COMMISSIONER OF INCOME-TAX VS T. P. S. H. SOKKALAL, 2000 PTD-MADRAS-HIGH-COURT-INDIA 2524 (1997)

Income-tax---

----Dividend---Deemed dividend---Advance to shareholder with substantial interest in company--Meaning of "person with substantial interest in the company "---Individual holding shares in her name and also as guardian of her minor children---Under Companies Act company not to take, notice of constructive trust in its register of members---Shares held as guardian and shares held on her own behalf to be taken into account while determining total number of shares of company---Indian Income tax Act, 1961, S.2(22)(e), (32)---Indian Companies Act, 1956, S. 163.

The expression "person who is substantially interested in the company" is defined in section 2(32) of the Income Tax Act, 1961, to mean a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent. of the voting power. The definition is relevant in considering the applicability of section 2(22)(e) as the said provision would apply only in the case of advance or loan made by a company in which the public are not substantially interested, to a person having a substantial interest in the company. Section 1,53 of the Companies Act, 1956, provides that no notice of any trust, express, implied or constructive, shall be entered on the register of members or of debenture holders. There is no provision of law which would deprive the shareholder from exercising the right of voting when the shares are standing in the name of the guardian for the benefit of minors and the right to vote is an essential and important characteristic of a share. The expression "voting power" found in section 2(32) is significant and it signifies the right to vote which is inherent in the shares.

The total shares issued by a company were 4,953, of which the assessee held 793 shares. One S had 1,694 shares in her own name and 2,186 shares were held by her in the name of her three minor, children the sum of Rs.87,000 overdrawn by the assessee from the company during the accounting year relevant to the assessment year 1973-74 was treated as a loan or advance to a shareholder substantially interested in the affairs of the company and assessed in his hands as deemed dividends invoking the provisions of section 2(22)(e). According to the Income-tax Officer, the minors had no voting rights and so the 2,186 shares held in the names of the minor children should be excluded in considering the question whether the assessee had a substantial interest in the company. The Appellate Assistant Commissioner found that the payments could be regarded as advance. However, the Appellate Assistant Commissioner held that the assessee was not a person substantially interested in the affairs of the company during the relevant -previous year, on the ground that the shares held for the benefit of three minors by their guardian S should also be included in the total number of shares to determine the question whether the assessee could be regarded as a person substantially interested in the affairs of the company. The Tribunal affirmed the view of the Appellate Assistant commissioner. On a reference:

Held, affirming the decision of the Tribunal that the shares held by S on behalf of her minor sons had voting rights. These were not suspended during the period of minority of the minors. Therefore, the expression "voting power" in section 2(32) would denote the total voting strength exercisable by all the equity shareholders in a company and since S had the voting right for each and every equity share held by her in her own name, and on behalf of three minor infants, the total shares held by her should be taken into account when applying section 2(22)(e). Therefore, the assessee was not a person substantially interested in the affairs of the company and the provisions of section 2(22)(e) were not applicable to him.

Beharilal v. Official Liquidator AIR 1918 Lah 138; Diwan Singh v. Minerva Films Ltd. (1958) 28 Comp. Cas. 1,91 (P&H); Fazalbhoy Jaffar v. Credit Bank of India AIR 1914 Bom. 128; Imperial Mercantile Credit Association, In re (1874-75) 19 Eq Cas 588 Muslim Bank of India. In re (1939) 9 Comp. Cas. 309 (Lahore) and Palaniappa Mudaliar (M.S.) v. Official Liquidator, Pashupathi Bank Ltd. (1942) 12 Comp. Cas.' 89 (Mad.) ref.

C. V. Rajan for the Commissioner

V. Ramakrishnan for the Assessee.

JUDGMENT

N. V. BALASUBRAMANIAN, J.---Pursuant to the directions of this Court, the Appellate Tribunal has stated a case and referred the following question of law for our opinion:

"Whether, on the facts and in the circumstances of the case and on a proper construction of section 2(22)(e) and section 2(32) of the Income Tax Act, 1961, the shares in the name of Selva Saroja was beneficially held by her so as to attract the operation of section 2(22)(e) of the Income Tax Act, 1961?"

The assessee is an individual having 793 shares in the company called T. P. Sokkalal Ramsait Factory (P.) Ltd. The Income-tax Officer in the assessment proceedings for the assessment year 1973-74 noticed that in the account of the assessee with the company, there were net drawings of Rs.87,000 which was claimed as trading advance. The Income-tax Officer held that it is not the company's business to ply lorries or advance monies for purchase of lorries and the money of the company had been diverted for non business use. He held that the assessee is a shareholder substantially interested in the affairs of the company and, therefore, a sum of Rs.87,000 overdrawn by the assessee during the year of account was treated as a loan or advance to a shareholder substantially interested in the affairs of the company and assessed the same as deemed dividends invoking the provisions of section 2(22)(e) of the Income Tax Act, 1961 (hereinafter referred to as "the Act").

The assessee carried the matter by way of appeal to the Appellate Assistant Commissioner against the .inclusion of the sum of Rs.87,000. as deemed dividend. The Appellate Assistant Commissioner found that the payment could be regarded as advance. However, the Appellate Assistant Commissioner held that the assessee is not a person substantially interested in the affairs of the company during the relevant previous year on the ground that the shares held for the benefit of three minors -by their guardian one T.P.S.H. Selva Saroja should also be included in the total number of shares to determine the question whether the assessee can be regarded as a person, substantially interested in the affairs of the company.

The Revenue preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal affirmed the view of the Appellate Assistant Commissioner. The Tribunal found that the guardian held the shares of the minors in her name and, therefore, the guardian was the shareholder and the shares held by the guardian on behalf of the minors should not be ignored. It is his order which is the subject7matter of the present tax case.

Mr. C. V. Rajan, learned counsel appearing for the Revenue, submitted that the minors have no voting right and the minors cannot enter into contract with the company and the shares held by the minors should be ignored to determine the question whether the assessee can be regarded as a person having substantial interest in the company.

Mr. Ramakrishnan, learned counsel for the assessee, submitted that the shares were held by the guardian 'and since the guardian is the shareholder, there is no reason to exclude the shares held by the guardian. He, therefore, submitted that if the shares held by the guardian in her own name as well as in her capacity as guardian for the minors are taken into account, the total shares held by the assessee would be less than 20 per cent. of the total shareholding and the assessee cannot be considered as a person who is substantially interested in the affairs of the company.

We have carefully considered the rival contentions of the parties. The total shares issued by the company were 4,953 shares, of which the assessee held 793 shares: One Selva Saroja had 1, 694 shares in her own name and 2, 186 shares were held by her in the name of her minor children and one share is taken by one H. A. Joshi. The Appellate Tribunal found that the shares were held by Selva Saroja in her own name and on behalf of the minors as guardian. In this factual background, the question has to be considered whether the assessee can be regarded as a person having substantial interest in the affairs of the company.

The expression "person who is substantially interested in the company" is defined in section 2(32) of the Act to mean a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent.. of the voting power. The definition is relevant in considering the applicability of section 2(22)(e) of the Act, as the said provision would apply only in the case of advance or loan made by a company in which the public are not substantially interested to a person having a substantial interest in the company. The assessee had 793 shares in his name and one Selva Saroja had 1, 694 shares. The case of the Revenue in his that the shares held in the name of three minor children viz., 2,186 shares, should completely be excluded on the ground that the minors have no voting right. As already seen, the said shares were held by Selva Sarola as guardian, and the finding of the Tribunal is that it is not the minors who held this the shares, but the guardian.

Section 153 of the Companies Act, 1956, provides that no notice of any trust, express, implied or constructive, shall be entered on the register of members or of debenture-holders. The register would show that the guardian is the shareholder and the company in not take notice of any such relationship of the trustee arid the beneficiary. Gower in his book Gower's Principles of Modern Company Law 4th edition, at page 431, observed as under:

"The register is prima facie evidence of the matters entered in it, and hence of the fact of membership and extent .of shareholding. But, it is not conclusive. If, therefore, there is no true agreement and this can be proved, the so-called member will not in fact be a member or shareholder. If the ostensible agreement is merely voidable because of some flaw such as fraud, misrepresentation or incapacity he must, of course, take steps to avoid it, and we have already seen in Chapter 16 that if the flaw is misrepresentation he must act promptly once he finds out the truth and, in any case, before the company goes into liquidation. If the flaw is incapacity he must also act promptly once the incapacity is removed, but it is not clear whether liquidation will preclude him from doing so in the case of infancy (on which alone there seems to be any authority) it has been held that winding tip-far from preventing the infant from renouncing---instead precludes him from confirming (unless the liquidator agrees) on his subsequently attaining full age."

The learned author Palmer in his treatise on Company Law (page 796 twenty-fourth edition) has stated as under:

"A foreigner may take shares, but in time of war the power of voting of a person who is an enemy, and his right to receive notices, is suspended, and he may cease for the time being to be a member altogether.

A person who is not sui juris, such as a minor or person of unsound mind, can become a member, but subject to the ordinary rules of contract, so that the contract is voidable, i.e., until it is disaffirmed, the contract remains valid.

Consequently, a transfer to a minor is good provided that the company registers the transfer, which it has a power to refuse. Even if the registration takes place and the company later learns that the transferee is a minor, it may repudiate the registration and retain the name of the transferor. A minor has a like power to repudiate a contract to take shares at any time during his minority or within a reasonable time after attaining his majority. What constitutes a reasonable time depends on the circumstances of each case and any act after attaining majority affirming the contract or the acceptance of any benefit will preclude the right to repudiate. This power to repudiate is lost when the company is wound up unless the liquidator consents. Upon any such repudiation a minor can recover sums lie has paid the company in respect of the shares provided that there was a total failure of consideration. If the shares were of any value he cannot recover money which he has paid although he canresist any further calls.

Until repudiation either by the company or the minor, a minor has the full powers of membership.

It is also profitable to refer to a passage from the Guide to the Companies Act by A. Ramaiya (Twelfth edition) wherein the learned author observes as under (page 257):

"When a guardian of a minor applies to be a member of a company, the company cannot enter the name of a minor in the share register, because a person's name may be registered as a shareholder only if he agrees in writing to be a member of the company. If the shares are registered in the name of the guardian, the guardian alone is the shareholder by virtue of section 153 of the Companies Act."

The position of shares held by the minors have been the subject matter of consideration in several decisions, but it is not necessary to consider those cases, as in the instant case, the findings of the Tribunal is that the guardian is found to be the shareholder. Therefore, if the shares are registered in the name of the guardian, the guardian alone is the shareholder. As already seen, section-153 of the Companies Act, provides that no notice of any trust, express or implied, shall be entered in the register of members of the company. Consequently, for all practical purposes, as far as the company is concerned, the shareholder is Selva Saroja.

In Fazalbhoy Jaffar v. Credit Bank of India, AIR 1914 Bom. 128, the Bombay High Court held that the minor may be a member of a company under the Companies Act, but the registered holder of the share is a person with a vested interest in the property which may be burdened with an obligation to pay calls in the future, and the registered member cannot keep the interest and prevent the company from having it and dealing with it as his own without being bound to bear the burden attached to it. The Lahore High Court in the case of Muslim Bank of India. In re (1939) 9 Comp Case 309, was dealing with a case where a father applied for some shares for his minor sons but signed the application form "on behalf of" his sons and paid out of his own money. The Lahore High Court held that the father must be treated as the owner of the shares and must be placed on the list of contributories. The Lahore High Court also held that the same principle would apply to the case of a father who purchases shares by signing his minor soil's name on the transfer form as transferee through himself. The Lahore High Court held as under (page 312):

"In the other case (Richardsons (1875) 19 Eq. 588), it was simply a case where the transferee whom they sought to put upon the register had actually signed the transfer but had signed it in the name of another who had given him no-authority to do it, namely, an infant. Therefore, they treated him as the real person who had signed the contract and consented to go on the register in respect of the shares."

The Lahore High Court in Beharilal v. Official Liquidator, AIR 1918 Lah. 138 has held that after purchasing a share in the name of minor, the father is personally liable on the share and the list of contributories can be altered by substituting the name of the father for that of the minor son.

This Court in M. S. Palantiappa Mudaliar v. Official Liquidator, Pashupathi Bank Ltd, (1942) 12 Comp. Cas. 89, was also dealing with a similar position as found in the case before the Lahore High Court, but found that there was nothing on record to show that the guardian was entertained as a subscriber of the company. This Court, therefore, held that in the absence of any evidence that any of his money was, used for the said purpose, the guardian cannot be treated as a subscriber. However, the question whether the natural guardian can be regarded as a contributor or not, need not be examined as the facts of the case clearly show that the shares were standing in the name of Selva Saroja. It is also not disputed that she is the natural guardian and under section 153 of the Companies Act; it is not open to the company to recognise any trust and when in the register of members the name of Selva Saroja is shown, she must be regarded as shareholder and, consequently, the company is not concerned with the relationship between the shareholder and the minor children in the matter of exercise of voting rights by her. It is, therefore, obvious that Selva Saroja, as a shareholder, can exercise the right of voting in respect of shares belonging to the minors and it is not possible to hold that those shares have no voting power. In addition, there is no provision. of law which would deprive the shareholder from exercising the right of voting when the shares are standing in the name of the guardian for the benefit of minors and the right to vote 'is an essential and important characteristic of a share. Therefore, as found, by the authorities, in the register of members of the company; if Selva Saroja is shown as a shareholder, though it was described therein that the shares were held on behalf of minor sons, the right to exercise the vote cannot be denied to her or her right to vote cannot be excluded from consideration in determining the question whether the assessee is a person having substantial interest in the company.

In Diwan Singh v. Minerva Films. Ltd. (1958) 28 Comp Cas 191, the Punjab High Court held that there was no bar to a minor acquiring or holding shares in a joint stock company and when the shares were fully paid up, they were subject to no obligation. However, it is not necessary to pursue that aspect whether the minor can acquire or hold shares in his own name as the finding of the Appellate Tribunal is that the shares were held by Selva Saroja in her own name and not by the minors.

Section 2(32) of the Act refers to the beneficial owner of shares and a person who is regarded as a person substantially interested in the company, if he carries not less than 20 per cent. of the voting power. The expression "voting power" found in section 2(32) of the Act is significant and it signifies the right to vote which is inherent in the shares. The shares held by Selva Saroja on behalf of her minor sons have voting rights. It is not suspended during the period of minority of the minors. Therefore, the expression, "voting power" in section 2(32) of the Act would denote the total voting strength exercisable by all the equity shareholders in a company and since Selva Saroia has the voting right for each and every equity share held by her in her own name and on behalf of three minor infants, the total shares held by her should be taken into account. Consequently, the view of the Income-tax that the minors have no voting right and 2, 196 shares held in the names of minor children should be excluded in considering the question whether the assessee has a substantial interest in the company is not sustainable in law. The Appellate Tribunal has found that Selva Saroja was the shareholder and not the minors and in view of the said finding of the Appellate Tribunal, the shares held by her in her own and on behalf of the minors cannot be ignored while totaling up the total shares issued by the company. Under these circumstances, the Appellate Tribunal, therefore, was right in holding that the shares in the name of Salva Saroja should be taken into consideration in the application of section 2(22)(e) of the Act. Accordingly, we answer the question of law referred to us against the Revenue. There will be no order as to costs.

M.B.A./4182/FC Reference answered.