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TMI Blog1971 (8) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 meaning of the Explanation in section 23A of the Act. Accordingly, he applied the provisions of that section. The assessee appealed to the Appellate Assistant Commissioner. The appeal relating to the assessment year 1952-53. was dismissed but with regard to, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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: " For the purposes of this section, a company shall be deemed to be a company in which the public are substantially interested--.... (b) if it is not a private company as defined in the Indian Companies Act, 1913 (VII of 1913), and.... (ii) the said shares wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision 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 equated to 'transferred'. The word imports a quality, a legal effect arising out of or inherent in the character and nature of the shares themselves. This quality does not stand by itself, for the section says 'are in fact freely transferable'. We have to give effect to eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 articles of which an article similar to article 37 will not be found. This article appears even in the standard articles of association prescribed under the Companies Act itself. The purpose, as has been noticed before, is only to give power to the directors for declining ..... X X X X Extracts X X X X X X X X Extracts X X X X
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