TMI Blog1971 (8) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... involved was whether the assessee-company could be regarded as one in which the public are substantially interested within the meaning of the Explanation in section 23A of the Indian Income-tax Act, 1922, hereinafter called the "Act" . The appeals relate to the assessment years 1952-53 and 1954-55. The assessee is a public company incorporated under the Indian Companies Act, 1952-53. Article 37 of its articles of association provided as follows: "The directors may at any time in their absolute and uncontrolled discretion and without assigning any reason decline to register any proposed transfer of shares." The Income-tax Officer held that the assessee was a company in which the public were not substantially interested within the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of any share to any person whom it shall in their opinion be undesirable in the interest of the company to admit to membership and were not obliged to give any reason for refusal to register was not a company the shares of which were freely transferable to other members of the public within the meaning of the Explanation in section 23A of the Act. Section 23A of the Act confers power to assess companies to super tax on undistributed income in certain cases. Sub-section (9), inter alia, provided that nothing contained in the section shall apply to any company in which the public are substantially interested. Explanation (1), which was so renumbered by section 7 of the Finance Act of 1957, to the extent it is material, is as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37 of the articles of association of the assessee the shares would not be freely transferable within the meaning of clause (ii) to Explanation 1 in section 23A(9) of the Act. It may be mentioned that before its amendment by the Finance Act, 1953, the corresponding provision appeared in the Explanation in section 23A(1) after the third proviso. But instead of the word "were" the word "are" was employed. The question, therefore, which has to be examined is whether the shares could be regarded as freely transferable to other members of the public. In our opinion the following observations in the East India Corporation case represent the correct view about the meaning of the word "transferable": " 'Transferable', ex facie, is not to be equat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rotecting the interests of the company. It cannot be assumed that the discretion conferred on the directors will be abused for ulterior purposes. The discretion which has been conferred for being exercised in the interest of the company cannot take away the tendency of the free transferability of the shares in the absence of cogent material or other factors from which it can be inferred that the shares were not capable of being freely transferred. Article 37 can by no stretch of reasoning be regarded by itself to be a restriction on the transfer of shares by one shareholder to another. Free transferability of shares is a normal and common feature of limited companies. Indeed, there would hardly be any public company in the memorandum or art ..... X X X X Extracts X X X X X X X X Extracts X X X X
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