The shares of a company must be freely transferable in order for the company to be considered a company in which the public are substantially interested.

THANIKKACHALAM J.

Pursuant to the order dated November 8, 1978, passed by this court in T. C. P. Nos. 160 to 165 of 1978, the Income-tax Appellate Tribunal, Madras, has referred the following three questions of law for our consideration

"1. Whether, on the facts and in the circumstances of the case and having regard to the provisions of clause 5 of the articles of association and the provisions of section 2(18)(b)(B)(ii) of the Income-tax Act, 1961, the Appellate Tribunal was right in holding that the company should be treated as one in which the public are substantially interested ?

2. Whether the Appellate Tribunal's finding that the shares of the assessee-company are capable of possessing the character of the transferability under sub-clause (n) of clause 5 of the articles of association and, therefore, the shares are freely transferable is sustainable in law and is a reasonable view to take on the facts of the case ?

3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that all the shares of the company need not possess the character of transferability in order to fulfil the provisions of section 2(18)(b)(B)(ii) ?"*

These questions relate to the assessment years 1967-68 to 1973-74. Since the questions are common and based on identical facts, all these cases are decided by this common order

The assessee-company has during these years claimed that it should be treated as a company in which the public are substantially interested. The Income-tax Officer noticed that the assessee-company has technical collaboration with Messrs. Joseph Lucas Industries Limited of the United Kingdom and the said foreign company holds 60 per cent. of the share capital of the assessee-company and also 60 per cent. of the voting rights. The Income-tax Officer, however, held that even though the foreign company is not a private company, the shareholdings of the said company have not been analysed to show that they have not been controlled by five or less personsUnless this was proved, the question of treating the assessee-company as a company in which public are substantially interested as per section 2(18) of the Income-tax Act would not arise. The Income-tax Officer also held that the shares of the assessee-company are not freely transferable and in fact no transfers have been made so far. It also held that the shareholders of the assessee-company are closely related and, therefore, the question of free transferability of the shares does not arise. The claim of the assessee-company was, therefore, negatived by the Income-tax Officer

The assessee-company preferred an appeal against the aforesaid order before the Appellate Assistant Commissioner of Income-tax, 'A' Range, Madras, and claimed the said status again. The appellate authority, on perusal of the collaboration agreement between the assessee-company and the foreign company, held that the foreign company was holding 60 per cent. shares of the assessee-company and consequently 60 per cent. of the voting power as well. Referring to various clauses of article 5 of the articles of association, the appellate authority came to the conclusion that the right of pre-emption vested in the other shareholders of the company as per the directions of the board of directors does not affect the free transferability of shares of the assessee -company. The authority, therefore, held that all the requirements of section 2(18) of the Act have been satisfied. The assessee-company was, therefore, held to be a company in which the public have substantial interest. The Income-tax Officer was accordingly directed to modify the assessment. The Department preferred an appeal before the Income-tax Appellate Tribunal against the aforesaid order. The impugned order held that because of clause (h) of article 5 of the articles of association which permits the board of directors to remove all obstacles to free transferability of the shares, this condition of free t