COMMISSIONER OF INCOME-TAX, WEST BENGAL versus EAST COAST COMMERCIAL CO. LTD.

Citation: [1967] 1 S.C.R. 821 · Decided: 11-10-1966 · Supreme Court of India · Bench: J.C. SHAH · Disposal: Set Aside

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Judgment (excerpt)

A 
COMMISSIONER OF INCOME-TAX, WEST BENGAL 
v. 
EAST COAST COMMERCIAL CO. LTD. 
October, 11, 1966 
B 
[J. C. SHAH, V. RAMAsWAMI AND V. BHAllGAVA, JJ.j 
c 
D 
E 
F 
G 
H 
Income Tax Act (11 of 1922), s. 23-A-Company In which pubUc are 
not substantially interested-Test for. 
Taxation of Income (Investigation 
Commission) Act, 1947 declared 
ultra vires-Admissions recorded by Authority acting under Act-Admisi-
bility in evidence. 
Members of a family held 4,015 shares, out of 4,391 shares in the reo-
pondent company, which was a public limited Company. In the course 
of investigation under the Taxation of Income (Investigation Commission)· 
Act, 194 7, the heads of the various branches of the family admitted that 
the shares were purchased by them out of their joint income which had not 
been disclosed and that a majority of the shares were held benaml. An 
offer of settlement was also made that a single assessment may be made in 
respect of the "secreted income" treating tilem as an association or persons 
and that every member of the family be treated as jointly and severally 
liable to pay tax on that income. For the assessment years 1950-51 and 
1951-52, the Income-tax Officer commenced proceedings under s. 
23A of the Income-tax Act, 1922, and held that the Company was one in 
which the public were not substantially interested and that its affairs were 
under the control of the members of the family. He passed an order under 
the section that the undistributed ponion of the assessable income of the 
Company as computed for income-tax purposes and reduced by the 
amount of income-tax and super-tax shall be deemed to have been distribut-
ed as dividends among the share-holders. The order was confirmed by tho 
Appellate Assistant Commissioner. The Income-tax Appellate Tribunal ro-
versed the order. The Tribunal held that the offers made by the members 
of the family to the Income-taX Investigation Commission were not rele-
vant in determining whether the Company was one in which the public 
were not substautially interested, and that from the fact that the members 
of the family held 4,015 •hares, it could not be inferred that the sb.ares 
were jointly acquired, or that the members exercised control over the 
affairs of the Compal'ly. The Tribunal also observed · that there was no 
material placed by the Department to show that the members of the family 
actually controlled the voting or acted in concert so as to bring the com-
pany within s. 23A. The Tribunal, therefore, held that the section did not 
apply to the Company since it was not established that that the Company 
was one in which the public were not substantially interested, even though 
the members of the family held more than 75% of the shares i-ssued by 
the Company. On .a reference,. the Hi~h Court confirmed the order of the 
Tribunal holding that even on the finding that the members of the family 
were in a position to control the affairs of the Company, there was no 
evidence of any overtact showing that they were acting in concert and 
thereby constituted a block. 
In appeal to this Court, 
HELD : The approach to the problem by the Tribunal and High Court 
was erroneous. It was for the Tribunal to determine, ha'ling regard to 
ordinary human experienC<> whether it may be safely taken that the mem-
bers of the family must have acted together as a controlling block. That 
822 
SUPREME COURT RBPORTS 
[1967] l S.C.R 
enquiry had not been made and the case was decided on the application of 
an erroneous test. 
[830 C-D] 
(i) In deciding whether an order under s. 23A (as on. the relevant date) 
is called for, it must be decided in the first instance whether there wu a 
group of penoos acting in concen holding a sufficient number of shares 
which may control the voting as a block. It is sufficient, if having regard 
to their relationship, their conduct, their common interest etc. it may be 
inferred that they must be acting together : evidence of actual concerted 
acting is normally difficult to obtain and is not insisted upon. It is the 
holding in the aggregate, of a majority of the shares issued, by a pel"°'1 
or persons acting 10 concen in relation to the affairs of the company which 
establishes the existence of a block, and if the block holds 75% of the 
voting power it shall be deemed that the company is one in which the 
public are not substantially interested. To establish that a company is one 
in which the public are not substantially interested

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