Free transferability of shares is curtailed where directors can refuse registration at will, so shares were not freely transferable.

Article 39's unqualified power for directors to refuse registration of share transfers constitutes a statutory restriction on transferability because legal title vests only on registration; where registration may be withheld at directors' discretion the shareholder's right to transfer is curtailed and shares are not "freely transferable" for the purposes of section 23A. The court applied the principle that directors must act reasonably and bona fide but held that absence of prior refusals does not eliminate a restriction; outcome: article 39 operates as a restriction and the shares were not freely transferable, favouring 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 in view of article 39 of the company's articles of association.

Analysis: Section 23A treats a company as one in which the public are substantially interested if its shares were freely transferable. Under the Companies law shares are movable property transferable in the manner provided by the articles of association and registration of transfer is essential to vest legal title. Article 39 conferred on the directors an unqualified power to refuse registration of transfers and did not oblige them to give reasons. Where such a power exists the directors must act reasonably and bona fide, but the mere absence of prior refusals does not negate the existence or operation of the restriction. The court examined authorities on the point and held that transferability and registrability are interlinked: if registration can be withheld at the directors' discretion, the right of a shareholder to transfer is curtailed because legal title does not pass absent registration and the company will continue to recognise the registered transferor. Accordingly article 39 operates as a restriction on free transfer within the meaning of section 23A.

Conclusion: The shares were not freely transferable within the meaning of section 23A of the Indian Income-tax Act. Decision in favour of the Revenue.

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