R. K. GULATI, J. ( 1 ) THIS reference relates to the assessment year 1959-60 with the relevant previous year ending on March 31, 1958. ( 2 ) M/s. Jaswant Sugar Mills Ltd. , Meerut (hereinafter referred to as "the respondent"), is a limited company. The Income-tax Officer passed an order under Section 23a of the Indian income-tax Act, 1922 (hereinafter called as "the Act"), on the ground that the assessee was not a company in which the public were substantially interested. It ought to have distributed out of its profits for this year Rs. 4,80,990 being 45% of the distributable income. As against this, it distributed only Rs. 3,55,000. There was thus a deficit of Rs. 1,25,990 for which the assessee had no satisfactory explanation. Accordingly, he levied additional super-tax of Rs. 2,64,130 ( 3 ) THE assessee was aggrieved and appealed to the Appellate Assistant Commissioner but the appellate Assistant Commissioner did not accept the assessees contention that the Income-tax officer wrongly invoked Section 23a of the Act. He, therefore, confirmed the assessment on the legal issue but allowed some relief on the quantum of tax and the income liable to tax under section 23a of the Act. ( 4 ) IN the second appeal filed before the Income-tax Appellate Tribunal under Section 33 of the act, the first objection pressed before it was that the assessee was a company in which the public were substantially interested in the year in dispute for the reasons : (i) it was a public limited company ; (ii) its shares were freely transferable by the shareholders to the other members of the public and the shares have been the subject-matter of dealing in the Delhi Stock Exchange ; (iii) the finding of the Appellate Assistant Commissioner to the effect that less than 6 persons controlled the affairs of the company was erroneous and its shareholding carrying more than 50% of the voting power at no time during the previous year were held by less than six persons. ( 5 ) THE Department, however, contested the matter, inter alia, on the grounds that: (a) Bulk of the shares of the assessee were held by one group, namely, Seth Banarsi Das Gupta and his sons, etc. , and out of two lakhs ordinary shares of the company, the Hindu undivided family of Banarsidas held 1,66,720 ordinary shares. ( 5 ) THE Department, however, contested the matter, inter alia, on the grounds that: (a) Bulk of the shares of the assessee were held by one group, namely, Seth Banarsi Das Gupta and his sons, etc. , and out of two lakhs ordinary shares of the company, the Hindu undivided family of Banarsidas held 1,66,720 ordinary shares. (b) The number of persons controlling the affairs of the company was five only and, therefore, less than the requisite number of six. A chart which is set out below was filed by the assessee before the Income-Appellate Tribunal showing the shareholding as on May 31, 1958, by the directors, their relatives, etc. : Pref. Shares Ordinary Shares no. of shares No. of votes on a poll. No. of No. of votes shares on a poll. 1. S. P. Chopra 100 100 2. Faroz Chand 100 100 3. N. S. Dass 100 100 4. Mai Das 100 100 5. Gupta Seth Banarsi Das 2250 90020 90020 6. Seth Mohan Lal s/o B. D. 200 200 ( 6 ) IT was not disputed that Seth Mohan Lal, son of Banarsi Das Gupta, and Seth Mohan Lal and sons form one group with Banarsi Das Gupta between themselves but according to the respondent-company, their combined shares came to only 93,270 holding which carried less than 50% of the voting power and the balance share out of the holding of Rs. 1,66,720 were held under blank transfers and, therefore, carried no voting power and as such were to be left out while computing the number of vote-carrying shares. ( 7 ) THE Income-tax Appellate Tribunal accepted the case of the respondent- company and held that it was a company in which the public were substantially interested and, therefore, Section 23a of the Act did not apply to the respondent-company. In view of these findings, the Tribunal did not go into the alternative grounds whether the dividends distributed by the respondent-company were reasonable and what was the correct income liable to tax under section 23a of the Act. ( 8 ) AT the instance of the Commissioner of Income-tax, the following two questions have been referred to this court for its opinion: " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the shares of the assessee-company carrying not less than fifty per cent. ( 8 ) AT the instance of the Commissioner of Income-tax, the following two questions have been referred to this court for its opinion: " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the shares of the assessee-company carrying not less than fifty per cent. of the voting power had been allotted unconditionally to or acquired unconditionally by and were throughout the previous year beneficially held by the public for the assessment year 1959-60 within the meaning of Explanation 1 to Section 23a (9) of the Indian Income-tax Act, 1922 ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not a company in which the public were not substantially interested within the meaning of Section 23a (9) of the said Act of 1922 ? ( 9 ) THE main and the only purpose of Section 23a of the Act is to check the avoidance of income-tax and super-tax by some companies by the simple device of accumulating in its hands, the whole or a substantial part of profits and not to distribute them as dividend which would attract income-tax and super-tax in the hands of the shareholders. This device is resorted to by a company which in popular parlance is called a "closely held company". A family, its near relatives and friends, who are generally promoters of the company, retain between themselves 51 per cent. or more shares and consequently 51 per cent. of the voting power, as each share carries one vote. They can by virtue of their shareholding prevent the distribution of profits either in whole or in part. The provisions of Section 23a of the Act are, however, not applicable to a company in which the public are substantially interested and popularly known as public companies. We have to deal in this Reference with the question whether Section 23a of the Act is applicable to the respondent-company. And the answer to this question depends on as to whether the respondent-company is a company in which the public are substantially interested. We have to deal in this Reference with the question whether Section 23a of the Act is applicable to the respondent-company. And the answer to this question depends on as to whether the respondent-company is a company in which the public are substantially interested. The attributes of such a company are given in Sub-clauses (a), (b) (i), (b) (ii) and (b) (iii) of explanation 1 attached to Sub-section (9) of Section 23a of the Act which, for the sake of convenience and ready reference, is reproduced below : " (9) Nothing contained in this section shall apply to any company in which the public are substantially interested or to a subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year. Explanation 1.--For the purpose of this section, a company shall be deemed to be a company in which the public are substantially interested (a) if it is a company owned by the Government or in which not less than forty per cent. of the shares are held by the Government; (b) if it is not a private company as defined in the Indian Companies Act, 1913 (VII of 1913), and (i) its shares (not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in profits) carrying not less then fifty per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the previous year beneficially held by the Government or a corporation established by a Central, state or Provincial Act or the public (not including a company to which the provisions of this section apply): provided that in the case of any such company as is referred to in Clause (ii) of Explanation 2, this sub-clause shall apply as if for the words not less than fifty per cent. , the words not less than forty per cent. had been substituted; (ii) the said shares were at any time during the previous year the subject of dealings in any recognised stock exchange in India or were freely transferable by the holder to other members of the public; and (iii) the affairs of the company or the shares carrying more than fifty per cent. had been substituted; (ii) the said shares were at any time during the previous year the subject of dealings in any recognised stock exchange in India or were freely transferable by the holder to other members of the public; and (iii) the affairs of the company or the shares carrying more than fifty per cent. of the total voting power were at no time during the previous year controlled or held by less than six persons, and in computing the number of six persons aforesaid, the Government or any corporation established by a Central, State or Provincial Act or a company to which the provisions of this section do not apply shall not be taken into account, and persons who are relatives of one another and persons who are nominees of any other person together with that other person shall be treated as a single person, the expression relative in this context meaning husband, wife, lineal ascendant or descendant, brother or sister : provided that in the case of any such company as is referred to in Clause (ii) of Explanation 2, this clause shall apply as if for the words more than fifty per cent. , the words more than sixty per cent. had been substituted," ( 10 ) AT first blush, it appears that the dual requirement of management of the affairs of the company and the concentration of more than 50% of the vote-carrying shares were alternative and are not cumulative, meaning thereby that if either of the two conditions is fulfilled, the company would be out of the net of Section 23a of the Act. That, however, does not appear to have been the intention of the Legislature because it will be very easy for a company so minded to defeat the purpose of the Legislature by having in the board of directors more than six persons, some of whom being only dummies, while the shareholding remains concentrated in the hands of family members or close relatives who are less than six in number. Therefore, the intention appears to be that both the conditions must be fulfilled simultaneously, namely, the affairs of the company as well as the concentration of shares of more than 50% should not be concentrated in the hands of less than six persons (see Punjab Produce and Trading Co. Ltd. v. CIT [1971] 82 ITR 619 (SC ). Therefore, the intention appears to be that both the conditions must be fulfilled simultaneously, namely, the affairs of the company as well as the concentration of shares of more than 50% should not be concentrated in the hands of less than six persons (see Punjab Produce and Trading Co. Ltd. v. CIT [1971] 82 ITR 619 (SC ). To bring about this result, Sub-clause (iii) should have been worded in the following manner: "neither the management of affairs of the company nor shareholding of more than 50% voting power should be concentrated in less than six persons. " ( 11 ) TO put it positively, the construction will have to be changed from "either or" to "neither nor". If that is done, the intention of the Legislature would have been clearly brought out. ( 12 ) AS regards Clause (a) of the Explanation, it is not disputed that the company is not owned by the Government nor does the Government hold 50 per cent. or more of shares of the company. So Clause (a) will not help the respondent-company. We have to see whether Clause (b) with its sub-clauses (i), (ii) and (iii) are satisfied. Clause (b) (i) is in two parts. One, that the company is not a private company as defined in the Indian Companies Act and the other that 50 per cent. or more of the vote-carrying shares (not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in the profits) have been allotted to and are held by the public unconditionally and beneficially throughout the previous year. There is no dispute with regard to the first part. The company is not registered as a private company under the Indian companies Act. As regards the second part, the Tribunal seems to have assumed that it is satisfied. We have our own doubts as to the correctness of the assumption with which we will deal later in this judgment. As regards Sub-clause (ii), there seems to be no dispute between the parties that the shares of the company are the subject-matter of dealing at the Delhi Stock exchange. Then we come to Sub-clause (iii) which again is in two parts. One is that the affairs of the company and the shares carrying 50 per cent. votes are not concentrated in the hands of less than six persons. Then we come to Sub-clause (iii) which again is in two parts. One is that the affairs of the company and the shares carrying 50 per cent. votes are not concentrated in the hands of less than six persons. To put it differently, it means that neither the management nor the shareholding of 50 per cent. or more is concentrated in the hands of less than six persons taken together. The main controversy centres round this provision. The respondent-company claims that neither the affairs of the company were controlled by less than six persons nor was there a combination of less than six persons holding 50 per cent. or more vote carrying shares at any time during the previous year. The Department, on the other hand, controverted this assertion. ( 13 ) BEFORE we proceed to decide as to which of the rival contentions is correct, we wish to give a brief synopsis and the purpose of the particular provisions. As we have stated earlier in this judgment, the purpose underlying this provision is to check avoidance of income-tax and super-tax by a small group of persons acting in concert or unison. The group may consist of the members of a family, their relatives and friends. The existence of such a group controls the affairs of a company directly or indirectly. Direct control can be exercised by all of them becoming directors of the company if the company is managed by its board of directors. Indirect control is exercised by manipulating the constitution of the board of directors. The directors are appointed ordinarily through election by the shareholders in a general meeting. The group inducts into the board directors of its own choice through the exercise of its voting power. Such directors play to the tune of such a group to promote their interest and they vote in accordance with the wishes of the group. Since all the major and important work pertaining to the affairs of the company is carried on by the board of directors by the resolutions which are in the interest of the group, the directors are, so to say, at the sufferance of the group and it is to their (the group)advantage to keep the directors in good humour to retain their directorship. It may be that occasionally the group inducts into the board prominent persons not connected with the group, but the value of such directors is only ornamental, in order to inspire confidence in the mind of the public and to attract more capital, such directors, however, being invariably in minority, their voice is easily stifled by the majority of directors. It follows as a corollary that the group controls the affairs of the company directly or indirectly. ( 14 ) IN such a situation, the number of directors has no relevance. Even if the number of directors is six or more, the affairs of the company can always be managed by the group whose number seldom exceeds six keeping in view the fact that the closely related directors are treated as one person as provided in Clause (b) (iii) of Explanation 1 to Sub-section (9) of Section 23a of the act. Yet another result follows from a situation like this. It affects the other requirement contained in Clause (ii) which requires that at least 50% of vote-carrying shares should be held by the "public". The word "public" in this context means the persons who do not belong to the group who may have promoted the company and who act in unison or in concert. If such a group holds beneficially shares carrying 51% or more, shares for allotment, to the public will always be less than 50% and as a result the condition mentioned in Clause (b) (ii) will be violated. The number of shareholders belonging to the public become immaterial and irrelevant. This proposition emerges clearly from at least three decisions of the Supreme Court, the leading case being CIT v. Jubilee Mills Ltd. [1963] 48 ITR (SC) 9. In that case, the company was a closely held company. The question arose whether the company was one in which the public were substantially interested so as to escape the net of Section 23a. The main controversy centred round the condition that 50% or more of the vote-carrying shares of the company were allotted to and beneficially held by the public. The company was managed by a firm of managing agents. It was found as a fact that there existed a group which acted in unison and concert. Some members of the group were on the board of directors and others were not. The company was managed by a firm of managing agents. It was found as a fact that there existed a group which acted in unison and concert. Some members of the group were on the board of directors and others were not. But all of them were partners of the firm of the managing agency which held a controlling interest in the company by virtue of its shares held (more than 51% ). At page 16 of the report in Jubilee Mills Ltd. s case [1963] 48 ITR 9, the Supreme Court has observed as under : " 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 shareholding must not be less than 25% (now 50%) 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 Raghuvanshi Mills case [1953] 24 ITR 338. The decision of this court is reported as raghuvanshi Mills Ltd. v. CIT [1961] 41 ITR 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 shree Changdeo Sugar Mills Ltd. v. C1t [1961] 41 ITR 667 that by unconditional and beneficial holding is meant that the shares are held by the holders for their own benefit only and without any, control of another. This court approved the decision of the Privy Council in Bjordals case [1955] 28 ITR 25 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 does not answer the description 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 does not answer the description public. There is nothing inherent in the office of directors which would 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 of the shareholders. " ( 15 ) THEIR Lordships further went on to observe at page 17 of the report as under : "it would, therefore, follow from what we have stated that we have first to see 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 51% of the total shares. But the company will still be a company in which the public can be said to be substantially interested because to cease to be so, the shareholding of the group must be more than 75%. In the group, any person, be he a director or a non-director, a relative of a director, a promoter of the company, or a stranger, may be included but only if belonging to a group or as holding the shares as a nominee of someone else belonging to the group. " ( 16 ) APPLYING the test, we have to see whether there is such a group to which the mischief of section 23a could be applied. At page 20 of the report, their Lordships observed as under : "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 seventy five per cent. 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. 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 Section 23a. " ( 17 ) THE same view has been reiterated by the Supreme Court in CIT v. Sahu Jain Ltd. [1916] 103 ITR 135, and the following extracts from page 142 may be noticed. While quoting from the judgment in the case of Raghuvanshi Mills v. CIT [1961] 41 ITR 613 (SC), the Supreme Court observed: "the word public is used (in the Explanation) 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 75% 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. " ( 18 ) IN that company, the main shareholding and directorship of the company was concentrated in the hands of S. P. Jain, his wife, Smt. Rama Jain, and his two sons. Some more shares were held by an associate company and some of the employees of Mr. S. P. Jain and his group. While answering the question whether the company was covered by the provisions of Section 23a, the supreme Court referred to the relationship of the Jain group including its employees and observed at page 147 as under : "there is no evidence whatsoever in this case that the shareholders did not cohere together in the matter of transaction of the companys 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. " ( 19 ) THERE are some more authorities on the subject but in view of the principle enunciated by the supreme Court, it is not necessary to advert to them. ( 20 ) NOW, turning to the facts of the case, the first thing we have to find out is if there existed an individual or group of persons who act in unison and by virtue of their controlling interest can be said to be controlling the affairs of the company. As to the existence of such a group, there is no dispute about it as it has been conceded by the respondent-company. ( 21 ) THE total number of equity shares of the company is two lakhs and shares carrying fixed dividend, namely, preference shares, are 10,000, the total number of shares being 2,10,000. ( 22 ) AS per Clause (b) (ii) of Explanation 1 to Sub-section (9) of Section 23a of the Act, the preference shares have to be excluded in order to ascertain the percentage of vote-carrying shares allotted to the public. Therefore, the shares which we have to take into consideration would be equity shares only which are two lakhs in number. Out of these shares, 1,66,720 shares are held by the Hindu undivided family of Sri Banarsi Das, of which 73,450 shares are held by the Hindu undivided family under blank transfer. A blank transfer means that the person holding such shares is the beneficial owner having in his possession a transfer deed executed by the transferor but the shares are not entered in his name in the shareholding register of the company. This type of shares is also to be included in the shareholding of the person concerned because he is the owner of these shares for all intents and purposes. He is entitled to receive the dividend on these shares, though not directly but through the transferor, i. e. , registered shareholder. These shares also carry votes which can be used to his advantage at his bidding through the registered shareholder who is obliged to do so under the transfer deed. He is entitled to receive the dividend on these shares, though not directly but through the transferor, i. e. , registered shareholder. These shares also carry votes which can be used to his advantage at his bidding through the registered shareholder who is obliged to do so under the transfer deed. Thus there is a group of the members of the Hindu undivided family of Seth Banarsi Das who hold roughly 83% of the vote-carrying shares. ( 23 ) ONE result that follows from this state of affairs is that the shares available for allotment to the public would be 27% only, because the group of Seth Banarsi Das cannot be said to belong to the public, a percentage far less than the requisite 50%. For this reason, the condition in clause (b) (i) to the Explanation 1 appended to Sub-section (9) of Section 23a of the Act would not be satisfied and the company would be hit by the provisions of Section 23a of the Act for this reason only. ( 24 ) AS regards the management of the company, it has been found by the Tribunal as a fact that the number of the directors is five treating Banarsi Das and the group as one person. The second condition, therefore, that the management of the affairs of the company should not vest in less than six is also not satisfied. The result is that all the three conditions remain unfulfilled and the company is one to which provisions of Section 23a are applicable. ( 25 ) THE Income-tax Appellate Tribunal, however, has taken a contrary view on the following two grounds : (i) that even though the number of directors is five, the management of the affairs of the company cannot be confined to the number of directors only as there may be persons other than directors who may be managing the affairs of the company ; (ii) that the shareholding of the Hindu undivided family of Seth Banarsi Das is less than 50% if the shares held under the blank transfer are left out. ( 26 ) AS to the first, the proposition is correct. Legally, it is possible that the persons other than the directors may be managing and controlling the affairs of the company. ( 26 ) AS to the first, the proposition is correct. Legally, it is possible that the persons other than the directors may be managing and controlling the affairs of the company. But such persons had to be named and the manner and the extent of their powers in management and in the affairs of the company had to be spelt out. This has not been done. The Tribunal has wrongly assumed that the burden lay on the Revenue to investigate and record a finding as to the existence of such persons. This view is erroneous. When the members of the board of directors are less than the requisite number of six, the onus lay on the company to prove that there were persons other than those on the board who were exercising control over the affairs of the company. This is clear from the judgment of the Supreme Court in CIT v. Sahu Jain Ltd. [1976] 103 ITR 135 and the passage extracted therefrom in this judgment, We have already demonstrated that the real control was being exercised by the group of Seth Banarsi Das even though all of them were not on the board of directors and they were admittedly less than six. ( 27 ) AS to the second proposition, we have already pointed out above that the shares held under blank transfer have also to be taken into account while ascertaining the voting strength of the group. This view finds support from a decision of the Supreme Court in Howrah Trading Co. Ltd. v. CIT [1959] 36 ITR 215. While referring to blank transfer of shares, the Supreme Court has observed as under (at page 219): "during the period that the transfer exists between the transferor and the transferee without emerging as a binding document upon the company, equities exist between them, but not between the transferee and the company. The transferee can call upon the transferor to attend the meeting, vote according to his directions, sign documents in relation to the issuance of fresh capital, call for emergent meetings, and, inter alia, also compel the transferor to pay such dividend as he may have received. See E. D. Sassoon and Co. Ltd. v. Patch [1922] 45 Bom LR 46 approved in Mathalone v. Bombay Life Assurance Co. Ltd. [1954] 24 Comp Case 1 (SC ). See E. D. Sassoon and Co. Ltd. v. Patch [1922] 45 Bom LR 46 approved in Mathalone v. Bombay Life Assurance Co. Ltd. [1954] 24 Comp Case 1 (SC ). " ( 28 ) IN the result, we hold that the respondent-company clearly fell within the mischief of Section 23a of the Act and was liable to the consequence flowing from it being a company governed by section 23a of the Act. ( 29 ) ACCORDINGLY, we answer both the questions referred to this court in the negative, in favour of the Department and against the assessee. The Commissioner of Income-tax shall be entitled to his costs which we assess at Rs. 200. .