RAGHUVANSHI MILLS, LTD. versus COMMISSIONER OF INCOME-TAX, BOMBAY

Citation: [1961] 2 S.C.R. 978 · Decided: 07-12-1960 · Supreme Court of India · Bench: J.L. KAPUR · Disposal: Appeal(s) allowed
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Judgment (excerpt)

I960 
December 7. 
978 
SUPREME COURT REPORTS 
[1961] 
RAGHUV ANSHI MILLS, LTD. 
v. 
COMMISSIONER OF INCOME-TAX, BOMBAY 
(J. L. KAPUR, M. HrnAYATULLAH and J.C. SHAH, JJ.) 
Income Tax-Majority shares of the assessee company held by 
Directors and their relations, if can be treated as held by the public 
-Test-Indian l11come-tax Act, r922 (II of r922), s. 23A, Third 
Proviso, Expla11ation (before amendment by the Finance Act, r955). 
One Maganlal Parbhudas who was a Director of the asses-
see company held 6,344 shares ont of a total of 10,000 shares of 
the company and he made a gift of lOOO shares to each of his 
five sons. During the accounting period the company had eight 
Directors including the said Maganlal Parbhudas and two of his 
sons and they held 4695 shares as between themselves. Out of 
the balance of the shares 4754 shares were held by the relatives 
of some of the Directors. Three sons of Maganlal Parbhudas 
were Directors of the Managing Company. The Income-tax 
Officer applied s. 23A of the Income-tax Act as it stood prior to 
its amendment by the Finance Act, 1955 to the company hold-
ing that this was not a company in which the public were sub-
stantially interested. The order of the Income Tax Officer was 
confirmed on appeal both by the Assistant Commissioner and 
the Tribunal. The High Court remitted the case to the Tribu-
nal for a statement whether the Directors were exercising de 
facto control over any of the other shareholders. The Tribunal 
thereupon gave the finding that the Directors, particularly the 
three sons of Maganlal Parbhudas who formed the Directors of 
the Managing Company were under the de facto control of their 
father. The High Court agreed with the finding of the tribunal 
and held that on the facts and circu1I1£tances of the case the 
shares held by the three sons of Maganlal Parbhudas could not 
be considered to be shares held by the members of the public 
within the meaning of the Explanation to the third proviso to 
s. 23A of the Income Tax Act. On appeal by the assessee com-
pany, 
Held, that in the Explanation the word "public" is used in 
contradistinction to one or more persons who act in unison 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. 
Sardar Baldev Singh v. Commissioner of Income-tax, Delhi and 
Ajmer, [1961] r S.C.R. 482, considered. 
The test is first to find out whether there is an individual 
or a group which controls the voting power as a block. If there 
is such a block the shares held by it cannot be said to be held 
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2 S.C.R. SUPREME COURT REPORTS 
979 
"unconditionally" or "beneficially" by the public. Only those 
shares which are "unconditionally" and "beneficially" held by 
the public uncontrolled by the controlling group can be treated 
as shares held by the public under the Explanation. The group 
may be composed of Directors or their nominees or relations in 
different combinations, but none can be said to belong to that 
group, be he a Director or a relative unless he does not hold the 
shares unconditionally and beneficially for himself. It is only 
such a person who can fall pro2erly outside the word "public". 
The view that Directors merely by reason of their being 
Directors stand outside the "public" is erroneous. 
Commissioner of Income-tax v. H. Bjordal, [1955) A. C. 309, 
followed. 
Mere relationship is of no consequence unless it is proved 
that the voting power of one relative is controlled by another 
relative. 
Tatem Steam Navigation Co. v. Commissioner of Inland Reve-
nue, (1941) 24 T.C. 56, followed. 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 
30 of 1957. 
Appeal by special leave from the judgment and 
-< 
order dated September 1, 1955, of the Bombay High 
Court in Income-tax Reference No. 37of1952. 
N. A. Palkhivala.and I. N. Shroff, for the appellant. 
K. N. Rajagopala Ayyangar and D. Gupta, for the 
respondent. 
1960. December 7. 
The Judgment of the Court 
was delivered by 
Raghuvanshi 
Mills, Ltd. 
v. 
Commissioner of 
Income-tax, 
Bombay 
HIDAYATULLAH, J.-The Raghuvanshi Mills Ltd., Hidayatullah J. 
Bombay (a public limited Company), has filed this 
appeal by special leave against the judgment and 
orders of the High Court of Bombay dated March 10, 
1953, and September 1, 1955. 
By the first order, the 
Bombay High Cou
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