A power given to the directors by the articles of association to refuse to register any transfer of shares without anything more is restrictive of the right of free transfer of shares which the members would otherwise have had.

G.K. MITTER, J.

1. THIS is a reference at the instance of the revenue for consideration of the question as to whether the shares of the assessee company were freely transferable within the meaning of s. 23A of the Indian IT Act in view of the provision of Art. 39 of its articles of association.

2. THE assessee is a "public company" within the meaning of the expression used in the Indian Companies Act of 1913. The assessment year in question is 1949-50, the relevant previous year having terminated on 7th July, 1948. The total income of the assessee as finally determined under s. 31(3)(a) on 11th Nov., 1954, was Rs. 1,12,132. The tax thereon amounted to Rs. 49,058 leaving a balance of Rs. 63,074 available for distribution amongst the shareholders of the company. No dividends were declared at the annual general meeting held on 9th July, 1949.

For the purpose of the Indian IT Act, however, and specially under s. 23A of the Act so far as is relevant to this case, a company can only be deemed to be a company in which the public are substantially interested if its 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 shareholders to other members of the public.

3. THE ITO held that Art. 39 of the articles of association of the company stood in the way of the assessee being considered "a company in which the public were substantially interested." The said article provides as follows :

"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."

4. ACCORDING to the ITO this provision prevented the free transfer of shares, inasmuch as it was open to the directors to refuse to recognise any transferee whom they did not approve of and as they were not bound to give any reasons for their refusal the power of refusal was unrestricted. There being no dispute that shares of the company were not quoted in any official stock exchange the ITO made an order that the entire undistributed profits of Rs. 63,074 should be deemed to have been distributed as dividends as on 9th July, 1949.

The attention of the AAC was drawn to the fact that, since the inception of the company in 1946, no less than 41 transfers had been effected up to 1953 when the matter came up before the IT authorities and that there had been no occasion for the directors to refuse registration of any transfer. The AAC, however, found that the transfers effected had always been to members of the same family or close associates of the directors. The assessee preferred an appeal to the Tribunal and the Tribunal has by a majority found that there was no restriction on the free transfer of shares imposed by Art. 39 and hence s. 23A could not be invoked. The Accountant Member was in favour of the appeal being allowed while the Judicial Member took a different view. The President of the Tribunal, however, was of the same opinion as the Accountant Member and in the result the appeal was allowed.

5. UNDER s. 28 of the Indian Companies Act, 1913, the shares in a company are moveable property transferable in manner provided by the articles of association of the company. Unless the articles provide otherwise, the shareholder has a free right to transfer his shares to whomsoever he wills. In the case of a private company the articles must restrict the right of a member to transfer his shares and must also limit the number of members to 50 and must contain a restriction prohibiting invitatio