of “deemed to include”. Several parts of section 4 of the Companies Act (1 of 1956) are directly inconsistent with the express provisions of section 108 of the Income-tax Act, 1961. A company may be a holding company of another for purposes of the Companies Act (1 of 1956) even if it does not hold any share of the subsidiary company if it has power to control the composition of the board of directors of the company by virtue of the provisions contained in the articles of association of the company or under a contract. Section 108(b) of the Act is applicable only when the parent company holds all the shares of the subsidiary company and not otherwise. If a part of the definition contained in section 4 of the Companies Act (1 of 1956) is imported in or adopted for the purpose of interpreting section 108(b) of Income-tax Act, 1961, it would lead to anomalies. The articifical extension of the meaning of the word “subsidiary company” by the Companies Act (1 of 1956), for purposes of the Companies Act (1 of 1956) only, cannot be imported in section 108(b) of the Income-tax Act, 1961. In my opinion, a sub-subsidiary company does not fall under section 108(b)108(b) of the Act. In my opinion, there is no scope for introducing such fiction in section 108(b) of the Act. All the prescribed conditions must be plainly and clearly satisfied if an assessee desires to avail of section 108(b) of the Income-tax Act, 1961. Section 4 of the Companies Act, 1956, reads as under :
“4. Meaning of ‘holding company’ and ‘subsidiary’. – (1) For the purpose of this Act, a company shall, subject to the provisions of sub-section (3), be deemed to be a subsidiary of another if, but only, if, –
(a) that other controls the composition of its board of directors; or
(b) that other –
(i) where the first-mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company;
(ii) where the first-mentioned company is any other company, holds more than half in nominal value of its equity share capital; or
(c) the first-mentioned company is a subsidiary of any company which is that other’s subsidiary.
Illustration
Company B is a subsidiary of Company A and Company C is a subsidiary of Company B. Company C is a subsidiary of Company A, by virtue of clause (c) above. If Company D is a subsidiary of Company C, Company D will be a subsidiary of Company B and consequently also of Company A, by virtue of clause (c), above, and so on.”
48. In Macbeth and Co. v. Chislett [1910] AC 220 (HL), 223, Lord Loreburn observed as under :
“it would be a new terror in the construction of Acts of Parliament if we were required to limit a word to an unnatural sense because in some Act which is not incorporated or referred to such an interpretation is given to it for the purposes of that Act alone.”
49. It is well settled that it would be inappropriate to draw inspiration from other statutes for an interpretation of a similar expression or word in another statute on a different subject as it is not uncommon for the same word or phrase to have a different meaning in different statutes.
50. In view of the above discussion, I hold that a sub-subsidiary is deemed a subsidiary of a holding company only for purposes of the Companies Act (1 of 1956) and section 4 of the Companies Act (1 of 1956) cannot be utilised for widening the scope and ambit of section 108(b) of the Income-tax Act, 1961.
51. I shall now refer to the cases cited by learned counsel on either side in support of their respective contentions. Learned counsel for the assessee relied upon several judgments of the Supreme Court and our court to buttress his contention that section 4 of the Companies Act (1 of 1956) coupled with the statutory illustration appended thereto be treated as incorporated in section 108(b) of the Income-tax Act, 1961, for the purpose of interpreting the expression “subsidiary” in section 108(b) of the Income-tax Act, 1961. Learned counsel for the assessee referred to the judgment of the Supreme Court in Howrah Trading Co. Ltd. v. CIT [1959] 36 ITR 215. In this case the apex court was required to interpret section 18(5) of the Indian Income-tax Act, 1922. The said section provided that any deduction made and paid to the account of the Central Government in accordance with the provisions of the said section and any sum by which a dividend had been increased under sub-section (2) of section 16 shall be treated as a payment of income-tax or super tax on behalf of the shareholder and credit shall be given to him therefor on the production of the certificate furnished under section 20 in the assessment, if any, made for the following year under this Act. The question before the court was as to whether the assessee was a “shareholder” within the meaning of section 18(5) of the Indian Income-tax Act, 1922, so as to be entitled to avail of the said provision. The apex court held that according to the common meaning of the expression shareholder, it was required that the name of the person claiming to be a shareholder must be on the register of the company. In this context, the Supreme Court took assistance also of the meaning of the word “shareholder” as used in the Companies Act (1 of 1956). With respect, this case has no relevance for the purpose of interpretation of section 108(b) of the Income-tax Act, 1961, when the said section is sought to be interpreted in conjunction with section 4 of the Companies Act (1 of 1956). Learned counsel for the assessee also relied upon the judgment of this court in the case of CIT v. Swadeshi Match Co. [1983] 139 ITR 833. In this case, the court was required to interpret Explanation II of Para D of Part II of the First Schedule to the Finance (No. 2) Act of 1962. The court was required to find out as to whether the concerned company held more than half of the equity share capital of the first-mentioned company. In this case there was no dispute that some of the shares were held by some of the admitted nominees of the assessee-company. The only question before the court was as to whether these shares held by the nominees of the assessee could be counted for the purpose of deciding the question as to whether the assessee held fifty per cent. share capital of the other company. The question arising in this reference is altogether a different question. The ratio of this case is of no assistance to the court. In this case, it is impossible to hold that the shares of the assessee-company are held by the U.K. company as an agent or nominee of the U.S. company.
52. Learned counsel for the assessee also referred to the judgment of the Court of Appeal in England in the case of S. Berendsen Ltd. v. IRC [1958] 34 ITR 611. In this case the question before the court was as to the interpretation of the expression “controlling interest” when a body corporate was a shareholder of another company. Such a question does not arise in our case. The ratio of this judgment is of no relevance for the purpose of resolving the controversy arising in this case.
53. Learned counsel for the assessee submitted that in any event the doctrine of piercing the veil of the corporation should be applied for the purpose of interpreting section 108(b) of the Act. Learned counsel submitted that the shares held by the U.K. company in the assessee-company must be deemed to have been held by the U.S. company itself in reality. Learned counsel for the assessee relied upon the judgment of the Supreme Court in the case of State of U.P. v. Renusagar Power. Co. [1991] 70 Comp Cas 127. It must be stated here and now that the doctrine of piercing the corporate veil cannot be applied so as to defeat and nullify the statutory provisions which are plain and simple. The said doctrine can be applied in certain situations only and not in face of the statute. In my view, the corporate personality of the concerned companies cannot be ignored for the purpose of interpreting section 108(b) of the Income-tax Act, 1961. Section 108(b) of the Act proceeds on the footing that the holding company and subsidiary companies are separate legal entities and their separate corporate personalities are duly recognised by law. In the case relied upon by learned counsel for the assessee, Hindustan Aluminium Corporation Ltd. (Hindalco) had established a factory in Uttar Pradesh for manufacture of aluminium and Renusagar Power Co., was a wholly owned subsidiary of Hindalco. The question before the court was as to whether Hindustan Aluminium Corporation Limited was consuming the self-generated power within the meaning of section 3(1) (c) of the U.P. Electricity (Duty) Act, 1952. Having regard to the totality of facts and circumstances of the case and the conduct of the parties including the Electricity Board, the Supreme Court held that Renusagar’s power plant must be treated as the’ “own source of generation” of Hindalco and Hindalco was liable to pay electricity duty on this basis as permissible under section 3(1) (c) of the U.P. Electricity (Duty) Act, 1952. With respect, this case has no relevance for the purpose of resolving controversy arising in this case.
54. Learned counsel for the assessee cited several other cases. It does not appear to me to be necessary to refer to all these cases as none of these cases appear to have any bearing on the issue before the court.
55. One more aspect of the problem was debated at the Bar as indicated below :
The question to be asked is as to whether a subsidiary company invoking section 108(b) of the Income-tax Act, 1961, can invoke the said provision only if its holding company is “a domestic company” within the meaning of section 2(6) (b) of the Finance (No. 2) Act, 1971, and not otherwise even if it satisfies all the conditions specifically prescribed by the said section. The question to be asked is as to whether section 108(b) of the Income-tax Act, 1961, must be interpreted differently for the purpose of the Finance (No. 2) Act, 1971, or whether the Income-tax Act, 1961, and the Finance (No. 2) Act, 1971, contemplate uniform construction of section 108 of the Act for the purpose of both the Acts. Learned counsel for the Revenue submitted that section 108(b) of the Act must be interpreted so as to be applicable only to a subsidiary company of “a domestic company in which the public are substantially interested”. It is not possible to add words in section 108(b) of the Income-tax Act, 1961, and accept this sub-mission. Section 2(6) (a) of the Finance (No. 2) Act, 1971, states that “a company which is referred to in section 108 of the Income-tax Act” shall be treated as a company in which the public are substantially interested for the purposes of the Finance (No. 2) Act, 1971. Learned counsel for the assessee submitted that for the purpose of applicability or non-applicability of section 108(b) of the Income-tax Act, 1961, the court must apply the same criteria for the purpose of the Finance (No. 2) Act, 1971, as is applied for the purpose of the Income-tax Act, 1961. Learned counsel for the Revenue referred to Paragraph F of Part I of the First Schedule in support of his submission and the heading and sub-heading appended thereto in support of his submission. Paragraph F of the First Schedule prescribes the rates of income-tax. The first heading is “Rates of income-tax”. The operative part of the provision reads as under :
“In the case of a domestic company-where the company is a company in which the public are substantially interested.”
56. In my opinion if the assessee (to whom the prescribed rate is to be applied) is a domestic company, it is sufficient to bring the assessee within the scope and ambit of Paragraph F-(1) (i) of Part I of the First Schedule of the Act provided the assessee falls under section 108(b) of the Income-tax Act. The heading or sub-heading “domestic company” used in Paragraph F of Part I of the Schedule for the purpose of application of the rate of income-tax cannot be imported in section 108(b) of the Income-tax Act, so as to prescribe additional conditions for applicability of the said section. Section 108(b) of the Income-tax Act must be interpreted on its own terms. The construction of section 108(b) of the Act has to be uniform for purposes of the Income-tax Act is well as the Finance Act. Section 2(17) of the Income-tax Act must be read in section 108 of the Act wherever the expression “company” appears therein. The heading and sub-heading affixed to Paragraph F of the Schedule are for purposes of applying the prescribed rate of tax to specified categories of assessees. Section 108(b) of the Act does not state that the said section shall be applicable only to subsidiary companies of which the holding company is a domestic company. It is therefore irrelevant to enquire as to whether the U.S. company or the U.K. company was a “domestic company” within the meaning of the said expression as defined in section 2(6) (b) of the Finance Act, 1971. If the definition of the expression “domestic company” is to be read in section 108(b) of the Act, for purposes of further restricting the applicability of section 108(b) of the Act to subsidiaries, it would lead to anomaly. The definition of the expression “company in which the public are substantially interested” as set out in section 2(6) (a) of the Finance Act is also for purposes of the First Schedule to the Act. The provisions contained in the First Schedule are enacted for the purpose of prescribing the rate of income-tax, etc. to a particular category of assessees. The two provisions stand by themselves and cannot be amalgamated and mixed up.
57. In my view, the assessee is not a company referred to in section 108(b) of the Act. It is irrelevant to enquire whether the U.K. company or the U.S. company was a domestic company within the meaning of section 2(6) (b) of the Finance (No. 2) Act, 1971. I do not agree that the Tribunal should be required to decide this question. With respect this line of inquiry is irrelevant.
58. I am in complete agreement with Brother justice Dr. Saraf when he holds that the scope of question No. 1 is wide enough to take within its sweep the question of the above referred facet of the question. On the merits of the controversy concerning the aspect, I have reached a different conclusion. I respectfully differ p2 from the view taken by Brother justice Dr. Saraf as discussed above.
59. As far as question No. 2 is concerned, in my opinion the merits of the controversy are not relevant. The assessee had in fact denied his liability to pay interest. At this stage, it is not relevant to enquire as to whether the appeal of the assessee on this aspect had a chance of succeeding or not. In my opinion, the ratio of the decision of the Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961, means that the appeal filed by the assessee-company must be held to be maintainable if the assessee denies its liability to pay interest altogether. In my opinion, the appeal filed by the assessee was maintainable. Merely because the appeal is held to be maintainable it does not follow that the assessee would necessarily succeed in the appeal.
60. For the various reasons as aforesaid, I am firmly and humbly of the opinion that question No. 1 must be answered in the affirmative and in favour of the Revenue and question No. 2 must be answered in the negative and in favour of the assessee. I do so accordingly.
61. Having regard to the nature of the controversy and interesting questions of law debated at the Bar, I have reached the conclusion that there should be no order as to costs of this reference.
S.N. Variava J.
63. This is a reference under section 256(1) of the Income-tax Act, 1961, whereby the Income-tax Tribunal had referred the following questions of law to this court for opinion :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-company was not a company in which public are substantially interested as defined in the Finance (No. 2) Act of 1971 for the purpose of the First Schedule to the said Finance Act ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal rightly held that no appeal lies against charge of interest under section 139 of the Act ?”
64. The reference was heard by a Division Bench of this court. The two judges took differing views. Therefore, the reference has been referred to this court.
65. Under section 259 of the Income-tax Act, in cases of difference of opinion, the judges should state the point of law upon which they differ. The case should then be heard upon that point of law only by one or more judges of the High Court. Unfortunately, the point of law upon which the judges differed has not been stated. It is now not possible to have the point of law stated as one of the learned judges has since retired.
67. All parties very fairly agree that under these circumstances this court should decide the two questions of law which have been referred to this court by the Income-tax Appellate Tribunal.
68. Even otherwise the point of difference appears to be that one of the judges has held that to qualify as a “company in which the public are substantially involved” not only the assessee-company but also its parent company/companies must also be domestic company/companies. The learned judge has then referred the matter back to the Tribunal for an enquiry into the question whether the parent company/companies could be said to be domestic companies. The other learned judge has differed on this point and held that it is not necessary to consider this aspect at all.
69. One of the learned judges has accepted a submission made on behalf of the assessee-company, viz., that the definition of “subsidiary company” as given in section 4(1)(c) of the Companies Act can be imported into the Income-tax Act. The other learned judge has disagreed with this.
70. This court will, therefore, also have to answer this reference by deciding on the above mentioned two aspects. It must be mentioned that the decision on these two aspects would in fact be decisive even on the questions referred to this court by the Tribunal.
71. Before the questions are taken up for consideration, it must be mentioned that arguments have proceeded before me on the basis that the following facts were admitted.
72. It is an admitted position that the assessee is a domestic company. It is an admitted position that 100 per cent. of the shares of the assessee-company are held by Gulf Oil (Great Britain) Limited, a company based and registered in England (hereinafter called “the U.K. company”). It is an admitted position that 100 per cent. of the shares of the U.K. company are held by Gulf Oil Corporation, Pittsburgh, a company based and registered in the United States of America (hereinafter called “the U.S. company”). The U.S. company is a company in which the public are substantially interested and that more than 50 per cent. of the shareholding of the U.S. company is held by the public in the U.S.A.
73. The relevant provision of the First Schedule to the Finance (No. 2) Act of 1971, reads as follows (see [1971] 81 ITR (St.) 81, 104)
“Paragraph F
In the case of a company, other than the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), –
Rates of income-tax
I. In the case of a domestic company –
(1) where the company is a company
in which the public are substantially
interested, –
(i) in a case where the total income 45 per cent. of the total
does not exceed Rs. 50,000 income;
(ii) in a case where the total income 55 per cent. of the total
exceeds Rs. 50,000 income;
(2) where the company is not a
company in which the public are
substantially interested, -
(1) in the case of an industrial company -
(a) on so much of the total income 55 per cent.;
as does not exceed Rs. 10,00,000
(b) on the balance, if any, of the 60 per cent.;
total income
(ii) in any other case 65 per cent. of the total
income :
Provided that the income-tax payable by a domestic company, being a company in which the public are substantially interested, the total income of which exceeds Rs. 50,000 shall not exceed the aggregate of -
(a) the income-tax which would have been payable by the company if its total income had been Rs. 50,000 (the income of Rs. 50,000 for this purpose being computed as if such income included income from various sources in the same proportion as the total income of the company); and
(b) eighty per cent. of the amount by which its total income exceeds Rs. 50,000.
II. In the case of a company other
than a domestic company -
(i) on so much of the
total income as consists of -
(a) royalties received from an
Indian concern in pursuance of an
agreement made by it with the
Indian concern after the 31st day
of March, 1961, or
(b) fees for rendering technical
services received from an Indian
concern in pursuance of an agreement
made by it with the Indian concern
after the 29th day of February, 1964,
and where such agreement has, in 50 per cent;
either case, been approved by
the Central Government
(ii) on the balance, if any, of the 70 per cent."
total income
Thus, if the assessee is a “domestic company” and is a “company in which the public are substantially interested” then under clause I(1)(ii) the rate applicable would be 55 per cent. of the total income. This is so because admittedly the total income of the assessee-company exceeds Rs. 50,000. If, on the other hand, the assessee is not “a company in which the public are substantially interested”, then under clause (2)(ii) the rate would be 65 per cent. of the total income.
Section 2(6) (a) of the Finance (No. 2) Act, 1971, provides that for the purposes of the First Schedule “company in which the public are substantially interested” means a company which is such a company as is referred to in section 108 of the Income-tax Act.
Section 2(6)(e) of the Finance (No. 2) Act, 1971, provides that all other words and expressions used in this section and the First Schedule but not defined in this sub-section and defined in the Income-tax Act shall have the meanings, respectively, assigned to them in that Act.
Section 108 of the Income-tax Act which reads as follows :
“108. Savings for company in which public are substantially interested. – 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.”
To be noted that section 108 also does not define what is a company in which the public are substantially interested. However section 2(18) of the Income-tax Act defines a company in which the public are substantially interested. Section 2(18) reads as follows :
“(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 :
74. 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
(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 there-under;
(B) (i) 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 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.
Explanation 2. – 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.’ and ‘more than fifty per cent.’, the words ‘not less than forty per cent.’ and ‘more than sixty per cent.’ had, respectively, been substituted.”
75. On the above provisions of law, one has to consider whether the assessee which is admittedly a domestic company, is also a company in which the public are substantially interested.
76. Mr. Dastur has submitted that this question can be looked at from four angles. He submitted that if any of these four are accepted by the court then the assessee would be a company in which the public are substantially interested. The four angles propagated by Mr. Dastur are :
(a) the U.S. company admittedly falls within section 2(18)(b)(B)(i)(d). He submitted that as the U.S. company falls under section 2(18)(b)(B)(i)(d), the U.K. company would fall under section 2(18)(b)(B)(i)(c). He submits that the U.K. company is thus a company in which the public are substantially interested within the meaning of section 108(a). He submitted that as the U.K. company is a company in which the public are substantially interested within the meaning of section 108(a) the assessee falls within section 108(b).
(i) In support of this proposition, Mr. Dastur relied upon a circular issued by the Central Board of Direct Taxes which clarifies that the expression “public” as used in section 2(18) had reference not only to the public in India, but also included public outside India. The circular also clarifies that one of the consequences of interpreting the expression “public” in a restricted manner would be that companies in which 50 per cent. or more of the shares are held by foreign companies (the bulk of whose shares are held by the public outside India) would have to be treated as those in which the public are not substantially interested. This circular shows how the Central Board of Direct Taxes interprets the word “public”. Even otherwise section 2(17) of the Income-tax Act also provides that even a body corporate incorporated by or under the laws of a country outside India is a “company” within the meaning of the Income-tax Act.
(ii) Mr. Dastur also relied upon the authority in the case of CIT v. Indo-Nippon Chemical Co. Ltd. [1986] 161 ITR 635 (Bom), in support of this proposition. In this case, the question was whether the shareholders of a Japanese company were members of the public within the meaning of section 2(18) of the Income-tax Act. The Division Bench of this court held that the Japanese shareholders of a Japanese company would be members of the public within the meaning of section 2(18).
(b) the U.S. company falls within section 2(18)(b)(B)(i)(d). He submitted that as 100 per cent. of the shares of U.K. company are held by the U.S. company, the U.S. company and U.K. company are one and the same. He submitted that then the assessee would fall within section 2(18)(b)(B)(i)(c). He submitted that a 100 per cent. owned sub-subsidiary of a 100 per cent. owned subsidiary should be considered as a subsidiary.
(c) the U.S. company falls within section 2(18)(b)(B)(i)(d) and the U.K. company thus falls within section 108(b). He submitted that by virtue of section 2(6) (a) of the Finance (No. 2) Act, the U.K. company would thus become a company in which the public are substantially interested. He submitted that the U.K. company would then fall under section 108(a) and the assessee would fall under section 108(b).
(d) the U.S. company falls under section 2(18)(b)(B)(i)(d) and is therefore a company in which the public are substantially interested under section 108(a). He submitted that under section 4(1)(c) of the Companies Act, a company is deemed to be a subsidiary of another if it is a subsidiary of any company which is the subsidiary of the other. He submitted that therefore a sub-subsidiary which fulfils the requirement of section 108(b) would be a subsidiary under section 108(b). He submitted that in this case 100 per cent. of the shares of the assessee are held by the U.K. company. He submitted that the assessee thus fulfils the requirement of section 108(b).
(i) In support of this proposition Mr. Dastur relied up on the case of Howrah Trading Co. Ltd. v. CIT , wherein the question was whether a person who had purchased shares in a company under blank transfer forms and in whose name the shares have not been registered in the books of the company was or was not a shareholder within the meaning of section 18(5) of the Income-tax Act. The Supreme Court whilst deciding this question held that under the Indian Companies Act the expression “shareholder” denotes no other person except a member. The Supreme Court held that no valid reason existed why the word “shareholder” as used in section 18(5) should mean a person other than the one denoted by the same expression in the Indian Companies Act. The Supreme Court was thus importing the definition of the term “shareholder” as used in the Companies Act into the Income-tax Act.
(ii) Mr. Dastur also relied upon the case of CIT v. Shantilal P. Ltd. . In this case the question was whether the loss suffered by the assessee was or was not a loss incurred in a speculative transaction within the meaning of section 43(5) of the Income-tax Act, 1961. In this case the Supreme Court held that there was no reason why the sense conveyed by the law relating to contracts should not be imported into the definition of “speculative transaction” in the Income-tax Act. Thus, in this case, the Supreme Court was importing the meaning as understood in the Contract Act into the Income-tax Act.
(iii) Mr. Dastur also relied upon the case of CIT v. Swadeshi Match Co. [1983] 139 ITR 833 (Bom). In this case, the question before this court was whether, on the facts and circumstances of that case, 330 equity shares held by one Western India Match Co. Ltd. (WIMCO) could be said to have been “held” by the assessee-company within the meaning of that expression occurring in Explanation II of Para D of Part II of the First Schedule to the Finance (No. 2) Act, 1962. In this case, the question was whether, in the absence of certain portion of the definition of “subsidiary company” occurring in section 4 of the Companies Act, which were found lacking in Explanation II of the Finance (No. 2) Act, WIMCO could be considered to be a subsidiary. Thus, to be seen that the entire definition of “subsidiary company” as given in the Companies Act was not adopted in the Finance (No. 2) Act. The Division Bench took note of an earlier judgment in Mafatlal Gagalbhai and Co.’s case [1980] 122 ITR 382 (Bom), wherein it was observed that the authorities applying the taxation laws would perforce have to go to the Companies Act to consider which was a holding company and which was a subsidiary company. The Division Bench then held that they were considering a provision for giving enhanced benefit by way of additional rebate to the assessee. The Division Bench held that if two constructions were possible, then it was desirable to adopt the construction which would benefit the assessee. The Division Bench held that the construction to be given to Explanation II should be one which would prevent dichotomy between the provisions governing “subsidiary companies” under the Companies Act and under the Income-tax Act. The Division Bench held that therefore WIMCO would be a subsidiary both for the purposes of the Companies Act and of Explanation II of the Finance (No. 2) Act.
(iv) Mr. Dastur also relied upon the authority in the case of State of U.P. v. Renusagar Power Co. [1991] 70 Comp Cas 127 (SC). In this case the question was whether the assessee-company which was Renusagar Power Company, could be said to be entitled to benefits given to companies consuming power from their own source of generation. The question was whether the assessee was entitled to certain rebates on the above basis. The facts were that Renusagar Power Company generated power. Its power was supplied only to Hindustan Aluminium Corporation Ltd. Renusagar Power Company was a wholly owned subsidiary of Hindustan Aluminium Corporation Ltd. The Supreme Court held that it was high time to reiterate that in the expanding of horizon of modern jurisprudence, lifting of corporate veil should be permissible as its frontiers were unlimited. The Supreme Court held that the veil on the corporate personality, even though may not be lifted, had become more and more transparent in modern company jurisprudence. The Supreme Court held that lifting of corporate veil is a changing concept and is of expanding horizons. The Supreme Court on the facts of that case held that Hindustan Aluminium Corporation Ltd., and Renusagar Power Company should be treated as one concern. On this basis, the Supreme Court held that the consumption of energy by Hindustan Aluminium Corporation Ltd., was to be treated as consumption from own source of generation by Renusagar Power Company.
(v) Mr. Dastur submitted that the definition under section 4(1)(c) of the Companies Act must be imported into section 108 of the Income-tax Act. He submitted that even on the doctrine of lifting of corporate veil it would be found that 100 per cent. of the shares of the assessee-company were held by the U.K. company and 100 per cent. of the shares of the U.K. company were held by a U.S. company. He submitted that it must therefore be held that the sub-subsidiary is also a subsidiary of the U.S. company and fell within section 108(b) of the Income-tax Act.
78. On the other hand, Mr. Deodhar submitted that the first requirement under Paragraph F was that the assessee must be a domestic company. He submitted that the term “domestic company” was governing clause I in paragraph F of the Schedule to the Finance (No. 2) Act. He submitted that therefore a company would be a company in which the public are substantially interested only provided that company as well as all parent company/companies were domestic companies. He submitted that this was clear from a reading of section 2(6) (b) of the Finance Act under which domestic company could only be an Indian company or a company which in respect of the income liable to income-tax has made prescribed arrangement for declaration and payments made within India of the dividends payable out of such income in accordance with section 194 of the Income-tax.
79. In support of this Mr. Deodhar relied upon paragraphs 4 and 8 to 12 (pages 232, 235-240) of the judgment of my Brother judge Saraf dated September 21/22 1993. A reading of this judgment shows that this submission has been accepted by the learned judge. However, as stated above, the other learned judge has not accepted this view. This is one of the points on which my brother judges have differed.
80. Mr. Deodhar also submitted that section 108(b) of the Income-tax Act only applies to such companies whose entire share capital is held by a company falling under section 108(a). He submitted that the definition of the expression “subsidiary company” under the Companies Act could not be incorporated into section 108 of the Income-tax Act. He submitted that neither of the two conditions prescribed under section 108(b) were satisfied by the assessee-company. He submitted that the assessee was not a subsidiary of the U.S. company and therefore was not a subsidiary of a company falling within section 108(a). He submitted. That a sub-subsidiary could not be treated as a subsidiary for the purposes of section 108(b). He submitted that therefore the assessee was thus not a company in which the public were substantially interested. In this behalf and in respect of the authorities relied upon by and submission of Mr. Dastur, Mr. Deodhar adopted the reasoning given by my Brother Judge Dhanuka (as he then was) in paragraphs 16-22 (pages 252-255) of the judgment dated September 22, 1993.
81. Mr. Deodhar submitted that for the above two reasons the assessee cannot be said to be a company in which the public were substantially interested.
82. I have heard both sides. I am unable to accept the submission of Mr. Deodhar that
the definition of the term “subsidiary company” under the Companies Act cannot be incorporated into the Income-tax Act. The authorities of the Supreme Court as well as of this court set out hereinabove are very clear. The authorities of the Supreme Court in the case of Howrah Trading Co. Ltd. [1959] 36 ITR 215 and of this court in the case of CIT v. Swadeshi Match Co. [1983] 139 ITR 833 clearly lay down that definitions given in the Companies Act must be imported into the Income-tax Act.
83. In this case, the Income-tax Act nowhere defines what is a “subsidiary company”. The Finance (No. 2) Act also does not define what is a “subsidiary company”. There would be a dichotomy if the assessee-company were to be a subsidiary company of the U.S. company for the purposes of the Companies Act, but were deemed not to be a subsidiary of the U.S. company for the purposes of the Income-tax Act. I am in agreement with the view expressed by my brother Dr. Saraf J., that the meaning given to the term “subsidiary company” under section 4(1)(c) of the Companies Act must be imported into section 108 of the Income-tax Act. Of course, the further condition laid down under section 108(b) must also be fulfilled. Thus, a sub-subsidiary would be a subsidiary under section 108(b) if the whole of its share capital has been held by the parent company or its nominees throughout the previous year.
84. If that meaning is incorporated then it is very clear that the assessee is a subsidiary within the meaning of section 108(b) of the Income-tax Act. This is so because, admittedly, the U.S. company is a company in which the public are substantially interested and falls within section 108(a). A 100 per cent. owned sub-subsidiary of a 100 per cent. owned subsidiary would be a subsidiary within the meaning of section 4(1)(c) of the Companies Act and also within the meaning of section 108(b) of the Income-tax Act. The assessee fulfils the condition of section 108(b) inasmuch as throughout the previous year 100 per cent. of its share capital was held by the U.K. company. Throughout the previous year 100 per cent. of the share capital of the U.K. company was held by the U.S. company. The U.K. company is thus a nominee of the U.S. company. The assessee would thus be a subsidiary within the meaning of section 108(b). In this view of the matter, it is not necessary to consider the three other angles propounded by Mr. Dastur.
85. I am, however, unable to accept the view that for the purposes of Paragraph F not only the assessee but the parent company/companies must also be domestic companies. A reading of Paragraph F does show that the rates of tax applicable therein are applicable to a “domestic company”. The reference to “domestic company” in the beginning is to the assessee. By virtue of section 2(6) (a) of the Finance (No. 2) Act, 1971, one has to go to section 108 of the Income-tax Act to determine whether a company is a company in which the public are interested. It is clear that section 108 of the Income-tax Act does not limit its applicability to a “domestic company”. Section 108 does not provide in clause (a) that it is to apply only to a domestic company. On the contrary, it applies to “any” company. Similarly, clause (b) of section 108 does not provide that it applies to a subsidiary of a domestic company. Thus, under section 108(a) a company could be a company in which the public are substantially interested even though it is not a “domestic company”. If that be so then a “subsidiary” under section 108(b) could be a “subsidiary” of a company which is not a domestic company. As stated above, the definition of a “subsidiary” under section 4(1)(c) includes a “sub-subsidiary”. As stated above the definition of “subsidiary” under the Companies Act must be imported into the Income-tax Act. Thus, even a sub-subsidiary would be a “subsidiary” under section 108(b). Such “subsidiary” may be a “sub-subsidiary” of a company which is not a domestic company. That under section 108 a company need not be a domestic company is also clear from the circular of the Central Board of Direct Taxes and from section 2(17) of the Income-tax Act. The authority in Indo-Nippon Chemical Co. Ltd.’s case [1986] 161 ITR 635 (Bom), also supports this view.
86. Thus the Legislature was well aware that a company can be a company in which the public are substantially interested by being a subsidiary or a sub-subsidiary of a company which is not a domestic company. Knowing this the Legislature, in Paragraph F, has only provided that the assessee is to be a domestic company. If the intention of the Legislature was that not only the assessee but its parent company/companies should be domestic company/companies, then the Legislature would have had to specifically so provide. In that case the Legislature could not/would not have, by virtue of section 2(6) (a) imported section 108 of the Income-tax Act. In that case, the Legislature would have in clause I(1) of paragraph F provided words to the effect “where the company and its parent company/companies is/are domestic company/companies in which the public are substantially interested”. The Legislature has purposely omitted to do so and the court cannot add words.
87. If it is held that the words “domestic company” in the opening part to clause I of Paragraph F govern the entire clause I, then there would be conflict between clause I and section 108 of the Income-tax Act. To avoid that conflict one would have to add words to section 108(b) of the Income tax Act to restrict a subsidiary to be a subsidiary of a domestic company. Where the Legislature intentionally omits to do so, the court cannot add words. This is particularly so when it is possible to harmonise both, without addition of any words to either, if it is held that the parent company/companies need not be domestic company/companies. It is settled law that if two interpretations are possible, then the one which harmonises must be accepted. It will, therefore, have to be held that so long as the assessee is a “domestic company”, it could be a company in which the public are substantially interested, even if the parent company/companies is/are not domestic company/companies.
88. In this view of the matter, it will have to be held that the assessee is domestic company in which the public are substantially interested Accordingly, the first question is answered as above.
89. As regards the second question, both sides fairly state that this question is squarely covered by the ratio laid down by the Supreme Court in that case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961. The assessee has claimed that they were not liable to levy. Thus, they have disputed liability. An appeal is maintainable. In any event on the view that I have taken, i.e., that the assessee is a domestic company or which the public are substantially interested, the second question would no longer survive. I am informed that the advance tax which had been paid by the assessee would cover the entire tax liability.
90. Accordingly the questions are answered as follows :
Question Answer 1. Whether, on the facts and in the In the negative. The Tribunal circumstances of the case, the Tribunal was not right in so was right holding that the assessee-company in holding. was not a company in which public are substantially interested as defined in the Finance (No. 2) Act of 1971, for the purpose of the First Schedule to the said Finance Act ? 2. Whether, on the facts and in the In the negative and in circumstances of the case, the favour of the assessee. Tribunal rightly held that no appeal lies against charge of interest under section 139 of the Act ?" I accordingly dispose of the reference as above.