Free transfer of shares depends on registration rights, and a directors' veto can prevent section 23A treatment.

A clause in the articles of association empowering directors to refuse registration of share transfers constitutes a real restraint on free transfer for the purposes of section 23A of the Indian Income-tax Act. Because legal title to shares does not pass until the transferee is registered, the existence of a refusal power means the shares are not freely transferable during the relevant period. The fact that the directors had not previously refused registration did not remove the restriction created by the articles. The shares were therefore not freely transferable, and section 23A applied in favour of the Revenue.

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Issues: Whether the shares of the assessee company were freely transferable within the meaning of section 23A of the Indian Income-tax Act despite the directors' power under article 39 to refuse registration of transfers.

Analysis: Section 23A turned on whether the company's shares were at any time during the previous year freely transferable. Under section 28 of the Indian Companies Act, 1913, transfer of shares is governed by the articles of association, and a clause empowering directors to refuse registration of transferees does operate as a restraint on free transfer because legal title does not pass until registration. The power to reject transfers was not merely theoretical, and the absence of prior refusals did not remove the restriction created by the articles.

Conclusion: The shares were not freely transferable, and section 23A was attracted. The question was answered in favour of the Revenue and against the assessee.

Final Conclusion: The reference was disposed of by holding that the assessee company was not entitled to be treated as a company whose shares were freely transferable for the purpose of section 23A.

Ratio Decidendi: A power conferred by the articles of association on directors to refuse registration of share transfers constitutes a restriction on free transfer, because a share is not fully transferred in law until the transferee is registered.

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