JUDGMENT

RANGANATH MISRA, J. - This appeal is by special leave and is directed against the judgment of the Bombay High Court dated July 16, 1974 on a reference made under Section 66(1) of the Income Tax Act, 1922. The year of assessment is 1951-52 corresponding to the accounting year ending March 31, 1951. The question referred by the Tribunal to the High Court at the instance of the revenue was :

Whether on the facts and in the circumstances of the case, the assessee company could not be held to be a company in which the public were substantially interested within the meaning of Explanation to Section 23-A(1) by reason of the fact that the shares of the company carrying not less than twenty-five per cent. of its voting power were not, in fact, freely transferable by holders to other members of the public for a large part of the previous year even though they were freely transferable as at the end of the previous year ?

2. Initially the company was incorporated as a private limited company at Jaipur on December 24, 1942 and was known as Messrs Rajputana Investment Company Private Limited. Under Articles 4, 81 and 82 of the Articles of Association of the company there was restriction on the transfers of the shares of the company by the shareholders to other members of the public. These articles were deleted at an extraordinary general meeting of the company held on March 26, 1951, and following the deletion, the restriction on transfer of shares was removed. So was the limit on number of shareholders. On the basis of the amendment the assessee claimed relief under Section 23-A(1) of the 1922 Act by pleading that all the statutory requirements were satisfied. The Income Tax Officer refused to accept the stand of the assessee on the ground that while the Explanation contained in Section 23-A(1) of the Act required the in the course of the previous year, the shares were freely transferable by the holders to other members of the public, the company came to satisfy the requirement only for four or five days of the year. The Appellate Assistant Commissioner adopted the same view whereupon the assessee appealed to the Tribunal. The Tribunal accepted the stand of the assessee and allowed the appeal, whereupon at the instance of the revenue the aforesaid question was referred and the case was stated to the High Court under Section 66(1) of the 1922 Act. The High Court found in for the assessee and against the revenue. That has led to the present appeal by special leave.

3. As pointed out above, the short point for consideration in this appeal is as to whether the assessee satisfied the requirements of the Explanation to Section 23-A(1) of the Act so as to be entitled to the tax benefit. This Court pointed out in the case of CIT v. Afco (P) Ltd. ((1963) 48 ITR 76) :

Section 23-A was enacted to prevent evasion of liability to pay super-tax by shareholders of certain classes of companies taking advantage of the disparity between the rates of super-tax payable by individuals and by the companies. The rates of super-tax applicable to companies being lower than the highest rates applicable to individual assessee, to prevent individual assessees from avoiding the higher incidence of super-tax by the expedient of transferring to companies the sources of their income, and thereby securing instead of dividends the benefit of the profits of the company, the Legislature by Act 21 of 1930, as modified by Act 7 of 1939, enacted a special provision in Section 23-A investing the Income Tax Officer with power, in certain contingencies prescribed in the section, to order that the undistributed balance of the assessable income reduced by the amount of taxes and the dividends shall be deemed to have been distributed at the date of the general meeting.

The Explanation provided :

For the purpose of this sub-section, -

a company shall be deemed to be a company in which the public are substantially interested if shares of the company (not being shares entitled