CA Deepak Rathore

CA Deepak RathoreUnder Section 2(18) of the Income tax a company is said to be “a company in which the public are substantially interested” in the following circumstances:

(a) if it is a company owned by the Government or the Reserve Bank of India or in which not less than forty per cent of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank; or

(aa) if it is a company which is registered under section 25 of the Companies Act, 1956    (1 of 1956); or

(ab) if it is a company having no share capital and if, having regard to its objects, the  nature and composition of its membership and other relevant considerations, it is declared by order of the Board to be a company in which the public are substantially interested. Provided that such company shall be deemed to be a company in which the public are substantially interested only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration; or

(ac) if it is a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, , to be a Nidhi or Mutual Benefit Society ; or

(ad) if it is a company, wherein 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 than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by, one or more co-operative societies.

(b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely :—

(A) shares in the company (not being shares entitled to a fixed rate of dividend whether with  or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder;

(B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent (40% in case of *industrial companies) of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by

(a) the Government, or

(b) a corporation established by a Central, State or Provincial Act, or

(c) any company to which this clause applies or any 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.]

  • Share held by the public are not considered for this purpose
  • * “industrial company” means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining.

Explanation.-For the purposes of this clause, a company shall be deemed to be

a) Mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, if the income attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making any deduction under Chapter VIA of the Income-tax Act) is even if less than fifty-one per cent. of. such total income;

b) which even though not mainly so engaged, derives in any year 51 percent or more of its income from such activities

Practical Analysis of the aforesaid provision

Suppose ABC Ltd. Company listed in Recognized Stock Exchange. Whether all the subsidiary will come in the purview public substantially interested company ??876666876786786*ABC Ltd – 20% shares of PQ Ltd

1. ABC Ltd. – Since the company is listed in recognized stock exchange, therefore ABC Ltd. is public substantially interested company by virtue of Section 2(18)(b)(A).

2. ANK Ltd.– Since the company is subsidiary of ABC Ltd( holding not less than 50% shares) which is listed in recognized stock exchange( ABC Ltd. is public substantially interested company) , therefore ANK Ltd. is public substantially interested company by virtue of Section 2(18)(b)(B)(c)

3. XYZ Ltd– Since the company ABC Ltd which is public substantially interested company holding less than 50% of shares of XYZ Ltd , therefore XYZ Ltd. is not a public substantially interested company.

4. T Pvt Ltd.– Since the company is Private company. The above section will not applicable to Pvt. companies , therefore TY Ltd. is not a public substantially interested company.

5. PQ Ltd. – Since the company ABC & ANK Ltd. (40+20=60) to which this clause applies holding not less than 50% of the share of PQ Ltd., therefore PQ Ltd. is public substantially interested company by virtue of Section 2(18)(b)(B)(c).

6. OK Ltd. – Since the company XYZ (to which this clause does not apply) holding the shares, therefore, Ok Ltd. is not a public substantially interested company.

7. K Ltd- Since the company ABC Ltd which is public substantially interested company holding 20% of shares of XYZ Ltd and T Pvt Ltd. though private in nature but fully owned by ABC Ltd, therefore Share held by T Pvt Ltd. will me count for the limit, total shareholding goes to 60% by virtue of this, therefore K Ltd is a Public substantially interested company.

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