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Issues Involved:
1. Whether the shares of the assessee company were freely transferable within the meaning of section 23A of the Indian Income-tax Act. 2. The impact of Article 39 of the assessee company's articles of association on the free transferability of shares. 3. The legal interpretation of transferability and registrability of shares under company law. Detailed Analysis: 1. Free Transferability of Shares under Section 23A: The primary issue in this case is whether the shares of the assessee company were freely transferable within the meaning of section 23A of the Indian Income-tax Act. The assessee is a public company under the Indian Companies Act of 1913, and the relevant assessment year is 1949-50. The Income-tax Officer held that Article 39 of the company's articles of association restricted the free transfer of shares, thus preventing the company from being considered as one in which the public were substantially interested. Consequently, the officer ordered that the undistributed profits of Rs. 63,074 should be deemed as distributed dividends. 2. Impact of Article 39 on Free Transferability: Article 39 of the articles of association states: "The directors may decline to register any transfer of share upon which the company has a lien and in case of shares not fully paid up may refuse to register transfer to a transferee of whom they do not approve. The directors may also in their absolute discretion refuse to register transfer of any share to any person whom it shall in their opinion be undesirable in the interest of the company to admit to membership. The directors shall not be bound to give any reason for refusal of transfer as aforesaid. No transfer shall be made to an infant or person of unsound mind." The Income-tax Officer argued that this provision allowed the directors unrestricted power to refuse transfers, thereby restricting free transferability. Despite the fact that 41 transfers had been effected without refusal, the Appellate Assistant Commissioner found these transfers were among family members or close associates of the directors. The Tribunal, however, by a majority, found no restriction on free transfer of shares imposed by Article 39, and hence section 23A could not be invoked. 3. Legal Interpretation of Transferability and Registrability: Under section 28 of the Indian Companies Act, 1913, shares are moveable property transferable as provided by the articles of association. Regulation 20 of Table A allows directors to decline registration of shares not fully paid or when the company has a lien. Article 39 goes further by allowing directors to refuse transfers if deemed undesirable for the company. The court noted that directors must fairly consider the question at a board meeting and are not bound to disclose reasons for refusal. The court will assume directors acted reasonably and bona fide unless evidence suggests otherwise. The judgment referenced several cases to elucidate that a transfer of shares is not complete until registration of the transferee's name. For instance, in Societe Generale De Paris and G. Colladon v. Janet Walker, it was established that complete legal title requires registration. Similarly, in In re Copal Varnish Co. Ltd., it was emphasized that transfer is complex and not complete without board approval and registration. The court also addressed the argument that transferability and registrability are distinct, concluding that they go hand in hand. The power given to directors to refuse registration operates as a restriction on transfer. The court cited English and Indian cases, including London Founders Association Ltd. v. Clarke and Firm Sawan Mal-Gopi Chand v. Shiv Charan Das, to support its view that legal ownership remains with the transferor until registration. Ultimately, the court held that the directors' unqualified right to reject any transfer under Article 39 means the shares are not freely transferable. The question referred was answered in the negative, and the assessee was ordered to pay the costs of the reference. Ray J. concurred with the judgment.
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