# M. S. Anirudh<t v. Tiu Tlwmco's Ba• Ltd. Hidayatullah, I

- **Citation:** [1963] Supp. 1 S.C.R. 83
- **Court:** Supreme Court of India
- **Decided:** 1963
- **Bench:** J. L. Kapur, A. K. Sarkar, M. HrnAYATULLAH
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-anirudh-t-v-tiu-tlwmco-s-ba-ltd-hidayatullah-i-2751
- **Pages:** 16

## Headnote

Irwmie Tax-Individual members of companiu, aa"8&11lent
of-Public s11bstantially interested, meaning of-Group control·
ling more thnn 15% voting power-Managing Agents forming such
II group-lndia11 Income-tax Act, 1922(11of1922), •· 23A.
Section 23A of the Incom,.tax Act, 1922, empowered the
Income-tax Officer to assess individual members of a company
in respect of undistributed assc!Sable income of the company in
certain circumstances. The proviso to this section made s. 23A
iu.:pplicable to a company in which the public was substantially
interested. The explanation to the proviso laid down that a
company shall be deemed to be one in which the public was
1962
M. S. Anirudh<t
v.
Tiu Tlwmco's Ba•
Ltd.
Hidayatullah, I
1962
1962
Commissioner nf
mt'ttcome-ttVe, Bombay
v.
... ubilee Mills Ltd.
84
SUPREME COURT REPORTS [1963] SUPP.
substantially interested if the shares of the company carrying
not less than 25°/0 of the voting power had been allo(ted uncondi·
tionally to or acquired by the public and were held beneficially
by the public. It was found that though the directors of the
company's qua directors did not hold more than 75% of the
shares, the shares held by such directors as were partners in the
firm of the Managing Agents of the con1pany together with the
shares held by other partners of the Managing Agents and tbe
shares held by the members of the Managing Agency on behalf
of minor children exceeded 75% of the voting power.
Hekl, that the company was not one in which the pub I ic wa.
substantially interested and s. 23A was applicable to it. No
person could be said to belong to the "public" unless he held
the shares unconditionally and beneficially for himself. The
v..•ords "unconditiOnally" and "beneficially" indicated that the
voting power arising from the holding of thos.e shares should be
free and not within the control of some sharehold.r and the
holder should not be a nominee of.another. Directors, qua
directors, were not without the pale of the public as there was
nothing that required them to act in unison. What ·had to
be seen was whether there was any individual or a group holdin15 the controlling interest which group acting in concert could
direct the affairs of the compa~y at its will. The partners of
the Managing Agency constituted a group holding more than
75% of the voting power in the company and they could not be
counted as public as they must be taken to act in their own
interest in unison".
Commissioner of Income-tax v. H. Bjordal, [1955]
28
I. T. R. 25, referred to.
Shri Changdeo Sugar Mills Ltd. v. Commi88ioner of Incometax, Bombay, [1961] 41 I. T. R. 667 ahd Ritghuvanshi MilZ. Ltd.
v. Commi,,sioner of Income-tax [1961] 41 I. T. R. 613, relied on.
CIVIL APPELLATE juR1SDICTION : Civil Appeal
No. 599 of 1961.
Appeal from the judgment and order dated
March 13, 1958, of the Bombay High Court in
I. T. R. No. 40 of 1957.
R. Ga=pathy Iyer and R. N. Sachthey, for the
appellant.
A. V. Viswana.tha Sastri and J. N. Shmfj, for
the respondent.
1962. September 17. The Judgment of the Court
was delivered by
l S.C.R.
SUPREME COURT REPORTS
85
HrnAYATULLAH, J.---This is an appeal on a certificate of fitness granted by the High Court of Bombay
against the judgment of the High Court dated March
13, 1958, on a reference made by the Income Tax
Appellate Tribunal. The Commissioner of Income
Tax, Bombay City I, is the appellant and tbc Jubilee
Mills Ltd., Bombay, the respondent.
The only
question raised in this appeal is the application of
s. 23A of the Income-tax Act to the assessee company.
The assessee company is a limited liability c01μpany with a paid-up capital of Rs. 15,25,000(-. lt5
paid up capital is m"ade up as under :---
1 Lakh Ordinary Shares of
Rs. 10 each
Rs. I U,00,000
5,000 Cumulative Preference .Shares of
Rs. 25 paid-up.
Rs. 1,25.000
4,000 Second Preference Shares of
Rs. 100 each fully paid-up.
Rs. 4,00,000
The Second Preference Shares do not entitle the
holders to vote. Thus shares of the assessce company
car

## Text

1 S.C.R.
SUPREME COURT REPORTS
83
though not to increase it. The document was altered
while in the possession of the very person who, as the
agent of Anirudhan, brought it to the Bank on both
the occasions. Anirudhan must be deemed to have
held out Sankaran as his agent for this purpose and
this creates an estoppel against Anirudhan, because
the Bank believed that Sankaran had the authority.
The offer thus remains in its amended form an offer
of Anirudhan to the Bank and the Bank by accepting
it turned it into a contract of guarantee which was
backed by the past consideration on which the offer of
Anirudhan was originally based.
In my opinion, the appeal must fail.
I would,
therefore, dismiss it.
BY COURT : In accordance with the opinion
of the majority, the appeal is dismissed. There would
be no order as to costs.
Appeal dismissed.
COMMISSIONER OF INCOME-TAX, BOMBAY
v.
JUBILEE MILLS LTD., BOMBAY
(J. L. KAPUR, A. K. SARKAR AND
M. HrnAYATULLAH, JJ.)
Irwmie Tax-Individual members of companiu, aa"8&11lent
of-Public s11bstantially interested, meaning of-Group control·
ling more thnn 15% voting power-Managing Agents forming such
II group-lndia11 Income-tax Act, 1922(11of1922), •· 23A.
Section 23A of the Incom,.tax Act, 1922, empowered the
Income-tax Officer to assess individual members of a company
in respect of undistributed assc!Sable income of the company in
certain circumstances. The proviso to this section made s. 23A
iu.:pplicable to a company in which the public was substantially
interested. The explanation to the proviso laid down that a
company shall be deemed to be one in which the public was
1962
M. S. Anirudh<t
v.
Tiu Tlwmco's Ba•
Ltd.
Hidayatullah, I
1962
1962
Commissioner nf
mt'ttcome-ttVe, Bombay
v.
... ubilee Mills Ltd.
84
SUPREME COURT REPORTS [1963] SUPP.
substantially interested if the shares of the company carrying
not less than 25°/0 of the voting power had been allo(ted uncondi·
tionally to or acquired by the public and were held beneficially
by the public. It was found that though the directors of the
company's qua directors did not hold more than 75% of the
shares, the shares held by such directors as were partners in the
firm of the Managing Agents of the con1pany together with the
shares held by other partners of the Managing Agents and tbe
shares held by the members of the Managing Agency on behalf
of minor children exceeded 75% of the voting power.
Hekl, that the company was not one in which the pub I ic wa.
substantially interested and s. 23A was applicable to it. No
person could be said to belong to the "public" unless he held
the shares unconditionally and beneficially for himself. The
v..•ords "unconditiOnally" and "beneficially" indicated that the
voting power arising from the holding of thos.e shares should be
free and not within the control of some sharehold.r and the
holder should not be a nominee of.another. Directors, qua
directors, were not without the pale of the public as there was
nothing that required them to act in unison. What ·had to
be seen was whether there was any individual or a group holdin15 the controlling interest which group acting in concert could
direct the affairs of the compa~y at its will. The partners of
the Managing Agency constituted a group holding more than
75% of the voting power in the company and they could not be
counted as public as they must be taken to act in their own
interest in unison".
Commissioner of Income-tax v. H. Bjordal, [1955]
28
I. T. R. 25, referred to.
Shri Changdeo Sugar Mills Ltd. v. Commi88ioner of Incometax, Bombay, [1961] 41 I. T. R. 667 ahd Ritghuvanshi MilZ. Ltd.
v. Commi,,sioner of Income-tax [1961] 41 I. T. R. 613, relied on.
CIVIL APPELLATE juR1SDICTION : Civil Appeal
No. 599 of 1961.
Appeal from the judgment and order dated
March 13, 1958, of the Bombay High Court in
I. T. R. No. 40 of 1957.
R. Ga=pathy Iyer and R. N. Sachthey, for the
appellant.
A. V. Viswana.tha Sastri and J. N. Shmfj, for
the respondent.
1962. September 17. The Judgment of the Court
was delivered by
l S.C.R.
SUPREME COURT REPORTS
85
HrnAYATULLAH, J.---This is an appeal on a certificate of fitness granted by the High Court of Bombay
against the judgment of the High Court dated March
13, 1958, on a reference made by the Income Tax
Appellate Tribunal. The Commissioner of Income
Tax, Bombay City I, is the appellant and tbc Jubilee
Mills Ltd., Bombay, the respondent.
The only
question raised in this appeal is the application of
s. 23A of the Income-tax Act to the assessee company.
The assessee company is a limited liability c01μpany with a paid-up capital of Rs. 15,25,000(-. lt5
paid up capital is m"ade up as under :---
1 Lakh Ordinary Shares of
Rs. 10 each
Rs. I U,00,000
5,000 Cumulative Preference .Shares of
Rs. 25 paid-up.
Rs. 1,25.000
4,000 Second Preference Shares of
Rs. 100 each fully paid-up.
Rs. 4,00,000
The Second Preference Shares do not entitle the
holders to vote. Thus shares of the assessce company
carrying votes are 1,05,000. This was the position
on June 30, 1947. We are concerned with the assessment year 1948-49 corresponding to the previous year
ended on June 30, 1947. In that year, the company
was assessed on a total income of Rs. 7,47,639/-. The
Income Tax Officer calculated the tax at Rs. 3,27,091,
and the balance available for
distribution was
Rs.4,20,548. In that year, the company ought, ifs. 23A
was applicable, to have distributed 60% of the above
amount. The company, however, declared dividends
which in the aggregate amounted to Rs. 24,750. The
Income Tax Officer, with the previous approval of
the Inspecting Assistant Commissioner applied the
provisions of s. 23 A of the Income Tax Act and held
that the company was deemed to have declared dividend of Rs. 3,97, 788/-.
The assessee company was being managed by a
firm called Mangaldas Mehta & Co. That firm
1962
Commissioner of
Income~lax, Bombap
v.
Jubilee Milts Ltd.
Hidayatulltih, I.
1962
Commissioner of
Income-tax, Bombay
v.
Jubilee Mills Ltd.
Hidayatullah, J.
86
SUPREME COURT REPORTS [1963) SUPP.
consisted of 14 partners of whom seven were the direc·
tors of the assessee company. The members of the
Managing Agents who were also directors held between
them 35,469 ordinary shares and 880 First Preference
Shares.
The remaining seven members of the Managing Agen.ts, who were not directors of the assessee
comp.any, held respectively 41,659 and 370 shares of
the two categories.
75 shares were held by Girdhardas & Co. Ltd. to which company admittedly s. 23 A
was applicable. Some of the members of the Manag·
ing Agency firm held on behalf 0f their minor children
or Qn behalf of their joint families 9,899 Ordinary
Shares and 937 First Preference Shares. The following
is a detailed break-up of the share holdings :-
Cate,gory 'A'.
··-
Share m
Shares held by Directors Holding the part- Holding
who are partners in the
of
nership
of the
firm of Managing Agents
ordinary of firm
Ist Preshares
of Mg.
ference
Agents'
Shares
firm
1. Shri Homi Mehta
50
8/128
Nil
2. Sheth Mathuradas Man·
galdas Parekh
6,466
14/128
273
3. ,,
Madanmohan
Mangaldas
11,052
14/128
2'.73
4. ,,
Madhusudan
Chamanlal Parekh
3,616
7/128
20
5. ,,
Mahendra
Chamanlal Parekh
3,616
7/128
20
6. ,,
Surendra Mangaldas Parekh
7,053
14/128
274
7. ,,
Indrajit
Chamanlal Parekh
3,616
7/128
20
-
35,469
880
-
1 S.C.R.
SUPREJ.VIE COURT REPORTS
87
Cateyury 'B':
Sliares held by the partners
of the Managing Agen1s
firm excluding the holding
of the Directors who arc
also partners as
shown
above.
1. Shri Harshavadan
Mangaldas
2. Mrs.Savitagavri
Chamanlal Parekh
3. Shri Virena minor by
draChamanhis mother
Share in
Holding the part· Holding
of Ordi· ncrship of the
nary
firm of Ist Pref.
shares
Mg.
Shares.
11,05:!
3,7 50
Agcnls'
firm
14/ 128
7/U8
274
16
Jal Parekh
and guardian
4. Shri .Manmohan
Chamanlal
Parekh
Mrs.Savitagavri Chaman-
!al Parekh.
-do·
5. Shri Kamalnayan
Chamanlal
Parekh
-do6. Shri Nutan
Chamanlal
Parekh
-do7. Shri Hussein Essa
6,328
7/128
4,462
7/128
4,962
7/128
4,962
7 /128
6,142
8/128
41,659
20
20
20
20
Nil
370
1962
Commissioner of
income-tax, Bombay
v.
Jubilee Mills Ltd.
Hidayatullahi J.
1962
Commissioner of
Income-tax, Bombay
v.
Jubilee llfills ltd.
Hidapatullah, J,
88
SUPREME COURT REPORTS [1963) SUPP.
Category 'C':
Shares represented by the
Directors
Holding of
ordinarv
shares ·
1. Sheth
Madhusudan
Chamanlal Parekh (No. 4
in 'A' above) as Karta
of the Joint Family estate
of Sheth Chamanlal
Girdhardas Parekh
2. Sheth
Mathuradas
Mangaldas Parekh (No. 2
in 'A' above) as guardian
and father of minor, Ben
Purnima Mathuradas
3. -do-
-do- Ben Veena
4.
-do-
-do- Ben Sunita
5.
-do-
-do- J agatkumar
Mathuradas
6. Sheth Surendra Mangaldas
Parekh (No. 6in 'A' above)
As guardian and father of
minor Darshan · Surendra
Parekh
7. -doas guardian and
father of minor Ben Babi
Surendra Parekh
3,899
1,000
1,000
1,000
1,000
1,000
1,000
Pref. Shares
Holding of
the Ist.
937
9,899
937
It appears that in the past the assessee company
incurred heavy losses and it had to reconstruct its capital
in 1930 because it had a debit balance of Rs.12, 75,QOO
in the Profit and Loss Account which had to be paid
out of capital. This was done by reducing the face
value of the Ordinary Shares from Rs. 100 to Rs. 10
each and of the Preference Shares from Rs. 100 to
Rs. 25 each, after obtaining the approval of the High
l S.C.R.
SUPREME COURT REPORTS
89
Court. It is the reconstituted capital which has been
shown by us in an earlier part of this judgment. It
also appears that Income Tax Officer granted to the
assessee company a rebate of one anna under proviso
(a) to paragraph (B) of part (I) of the Second Schedule
of the Finance Act, l!J48.
This rebate was granted
to those companies to which the provisions of s. 23 A
were not applicable. Subsequently, the Income Tax
Officer, as stated already, applied s. 23 A 1.0 this
company and it was contended that he was incompetent
to do so as he must be deemed to have impliedly held
already that s. 23 A was not applicable. Section 23 A
before its amendment in 1955, in so far as it is material
read as follows:-
"23A. Power to a . .sses8 individ·ual members of
certain companies. -
( l) 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 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 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 company in respect
thereof shall be deemed to have been distributed
as dividends amongst the shareholders as at the
date of the general meeting aforesaid, and
1962
Cmu111is.1io11cr nf
lnrmne-tax, Bnmhay
v.
Jubilrt 1ililh [,td.
Hir/a~·atullah, J.
1962
Co111111is,ri1111rr nf
!11come-tax, Bmnbay
v.
Jubilee 1\fills Ltd.
90
SUPREME COURT REPORTS [1963] SUPP.
thereupon the proportionate share thereof of
each shareholder shall be included in the tota I
income of such shareholder for the purpose of
assessing his total income:
x
x
x
x
x
x
x
x
Provided forther that this sub-section shall
not apply to any company in which the public
arc substantially interested or to a subsidiary
company of such a company if the whole of the
share capital of such
subsidiary company is
held by the parent company or by the nominees
thereof.
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 (not being shares
entitled to a fixed rate of dividend, whether
with or without a forther right to panicipate in
profits) 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 (not including a
company to which the provisions of this subscction apply), and if any such shares have in
the course of such previous year been the subject of dealings in any stock exchange in the
taxable territories or are in fact freely transferable by the holders to other members of the
public."
We are really concerned with the application of
the Explanation to the facts of this case.
The Explanation, is so far as it is relevant to onr purpose, says
that a company shall be deemed to be a company in
which the public are substantially interested if the
1 S.C.R.
SUPREME COURT REPORTS
91
shares of the company carrying not less than 25 % of
the voting power have been allotted unconditionally
to or acquired unconditionally by the public and are
held beneficially by the public.
The Income-tax Officer held that this was not
a company in which the public were substantially
interested and that the grant of the rebate earlier by
him did not estop him from applying s. 23A to this
company.
His order was upheld by the Appellate
Assistant Commissioner and the Tribunal on both the
points.
The assessee company then applied for a
reference and the Tribunal referred the following
questions for decision by the High Court:--
"(l) Whether, on the facts and in the circumstances of the case, the Income-tax Officer
was competent to pass an order under
Section 23A(l) of the Act after having
allowed a rebate of one anna per rupee in
the assessment under the proviso (a) to
paragraph (B) of Part I of the Second
Schedule of the Finance Act, 1948?
(i) If the answer to question No. 1 is in the
affirmative whether on the facts and in the
circumstances of the case, the assessee company is a company in which the public arc
substantially interested for the purposes of
Section 23A of the Act?
(3) Whether the loss of Rs. 12, 75,000 incurred
by the company prior to its reconstruction
in 1930, could be taken into consideration
for purposes of the applicability of Section
23A (1) of the Act?"
The High Court, by the judgment under appeal,
answered the first two questions in the affirmative and
in view of the answer to ~estion. No. 2 it consider~d
it unnecessary to answer the third. The Commissioner of Income Tax obtained a certificate of fitness
and filed the present appeal.
1962
Cnmminioner 1Jf
lncame-tav:, B1Jmba
v.
Jubilee ,\fills /,(I.
Hidayatuli<d1, J.
1962
Commi.1.1io.'1cr nf
Jncomt'·lax, Bombay
'"
Juhifte Jfill~ Ltd.
/lida;'atullah, J.
92
SUPREME COURT REPORTS [Hl63] SUPP.
The answer to the first question is in favour of
the Commissioner of Income Tax. The other side
has not appealed and Mr. Vishwanath Sastri for the
assessee company conceded before us that the High
Court was right. The third question depends on the
answer to the first question but as it has not been
answered by the High Court we do not consider it
necessary to answer it here for the first time. We
shall now address ourselves to the second question.
The Tribunal in dealing with the
question
whether the public could be said to hold 25% or
more of the voting power in the assessee company took
into consideration a decision of the Privy Council in
Commis8·ioner OJ Income Tax v. H. Bjordal,(') and
held that though directors, qiui directors, do not
cease to be members of the public, the holding of the
group of 14 individuals who collectively formed
the
Managing Agency firm oLMangaldas Mehta & Co.
could not be counted as held by the members of the
public in this case for purposes of the Explanation.
The Tribunal was further of the opinion that this
group of persons had a 'juristic personality' and it
should be taken into account as a group in determining where the Controlling power vested according to
the test laid down by the Privy Council in the said
case.
The High Court reversed the decision of the
Tribunal following its earlier decision reported in
l!a.rflu11ran.,hi 1'fills Ltd. v. Co1111nissioncr 1:( 1nm111e-
'l'a.i;('). In that case the High Court had held that directors, qnct. directors must be contrasted with the public
and if' the directors held more than 75% of the voting
power then alone the company could be said to be
unc in which the public were not substantially interested.
The High Court's view was that the Managing
Agents act under the direction of the directors and
unless the directors were themselves controlling the
voting power above the limit stated by the Explanation, the company must be regarded as one in which
(I) [1955] 28 J. T. R. 25.
(2)
[1953] 24 I. T. R. 338.
1 S.C.R.
SUPREME COURT REPORTS
93
the public were substantially interested.
Applying
the same test to the present case, the High Court
found that the directors between them held only the
shares which wb have shown in tabular form under
category 'A'. 'Since the number of these shares was
not up to the mark to attracts. 23A, the High Court
answered the second question in favour of the assessee
company. The request of the Department that a
supplemental statement of the case be asked from the
Tribunal as to whether any person belonging to
catagories 'B' and 'C' was so much within the control
of the directors as not to hold the shares unconditionallv
or beneficially for himself was rejected by the High
Court observing that this would give a second chance
to the Department to lead further evidence. Following
the decision of the House of Lords in Tlwnucs Frdtori:ni
(Lancashire) Ltd. v. Ink.nd Revenue C'ommi:ssioner. (')
they refused to take action under s. 06 (41.
The Hiμ;h
Court took notice of the fact that the Privy Council in
.Bj01·dr1l's case (supi:a) had indicated a test to determine what is meant by "public" which was different
from that indicated by them in RrJghnwnshi Jlfill'.,
ca.se (su.pra.).
They, however, held that after l!J50
the decisions of the Privy Council had only a persuasive authority and the decision of the High Court was
binding in the absence of a decision by this Court.
They, therefore,
applied
their own decision in
Raghuva.nshi
J1f_ill's · mse and decided this case
accordingly.
It may be pointed out .that the High Court did
appreciate the point of view expressed by the Privy
Council in the above-mentioned case.
They observed
as follows:-
"lt may be that our view is erroneous; and
it may be-and very probably it is-that the view
taken by the Privy Council is the right one.
But, as we have said, so long as the judgment of
the Bombay High Court stands_. it was the
duty both of the Department and of the Tribunal
to give effect to that drcision."
(I)
[1942] A. C. 643,
1962
Commissioner nf
Incomt·tax, Bomba."
v.
J11bifre l\1ill.i Ltd.
Jfida.i•atut!nh, J.
1962
Commiuioner of
!11c0111-::-tax, Bumba_v
v.
J11bilu A/ills Ltd.
llida1•afflliah,· J.
94
SUPREME COURT REPORTS [1963] SUPP.
Section 23A is not applicable to a company in
which the public are substantially interested. What
is "substantial" interest of the public is stated in the
Explanation. That interest represented in terms of
the share-holding must not be less than 25% of the
total number of the shares, but no person can be said
to belong to the "public" unless he holds the shares
unconditionally and beneficially for himself. What
is meant by "unconditionally" and "beneficially" was
explained by this Court in an appeal against the
decision of the High Court of Bombay in the
Ra.ghu.vrmsM ~Mills' case.
The decision of this Court
is reported in [1961) 41 I.T.R., 613.
This Court
pointed out that by the words "unconditionally" and
"beneficially"
is indicated that the voting power
arising from the holding of those shares should be free
and not within the control of some other shareholder
and the registered holder should not be a nominee of
another. It was pointed out again by this Court in
8hri: Chnngdeo Sugar Jfil/!3 Ltd. v. Commissw11'!.r
of Incorne J'ax Bombny, (') that by "unconditional"
and "beneficial" holding is meant that the shares are
held hv the holders for their own benefit onlv and
without any control of another.
·
This Court approved the decision of the Privy
Council in Bjordal' s case that directors, qua directors,
are not without the pale of the public. This Court
pointed out that what one has to find out is whether
there is an individual who, or a group acting in
concert ·which, controls or control the affairs of the
company to the exclusion of others by reason of his
or their voting power.
Such person or group of
persons do not answer the description "public." There
is nothing inherent in the office of directors whichwould lead one to think that the directors must act in
unison.
They are persons in whom the shareholders
have reposed confidence and on whom they have
conferred powers which under the scheme of the
Companies Act, have to be exercised for the benefit
(1) [1961] 41 I. T. R. 667.
l S.C.R.
SUPREME COURT REPORTS
95
of the shareholders.
The directors are, in a manner
of speaking, trustees of these powers. It is the duty
of the directors to exercise these powers to the best of
their independent judgment.
Tl•ere
is
therefore,
nothing in the nature of things or at all that requires
the directors to act in unison.
This Court pointed out
in the Jla,ghnmnshi J1fi'.ll8' mse (') that such a group
may be composed of directors or their nominees or
relations in different combinations or may be composed of persons none of whom is a director provided
such a group forms a block which holds the controlling
interest in its hands.
It would, therefore. follow from what we have
stated that we have first to sec whether there is an
individual or a group holding the controlling interest
which group acting in concert can direct the affairs
of the company at its will.
The controlling interest,
of course, is effective only if the group owns iii o,;, nf
the total shares.
Bu l the company will st ill he a
company in which the public can be said tn be substantially interested became to cease to be so the shareholding of the group mmt be more than 7 i"i •;,\,.
In
the group, any person, be he a director or a nondirector, a relative of a director, a promoter of the
company, or a strang-cr, may be included hut only if
belonging to a group or as holrling the shares as a
nominre of someone rise belonging to the group.
W c
have
indicated
again the true test whirh
was not applied in the judgment of the Bombay High
Court in the ltay/m,1·amshi JJills' msr(') and applying
which we reversed that decision.
Applying the above
test, we have
to
sec
whether there is such a group in this company. J t is
obvious from what we have said that category 'A'
which consisted of the directors could not he regarded
as outside "public" mcrclv by reason that they were
directors. But there is. however, an intimate connection between catcgorv 'A' and category 'TI' in as
much as both arc members of the Man;wini,; Agenn·
!I) [!%!] 11 !, T R. tM
il) [1'153] ~{ LT, P,, 333,
1962
C1Jmmis1ionrr of
lnro/!/e-inr:, Bomba
'"
Jubilu .\Jil/1 Lt1
/f/,/n rn.'11/!ah, J.
1962
r:omminiuner of
lnromt-tax, Bombll)'
v.
Juhifte Alil!s Ltd.
Hida)•atul!ah. J.
!)()
SUPREME COURT REPORTS [1963] SUPP.
firm. In other words, there is evidence of yet another
group, name! y, the group of shart'holdcrs who constitute the Managing Agency firm.
We agree with the High Court that Managing
Agents act under the control and direction of the
directors.
The Managing Agents are also appointed
by the company.
The control of the affairs of a
company is ordinarily in the hand of the directors of
the company but there may be cases in which the
Managing Agents, by reason of their superior holding
of shares, may be able to appoint the directors and
generally to control tht> views of the directors. Where
the l\fanaging Agents hold an interest which is small
and is thus not capable of exercising an overriding
power, other evidence mav be required to show that
they, in conjunction with others, are running the affairs
of the company to the exclusion of the public. \Vherc,
however, the Managing AgTnts admittedly hold 51 %
or more of the shares, it is obvious that the controlling interest belongs to the Managing Agents.
When,
therefore, the :tvianaging Agents, either by themselves
or with those who act in concert with them, hold
shares above the 75%, limit they can be regarded as
constituting a group which cannot be counted as
"public". In such a case the holding of the Managing Agents, if above 75°/o, may furnish proof that the
company is one in which the public are not substantially interested.
It was contended before us that
even among the ,Managing Agents some may take an
independent view.
Normally Managing Agencies are
not formed bv parties except for the purpose of
mutual gain and the commonness of the interest lends
a cohesion to the body which enables it to act in its
own interest. When such a body holds shares carryinl!,'
more than 75° ;, of the voting power the company
itself is run mainly as the Managing Agents desire it
to be run.
Such a l\fanagin,g Agency could easily
choose its own directors and the directors would not
be indep1'nncnt persons hut mere nominees of the
1 S.C.R.
SUPREME COURT REPORTS
97
Managing Agents. In such a case the inference is
irresistible that we have a group, which as a group,
can run the company at its will and which not only
controls the voting at the meeting of the shareholders
but, by selecting its own directors, gets the directors
to act according to its own desires.
No member of
such a Managing Agency firm can be regarded as
belonging to "the public" and when this happens the
company comes within the reach of s. 23A.
Applying the above test to the present case, it is
clear that the Managing Agents, between them hold
77,128 out of 1,00,000 ordinary shares, well above the
limit. Thev have in addition 1,250 First Preference
Shares out ~f 5,000 which also carry voting power.
To this must be added 75 shares held by Girdhardas
& Co. Ltd. to which s. 23A is admittedly applicable.
This brings the total holding to 78,453.
75% of the
total shares bearing votes is 78, 750. This shows that
the holding of the Managing Agents is short by 298
shares for the application of the Explanation to
s. 23A. But when we turn to category "C" we find that
6,000 shares were held by the members of the
Managing Agency on behalf of minor children and
the voting power arising from these shares was in
their own hands as guardians. There is no doubt that
in the present case shares carrying more than 75% of
the voting power are held by persons whq form a
group in the sense indicated by this Court in
Raghumnshi Mills case and by us here. The reason
is this : Shares carrying more than 7 5 % of the voting
power are held by the partners of the managing
agency or persons under its control. Now it seems to
us that it is to the interest of the partners of this firm
to exercise their voting power in one way, namely the
way that brings to them the largest profit out of the
company. It is true that the managing agents are
the serv3:nts of the company in a manner of speaking
and no~ Its masters and also that the object of a firm of
managmg agents is to carry out certain administrative
1962
Comminioner of
Income~!a.<, Bombay
v.
Jubilee Mills Ltd.
Hida_yat11llah, J.
1962
Commissioner of
ln•ome~tax, Bombay
v.
Jubiltt Mills Ltd.
Hidayatullah, J.
98
SUPREME COURT REPORTS [1963] SUPP.
duties concerning the company under the control
of the directors of the company. That however is
irrelevant and in any case is far from the truth in the
present case.
Here the partners of the managing
agency practically own the company.
At the hearing a point was raised that it has to
be proved as a fact that the persons constituting the
group which owns shares carrying more than seventyfive percent of the voting power, were acting in unison.
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. It is not necessary
to state the kind of evidence that will prove such
concerted actings. Each case must necessarily be decided on its own facts.
The exclusion of "public" in
the manner indicated generally from more than 75%
of the shares and the concentration of such a holding
in a single person or a group acting in concert is what
attracts s. 23 (A).
In our opinion, the High Court was not right in
answering the second question in the affirmative. The
appeal is allowed. The answer of the High Court is
set aside and the question is answered in the negative.
The respondent shall pay the costs here and in the
High Court.
Appwl allnwed.