Judgement

GROVER, J.: These appeals by certificate from a judgment of the Calcutta High Court arise out of Income-tax References in which the main point 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 23-A of the Indian Income-tax Act, 1922, hereinafter called the "Act".

2. The appeals relate to the assessment years 1952-53 and 1954-55. The assessee is a public company incorporated under the Indian Companies Act, 1913. 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 Sec. 23-A 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 subsequent year it was allowed. The Appellate Tribunal upheld the contention that Article 37 of its Articles of Association did not operate as a bar to the free transferability of the shares and therefore it was a company in which the public were substantially interested within the meaning of the Explanation in Section 23-A of the Act. Thereupon the Tribunal was moved by the Commissioner of Income-tax for stating the case and referring the following question of law which was referred by it to the High Court in the case relating to the assessment year 1952-53:

"Whether on a true interpretation of Article 37 of the Articles of Association, the assessee Company can be regarded as one in which the public are substantially interested within the meaning of the third proviso to Section 23-A (1)".

A similar question was referred in the case relating to the assessment years 1954-55. The High Court following a judgment of the same court in Commr. of Income-tax, West Bengal v. Tona Jute Co. Ltd., (1963) 48 ITR 902 (Cal) answered the questions referred against the assessee and in favour of the Revenue. In that case the Calcutta High Court had expressed the view that a public company whose Directors had absolute discretion to refuse to register the 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" 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 23-A of the Act.

3. Section 23-A of the Act confers powers 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-

(a) ........................

(b) if it is not a private company as defined in the Indian Companies Act, 1913 (VII of 1913), and

(i) ..........................

(ii) the said shares were at any time during the previous year the subject of dealing in any recognised stock exchange in India or were freely transferable by the holder to other members of the public; and

(iii) ........................"

The Calcutta High Court referred to the relevant provisions of the Indian Companies Act, 1913 according to which unless the Article provided otherwise the shareholder had a free right to transfer his shares to whomsoever he liked. But it was considered that where the Articles contained a power under which the Directors could d