Public shareholding exemption under section 23A(1) requires both voting-power threshold and actual free transferability or market dealings.

Section 23A(1) exemption depended on two cumulative conditions: the public had to beneficially hold at least 25% of the voting power, and the relevant shares also had to be subject to stock exchange dealings or be in fact freely transferable. The court treated stock exchange quotations as only prima facie evidence and found that static beneficial shareholding did not prove actual open-market dealings. It further held that articles allowing directors an unqualified veto over transfers negatived free transferability. As the second condition was not proved, the assessee was not entitled to the benefit of the third proviso and its Explanation, and the order under section 23A(1) was upheld.

---

---

Issues: Whether the assessee-company was entitled to exemption from section 23A(1) on the ground that the public held not less than 25% of the voting power and that the shares were either the subject of dealings in a stock exchange or were in fact freely transferable.

Analysis: The statutory Explanation to the third proviso to section 23A(1) was construed as laying down two cumulative requirements. The assessee had to show not only that shares carrying at least 25% of the voting power were unconditionally allotted or acquired and beneficially held by the public, but also that such shares had in the relevant previous year been the subject of dealings in a stock exchange or were in fact freely transferable. The finding that more than 25% of the voting power was beneficially held by the public did not by itself establish entitlement to the exemption. The stock exchange quotations were only prima facie evidence and were not conclusive where the Tribunal found that the beneficial shareholding remained static and there was no satisfactory proof of actual dealings in the open market. The articles of association, which conferred on the directors an unqualified power to refuse registration of transfers and to veto transfers without assigning reasons, also negatived free transferability.

Conclusion: The assessee failed to prove the second statutory condition and was not entitled to the benefit of the third proviso and the Explanation to section 23A(1); the order under section 23A(1) was upheld.

---