# COMMISSIONER OF INCOME TAX BIHAR, PATNA v. SAHU JAIN LIMITED

- **Citation:** [1976] 3 S.C.R. 398
- **Court:** Supreme Court of India
- **Decided:** 1976-02-16
- **Case number:** Civil Appeal Nos. 761 & 762. of 1971
- **Bench:** P. K. Goswami, S. Murtaza Fazal Ali
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-bihar-patna-v-sahu-jain-limited-6746
- **Pages:** 15

## Headnote

lncon1e Tax Act, 1922-Section 23A(l)-Undistributed profits of a company
-Company in which public are substantially interested-Acting in co1IcertRclatio11ship aniongst shareholders if decisive-Family concern.
Sahu Jain was a private limited company during the assessment years 1952-53
and 1953-54.
All the shareholders of the company are the family members
of ~Ir. S. P. Jain except two employees who held 20 out of 50,000 shares and
excepting the three Companies ,.vhich were also sister concerns.
Under s. 23A
of the lncome Tax Act. 1922, prior to its amendment in the year 1955, where
the Income Tax Officer is satisfied that in respect
of
any
previous
year
the profits and gains distributed as dividends by any Company are less than
60 per cent of the assessable income of the company as reduced by
the Income Tax and Super
1~ax payable by the company in respect thereof, he shall unless he is satisfied that having regard to the loss incurred
by the company in earlier years or to the smallness of the profit made,.
the payment of a dividend or a larger dividend than declared would be un 4
reasonable, make an order in writing that the undistributed portion of the
income of the company of that previous year as compllted for incon1e tax
purposes and reduced by the amo.unt of income tax and supertax payable by
the company in respect thereof shall be deemed to have been distributed as
dividends amongst the shareholders.
The proviso to the said section provides
that the provisions of the section \VOuld not apply to any company in which
the public are substantially interested if shares of the company carrying not
less than 25 per cent of the voting power have been allotted unconditionally
to or acquired unconditionally by the public or beneficially held by public. The
Income Tax Officer held that the provisions of s. 23A were attracted in the
case of the company for both the years.
The Appellate Assistant Commissioner
confirmed the order of the Income Tax Officer. The Tribunal held that s. 23A
\Vas not applicable to the co1npany in respect of both the assessment years.
The Tribunal held that unless it is presumed that because
of
relationship
Shri S. P. Jain, Smt. Rama Jain and Shri A. K. Jain should be regarded as
acting in concert there is no other material on record on the basis of which
such- a conclusion could be supported.
On a reference made by the Tribunal,
the High Court answered the question in favour of the assessee and against
the Revenue.
In an appeal by special leave the appellant contended :
1. 80 per cent of the share capital was held by S. P. Jain and his wife
and t\vo sons; one of whom \vas a minor throughout the period and another
for a portion of the period and that the remaining shares were held by the
company which \Vere under the control of S. P. Jain and that only 20 sh3resout of 50,000 shares were held by two employees under the control of
S. P. Jain.
2. A. K. Jain was appointed as a Director when he \Vas a minor and he
became a Managing Director on a salary of Rs. 6,000/ · per month when he
\Vas 20 years old.
3. S. P. Jain who was a Director resigned making room for his Private
Secretary for appointment as Director.
4. The Company showed a loss of Rs. 2 lacs and odd in a transaction iR
H
hessian and the same was shown as profit by Smt. Rama Jain wife of S. P.
Jain.
5. S. P. Jain, A. K. Jain. R. Sharma and N. C. Jain were the promoters
pf the company and were signatories to the Memorandum of Association.
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C.l.T. V. SAHU JAIN LTD.
399
The respondent contended :
1. Smt. Rama Jain and A. K. Jain were independent assessees.
A .. _. ~· Ja~n
was taking independent decisions as a competent Director. Mere re1ationsh1p
would not lead to the conclusion that the said two shareholders acted in
concert with S. P. Jain.
2. A. K. Jain was an independent shareholder and was not under the
control of S. P. Jain or any other Director or shareholder.
A
3. N. C. Jain was Director from 1950 to 1954 and S. P. Jain
became
B
Managing Direc

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398
COMMISSIONER OF INCOME TAX BIHAR, PATNA
v.
SAHU JAIN LIMITED
February 16, 1976
[P. K. GOSWAMI AND S. MURTAZA FAZAL ALI, JJ.)
lncon1e Tax Act, 1922-Section 23A(l)-Undistributed profits of a company
-Company in which public are substantially interested-Acting in co1IcertRclatio11ship aniongst shareholders if decisive-Family concern.
Sahu Jain was a private limited company during the assessment years 1952-53
and 1953-54.
All the shareholders of the company are the family members
of ~Ir. S. P. Jain except two employees who held 20 out of 50,000 shares and
excepting the three Companies ,.vhich were also sister concerns.
Under s. 23A
of the lncome Tax Act. 1922, prior to its amendment in the year 1955, where
the Income Tax Officer is satisfied that in respect
of
any
previous
year
the profits and gains distributed as dividends by any Company are less than
60 per cent of the assessable income of the company as reduced by
the Income Tax and Super
1~ax payable by the company in respect thereof, he shall unless he is satisfied that having regard to the loss incurred
by the company in earlier years or to the smallness of the profit made,.
the payment of a dividend or a larger dividend than declared would be un 4
reasonable, make an order in writing that the undistributed portion of the
income of the company of that previous year as compllted for incon1e tax
purposes and reduced by the amo.unt of income tax and supertax payable by
the company in respect thereof shall be deemed to have been distributed as
dividends amongst the shareholders.
The proviso to the said section provides
that the provisions of the section \VOuld not apply to any company in which
the public are substantially interested if shares of the company carrying not
less than 25 per cent of the voting power have been allotted unconditionally
to or acquired unconditionally by the public or beneficially held by public. The
Income Tax Officer held that the provisions of s. 23A were attracted in the
case of the company for both the years.
The Appellate Assistant Commissioner
confirmed the order of the Income Tax Officer. The Tribunal held that s. 23A
\Vas not applicable to the co1npany in respect of both the assessment years.
The Tribunal held that unless it is presumed that because
of
relationship
Shri S. P. Jain, Smt. Rama Jain and Shri A. K. Jain should be regarded as
acting in concert there is no other material on record on the basis of which
such- a conclusion could be supported.
On a reference made by the Tribunal,
the High Court answered the question in favour of the assessee and against
the Revenue.
In an appeal by special leave the appellant contended :
1. 80 per cent of the share capital was held by S. P. Jain and his wife
and t\vo sons; one of whom \vas a minor throughout the period and another
for a portion of the period and that the remaining shares were held by the
company which \Vere under the control of S. P. Jain and that only 20 sh3resout of 50,000 shares were held by two employees under the control of
S. P. Jain.
2. A. K. Jain was appointed as a Director when he \Vas a minor and he
became a Managing Director on a salary of Rs. 6,000/ · per month when he
\Vas 20 years old.
3. S. P. Jain who was a Director resigned making room for his Private
Secretary for appointment as Director.
4. The Company showed a loss of Rs. 2 lacs and odd in a transaction iR
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hessian and the same was shown as profit by Smt. Rama Jain wife of S. P.
Jain.
5. S. P. Jain, A. K. Jain. R. Sharma and N. C. Jain were the promoters
pf the company and were signatories to the Memorandum of Association.
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C.l.T. V. SAHU JAIN LTD.
399
The respondent contended :
1. Smt. Rama Jain and A. K. Jain were independent assessees.
A .. _. ~· Ja~n
was taking independent decisions as a competent Director. Mere re1ationsh1p
would not lead to the conclusion that the said two shareholders acted in
concert with S. P. Jain.
2. A. K. Jain was an independent shareholder and was not under the
control of S. P. Jain or any other Director or shareholder.
A
3. N. C. Jain was Director from 1950 to 1954 and S. P. Jain
became
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Managing Director subject to the approval of the Government. A. K. Jain
was appointed as Deputy Managing Director on a remuneration of Rs. 6,0001per month subject to the approval of the Central Government.
4. The transactions like one of hessian are common transactions and no
undue importance can be attached to it.
5. Merely because .some persons are promoters or employees of a Company
that would not affect their character as shareholders of the Company.
C
Allowing the appeals by special leave,
HELD : 1. The controversy is whether the company is one in which the
public has 25 per cent or more shares. [404C]
2. This Court held in the case of Commissioner of Income Tax. We.st Bengal
v. East Coast Commercial Co. Ltd .• [1967] (I) SCR 321 that the word 'public"
is used in the explanation to s. 23A in contra-distinction to one or more
persons who act in unison and amongst whom the voting power constitutes a
block. This Court also held that the Tribunal had to decide in the first instance
whether there \vas a group of persons acting in concert holding a sufficient
number of shares which may control the voting as a block. But the existence
of block is not decisive. The company would still be a company in which
public are substantially interested if 25 per cent or more of the voting power
has· been allotted unconditionally to and beneficially held by the public. This
Court also held that the relationship and position as Director are not by
themselves decisive. But if the relatives act not freely but with others they
cannot be said to belong to the public. The test is not whether they have
actually acted in concert but whether the circumstances are such that human
experience tells us that it can safely be taken that they must be acting together.
[406A, C-D, H, 407A]
3. It is clear that this company was a family concern with only 20 shares
out of 50.000 shares allotted to the two outsiders who again happened to be
paid employees. The presence of these two outsiders is of the least significance
in the matter of management of the affairs of the company.
A. K. Jain
hecame a Director even when he was a minor.
He would not ordinarily be
able to play the role he is supposed to have doite in the Board meetings
unless S. P. Jain was confident that the Board was carrying out its mandates
with regard to the affairs of the Company. The fact that A. K. Jain and
others' were authorised to sign agreements on behalf of the Company is not
of 2re<lt si_gnificance. There is no evidence whatsoever to show that Rama
Jain wife of S. P. Jain was at all independently acting.
[409G, H, 410]
4. When a company is composed mostly of family members owning lion'i!:
share in the entire share capital of the company the onus to keep clear of the
reach of s. 23A will be on the shareholders _by adducing some positive evidence
about the absence of control by the contro1ling shareholders. [410-BJ
5. No single factor can be decisive but having regard to the totality of the
circumstances revealed in the case and the conduct of the transactions of the
company taken with the relationship which in the circumstances of this case
is not a ne2liclble element, this Court is clearly of the opinion that it is a
case in which it cannot be said that the public is substantially intereste..d in
25 per cent or more shares of the company. [410D-E]
6. Even if A. K. Jain is said to be· a member of the public, his share~
together with the shares of Ashoka Agencies Limited is 500 less than the
minimum shareholdin.e: requisite to earn the benefit of the third proviso to
s. 23A read with the explanation. [410-EJ
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SUPREME COURT REPORTS
(1976] 3 S.C.R.
7. Between August 11, 1951 and May 1, 1952, A. K. Jain and 2 employee
Directors apparently took all decisions for the company in the Board's meetings.
This is not ordinarily possible but for collaboration with the major shareholders.
This is a case where more ls meant than meets the eye.
[ 41 OE~F]
8. It is a clear case of all the shareholders acting in concert and in unison
and the two employee Directors were merely dummies.
There is not the
slightest inkling of the public being interested far less substantially interested
in this company. [410G]
9. The intimate relationship of the shareholders, with not the least evidence
of disconcert amongst them, the ordinary expectation for individual profit in
commercial undertaking; the history of the company and its continued smooth
working is inconsistent with anything but full unison amongst the shareholders.
The Board's meetings are evidence of well organised, well knit, close unity of
views in all affairs which in ordinary course of human conduct would not
have been at all possible but for a single or concerted action in the company
management by a controlling group.
[410D-F]
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 761 & 762.
of 1971.
\,
(Appeals by Special Leave from the Judgment aud Order dated
the 14-3-1969 of the Patna High Court in M.J .C. Nos. 182 and
-~
183 of 1962).
B. Sen, T. A. Ramachandran and S. P. Nayar, for the appellant.
Hardayal Hardy, and Bishamber Lal, for respondent.
The Judgment of the Court was delivered by·
GOSWAMI, J.
These two appeals by special leave are directed
against the common judgment of March 14, 1969, of the Patna High
Court in the matter of two references under section 66 (1) of the
Indian Income-tax Act, 1922, relating to assessment years 1953-54
and 1954-55 of the respondent (hereinafter to be referred to as the
company).
The case has a rather chequered history as will appear from the
facts narrated below :-
The company at the material time was a private limited company
and at the end of the relevant previous years, namely, August 31,
1952 and August 31, 1953, the shareholding was as follows:-
Number of shares on
31-8-1952
31-8-1953.
1. Sri Ashok Kumar~Jain,
10,000
10,000
Managing Director.
2. Sri R. Sharma, Director.
lO
10
3. Sri N. C. Jain, Director.
10
10
4. Sri S. P. Jain
10,000
10,000
5. Smt. Rama Jain .
10,000
10,000
6. Sri Alok Prakash Jain
l 10,000
10,000
7. Sri Rishabh Investment Ltd.
5,000
5,000
8. Dal mi a Jain Co. Ltd.
2,000
2,000
9. Universal Bank;or India Ltd.
980
980
10. Ashoka Agencies Ltd. ,
2,000
2,000
50,000
50,000
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C.I.T. v. SAHU JAIN LTD. (Goswami, J.)
401
Of these shareholders Rama Jain is the wife of S. P. Jain and Alok
Prakash Jain and Ashok Komar Jain are the sons of S. P. Jain and
Rama Jain.
Ashok Kumar Jain (briefly A. K. Jain), the Managing
Director, attained majority on March 5, 1952, while Alok Prakash
Jain was a minor during both the accounting
years.
The
three
companies, namely, Rishabh Investment Ltd., Dalmia Jain Co. Ltd.
and Universal Bank of India Ltd., are companies
to
which
the
provisions of action 23A of the Income-tax Act, 1922 .(briefly the
Act) prior to its amendment by the Finance Act
1955,
applied.
S. P. Jain was the principal shareholder of the Universal Bank of
India Ltd. holding 980 shares.
Ashoka Agencies Ltd. with 2000
shares was ·a company to which admittedly section 23A did
not
apply.
R. Sharma and N. C. Jain holding 10 shares
each
were
employees, N. C. Jain being the Secretary of S. P. Jain.
The Income-tax Officer by his orders of September 25, 1957
and October 30, 1957, held that section 23A was attracted in the
case of the company for both the years.
On appeal, the Appellate
Assistant Commissioner remanded the matter back to the Income-tax
Officer for a finding on certain additional facts.
The Income-tax
Officer in his remand report submitted certain additional facts to
the Appellate Assistant Commissioner who in due course affirmed
the orders of the Income-tax Officer.
The company appealed
to
the Income-tax Appellate Tribunal, Bihar, at Patna.
The Tribunal
allowed the appeal by its order of January 26, 1961 (7) and held
that section 23A was not applicable to the company in respect of
both the assessment years.
At the instance of the
Commissioner
Income-tax, Bihar, the following question was referred by the
Tribunal to the High Court :
"Whether on the facts and circumstances of the case
the Tribunal was justified in holding that the provisions of
section 23A of the Income-tax Act were not applicable to
the assessee company for the assessment
years
1953-54
and 1954-55" ?
The High Court by its order of December 9, 1965, in view of two
decisions of this Court, namely, Raghuvanshi Mills Ltd. v. Commissioner of Income-tax, Bombay,(') decided on December 7, 1960 and
Commissioner of Income-tax Bombay v. Jubilee Mills Ltd.(2) Bombay, decided on September 1, 1962, directed the Tribunal to submit
· a supplementary statement of case to it :
"Whether bearing in mind the principles laid down by
the Supreme Court in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax (41 Income Tax Reports 613) and
Commissioner of Income-tax, Bombay City v. Jubilee Mills
Ltd. ( 48 Income Tax Reports 9) Shrimati Rama Jain and
Sri Ashok Kumar J a~n, or either of them could be safely
taken to have acted m concert with Sri S. P. Jain during
the years in question, in respect of the
affairs
of the
assessee company" ?
(I) [1961] 2 S.C.R. 978.
(2) [1963] Supp. 1 S.C.R. 83.
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402
SUPREME COURT REPORTS
(1976] 3 s.c.R.
The High Court also directed that "the Tribunal may take additional
evidence, if it considers it necessary to enable it to state the supplementary case as directed above".
The Tribunal thereafter, after hearing the parties, submitted a
supplementary statement of case to the High Court on September 30,
1966. A controversy arose before the Tribunal with
regard
to
entertainment of additional evidence which the Revenue wanted to
adduce before it, particularly in view of the direction of the High
Court, but the Tribunal did not accede to the request and additional
evidence was not received.
The matter then came up before the
High Court resulting in the impugned order against the
Revenue.
Hence these two appeals by special leave.
The Revenue reiterated its grievance before the High Court about
the Tribunal's refusal to entertain additional evidence without success and the matter is no longer in controversy in view of a decision
of seven Judges of this Court in The Keshav Mills Co.
Ltd. v.
Commissioner of Income-tax, Bombay North,(') affirming the earlier
decisions of this Court in the case of the New Jehangir Vakil Mills
Ltd. v. The Commissioner of Income-tax, Bombay North(')
and
The Petlad Turkey Red Dye Works Co. Ltd. Petlad v. The
Commissioner of Income-tax, Bombay, Ahmedabad('). It is now
well-settled that when the Tribunal has disposed of the matter and
is preparing a statement of the case either under Section 66(1)
or
under section 66(2), there is no scope for any further or additional
evidence and the power of the High Court under section 66 ( c) can
be exercised only in respect of material and evidence
which
has
already been brought on the record.
It was contended on behalf of the Revenue before the High Court
that the finding of the Tribunal was perverse.
Mr. Sen appearing
on behalf of the Revenue before us has fairly and, in our opinion,
rightly not pressed this submission before us.
Similarly on behalf
,of the company also it was contended
before
the
High Court
that there was no principle of law involved in drawing any inference
in the cases in answer to the plea of the Revenue that the finding
whether section 23A was not attracted was a mixed question of law
and fact. It is not possible to hold that the question referred to the
High Court is not a question of law as undoubtedly on the statement
of case an important question of law does arise and the composite
reference was competent.
The question that arises for consideration is whether on the facts
and circumstances that are established before the Tribunal the company in the two assessment years can escape the reach of section 23A
of the Act.
(1) [1965] 2 S.C.R. 908.
(2) [1960] l S.C.R. 249.
(3) [1963] Supp. 1 S.C.R. 871.
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C.I.T. v. SAHU JAIN LTD. (Goswami, I.)
403
Section 23A prior to its amendment in 1956 and so far as it is
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material read as follows :-
"23A ( 1). Power to assess individual members of certain companies.-
Where the Income-tax Officer is satisfied that in respect
of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month
B
after its accounts for that previous year are laid before the
company in general meeting are less than sixty per cent, of
the assessable income of the company of that previous year,
as reduced by the amount of income-tax and super-tax
payable by the company in respect thereof he shall, unless
he is satisfied that having regard to losses incurred by the
.company in earlier years or to the smallness of the profit
C
made, the payment of a dividend or a larger dividend than
that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner
an order in writing that the undistributed portion of the
assessable income of the company of that previous
year
as computed for income-tax purposes and reduced by the
amount of income-tax and super-tax payable by the comD
pany in respect thereof shall be deemed
to have been
distributed as dividends amongst the share-holders as
at
the date of the general meeting aforesaid, and thereupon
the proportionate share thereof of each shareholder shall
be included in the total income of such shareholder for the
purpose of assessing his total income :
•
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Provided further that this sub-section shall not apply
to any company in which the public
are
substantially
interested ..... .
Explanation.-For the purpose of this sub-section, a
company shall be deemed to be a company in which the
public are substantially interested if shares of the company
. . . . carrying not less than twenty-five per cent of
the
voting power have been allotted unconditionally
to
or
acquired unconditionally by, and are at the end
of' the
previous year beneficially held by the public . . . . . and if
any such shares have in the course of such previous year
?een the subject of dealings in any stock exchange or are
m fact freely transferable by the holders to other members
of the public".
In this case the company did not declare any dividend for the
assessment year 1953-54.
In the next assessment year 1954-55,
~:mly. a sum of Rs. 50,000/- was distributed as dividend. It is not
m dispute ~hat the company had sufficient requisite assessable income
out of .which ~ufficient or larger dividend could have been paid.
There is no dispute that the payment of an adequate dividend for
the first year and larger dividend for the next year would have been
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404
SUPREME COURT REPORTS
(1976] 3 S.C.R.
at all unreasonable in respect of these two assessment years.
The
only controversy between the parties is with regard to the exclusion
of the company from the application of section 33A in view of the
third proviso read with the Explanation.
In other words, is
the
company one in which the public are substantially interested ? It
could be so in terms of the Explanation if 25 per cent shares of the
company or more had been allotted unconditionally to, or acquired
unconditionally by, and are at the end of the previous year beneficially
held by the public and if any such shares in the course
of such
previous year were in fact freely transferable by the holders lo other
members of the public. It was not in dispute that the shares of the
company were in fact freely transferable by the holders
to
other
members of the public. The controversy, therefore, is within a very
narrow compass, namely, whether, as stated earlier, the company is
one in which the public has 25 per cent or more shares allotted unconditionally to, or acquired unconditionally by it and are at the
end of the previous year beneficially held by it.
It may be mentioned that section 23A ( 1), as it stood before the
amendment by the Finance Act 1956, did not authorise amalgamation
of the shares held by "relatives" as if they represented
a
single
shareholder. It will, therefore, be a question of fact and a matter
of inference in each case whether any "relatives" forming themselves
into a company acted as a group or block in concert in controlling
the affairs of the company.
Relationship would not, per se, lead to
such a conclusion.
The Tribunal in its order observed :
"Sri A. K. Jain became major on 5-3-1952. Therefore,
as at the end of the two previous years, his holding of
10,000 shares cannot ipso facto be amalgamated with the
'shareholding of Sri S. P. Jain as if he was the nominee of
his father.
The shareholding of 10,000 shares by Mrs.
Rama Jain has also to be left out of account since,
as
already observed, there is no finding that Sri S. P. Jain
provided the consideration for the acquisition of
I 0,000
shares held by her. Assuming, therefore, that Sri S. P. Jain
was controlling shareholder, the shares held by the members
of the 'public' which would include Sri A. K. Jain and
Mrs. Rama Jain would be at least 22,000 shares".
In the supplementary statement of case filed by the Tribunal enclosing various orders and otller documents, it is shown that S. P.
Jain was Director of the company from August 3, 1950 to September 25, 1950. He was appointed Managing Director from Jnne 6,
1953, subject to approval of the Government.
A. K.
Jain was
Director of the company from August 3, 1950 even when he was a
minor (his date of birth being March 5, 1934) and was appointed
Deputy Managing Director from June 6, 1953, subject to approval
of the Government.
R. Sharma was Director from 3-8-1950
to
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C.I.T. v. SAHU JAIN LTD. (Goswami, !.)
405
7-9-1956.
He was Secretary of R._K. Dalmia and employee of Sahu
A
Jain Limited.
H. C. Jain was Director from 25-9-1950 to 25-3-1954.
He was Secretary of S. P. Jain and employee of Ashoka Agencies
Limited.
From the above it appears that the Deputy Managing Director
and the two other Directors held amongst themselves 10,000 shares
B.
and out of the balance 30,000 shares were held by the relations. of
the Managing Director, namely, by the father, the mother and the
minor brother.
It also appears that S. P. Jain along with Ashok
Kumar Jain, R. Sharma and N. C. Jain were the promoters
and
subscribed to the Memorandum of Association at the start of
the
company in July 1950. It also appears Ashok Kumar Jain, Director,
was getting a remuneration of Rs. 6,000/- per month w.c.f. SeptemC
ber 1951 in accordance with the resolution passed in an extra-ordinary general meeting of the shareholders on October 1, 1951. At
the meeting of the Board of Directors dated November 29, 1950,
Ashok Kumar Jain and R, Sharma, Directors of the company, were
authorised to execute managing agency agreements
with
different
companies.
Ashok Kumar Jain was generally presiding over
the
meetings from November 1950.
I>
The Tribunal further observed in its statement of case that -
"A perusal of the minutes or the proceedings of the
general meetings does not lead to any inference that Sri S. P.
Jain, Smt. Rama Jain and Sri A. K. Jain were necessarily
acting in concert. On the other hand, it appears that despite
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his young age, Sri A. K. Jain seems to have been
taking
active interest in the management of the affairs of the assessee-company and the companies managed by it.
Unless it
is to be presumed that because of relationship, Sri S. P. Jain,
Smt. Rama Jain and Sri A. K. Jain should be regarded as
acting in concert, there is no other material on record on the
basis of which such a conclnsion could be supported".
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The Tribunal also observed :
"that in spite of opportunity afforded by the Appellate Assistant Commissioner, the Income-tax Officer had not brought
on record materials to show that the voting rights of Mrs.
Rama Jain or Sri A. K. Jain were controlled by Sri S. P.
Jain".
The Tribunal concluded by observing that -
"The revenue had failed to establish that Sri S. P. Jain, his
wife and his son Sri A. K. Jain were acting in concert".
Section 23A again came up for consideration before this Court in
Commissioner of Income-tax, West Bengal v. East Coast Commercial
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[1976] 3 $.C.R.
Co. Ltd. (I).
This Court made a reference to the Raglwranshi Mills'
case (supra) where it was observed :
"The word 'public' is used (in the Explan~tion). in contradistinction to one or more persons who act m umons and
among whom the voting power constitutes a block. If such
a block exists and possesses more than seventy-five per cent
of the voting power, then the company cannot be said to be
one in which the public are substantially interested ..... .
the test is first to find out whether there is an individual or
group which controls the voting power as a block. If there
be such a block, the shares held by it cannot be said
to be 'unconditionally' and 'beneficially' held by members of
the public".
This Court further observed :
" The Tribunal had to decide in the first instance whether
there was· a group of persons acting in concert holding a
sufficient number of shares which may control the voting as
a block.
But the existence of a block is not decisive. If
there be a group of persons holding control over voting,
the Company would still be a Company in which the public
are substantially interested, if twenty-five per cent or more
of the voting power has been allotted unconditionally to and
beneficially held by the public and the shares were in the
previous years subject of dealings in any stock exchange in
the taxable territories or were in fact freely transferable by
the
holders
to
other members of the public.
The two
enquiries are distinct".
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This Court further referred to Jubilee Mills' case (supra) and Raghu-
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vanshi Mills' case (supra) and observed as follows :-
"But in Commissioner of Income-tax, Bombay City-I v.
Jubilee MU!s Ltd. (supra) this Court held that no direct
evidence of overt act or concert between the members of the group having control over voting was necessary
to prove that the Company was not one in which the public
were substantially interested. It was observed. in Raghuvanshi Mills' case (supra) that 'in deciding if there is such
a controlling interest, there is no formula applicable to all
cases. Relationship and position as director are not by themselves decisive. If relative act, not freely, but with others,
they cannot be said to belong to that body, which is described as 'public' in lhe Explanation'.
In Jubilee Mills' case
(supra)
this
Court elaborated those
observations and
stated :
The test is not whether they have actually acted in concert but whether drcumstances are such that human experience tells us that it can safely be taken that they must
(1)[19671 1 s.c.R. s21.
C.I.T. v. SAHU JAIN LTD. (Goswami, J.)
be acting together. It is not necessary to state tbe kind of
evidence that will prove such concerted actings. Each case
must necessarily be decided on its own facts".
407
This Court finally in the above East Coast Commercial Company's
case concluded as foUows :-
"On an analysis of the reasons recorded by the Tribunal
and the High Court, it is clear that the Tribunal held that
the Kedias did not form a controUing group because there
was no evidence that they actuaUy controlled the voting,
even though they held more than seventy-five per cent of
the shares issued by the Company : the High Court observed
that the members of the Kedia family held 4,016 shares of
the Company and were in a position to control the affairs
of the Company, but there was no evidence to show that they
did in fact act in concert and controlled the affairs of
the Company as a block. But, as already observed, if the
members of the Kedia family formed a block and held more
than seventy-five per cent of the voting power, it was not
necessary to prove that they actuaUy exercised controlling
interest. It is the holding in the aggregate of a majority of
the shares issued by a person or persons acting in concert
in relation to the affairs of the Company which establishes
the existence of a block. It is sufficient, if having regard
to their relation etc., their conduct, and their common
interest, that it may be inferred that they must be acting together; evidence of actual concerted acting is normaUy difficult to obtain, and is not insisted upon".
We may also observe in passing that it does not appear that the
East Coast Co_mmercial Company's case (supra) was referred to during the hearing in, nor was it noticed by, the High Court.
The Tribunal in the supplementary statement observed as follows:-
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"Unless it is to be presumed that because of relationship,
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Sri S. P. Jain, Smt. Rama Jain and Sri A. K. Jain should be
regarded as acting in concert, there is no other material on
record on the basis of which such a conclusion could be
supported".
The High Court also observed to the same effect :
" It may be that in view of the relationship of the parties as
to a group consisting of the father, two minor sons and
their mother, a possible inference was that the relationship
was such that they could reasonably be taken to be acting as
a group in concert .... " but "the assessee could not be
placed in the category of such a company accordingly because
of close relationship".
Keeping in the forefront the test laid down by this Court in East
Coast Commercial Company's case (supra), Mr. Seo on behalf of the
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Revenue submitted for our consideration the following facts and circumstances from which, according to counsel, an inference can be
reasonably drawn about the controlling power in a block confined to
a family group holding more than 75 p~r cent shares :
( 1) 80 per cent of the share capital ( 40,000 out of
50,000) is held by S. P. Jain, his wife and two sons,
one of whom was a minor throughout the period of
the two accounting years and the other son,
A. K.
Jain, for a portton of the period upto March 1952.
The remaining 20 per cent of the shares was held by
the companies which were under the control by
S. P. Jain and out of which 20 shares were held by
two employees under the control of S. P. Jain.
(2) A. K. Jain was appointed as Director in the company
in August 1950 when he was a minor, aged 16 years,
and he became the Managing Director on 1-2-1954
at a salary of Rs. 6,0001- per month.
According to
counsel this could not have been possible if he was
not the son of the controlling shareholder, S. P. Jain.
( 3) S. P. Jain who was a Director resigned making room
for his Private Secretary N. C. Jain for appointment
as Director.
( 4) During the assessment year
I 953-54 the assessee
company claimed Rs. 2,02,500/- as loss in a transaction in hesslan through Messrs Kabra & Co. in settlement of August 18, 1952, and the same amount
was shown as profit in hessian through the same
broker by Smt. Rama Jain wife of S. P. Jain in the
settlement.
(5) S. P. Jain, A. K. Jain, R. Sharma and N. C. Jain
were the promoters of the company and were the
signatories to the Memorandum of Association.
Mr. Hardy, the learned counsel for the respondent, on the other
hand, replied to the submissions as follows :-
(1) Rama Jain and A. K. Jain are independent assessees.
The minutes of the Board's meetings clearly show
A. K. Jain as a competent Director taking independent
decisions.
Mere relationship, therefore, would
not
lead to the conclusion that these two shareholders
acted with S. P. Jain in concert.
He, however, admits that S. P. Jain may be said to control the voting
power of the minor son, Alok Prakash Jain, as his
natural guardian.
According to Mr. Hardy if Rama
Jain and A. K. Jain are holding 20,000 shares out of
50,000, they cannot be held to be acting in concert
with S. P. Jain and section 23A will not be attracted.
(2) With rerrard to the second submission of Mr. Sen,
Mr. Hardy submits that there is sufficient evidence
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C.I.T. v. SAHU JAIN LTD. (Goswami, J.)
409
in the record, which is even referred to in the further·
statement of the case, that A. K. Jain was an independent shareholder and was not under the control
of S. P. Jain or any other Director or shareholder.
He further submits that there is no evidence whatsoever that the money for purchasing the shares of
A. K. Jain or even of Rama Jain was advanced by
S. P. Jain.
(3) With regard to the third submission of Mr. Sen, Mr.
Hardy had to admit that N; C. Jain was Director
from 1950 to 1954 and S. P. Jain was
Director
from August 3, 1950 to September 25, 1950 and
S. P. Jain became Managing Director of the company
on June 6, 1953, subject to the approval of the
Government on a remuneration of Rs. 8,000/- per
month and A. K. Jain was appointed as Deputy
Managing Director on a remuneration of Rs. 6,000/-
per month subject to the approval of the Central
Government (vide minutes of Board's meeting of
June 6, 1953). According to Mr. Hardy, appointment of Directors or even Managing Director is a
regular matter of the company and no particular
significance should be attached to these appointments.
( 4) With regard to the fourth submission Mr. Hardy submits that such transactions are common with brokers
and even the purchaser is not known in most of the
cases. Hence no undue importance should be attached to the hessain transaction so as to influence the
conclusion. It is also pointed out that there was no
controversy about the genuineness of the hessian
transaction.
We are of the view that the genuineness of the aforesaid transaction is, however, irrelevant for the purpose of considering its effect
in acting in concert by the shareholders.
(5) With regard to the fifth submission Mr. Hardy submits that it i~ true that S. P. Jain, A. K. Jain. R.
Sharma and N. C. Jain were the promoters of the
company but admittedly two of them, namely,
R. Sharma and N. C. Jain were outsiders. That they
were employees would not affect their character as
shareholders of the company or even as Directors.
It is clear that this company was a family concern with only
20 shares out of 50,000 shares allotted to two outsiders who again
happened to be paid employees. The presence of these two outsiders
ns of the least significance in the matter of management of the
affairs of the company. It is true that most of the meetings of the
;Board of Directors were presided over by A. K. Jain with either of
the two employees or one of them attending the same. It must however, be noted that A. K. Jain became a Director even when he' was a
minor aged 16 years.
He would not ordinarily be able to play the
role he is supposed to have done in the Board's meetings unless S. P.
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[1976] 3 S.C.R.
Jain was confident that the Board was carrying out his mandates
with regard to the affairs of the company. It is also true that A. K.
Jain and the other Directors were authorised to sign agreements on
behalf of the company, but this is not of great significance since this
was in pursuance of a decision of the Board's meeting which could
not have been passed but for the concurrence of S. P. Jain. There is.
no evidence w)latsoeve~ to show that Rama Jain, wife of S. P. Jain,
was at all independently acting.
When a company is composed mostly of family members owning
lion's share in the entire share capital of the company the onus to
keep clear of the reach of section 23A(l) will be on the shareholders
by adducing some positive evidence about the absence of control by
the controlling shareholders.
So far as Rama Jain is concerned it is not possible to hold that
S. P. Jain would not be able to control his wife's voting power along
with that of his minor son, Alok Prakash Jain. It is true that mere
relationship or being a Director is· not decisive.
As a matter of fact
no single factor can be,decisive but having regard to the totality of the
circumstances revealed
in the case and the conduct of the
transactions of the company taken with the relationship which, in the
circumstances of the case is not a negligible element, we are clearly
of the opinion that it is a case in which it cannot be said that the·
'public' is substantially interested in 25 per cent or more shares of
the company.
Even if we allow A. K. Jain to be a member of the
'public', he· only holds I 0,000 shares and taken with 2,000 shares
of Ashoka Agencies Ltd., the total shareholding comes only to 12,000•
shares, that is to say, 500 less than the minimum shareholding requisite
to earn the benefit of the third proviso to section 23A read with the
Explanation.
Further, between August 11, 1951 and May 1, 1952, A. K. Jain
and two employee-Directors, the latter having a modicum of 10
shares each, apparently took all decisions for the company in the·
Board's meetings. This is not ordinarily possible but for collaboration
with the major shareholders.
This is a case where more is meant than
meets the eye. We are unable to hold in this case, in absence of
any reliable evidence to the contrary, that the voting power of the
three Directors was free and uninhibited and not within the orbit of
control of the other major shareholders, S. P. Jain and Rama Jain
acting in concert. It is a clear case of all the shareholders acting i11'
concert and in unions and the two employee-Directors were merely
dummies.
There is not the slightest inkling of 'public' being interested, far less substantially interested, in this company.
There was
no one who could come within the term 'public' outside the ring of the
shareholders acting in concert for their own ends with a common purpose.
There is no evidence whatsoever in this case that the shareholders did not cohere together in the matter of transaction of the·
company's affairs.
When the reality is manifest some reliable evidence within the special knowledge of the assessee must be forthcoming from its side to contradict the obvious in order to be covered!
by the exception.
This has not happened in this case.
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C.l.T. v. SAHU JAIN LTD. (Goswami, J.)
411
Unless the two employees were nominees of the major sharehold·
ers it is ordinarily absurd to suppose that they could aspire to be and
become Directors of the company.
The Appellate Assistant Commissioner in his order, which is annexed with the statement of the case,
mentions that-
"In fact ·Shri S. P. Jain as a controlling shareholder had
brought himself in as a Director of the company right from
the inception of the company and was the first Director of the
company from 3-8-50 to 25-9-50.
From September '50 to
March '54, however, he temporarily gave up the directorship
by putting in an employee as a nominee-director, Sri N. C.
Jain, for the intervening period so that there may be no hitch
in the appellant-company being appointed as Managing Agent
of certain other companies under his control on which also
Sri S. P. Jain was a Director, such as the Rohtas Industries
Ltd., Bharat Collieries Ltd., S. K. G. Sugar Ltd., DehriRohtas Light Railway Co. Ltd. and New Central Jute Mills
Ltd. As soon as this objective was achieved, Sri S. P. Jain
staged a come back as a Director of the appellant-company
on 25-3-54 when the nominee-director Sri N. C. Jain resigned his directorship to make room for his master Sri S.